Universal Logistics Holdings, Inc. (ULH) CEO Tim Phillips on Q1 2021 Results - Earnings Call Transcript

Universal Logistics Holdings, Inc. (NASDAQ:ULH) Q1 2021 Earnings Conference Call April 30, 2021 10:00 AM ET

Company Participants

Tim Phillips - CEO, President & Director

Jude Beres - CFO & Treasurer

Conference Call Participants

Christian Wetherbee - Citigroup

Bruce Chan - Stifel

Operator

Hello, and welcome to the Universal Logistics Holdings First Quarter 2021 Earnings conference call. [Operator Instructions]. 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 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. 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, sir.

Tim Phillips

Good morning, and thank you for joining Universal Logistics Holdings First Quarter Earnings call. I want to start off by congratulating the dedicated professionals of the team Universal who together made this quarter such a success. We developed a strategic plan that would be both versatile for the ever-changing logistics environment and aggressive enough to achieve the results our shareholders expect.

I believe the strong results we reported in the first quarter of the year demonstrate our plan is executable, even in an environment sparred with weather disruptions, parts shortages and the ever-present hiring challenge of the transportation and logistics space. While we believe technology will play a role in furthering our success, our continued ability to attract and retain professional truck drivers, warehouse workers and office personnel will be key to Universal's success in 2021 and beyond.

Now for the quarter. In yesterday's earnings release, Universal reported first quarter earnings of $0.80 per share on operating revenue of $415.2 million, beating estimates on both top and bottom line. First quarter operating results represented not only Universal's best top-line revenue, operating income and earnings per share for the first quarter, they are the highest results ever reported. This is a direct reflection on the strategic focus and corresponding road map that has been developed by all of our operating segments.

I am extremely encouraged by the additional opportunity we have to further drive efficiencies and operational excellence. The year-over-year top-line revenue increase can be attributed to growth in four of the five service lines. Dedicated services-led the way growing over 50% on a year-over-year basis. Brokerage and value-added services also experienced double-digit growth, increasing 12.8% and 12%, respectively, compared to the same period last year.

Strong pricing also led to growth in our truckload services, where we were experienced modest gains in the first quarter of 2021. We did experience some headwind as congestion and power unit availability hindered intermodal for the first two months of the quarter. However, we did see an 8% uptick in revenue in the month of March.

Continued strong demand for light-duty vehicles kept our contract logistics group busy in Q1. Even though chip and part shortages began to show impact at the tail end of the quarter, during the quarter, weather played a larger role than part shortages, with several of our large plants served being down a couple of days up to a week. We expect these disruptions to be temporary as the production forecast for autos remains strong for the full year 2021.

I am also pleased to report that Contract Logistics Group added an additional $20 million in new business wins for the quarter. We expect these launches to begin in Q2 of 2021 to be on a full run rate by Q2 of 2022. Although obtaining qualified drivers and contractors remain extremely competitive, I'm pleased to report our Trucking segment was able to sequentially grow its driver base. The agent-based division of Truckload Group was successful in on-boarding 14 new agents. Increased driver count paired with continued inventory replacement, helped increase the group's top-line revenue. Steel, metals, industrial goods and energy loads level remain below Q1 2020 levels. But indications for the back half of the year remain robust.

Exiting the quarter, we remain very confident in the runway for growth, propelled by new business wins in a favorable rate environment, fueled by tight inventories. Our company brokerage operation remained in positive territory for the quarter but experienced tight capacity and unfavorable weather in the back half of February. Gross margins for the quarter finished in the high single digits, but trended favorably the last part of the quarter.

While revenue was up 15.8% year-over-year, the number of loads being handled decreased by 20.8%. The increase in revenue was driven by higher spot market rates and better contract pricing. Currently, 70% of our freight is running under new rates. For intermodal drayage, record import volumes coupled with terminal congestion, further deteriorated operational flow and turn times at many of the intermodal facilities around the country. We also experienced additional street time for loads and empties as customers and intermodal facilities struggled with the volumes.

Our revenue per load move saw a modest movement downward. While we saw increases in spot market, our contract rates were slower to follow suit. Although Intermodal Drayage Group performed okay, there's plenty of road for improvement. We continue our recruiting efforts, reviewing our compensation packages for all of our major markets and have renewed initiatives to entice drivers back to the workforce.

