Universal Truckload Services' (UACL) CEO Scott Wolfe on Q2 2014 Results - Earnings Call Transcript

| About: Universal Truckload (UACL)

Universal Truckload Services, Inc. (NASDAQ:UACL)

Q2 2014 Earnings Conference Call

July 25, 2014 10:00 ET

Executives

Scott Wolfe - Chief Executive Officer

Don Cochran - President

David Crittenden - Chief Financial Officer

Jeff Rogers - Executive Vice President

Analysts

Chris Wetherbee - Citi

Todd Fowler - KeyBanc Capital Markets

Kelly Dougherty – Macquarie

John Larkin - Stifel

Operator

Hello, and welcome to Universal Truckload Services Incorporation’s Second Quarter 2014 Earnings 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 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 words such as believe, expect, anticipate and project. Such statements are subject to uncertainties and risks 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. Scott Wolfe, Chief Executive Officer; Mr. Don Cochran, President; Mr. David Crittenden, Chief Financial Officer; and Mr. Jeff Rogers, Executive Vice President for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin.

Scott Wolfe - Chief Executive Officer

Thank you, Sally. Good morning, everyone and welcome. Thank you for joining us for our Universal Truckload Services’ second quarter earnings conference call. Before we get started today, I would like to introduce Jeff Rogers. He is our new Executive Vice President joining us for the first time. As part of Universal’s succession plan, Jeff will be taking over the CEO role when I transition to the board at the end of this year. Prior to joining Universal, Jeff served as President of YRC Freight and of USF Highland Inc. and was Chief Financial Officer of YRC Regional Transportation Incorporated. Jeff has agreed to take questions during our Q&A session after the review of our quarter.

Universal is heading in the right direction with consolidated operating revenue, up $43.4 million, a 16.4% increase for the second quarter of 2014 over the second quarter of last year. We have seen solid growth in transportation services revenue this quarter, which is up 10.1% over the second quarter of last year. The transportation services business continues to benefit from increased freight volumes and strong pricing, which Don Cochran will discuss in a moment in addition to discussing our intermodal business.

Overall, performance was further improved by our value-added services, which grew by 48.5%. Primarily this growth was a result of last year’s acquisition. Intermodal revenue was up slightly, an increase of 1.4% over the same quarter last year. In all, Universal is trending back toward historical rates of growth and profitability after last quarter’s weather-related impacts.

By design, our business mix as compared to the same period last year reflects a shift. Transportation services revenue is 64.2% of our consolidated revenue versus 67.9% in the comparable quarter last year. Likewise, value-added services revenue at 24.7% compared with 19.4% for last year. And the intermodal at 11.1% of total consolidated revenue as compared to 12.6% for the second quarter last year.

From an industry perspective, we continue to see solid revenue growth in our key markets. From a value-added growth perspective, our automotive production volumes remained strong with the latest SAAR forecast for June at 16.9 million units. Likewise, heavy truck production volumes are also strong with a forecast of between 10% and 12% growth year-over-year from 2013 to 2014. From the transportation viewpoint, the retail and consumer goods vertical has also performed very well. Revenue in this vertical is up 15.3% for the second quarter 2014 over second quarter of last year.

Energy-related revenue was consistent with the last quarter, but is up $14 million for the first half of 2014 over the first half of 2013 when windmill production and subsequent transportation was restarting. Last quarter, I mentioned the award of a transportation management and dedicated services contract awarded us – with us from an OEM in the Southeast that was a new service offering for a new customer. On June 1, Universal launched this service which is certainly transportation management. And we are in the post-launch analysis stage.

Now and over the coming months we will be balancing the contract service requirements, staffing levels and equipment for margin improvement. We expect to be running at planned margins by the end of the third quarter. This means that the fourth quarter will be our first representative full quarter performance for the new business.

Form a revenue perspective this will offset some of the lost value added operation revenue that we talked about before, but from a profitability perspective it will lend itself more towards transportation margins than the value added margins. Our enterprise sales efforts are beginning to show progress. For example, in the third – we are in the third round of a bid to supply container management services with a new automotive OEM in the Southeast. We are still negotiating business expansion contract with one of our industrial OEM customers with a startup expected in the fourth quarter on some existing operations that we have. Additionally we are discussing two new business opportunities with the same customer, one in the Southeast and one in Mexico.

Finally, one of our current automotive OEM customers has specified 18 new business opportunities for us in addition to 10 potential expansion opportunities that have yet to be quantified. Another current customer is discussing new opportunities in the Southwest and in South America. Lastly a current automotive customer is requesting pricing for an operation in the Southwest and one in Mexico. Needles to say from our perspective our value added business model is alive and well in North America. Interestingly and perhaps more importantly it’s gaining recognition in South America and elsewhere internationally as customers increasingly ask for our assistance with their global operations.

In keeping in line with the automotive industry third quarter revenue from a value added services is typically lower than the second quarter, fewer fuel production days and (indiscernible) shutdown periods when the plants are typically retooled for the next model year. This year that extends into August for certain specific plants. Looking at driver recruitment, still a major ongoing topic in the transportation side of the business, strategies for attracting, hiring and retaining more drivers, more supervisors and logistics associates is a recurring topic in operational meetings.

