Universal Logistics Holdings, Inc. (NASDAQ:ULH) Q2 2018 Earnings Conference Call July 27, 2018 10:00 AM ET
Jeff Rogers - Chief Executive Officer
Jude Beres - Chief Financial Officer
Chris Wetherbee - Citigroup
Bruce Chan - Stifel, Nicolaus
Hello, and welcome to Universal Logistics Holdings’ Second Quarter 2018 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 words such as belief, expect, anticipate and project. Such statements are subject to risks and uncertainties, and actual results could differ materially from those expectations.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Rogers, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer; and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations.
Thank you. Mr. Rogers, you may begin.
Thanks, Xetania. Good morning. Thank you for joining the Universal Logistics Holdings Second Quarter 2018 Earnings Call. The Universal team delivered records in revenues, operating income and earnings per share this quarter. The path we started on in 2014 with changes to our leadership team, our goal to simplify, increase focus and improve execution; our goal to provide great service to our customers, and therefore, have meaningful discussions in order to get paid for that great service, all came together to deliver second quarter results.
On the top line, consolidated revenue increased over last year’s $60.7 million, or 19.9%, to $366 million. Our second quarter operating income of $26.3 million increased 309%. Earnings per share of $0.62 increased over last year by 545%, and both were the highest in our history. I’m very proud about the results the Universal team delivered this quarter.
Once again, each service line delivered revenue growth year-over-year. Revenue for truckload services was up 7.7%; brokerage services revenue was up 42.9%; intermodal revenue, which includes a full quarter of Fore Transportation was up 41.7%. Our dedicated unit had revenue increases of 17.8% and our value-added businesses had 6.5% in additional revenue. Our sales pipeline grew to over $0.75 billion and includes significant opportunities across all our verticals.
In truckload services, which excludes brokerage, our revenue was up 7.7%. The increase in revenue comes from 12.7% higher revenue per load, but 7.2% reduction in total loads hauled. Our driver count for our irregular route agent business is down 5.3%, as it is very difficult to find drivers for this segment in this environment.
Pricing remained firm throughout the quarter, and we continued to secure double-digit increases on contractual business and high double-digit increases and more on spot business. We added 31 new agents year-to-date and our revenue from all new agents is over $20 million on a run-rate basis.
Brokerage services revenue increased nearly 43% year-over-year, driven by load count increases of 8.9% and revenue per load increases of 30.1%. Our standalone brokerage company’s margins rebounded nicely in the second quarter and we see very strong results so far in July. Our intermodal team continues to outdo themselves. They delivered another record quarter on the top line and best-ever operating income.
Overall, revenue increased 41.9%, driven by a 12% increase in loads and a 27.4% increase in revenue per load. Pricing continues to strengthen in the drayage space. We believe that providing drayage capacity is the best part of the intermodal play for growth and profitability. And that’s exactly what we do, which gives us great confidence in our future performance.
Dedicated services revenue increased 17.8% year-over-year. We continued to negotiate new rates during the quarter, and we are having success with most of our customers as they see the value of dedicated capacity in this current environment. Our dedicated unit did return to profitability in the second quarter, but still remains below our expectation.
Our value-added operation supporting heavy-truck continues to accelerate as revenue grew 22.7%, as classic truck production continues at elevated levels. We are very pleased with the overall performance of this unit as they have returned to historically high margins, and we see this continuing through 2019, based on current production forecast.
For our value-add business that supports our auto, aerospace, retail and industrial customers, revenue grew 1.4% year-over-year. The margins in our legacy logistics business have returned to historical norms and the team is performing very well. As I said last quarter, our focus for this business unit will continue to be margin improvement with intelligent growth.
The environment continues to be robust, and honestly, I do not see anything that will disrupt that for the remainder of this year and through 2019. The driver shortage continues and there has not been any significant increase in capacity throughout the transportation industry.
Universal’s performance in the second quarter is more about solid execution across all our business units and the return to historical margins in our value-added businesses. We have been working very hard over the last several years to take advantage of our unique, diversified asset-light model and increase our earnings in areas outside of the cyclical truckload transportation space. And this quarter shows how we can deliver on that plan.
The second quarter was a record quarter for Universal, yet I see plenty of opportunity for continued improvement. We are actively executing on our acquisition strategy, and we feel very good about our ability to acquire companies that meet our criteria. Our momentum is good. Our execution is solid. We feel very good about what is ahead for Universal Logistics.