As we look ahead, we continue to remain bullish on the remainder of 2021. We expect to navigate the near-term issues with supply chain disruption, port and rail congestion and what we hope to be the final stages of COVID. Although chip and part shortages will have some effect on top-line revenue in Q2, we believe the backlog and demand sets up for a very robust second half of 2021.

As mentioned before, I'm still extremely optimistic on our ability to operationally execute and deliver the numbers within our forecasted range. We continue to evaluate the quality opportunities in our contract logistics network and using our experience, technology and velocity expertise to actively branch out into alternative spaces in existing verticals as well as focusing on new verticals. Our presence and knowledge continue to grow in electric vehicle space with current launches, recent wins and interest in new projects. We remain committed to grow the Contract Logistics segment, so it reflects a greater percentage of overall top line revenue.

We remain extremely optimistic on our core customer base and our ability to execute in the market that appears to have a long runway of customer demand. Light vehicle inventories at dealerships have recently dipped below 40 days and indicating forecast that SAR will be moved above $15.5 million originally predicted this year. We are fortunate to support many locations that produce the vehicles in high demand. Demand for Class 8 trucks has also taken off since the beginning of the year, although there has been production disruption because of parts. All indicators point to a robust second half of 2021.

Our bullish outlook on drayage franchise remains strong even though we experienced some headwinds in the first quarter. Indications are that the backlog and shifted anchor will correct itself by the end of Q2, allowing greater fluidity and reducing turn times by our drivers and contractors. The Drayage Group is also seeing rates increasing as we begin Q2. Better churn times, higher rates will allow us to attract and offer greater earning opportunities to our driver and contractor base while leveraging scale for additional margin.

Our truckload segment is continuing to see metals and industrial rates increase with volumes starting to step back towards pre-COVID levels on the open deck side. Food, beverage and consumer goods should remain extremely strong and allow for considerable growth and opportunity. We continue to work to better optimize our company assets and strategic customer partnerships and new pricing in a local and regional model. We will continue to see headwinds with the supply of qualified drivers and contractors as we navigate the remainder of the year.

With our company managed brokerage, we believe we will continue to see tight capacity into the near future, which makes our third-party carrier relationships a continued focus. We have worked hard to reprice our contractual business, and we'll continue our efforts to strike a balance between spot market and contractual business while evaluating our customer partnerships.

Nowhere in the landscape - nowhere is the landscape more competitive than recruiting qualified truck drivers. The need for additional drivers is a common theme in the industry. As has been widely reported, the pool of qualified driver has been disrupted by coronavirus, the drug clearinghouse, extended unemployment benefits and limited driver school graduates; the headwind from which we expect to persist for the remainder of the year.

To compass this, we have structured a solid recruiting and retention strategy that includes increases to our driver wages and contractor payouts, on-boarding new trucks to the company fleet and creating quality of life options to address the needs of the ever-changing workforce. Our efforts are paying off. In the first quarter of 2021, we were able to add over 500 drivers and contractors to our fleet. Our recruiting efforts are paying off in other areas as well. To support our new business wins, we have successfully on-boarded over 800 warehouse workers and 90 management members to our contract logistics team.

In the first quarter of 2021, Universal was able to onboard just shy of 2,000 associates across all of our operations. I'm extremely excited about the talent we have been able to assemble to better service our customers. We continue to expand our team of talented women and men who are committed to work towards our common goal of operational excellence and customer satisfaction. I continue to admire and respect the team's ability to work through disruption. Universal is truly a people driven company.

Thank you for your continued efforts. Now I'd like to turn the call over to Jude. Jude?

Jude Beres

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $21.7 million or $0.80 per share on total operating revenues of $415.2 million in the first quarter of 2021. This compares to net income of $12.2 million or $0.45 per share on total operating revenues of $382.2 million in the first quarter of 2020.

Consolidated income from operations was $31.2 million for the quarter compared to $23.9 million one year earlier. EBITDA increased $11.4 to $51.2 million, which compares to $39.8 million one year earlier. Our operating margin and EBITDA margin for the first quarter of 2021 are 7.5% and 12.3% of total operating revenues. These metrics compare to 6.3% and 10.4%, respectively, in the first quarter of last year.