From a labor perspective, our logistics segment we have all of our labor contracts negotiated through the first quarter of 2015. Our growth plan continues to accelerate as we strengthen our customer relationships and build new ones. Organically many of the pipeline growth opportunities I had mentioned earlier are a result of strong relationships fostered over years by our acquisitions in both LINC and in Westport. The acquisitions were presently considering highlight new opportunities and expansion of our geographical presence. They will also be smaller tuck in operations for agency conversions aligned with our transportation and intermodal business to further expand our capacity.

With that I will turn the discussion over to Don Cochran. Don?

Don Cochran - President

Thank you, Scott. The transportation segment is benefiting from an increase in freight volumes of steady and improved economy and from tighter capacity. As we mentioned last quarter recruiting and retention remain the key buzzword in our marketplace and we continued to add options to gain capacity. The marketplace in general is showing high single and low-double digit rate increases year-over-year for flatbed and specialized haulers. In localized instances we have even seen existing conditions in the van marketplace similar to that. Freight is plentiful and capacity is tight.

Within transportation services revenue for both flatbed and specialized heavy haul activity show a 5.3% growth for the second quarter of 2014 over the second quarter 2013, right in line with the overall transportation segment. Net of fuel surcharges the van revenue has increased 12.8% for the same timeframe. Brokerage revenue has increased 20.5% year-over-year for the second quarter of 2014 over the second quarter of 2013. We have seen modest acceleration in the pace of business and in available loans.

Energy accounts lead the way for increased business. Comparing Q2 2014 to Q2 2013, our oilfield revenue gained 7.5% and wind energy gained 27.8%. For the six months of 2014, oilfield is up 7.5% and wind is up 76.3%. The remaining flatbed commodities, metals, building materials and machinery were up slightly 2% for the first six months of 2014. All flatbeds are up 10% for the first half of 2014 compared to the first half of 2013. Our van business increased 9.2% for the first half of 2014 compared to the first half of 2013. All of these comparisons are net of fuel.

Conditions have improved in brokerage. Total revenue in brokerage increased to $78 million for the first half of 2014 or 5%. Margins are stable on other brokerage businesses and rates are increasing marginally faster than purchase transportation. Several agents have shown significant increases in the first six months of this year. The bulk of those agents showing increases are flatbed agents. We have opened several new agencies in the second quarter that brought with them additional flatbed business with a variety of accounts.

The legacy Universal Truckload business is currently 75% flatbed and 25% van. Our view in the next few months tells us that many of our agents expect to grow in the third and fourth quarters on pace with the second quarter. Growing our fleet is part of the process, so we are continuing to work on recruiting and retention. Our total fleet count is up less than 1% with part of that coming from added company tower and leased purchase trucks. Company terminal revenue growth grew at roughly 10% over the first half of 2013.

In addition to growing energy business, we see new business from efforts with our enterprise sales team in the automotive, pipe, steel and aluminum accounts. Safety, retention and recruiting remain our biggest challenges. We expect to have an expanded lease purchase program in Q3 2014. Details are being completed now. Our retention program is giving us modest improvement. Recruiting is tough as all of our competitors are going all out to find every possible truck. We are installing electronic logging devices at a more rapid pace and expect to be nearly 50% by the end of the year. We feel very optimistic about the next half of the year. It’s good time to be in trucking and we are working hard to take advantage of the very good market.

The U.S. intermodal marketplace is growing at a modest pace in 2014. The international sector is predicted to grow about 6% on the import side and 2% on the export side. Domestic rail volumes are expected to increase about 6.5%. Through the first five months of the year, the market has experienced about a 4.7% increase in imports, while exports have been fairly flat. Domestic intermodal volumes are up 5.4% year-over-year with trailers showing a greater increase than containers. We can deduce that because of capacity constraints than carriers are putting more equipment on the rail.

Universal’s intermodal performance has gained momentum in the drayage area. While TruckCam was stagnant in May, we have recently experienced a 3.9% spike in truck count. We have seen spot buy rates increase in most markets as the amount of work continues to grow. However, our domestic intermodal rates are competitive, because of the competition for space on the Class 1 railroads.

A breakdown of our service sectors over the last six months shows that we have outperformed market in drayage with an overall – with a year-over-year increase of 9.4%. Our container yard services are down as steamship lines improve repair requirements and improve the efficiency by street-turning containers. Both these issues impact the amount of equipment entering our container yards. The first half of the year, we saw depot revenues slip 5% and maintenance repair revenue drop 11% compared to the first half of 2013.

On a positive note, depot revenue has increased year-over-year by 10% for the month of May and June, and maintenance and repair revenue was up over 8% in the month of June. On the domestic side, our revenue was down as the volume customer changed models and shifted from rail to truck, which Universal Truckload Services picked up part of. June was a positive month for our spot market and domestic news was up another 100%.

Because of the severe decline in domestic revenue, intermodal was down 4.3% for the first half of the year or the same period. The outcome of the second half of 2014 will be greatly influenced by our ability to add contractors and inject additional company assets. We will get some assistance from tighter capacity, which will allow us to take advantage of price increases in the second half. We should see increases reach beyond just a spot market with pricing discussions underway with several steamship lines and global logistics companies.

We continue to look at expansion opportunities for our company facilities. Acquisitions remain a key part of our growth strategy in larger open-market locations. We are considering working on acquisitions in the Western states and in the Midwest. Universal’s Intermodal footprint has been well received by our customer base as they continue to centralize offices and engage with larger partners on a national level.