With that, I’ll turn it over to Jude.
Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $17.7 million, or $0.62 per share on total operating revenues of $365.9 million in the second quarter of 2018. This compares to net income of $2.7 million, or $0.10 per share on total operating revenues of $305.2 million in the second quarter of 2017.
Consolidated income from operations increased $19.8 million to $26.3 million, compared to $6.4 million in the second quarter of 2017. EBITDA increased $21.4 million to $39.8 million in the second quarter of 2018, which compares to $18.4 million one year earlier.
Our operating margin and EBITDA margin for the second quarter of 2018 are 7.2% and 10.9% of total operating revenues. These metrics compare to 2.1% and 6%, respectively, in the second quarter of 2017.
Looking at our segment performance for the second quarter of 2018. In our Transportation segment, which includes our truckload, intermodal and freight brokerage businesses, operating revenues for the quarter rose 33.8% to $234.2 million, compared to $175 million in the same quarter last year. Income from operations increased $1.8 million, or 21%, to $10.3 million, compared to $8.5 million in the second quarter of 2017.
In our Logistics segment, which includes our value-added logistics, including where we service the Class A heavy-truck market and dedicated transportation business, income from operations increased $17.5 million to $15 million on $131.4 million of total operating revenues, compared to an operating loss of $2.5 million on $129.9 million of total operating revenue in 2017.
On our balance sheet, we held cash and cash equivalents totaling $1.7 million and marketable securities of $12.5 million. Outstanding debt net of $1.2 million of debt issuance costs totaled $272.2 million. At the end of the second quarter, our net debt-to-EBITDA ratio was 2.6 times on a trailing 12-month basis. Capital expenditures for the quarter totaled $24.3 million. For 2018, we are expecting capital expenditures to be in the $65 million to $70 million range, and interest expense between $11 million and $11.5 million.
On Thursday, we declared Universal’s regular quarterly dividend of $0.105 per share. This quarter’s dividend is payable to shareholders of record at the close of business on August 6, 2018, and is expected to be paid on August 16, 2018.
Xetania, with that, we’re ready to take some questions.
[Operator Instructions] And your first question comes from the line of Chris Wetherbee with Citigroup.
Hey, guys, good morning.
Hey, good morning.
So wanted to start, I guess, on the truckload side. You talked about the opportunity to get some pretty significant rate increases. Can you help us sort of understand what your mix is between contract and spot? So what is that sort of mix today? And sort of where is that opportunity taking you as the rest of the years plays out to that mix change?
I don’t see any change in the mix. First of all, we’re about 50-50 on the owner-operated agent truckload business, Chris. So again, I don’t see any change in that mix, but it’s 50-50. So as far as opportunities go, you can look at both things. The spot has been really, really hot and it’s still real hot. And contractual business is catching up and is getting much stronger, because I think, people realize it’s not going – the spot market is not going to change anytime soon. So they might as well lock in a contract. Even though the contract rate may be double digits at this point, it’s better than a 20%, 25% spot rate. So how – that’s how I’ll leave that, I guess.
Okay, that’s helpful. When you think about the – I guess, the margins in total transportations, they’ve been a little inconsistent over the course of the last several quarters and were down a little bit sequentially. How do you think about that? So what is the market backdrop that you need to start seeing sort of consistent meaningful improvement on the transportation side from a margin standpoint?
Well, the inconsistency is coming really from the dedicated space. If you look at truckload, the legacy agent business has been pretty consistent. Those margins are getting a little bit better. But the dedicated space and we struggled – last quarter was unprofitable, not a lot, but a little bit.
And this quarter, they turned back to profitability. But that’s really where we’re seeing a lot of the inconsistency and it’s that automotive. We focus on automotive and dedicated. We’ve been talking about that for ever since I’ve been here about trying to get out of the – or expand further away from automotive and we’ve not been real successful to do that.
So that’s where the inconsistency comes from the margins, because it really – a lot of it depends on our plants up and running or not. So there’s always some normal inconsistencies in the automotive space. And our dedicated unit has been, what I would say, extremely inconsistent.
So to make that more consistent, we’re going to continue to execute on the strategy of trying to expand away from automotive and dedicated, because there are plenty of opportunities out there to do that. We’ve just not been able to take advantage of that yet, but we’re going to keep swinging at it, and I think we can do it. And then just focus on the automotive customers that, I think, are a little bit more willing to pay on a consistent basis, so.