Looking at our segment performance for the first quarter of 2021 in our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations increased $5.1 to $16.8 million on $154 million of total operating revenues. This compares to operating income of $11.7 million on $127 million of total operating revenues in the first quarter of 2020.

Operating margins for the quarter were 10.9% versus 9.2% last year. In our intermodal segment, operating revenues declined 6% to $103.7 million compared to $110.3 million in the same period last year. Income from operations also decreased $500,000 to $8.5 million. This compares to operating income of $9 million in the first quarter of 2020. Operating margins for the quarter were flat year-over-year at 8.2%.

In our Trucking segment, which includes both our agent-based and company managed trucking operations, operating revenues for the quarter increased 3.6% to $94.9 million compared to $91.6 million in the same quarter last year, while income from operations increased 15.4% to $5.2 million. This compares to operating income of $4.5 million in the first quarter of 2020.

Included in the current quarter are $1.4 million of legal-related charges. Excluding these charges, our trucking segment would have operated nearly at 7% for the quarter. In our company managed brokerage segment, operating revenues for the quarter rose 15.8% to $61.1 million compared to $52.8 million in the same quarter last year, while income from operations also increased $1.8 million to $400,000. This compares to an operating loss of $1.4 million in the first quarter of last year.

Operating margins for the quarter were 0.7 of 1% versus a negative 2.6% last year. On our balance sheet, we held cash and cash equivalents totaling $10.8 million and $7.5 million of marketable securities. Outstanding debt net of $1.5 million of debt issuance costs totaled $429 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported TTM EBITDA was 2.6x. Universal's 12-month target total leverage ratio is between 2 and 2.5x EBITDA.

Capital expenditures for the quarter totaled $4.9 million, our forecasted capex for the full year is expected to be in the $65 million to $75 million range before any additional business wins in our contract logistics segment or strategic real estate purchases. Interest expense for the year is expected to come in between $14 million and $16 million.

As Tim mentioned in his prepared remarks, we are experiencing some short-term headwinds in our contract logistics business. This is due to supply chain disruptions at some of our North American auto customers due to the highly publicized chip shortage. While we expect these disruptions to be resolved within a year, it is difficult to predict the full impact on the current quarter. These headwinds are currently negatively impacting our top-line revenues at a rate of approximately $1 million per week.

Our original forecast for Q2, top-line revenues were in the range of $420 million to $440 million with operating margins in the 8% to 9% range. Assuming the disruptions are corrected by mid-Q2, we anticipate new quarterly revenue target of between $400 million and $420 million and due to our variable cost model, operating margin should remain in the 7% to 8% range for the quarter. Timing, of course, will be the largest influencer on achieving those targets.

Given the robust auto production forecast for the full year, we believe any temporary loss of production units will likely be made up within that year, within the year. For that reason, we are reaffirming our full year revenue guide of total operating revenues between $1.6 billion and $1.7 billion and operating margins in the 7% to 9% range.

Finally, 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 7, 2021, and is expected to be paid on July 6, 2021.

With that, Thea, we're ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We'll pause for just a moment to compile the Q&A roster. And the first question will come from Chris Wetherbee with Citi. Please go ahead.

Christian Wetherbee

Very helpful sort of detail in terms of how you're being impacted by some of your customers' facilities. I guess maybe if I could take that just a step further and maybe understand practically how you sort of see the recovery kind of playing out. I think you're saying maybe mid- 2Q, you could maybe see some of these shortages begin to reaccelerate here and can get back to sort of normalized production levels. What do you think are the steps that need to happen?

I guess we've been a little bit surprised at the length of the potential disruptions that we've seen so far. So what are the positive indicators that you guys are looking at that can give you confidence that maybe we're going to come out of this thing at some point during 2Q and maybe not see it slip further into the back half of the year?

Jude Beres

Hey, Chris, it's Jude. So really, how it kind of works for us is that we're told in advance when the plants are going to operate and when they're not going to operate. And so then we can obviously apply the labor to assist in that inbound manufacturing logistics support that Universal is known for.