We continue to build revenue with large – with our largest customers and we quoted several large opportunities with existing customers and expect the volume to increase in the second half of the year. The second half of the year, we’ll see year-over-year comparisons in positive figures. Our domestic comparisons become easier in the second part of the year and drayage is expected to continue to grow in the low double-digit range. Our container yard services should see an upward movement as steamship communities prepare equipment for the coming shipping season.

With that, I’ll turn the conversation over to David.

David Crittenden – Chief Financial Officer

Thank you, Don, and good morning everyone. As highlighted in our second quarter earnings announcements, Universal second quarter financial performance reflected extension of favorable first quarter trends in the truckload transportation operation and a solid rebound and profitability in the continuing logistics segment, which includes revenues from value-added services and dedicated transportation.

As Scott and Don described, the overall operating environment was markedly improved compared to the previous quarter and we do anticipate continued stability in the next few quarters. We earned $13.6 million or $0.45 per share on consolidated operating revenues of $307.5 million. On a year-to-date basis, we booked earnings of $0.72 per share on total operating revenues of 587 units. Our reported revenues exceeded the estimated range we communicated in late June by about 2.5% primarily due to strong demand in most of our truckload categories in the week preceding the shortened Fourth of July week.

Our earnings per share fell at the midpoint of our prior guidance, including some corporate costs that were not record related to our operating segment. Revenues from transportation services as Scott said increased 10.1% or $80.1 million from Q2 2013 and 9.8% compared to the prior quarter driven by the demand of pricing trends that Don just commented on. Revenues from value-added services including Westport revenues totaling $26.3 million or up $24.8 million compared to Q2 2013.

A more meaningful comparison, though, may be the 9.4% increase from $69.5 million of value-added revenue in the first quarter. The quarter-over-quarter comparison is of interest has a better reflects our ongoing operations as well as traditional strong second quarter demand for value-added service due to our automotive customers production schedules. Revenues from intermodal services were basically flat on a year-over-year basis, but up 13.2% from the preceding quarter. In total, our consolidated second quarter revenues compared to the first quarter were up 10.1% or $28.2 million. In terms of operating income, we reported income from operations totaling $24.4 million in the quarter ended June 28, up slightly from $23.7 million one year earlier and $14.6 million in the first quarter.

As a percentage of consolidated operating revenue, our operating margin was 7.9% compared to 9% in Q2 last year, the 5.2% in the first quarter of this year. Compared to one year ago, about 70 basis points of the adverse change, excuse me, 70 basis points of the adverse change in consolidated margins can be attributed to intangible amortization in connection with Westport, which is not reflected in last year’s result. Of greater note, Universal’s second quarter consolidated operating margin of 7.9% reflects the anticipated rebound we experienced from 5.2% in the first quarter when Universal’s cost of services increased due to weather, resulting in a historic compression of margins, particularly in our value added services and dedicated transportation operations.

If you take a look at the EBITDA margins that we reported in the item captured non-GAAP financial measures, you will see that we reported Q2 2014 EBITDA margin of 10.5% compared to 10.8% last year and 8% in the first quarter. We believe the slight decline between the recent quarter and one-year ago has more to do with the shifting mix of our various businesses, which have different margin characteristics, than anything else. More recently, we think the pricing dynamic is favorable for margins in Universal’s truckload business and we continue to implement strategies across our operations that should over time permit incremental improvements in our aggregate margins whether based on operating income, EBITDA or net income.

A comparative analysis of Universal’s consolidated income statement shows that, when calculated as a percentage of revenue, our Q2 costs of purchase transportation and commission expense together was 54.2%, up just slightly from 53.8% in the first quarter. In contrast, the line’s direct personnel and related benefits were 17.9% in the second quarter, down from 19% of the preceding quarter. Similarly, other operating expenses declined to 10% of revenues in Q2, compared to 10.9% in Q1. Improvements in these cost items relate to the restoration of expected productivity levels.

Page 6 of the press release dissects the performance of Universal’s two reportable segments, transportation and logistics. And I’ll comment on each of those briefly. In our transportation segment which includes our agent-based transactional truckload transportation, along with intermodal services, brokerage and specialized services, revenue in the quarter ended June 28, increased to $195.4 million, a $70.1 million of 9.6% increase from a $169.5 million and 11.4% increase over the first quarter. Expressed as a percentage income from operations in Universal’s transportation segment increased 5% of revenues in Q2 compared to 4.2% last year and just 3% in the first quarter.

As Don described, favorable pricing has emerged as the response to tight capacity, which we think will continue to benefit large carriers with more flexible fleets like Universal. Westport Axle was not integrated into our value added services organization and enterprise sales activities. Its financial performance is consolidated in our logistics segment. As I mentioned in April, in the first quarter Westport earned income from operations totaling $3 million including about $2 million of intangible amortization and operating revenues totaling $25.3 million. With strong industrial demand from key heavy truck customers continuing, our newest subsidiary continued its profit performance in the recent quarter, earning $4.1 million of operating income on $26.3 million of sales.