Okay. Okay, that’s helpful. That makes sense. When you think about the typical seasonality between the second quarter and the third quarter, plant shutdowns and those types of dynamic that happened over the summer had historically had some impact on sort of 2Q to 3Q cadence. Could you help us sort of understand that, because a lot of your business is growing at a very rapid pace. So I’m not completely sure if that’s still the right way to think about it. So any help there would be great?
Sure, and we still see that in the value-add, the legacy LINC or the value-add business, because it’s so heavily automated. There is always that July two-week shutdown. And there’s still a lot of plants that have that same shutdown this year. It was really kind of strange. Pickup truck and SUV, we’re still running fairly high production, but then we had a changeover in one of the big plants that we support that actually changed their model.
So they were down for a couple of weeks. And actually, just started coming back up. It was more of a model change versus the normal July shutdown. So we are clearly going to see a little bit of a hiccup in July for the value-add space. The beauty of it is, we’re seeing such strength on the intermodal space, that’s just building. So how much of that offsets, what’s going on in the value-add, we’ll see as the quarter plays out. And I think, brokerage is getting even stronger through July, so we’re seeing some real strength there.
So normally, yes, I would agree with you that you would see a little bit of a hiccup from second quarter to the third quarter, but I’m not sure we’re going to see that this year. So we’ll see how it plays out.
Okay. So maybe flattish is not an unreasonable way to think about it or potentially – I mean, I guess, maybe you could even see a little bit acceleration from 2Q to 3Q?
I would agree with that.
Okay. All right, that’s helpful. And then two more here and I appreciate the time. You’ve talked at LINC over the long run about returning the company to 8% margins. Obviously, last year, I think it was a disappointing year from a margin standpoint. But so far through the first-half of the year, you guys are making significant strides higher in terms of total company margins.
I guess, maybe two-part question here. What do you think margins are going to roughly look for 2018? And then how quickly do you think you can maybe address that 8%, though – that’s still sort of your 2020 target? Has it potentially moved forward a little bit? What are the puts and takes there?
Yes, I think, we’re definitely on the path to get to the 8% as we progress through this year. I mean again, I’ll sit here and say, I mean, our long-term goal is 10%. I mean, that’s where we’re trying to focus towards, Chris. And whether that – whether we get there by 2020, I mean, that’s what we’re going to – but we got to get some things done in the back office from a technology perspective. I think, that it will help us and we’re well on the way of delivering that. So, I think, 8% is very doable by the end of this year and then we will shoot for 10% by 2020.
Okay, that’s helpful. Last question just on acquisitions, you mentioned that any sort of specific subsector or any sort of area that you’re a little bit more focused or otherwise on?
Yes. We’ve talked about that before. Fore was in the intermodal. We love the intermodal space. We like what we see there in drayage. We think that’s great opportunity. So obviously, we’re looking there and we think we have opportunities. We’re willing, as I’ve said, we’re going to be very disciplined, but we want to look at businesses that either add a new area, whether a location that fits within our strategic footprint, where we’re not at now and we also want to do what we do.
And we also have to find companies that have better earnings than we do or at least even, because I’m not going to dilute what we’re doing. So that does limit the targets, but we feel pretty good about what we have on our plate right now. So we’re pretty comfortable with our strategy.
Yes. The segment seems to be momentum in the business. That makes sense. Thanks very much for the time this morning, guys. I really appreciate it.
Your next question comes from the line of Bruce Chan with Stifel.
Yes. Good morning, gentlemen. Congratulations, nice way to end the week here. Just a couple of questions from me. You talked a little bit about the low decline in truckload. I’d imagine that’s mostly just selective pricing action. Can you maybe give us a little bit of color there, talk about kind of where you are in that process? And how we should expect that kind of load yield dynamic to play out going forward?
Right. We’re not pleased with that. We would love to, if nothing else, maintain the drivers we have. So there is still always turnover in the truckload space and we took that in the industry tallies numbers in the 80% to 100% turnover. We’re typically around 60%.
So we think we’re better than the industry there. But we’ve lost drivers, what I will call, in that irregular route where the driver goes out and is gone for weeks on in. Those drivers are, what Jude likes to call, unicorns. They’re hard to find. And therefore, we’ve lost a few. Part of it is pricing, but right now every driver is making a lot of money because of the rate structure.