Although our detailed commentary on these operations will diminish going forward, I should mention here that we recently finalized certain post-closing matters with Westport’s previous owner pursuant to the acquisition agreement and with modest overall impact. Excluding Westport’s performance, though, revenue from our logistics segment were basically flat at $85.8 million compared to second quarter of 2013, but up over 9% compared to first quarter logistics segment revenue of $78.6 million. The quarter-over-quarter increase largely reflects a typical seasonal impact in daily production activity. The new managed service operations as Scott mentioned only had a modest impact on revenues beginning in June.

Income from operations without Westport was about $12 million or 14% of Q2 logistics revenues which compared to 19.7% one-year ago. Overall, operations reported in Universal’s logistics segment closed to $112.1 million revenue in Q2 resulting an income from operations totaling $60.1 million. Compared to the immediately preceding quarter, Q2 operating revenues increased 7.8%, largely due to the anticipated seasonal production volume changes that I just mentioned.

Operating margins for our logistics segment, which includes both value-added services and dedicated transportation, were 14.4% for the full year. This compares to just 9.3% in the immediately prior quarter and also to 19.7% last year. Second quarter 2014 logistics segment margin began rebounding from compressed Q1 levels early in the quarter but not immediately. Across the 13 weeks ended June 28, the overall segment margin also reflect approximately $500,000 of costs not directly related to ongoing production as well as launch cost incurred in June in connection with our new transportation management operation.

Our target profitability for businesses in Universal’s logistics segment over the long horizon is 50%. However, the ramp-up of the managed service business and related timing makes near-term estimates a little tricky. I would point you to the supplemental information on the earnings announcement, which includes among other key operational data are calculation of earnings before interest, taxes, depreciation and amortization. This information may be of interest to those in our audience today who are interested to evaluate Universal’s free cash flow, which is a distinguishing feature for our company and one of the benefits that we think is attributable to our asset-light business model.

Turning now to the balance sheet, Universal held $8.1 million of cash, $12.4 million of marketable securities at June 28. Borrowing totaled $242.4 million, a $4.9 million increase since the beginning of this year. Universal’s capital expenditures totaled $19.4 million in the second quarter. Although our recent investments relative to period revenues is somewhat higher than our long-term target, it reflects both catch-up purchases from late 2013 deferrals and additional equipment acquired to support dedicated transportation services in connection with our new transportation management and dedicated services contract.

We will file our quarterly 10-Q in about 10 days – 10 business days from today and it will provide additional detail behind the financial performance we’re discussing today. This will include some details on share buybacks we executed in the second quarter under an existing program at an average cost per share of $24.32 and a total cost of $4.1 million.

Looking ahead, Don and Scott discussed trends that will drive our financial performance for the next several quarters including first good demand fundamentals in our key markets, deploying a pricing for our truckload transportation services and encouraging pipeline of new value-added business prospects including a new automotive OEM customer balanced by ongoing capacity constraints and regulatory challenges particularly in the specialized markets we serve as well as revenue comparisons in Q2 and Q3 for our logistics operations to the extent that new business opportunities are different or do not completely offset a few of the operations we closed beginning late last year.

As I described in our late April conference call, we expect consolidated 2014 revenues to increase about 10% to 12% over 2013. This is comprised of average full year growth or aggregate full year growth I would say it about 7% to 8% across our truckloads intermodal and specialized services platforms and 20% to 25% growth in a value-added and dedicated transportation services including Westport. Of course, we also hope we can convert several of the opportunities Scott mentioned still this year. But the negotiation and launch phase for our large logistics opportunities can extend from several months to several quarters.

From an operating margin perspective, we do anticipate relatively stable profitability expressed as a percentage of revenue through the end of 2014. Following our move back towards longer term trends after Q1 with opportunities for incremental improvement in future quarters based on strategic initiatives and cost reduction actions. To us, this means about 95 OR for our transportation segment business through the end of 2014 and about 85 OR in our logistics segment with modest changes up or down depending on our efforts in connection with our new managed service business and any other significant new value-added services launches.

We also expect corporate costs that are not allocated to our two operating segments to moderate somewhat in the second half following Q2, although as you know, the timing of our cost of acquisition initiatives and other corporate investments are not always easy to predict. I will point out though that we are involved in a critical review of our overall organization and administrative systems, which have expanded in recent years with each successive acquisition. Management team believes we have an opportunity here to simplify our structure in ways that will enhance our customer service, productivity and profitability in 2015 and beyond.

In concluding the formal comments this morning, let me pickup on Don’s last comment. Management team here likes how Universal is positioned. We are working hard to take advantage of a good market for transportation logistics services. Of course, the business is not without regulatory and competitive challenges. And the closing of a few of our logistics operations has dampened Universal’s near-term profitability, where we do believe Universal’s broad capabilities, balanced customer relationships across several industries and asset-light business model are distinctive. We are also getting to know Jeff. He is showing valuable insights in his experience. From my vantage point, he also seems to appreciate joining the company with modest leverage, excellent cash flow, high ROI, good employee relations and a trajectory of organic growth.

With that, we want to thank you for your time and interest. Sally, we would like to invite you to open up the telephone lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Chris with Citi. Your line is open.

Chris Wetherbee - Citi

Yes hi, it’s Chris Wetherbee. Thanks guys for taking the call. Maybe I can start on the margin side. I guess I just wanted to understand a little bit how we should think about the cadence of margin in the various segments. I think you said 95 OR in the transport side and 85 value-added or logistics. So, that sort of implies a bit of a pickup here into the back half of the year, but maybe my question is more about the longer term when you think about 2015 and you get past some of the incremental headwinds on the value-added side. Is this still a business that can operate sort of in that mid-to-upper teens type of range, I guess I just want to make sure I understand first?

Scott Wolfe

This is Scott Wolfe, Chris. We certainly believe that from on the logistics side of the business that we will be able to operate and present a margin rate in that mid-to-high teen range for 2015.

Chris Wetherbee - Citi

Okay, so that’s what you think. And so obviously there is a bit of a step up here coming in the back half of the year, I think that’s consistent with your comments. When I think about some of the normal seasonality from 2Q to 3Q, typically you have some of those interruptions from a maintenance perspective on some of the customers. You mentioned in the commentary that maybe some of that would flow into August. Should we expect a little bit – how should we expect seasonality to trend 2Q to 3Q? Is it a little bit more pronounced than normal or is it basically in line with what we have seen in previous years?

Scott Wolfe

I believe it will be in line. The expansion into August typically what we would see is in the late June July timeframe. The OEM customers particularly would shutdown for model changeover. This year because of new product launches and those kinds of things, there is an extended time frame. It’s no more than normal. It’s just falling outside of the normal cycle.

Don Cochran

I might add Chris, year-over-year trends are what we commented on, but if you look three versus two transportation segment is basically flat driven by number of days more than anything and seasonality things like that. The logistics segment again primarily driven by the automotive piece of it is basically down kind of mid-teens over the second quarter. Growth from third quarter of last year, but that seasonal effect – the second quarter is always the strongest quarter for that business. Third quarter is always the softest.

Chris Wetherbee - Citi

Okay, that’s helpful. And then I guess when I’m thinking about the pipeline of new business, it sounds like things are continuing to go well with – I think, Scott, you mentioned quite a few potential opportunities both for new and maybe existing customers as well. As you are thinking about sort of the conversion of that pipeline, do you feel like things are sort of building and so the pipeline is getting a little bit more robust so maybe we can expect a little bit higher rate of conversion going forward or am I reading a little bit too much into the comments that you made earlier in the call?

Scott Wolfe

We again – when we found the enterprise sales team as Universal purchased LINC and we put the sales activity together. At that point in time, we were in a transitional phase. And in what it took for us in the logistics side, the – there is a significant longer lead time. The items that I discussed with you are once that we see coming to fruition, if we are successful, predominantly in the first half of 2015. But we are working on projects and pricing projects like now that we’ll not launch until 2017 and 2019. I didn’t talk about those at all. So we are seeing a more robust pipeline and we have seen basically in the last 18 months.

Chris Wetherbee - Citi

Okay, that’s very helpful. And I guess my last question would just be around the potential for acquisition targets. I think Don talked about potential opportunities on the intermodal side. How should we think about sort of your positioning toward potential acquisitions? Is it – is everything on the table as a possibility for one to happen maybe this year or the next 12 months as you think out and into that target most likely going to be on the intermodal side, or are you sort of all options still open here?

Don Cochran

I’ll answer at least the part on the intermodal side, Chris, this is Don. We have look at both big and small. What is important to it though, is that it is a good fit with our strategy. We’re not the same in some of the domestic intermodal companies. We rely heavily on the international trade and international steamship marketplace. So we will continue to look at, at least on the smaller side on some of those. We’re always interested in something that would be transformational and we are looking, but again more than likely if it’s strategic, it’s going to be a little bit smaller and it will be leaning more towards the international trade.

Chris Wetherbee - Citi

Okay, that’s very helpful. Thanks for your time. And Jeff, welcome aboard. Thanks.

Jeff Rogers

Okay, good to see – talk to you, Chris.

Operator

Your next question comes from the line of Todd with KeyBanc Capital Markets. Your line is open.

Todd Fowler - KeyBanc Capital Markets

Great, thanks. Good morning everybody and Scott, congratulations. And yes, Jeff, welcome aboard. I guess I wanted to follow-up with Chris’s line of question kind of on the second half in the expectations. Is the full year revenue guidance still 10% to 12% and that’s the case to me it seems like that it implies a pretty significant step down in the growth rates in the third and fourth quarter and I just want to make sure that number one, I’ve got that right and number two, what would be the pieces that are driving the decelerating revenue growth in the back half.

Scott Wolfe

Hi, Todd, let me take a swing of that. Yes, 10% to 12%, I think that was in my comments as well. The thing that most impacts the third and fourth quarter year-over-year on the logistics side is the trend that I commented on in responding to Chris, second quarter is a strong quarter. So, comparisons to previous quarters have to be taken into consideration. And the rest of that, I mean, I think we think in terms of compared to prior year, we’re still kind of in the low-teens high single-digit numbers with respect to transportation, which is I think very consistent with what we said in terms of both pricing and loads. I think what we’re trying to suggest is that the economy seems to be growing consistently at a low but consistent rate in the markets that we’re in. We’re getting good pricing because of capacity, so we can look back from the numbers. But those are the two major things that are driving the segment revenues.

Todd Fowler – KeyBanc Capital Markets

Okay. And then – so just on the value-added services side it’s mostly the seasonality, but are there any contracts that are transitioning off in the back half of the year will be pretty much worked through the contract transitions over the past couple of quarters?