So I don’t think it’s necessarily the rate. I think, it really is a driver that is going to be consistent turnover in our industry, because somebody is going to offer the next bell and whistle until somebody catches up with it. And you got lot of folks that just kind of hop around within companies. That’s why I made the comment. There has been a lot of concern about increased capacity or supply, I just don’t see it.
So somebody may add a few drivers over here, but those drivers are coming from somebody else. And I think in some case, we saw lots of drivers in that space, but they probably went over to somebody else that may be added a few drivers. We’re seeing driver increases on intermodal, because that’s just what I would call a much better quality of life area for a driver, because they’re home every night. We’re seeing increase in drivers on the dedicated side.
So it’s really more about, I think, the comfort level of the driver and the ability of them to basically go get a job wherever they want right now. And so therefore, we’re seeing a little bit of a decline in that very, very difficult space.
So then just two quick follow-ups on that. I guess, first, is there anything that you can do to try to change that, or is this just a matter of maybe the market maturing a little bit and waiting for that average turnover level to come down and equalize?
And then, the second question is just given your outlook for capacity tightness and the difficulty in getting drivers, does that influence your outlook for Class A production at all, stretching out for the rest of this year and into 2019?
Sure, good question. So the first – what we’re trying to do, we’re – we go constantly and review what all of our competitors are doing to make sure that we’re doing at least equal from a driver pay, benefits, all the things that we’re offer in drivers.
The different thing that we’re trying to get better at is planning out those drivers’ day, so that we give them the opportunity to maximize their asset, maximize their time. We’ve not done that in years past. So we’re really focused on trying to improve their ability to have a backhaul load or a better triangulation on their load for the next two weeks or whatever.
So we’re really focused on that right now from a planning perspective. We’re moving forward with some technology, that’s also going to help that, we believe, in the near-term. So it’s really, I think, more about what we can do to make the drivers like a little bit better and we’re focused on that. The next question, again, remind me what the second part…
Class A truck?
Oh, the Class A truck. Bruce, when I look at the forecast through 2019, because 2019 forecast is actually higher than 2018 from a build perspective. From what we see is Class A truck right now, all of the trucks that are being bought are primarily for replacement, at least, that’s what we’re doing.
We’re replacing the older fleet because you’re getting better fuel mileage on new tractors now, which on years past that wasn’t the case. People always hated to buy the new tractor, because it seemed to be the miles per gallon got worse and that was years ago. So now, you get better fuel mileage, you get better safety performance because of all the new technology in the tractor.
So we’re replacing our fleet and getting to our life cycle. I believe, what I’ve heard on all the conference calls, pretty much everybody is saying the same thing. So even though the driver capacity is tight and there are not going to be any more additional drivers, in my opinion, of significance in the near-term. People are still going to focus on replacing their life cycle – getting to their life cycle and replacing their fleet. And also you got the tax benefits that came out and why it’s beneficial to provide CapEx and get a reduction in your cash tax.
So I don’t see any changes in that over the next couple of years. So I don’t know why Class A truck production build would change significantly as long as the economy stays strong and that sure looks like with GDP coming out over 4% today. So there’s a lot of things that are – that tell me that this is a long-run cycle.
Great. Well, that’s a very good color. And then just two last questions here on dedicated. I’m wondering if you have kind of the yield progression, maybe isolating for the length of haul. And then just to focus in on the length of haul decrease, is that a change at existing customers? Is that a result of mixed differences with new customers that you’re adding? Are there any read-throughs from the kind of length of haul decline as far as the kind of health or nature of your customer business?
Yes, on the dedicated, I believe, it’s really the customers just changing their mix and going to shorter shuttles. We’re – with this bid, maybe we lost some of the long links of haul and we’re going to – they’re going to want us to do more of their shuttle local business.
So it’s really just a change in the mix of the customer. I wouldn’t read a ton into that, because it changes all the time depending on what those customers are doing, because we pretty much stayed with the same four automotive customers in the dedicated space for 20 years. So it’s really just a change in their mix.
Okay. All right, great. Well, thank you very much and I appreciate the time.
You bet. Take care, Bruce.
[Operator Instructions] And there are no further questions at this time.
Super. Well, we appreciate everyone’s time. We look forward to talking to you, again, at the end of the third quarter and everybody, have a great weekend. Take care.
This concludes today’s conference call. You may now disconnect.