David Crittenden

Well, we have worked through them. The costs associated with them has kind of run through, but if you go back to second quarter or third quarter a year ago, it represents $8 million to $9 million worth of quarterly revenue that won’t to be in our third quarter in connection with those old businesses.

Todd Fowler – KeyBanc Capital Markets

Okay, that helps. And then the comment on the margin expectations for value-added services, does that include the step up in amortization related to Westport and I guess what I am trying to get a sense of is right now the segment is kind of the mid-teen margin level and a year ago it was kind of in the high-teens, is the biggest difference there the amortization related to Westport, or does they have something more to do with the mix shift and some of the contracts that have transitioned off?

Jeff Rogers

I’m going to let Scott respond to that question because he was responding that to me in my office earlier today. Go ahead Scott.

Todd Fowler – KeyBanc Capital Markets

I am just glad I am asking the same question I guess.

Scott Wolfe

What we are really seeing, we talked just a couple of moments ago about getting the enterprise sales group and those kinds of things, the activity in those going and the amount of lead time that it takes to bring that business in. What we are seeing is that our business model the way that it’s cost and priced, to get the higher-teen margin rates requires an influx of new business on the front end. That has been slow to develop.

Todd Fowler – KeyBanc Capital Markets

Okay.

Scott Wolfe

Typically that business comes into the higher rate. So that’s why we are working diligently on improving the revenue line.

Don Cochran

Westport has performed very well. We are reluctant to say exceeding expectations, but it’s doing what you would hope a new acquisition does. And it’s also kind of got the wind at its back with respect expect industrial demand for heavy tractor. So I think it’s taking the additional couple of million of amortization in stride. And so I would say the first part of your question was how does Westport affect that, we don’t think it’s being hampered by the amortization of Westport’s intangible.

Todd Fowler – KeyBanc Capital Markets

No and Scott, the answer really helps because I think that was something that I would knew and maybe just I have forgotten or put it in the back of my mind that the margin profile is typically higher and so if I understand that correctly once we see the value-added services revenue growth start to reaccelerate organically that’s going to help the margin profile?

Scott Wolfe

That’s correct.

Todd Fowler – KeyBanc Capital Markets

Okay, good. And last two ones I had. David, I think you had mentioned that there were some corporate costs or I wasn’t sure how you actually termed them in the SG&A line, this quarter I was curious if you could quantify what those were for and how much they were. And then my last question is what we should be thinking about for interest expense? Thanks.

David Crittenden

Sure. They were corporate costs and interest expense. If you look at the segment reporting detail of the second quarter versus first quarter, you can kind of get sense of the order of magnitude in the second quarter. But it’s a variety of things, it’s no one thing. But we did do some things in – of an exploratory basis in the capital markets in the second quarter that is the primary driver of the quarter-over-quarter change in interest expense. And we had some additional reserve items primarily in connection with our value-added services business kind of close out costs associated with the close down of some operations, as well as some reserve items in connection with some service claims that were directly hitting kind of the operating margin primarily for the logistics business. So I would say maybe it’s about $0.5 million of excess interest cost and maybe $800,000 to $1 million of costs that hit the operating line that would be not specifically associated with the ongoing operations.

Todd Fowler – KeyBanc Capital Markets

Okay, that’s helpful. Thanks for the time this morning.

Scott Wolfe

Thanks, Todd.

Operator

Your next question comes from the line of Kelly with Macquarie. Your line is open.

Kelly Dougherty – Macquarie

Hi, thanks for taking the question. Just one quick clarification, the margin ranges you are referring to are EBIT margins, not EBITDA, right?

Scott Wolfe

Yes.

Kelly Dougherty – Macquarie

Okay, thanks. Just wanted to talk a little bit about the dedicated business that you have, should we think about them as kind of cost-plus businesses where maybe you pay a little bit more for purchase transportations or things like that in a given quarter, but then you’re able to recruit that they’re just a timing lag or are they contracts that have a set price and then the margin has to knew if there is any upward pressure on cost.

Scott Wolfe

Dedicated transportation as we handle it today is contract base transportation. Therefore, it is a fixed scenario for a given period of time so, fixed scenario meaning a fixed cost-in model for a specified period of time.

Kelly Dougherty – Macquarie

And how long are they, I’m sorry, I’m just wondering how long that is specified. Is it renewed every year or?

Scott Wolfe

Transportation generally – transportation contracts are reviewed and renegotiated on an annualized basis.

Kelly Dougherty – Macquarie

Okay. And now do you sign the – I guess I’m trying to get out is some of these relatively recent upward pressure on trucking costs have already been captured and the pricing or if may be there is some more leeway for margins once you go back and make up for those higher costs, I mean, how do these things get signed on a calendar year basis, kind of rolling throughout the year, how can we think about that?

Scott Wolfe

Each contracts certainly has a – not everything expires on April 1st. The contracts are varied by customers throughout the year, but your question is very appropriate today. Based on the issues that we face in the dedicated transportation in the first quarter has required us to reevaluate our costing relative to that business. So, we are aggressively pursuing interim contract price increases with two or three of our accounts in that dedicated segment. So, it’s a TBD. We will basically specify what we need to be able to do business that then will end up in a pure negotiating strategy and the conclusion to be determined.

Kelly Dougherty – Macquarie

Okay. Is there any kind of move to change the way that contracts are structured so, maybe it’s not necessarily a fixed price given that kind of moving parts now or maybe it’s more of a cost plus or fixed margin?

David Crittenden

Yes, Kelly, this is David. I know from some of our last – our past conversations and reading some of your analysis another of our peers that you’re kind of focused on the margin, the consistency of the margin. We actually generally believe that the dedicated business allows us to lock in the economics of our contract for a longer period of time than just a spot buy. So, we’re not – that portion of the business is not transactional and it has the opposite of the effect that you’re talking about. What Scott referring to is certainly in the first quarter where productivity was affected, it kind of late open some exposure that we had with respect to the – the economics of dedicated business and one of the great things about those dedicated lanes and those dedicated contracts with those relationships is it allows us to behave, it’s not work in the way need to be for us. We need to renegotiate the conversation. So, it’s not a question kind of margin compression over time. It’s when you become aware of different economics you have the ability to change them and that’s what we do in the dedicated business as opposed to the opposite of that would be like a brokerage type of an arrangement. Does that…

Kelly Dougherty - Macquarie

What I was basically talking about when you think about other companies that have dedicated arrangements, it’s a cost of business so, that – it’s not spot at all, I mean, it’s kind of multiyear, but it’s, here’s the margin that I need to get and I was just kind of wondering how yours are. But it seems this is a fixed price contract until your price or your costs move higher, and then you go back and you renegotiate that fixed price. Is that how to think about it?

Scott Wolfe

Yes, it is.

Kelly Dougherty - Macquarie

Okay. Are you finding that customers are looking to do more of that as capacity gets tighter and maybe they are worried about being exposed on the capacity side? So, people are more interested in these kind of dedicated arrangements?

Scott Wolfe

In our dedicated environment, it’s one that’s more historical. So, it’s not related to recent trends. What we are seeing are our customers are positioning carriers, positioning from the perspective of what can we do to help you to where they are trying to protect current capacity and soliciting investment for future capacity. All of which again is to be determined.

Kelly Dougherty - Macquarie

Okay, thanks. Just switching gears then I know you guys are very focused on the international side of things in the intermodal business. And just wondering if you could help us think about what kind of impact if any there was from shipping company being concerned about the strike situation on the West Coast? Has that kind of boosted how you think about your operations in the second quarter and maybe if so some of that 3Q what would have been in 3Q got pulled into the second quarter?

Don Cochran

This is Don, Kelly. And yes, we have been watching it very closely. The negotiation at least seems to be moving along amicably. We have seen some shifting of ships from one market to another, but it hasn’t been a real impact yet. As the real shipping market winds up here in the next few weeks, we are watching it a little bit more closely, but again that’s where we see our best opportunities. Our national footprint with those steamship lines has given us lots of opportunities, where we are seeing some price flexibility going forward. And we are getting that because we serve not only the ports, but the rails. So, we are pretty optimistic about that. We are in Savannah and Charleston and we are also in LA, Long Beach. So, we do see them reading those tea leaves and we are trying to react to them too.

Scott Wolfe

In addition to that, Kelly, I would tell you that we are confident personally in the West Coast capacity. In other words, we are looking at investing potentially making an acquisition, because we need and fairly need a greater penetration in a very large market that can’t be easily replaced.

Kelly Dougherty - Macquarie

That’s helpful. Just wondering if you saw I mean because we know of companies here have kind of shipped earlier than maybe they would have otherwise concerns about the strike happening. Did you see that benefit in the second quarter in those numbers or really that’s just kind of the overall environment and hard to pull that out?

Scott Wolfe

Yes, Kelly, that is part of our drayage business. When we look at the first quarter, we also suffered from the difficulty in our intermodal business, but demand for drayage services is pretty strong right now. And we see it going forward the next two quarters.

Don Cochran

Kelly, are you – is your question though specifically in connection with LA and Long Beach that somehow people are pulled into second quarter from the third quarter.

Kelly Dougherty - Macquarie

Yes. I mean, we have heard of people who are shipping things earlier ahead, because they were worried about this strike deadlines. I wasn’t sure if some of the benefit maybe you saw in the second quarter would have been taken a little bit from what you are expecting to see in the third quarter, but that doesn’t…

Don Cochran

The intermodal pulled forward demand.

Scott Wolfe

Very well could be. We are hearing, again a bifurcated response from most of our steamship lines, but yes, we do think some of that is pull forward.

Kelly Dougherty - Macquarie

Okay, great. Thanks very much.

Scott Wolfe

Thank you.

Operator

Your next question comes from John with Stifel. Your line is open.

John Larkin - Stifel

Good morning gentlemen.

Scott Wolfe

Good morning.

Don Cochran

Good morning.

John Larkin - Stifel

Just wanted to and maybe if this is too blunt a question, we could handle it offline, but with Scott transitioning to the board at the end of year, Jeff will be taking over, fortunately has a chance to sort of integrate himself into the operation and get to know everyone and so forth. But I was a little surprised and I know many of our clients were surprised that Scott’s replacement came with a preponderance of less than truckload experience, given that Universal is not a big player in the LTL market? I don’t know who wants to address that, but either Jeff could address it directly or perhaps Scott you can address it?

Scott Wolfe

Yes. We both may take a shot at it. First, I would tell you that Universal doesn’t have any plans to get into the LTL market. With Jeff what we – what we saw was an experienced transportation person that isn’t new to the industry and has a very strong background both from a managerial, from a finance perspective. Those are strengths, he has proven his capabilities. What does Jeff have to concentrate on learning certainly is the value added business. That is something that he would be able to learn very quickly. My goal and part of my reason for being on the Board is to continue to help in that arena. So from that perspective we think it can be a very smooth transition. So Jeff?

Jeff Rogers

Yes. I would agree with that. I mean this is a unique opportunity to spend this much time in a transition. I mean I think we could all say that most of the times in our career you don’t get six, seven months to learn in a transition. So I appreciate the fact that we are able to do that. And to Scott’s point, yes I don’t consider myself an LTL guy either just because I am more of a finance guys that was in LTL, but I have also got a lot of experience with UPS and operations. So I don’t consider myself to be very specific but more of a broad business person that I think can understand what levers to pull and we will bring that experience. So John I think it’s a great opportunity for me. I am loving what I am seeing and just looking forward to. But Scott will there and I will get as much out of his brain as I can in the next five months and he will around to help. But I sure think it’s going to be a great opportunity and we have got lots of good things to do going forward.

John Larkin - Stifel

Those are good answers. I appreciate that. Is it fair to say that there is a fair amount of customer overlap between your Holland customers and the Universal customers?

Jeff Rogers

Well, I think there is definitely some Holland was huge from an automotive perspective, Tier 1 suppliers as well as the direct OEM, so there is definitely some customer overlap. There is customer overlap on the retail side in the value add business there is no question. So I am having some good conversations with some customers and look forward to spend more time converting most of the customers, but there is definitely some overlap.

John Larkin - Stifel

Thank you for taking the time to answer that question. Secondly shifting gears a little bit towards the acquisition area there are a number of folks out there that have become quite a bit more what I would call proactive in the acquisition space, we just saw this morning that TransForce is buying Contrans just one of the biggest trucking roll ups up in the Canada itself, lots of combinations occurring out there, are you finding the acquisition world a little more cluttered with buyers out there looking for opportunities or what you are looking for sort of unique enough that you are not seeing a lot of competition?

Scott Wolfe

There are a myriad of opportunities that exist, but acquisitions of LINC and Westport I think demonstrate from a logistics perspective what we are looking at. There are some very large companies that are currently on the market. Would you evaluate those to make a certainly huge change in your business model, yes. We don’t believe that that is an area in which we can compete right now. And the reason is private equity is playing a huge role in many of the acquisitions that we are seeing right now. And the multiple is potentially getting a little too far away. From a transportation – so from a logistics perspective with the opportunities we have John, we are hopeful certainly to be successful and would like to focus on the organic side of growth when it comes to the logistics business.

In the transportation segment, we will again look at smaller tuck-in type that help us either from a service perspective or a geographic perspective to help us in penetration and get us additional capacity. We do not envision at this juncture a huge transaction to buy competition.

John Larkin - Stifel

I guess those transportation tuck-ins are almost by definition less risky, less expensive and enable you to build out your geographic footprint and build out your capabilities and so forth. So, those make a whole bunch of sense to me.

Don Cochran

We have not had any of those, John that have really let us down. They don’t make the big impact, but they have helped us with our strategy and helped us reformulate the company. So, it still makes a lot of sense for us.

John Larkin - Stifel

Now, not to beat a dead horse over the head on dedicated, there was quite a line of questioning earlier on that topic, but there are some companies out there that are involved in fairly big dedicated contracts. I guess with truckload capacity being so tight going forward primarily due to the worsening driver shortage, a lot of customers are thinking about the dedicated alternative as a solution to the problem long-term, but it seems like these startup expenses tend to drag on for multiple quarters. How confident are you that the startup expenses associated with this new relatively large contract, I presume, that you started up here in the second quarter will be completely behind you by the end of the third quarter? Is there any risk those swap over into the fourth quarter, the first quarter of next year?

Scott Wolfe

We are certainly currently in our second month. What we have been able to do is to stabilize the operation, which is critical in the dedicated side of that, John. Our focus then going forward for August, September will be to gain control of the launch cost that we put in place. We are already starting as an example to – in a launch like this, the workforce from an administration, excuse me, administrative perspective, we have about 2.5 times as many people involved in the launch as we would on the run rate. And so we will be drawing those individuals and there is a timeframe to get that accomplished and a lot faster than the fourth quarter. From an equipment perspective, we did a lot of leasing and made a lot of purchases to ensure that we could give the customer the service level that we basically promised in execution. We have already started to turn back equipment or reallocate in some instances equipment to other operations. So, I am reasonably comfortable in saying that we think the fourth quarter will be at operational level and startup done.

John Larkin - Stifel

Got it. Thanks very much for taking my questions.

Scott Wolfe

Sure. Thank you.

Operator

There are no further questions at this time. Mr. Wolfe, I turn the call back over to you.

Scott Wolfe - Chief Executive Officer

Well, thank you. I appreciate it. Thanks everybody. As always, we appreciate your interest, your participation in today’s call. Certainly, we look forward to speaking with you in the near future. We have got a lot of good things going on for ourselves. We wish you to have a really great day and certainly very enjoyable weekend. With that, thank you all again. Bye.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!