So as of right now, we only really have insight until the middle of May. So the current schedules that we have basically tell us what plants are going to be open, which plants are going to be closed and when their expected recovery times is. So we're expecting that to be mid-quarter, and that's really the only insight that we have.

I can tell you, though, over the past couple of weeks, those numbers have been so fluid that they changed multiple times in a day. So once again, we're just kind of reacting to what we're hearing from the OEM's, but at least we have that insight through the next few weeks.

Tim Phillips

And Chris, I'll add a little bit of color to that also. Even though we don't have that long-range forecast, we're still very confident in our facilities because we are wrapped around what we believe to be the auto's most successful line of products, and we know that they want to put those products out on the street. So we still see continued production. So we're happy to be in the spaces that we are right now.

Christian Wetherbee

Yes. Certainly, it seems like there's no demand at the current moment. So that makes a lot of sense. That's helpful. I appreciate that. Maybe turning to the truckload side, understanding sort of what the opportunity here is for rate. Obviously, rate has been significantly higher, and spot rates obviously have been up quite a bit. What do you think sort of the potential for realization?

Maybe if you want to talk about it in average revenue per tractor terms? Or if you just want to talk about it, which obviously includes some degree of productivity? Or do you want to talk about just kind of pure rate dynamic? What is your outlook for sort of the next several quarters of this year?

Tim Phillips

Yes. This is Tim. I think our outlook on rates is very good. I think that you have to break it down into some of the segments. And as you said, the truckload segment, we've been experiencing rate increases anywhere from 8% to 15% and the spot market even higher on that, depending on where it's going and what needs to be moved.

We see that type of rate environment, at least extending out Q2, Q3 and then we'll reanalyze where everything is. But there's nothing that I'm seeing from the customers or that we're reading that says that this demand lets up or that inventories will be replenished in a timely fashion or the supply chain congestion from an international standpoint rights itself right away. So we're pretty confident that we'll see continued rate increases.

We're also equally confident that as these bids come up, we'll study it closely, and we've been pretty successful in negotiating with the customers on those. So across the board on the truckload side, I would see the opportunity for continued even low double-digit rate increases. And then on the company asset side, we kind of blew the terminal network up and redefine it in a local and regional standpoint for the company assets. So our goal there is, we know the rate environment is favorable, now it's our time to optimize the trucks and make sure that we're executing on an operational level. So that will be the focus for the company trucks to continue to layer in and optimize those so we can see the full potential of revenue per truck per week.

Christian Wetherbee

Okay. Intermodal, how do you - how are you guys thinking about sort of the congestion that's out there on the rail network and maybe service where it stands? And how do you think sort of the ability to look at the load dynamic kind of play out? Obviously, you're facing tough comps in the first quarter and obviously, weather and other factors were disruptions, comps get easier, but you do have high hurdles even in the back half of the year in terms of growth from last year. So how do you think about sort of absolute loads on the intermodal side potentially ramping up from here? Is this sort of a cleaner run now that the weather is broken? And maybe there's some improvement on the margin on the rail side? Or how do you think about it?

Tim Phillips

Well, I think the rubber on the road, I mean, from the time we pick it up to get it to customer, yes, we're getting into a much better season. I don't see weather disruptions. I still see a supply chain disruption when it comes to ships at anchor and/or now seeing some of the flow of the freight that's coming in, hit the inland markets, whether it's Chicago, Memphis, some of those other inland markets, where now we have internal congestion that's starting to build.

And what I mentioned earlier in the prepared remarks is what we're seeing is street time starting to increase. So that asset now, that chassis that's so valuable in those markets, is now sitting on the streets an extra day or two, which further compounds the problem. What we've done from a company standpoint, we've been very aggressive on adding assets, our own assets, into the rotation. As we put them on, we're putting them into those major markets to help with fluidity. It does not solve the complete problem but makes us a nice option for customers that have hot sensitive loads to utilize our equipment. So I expect some of this congestion to not totally alleviate itself, but to start to get better as we exit Q2 into Q3.

Our other issue to hit our full plan will be, can we source the drivers and the contractors then once the supply in fluency opens up to handle those additional volumes. We did take a step or two back on the number of contractors and drivers we're running in intermodal. And some of that was due to COVID, of course, but a bigger thing to be said for that is we work together the last two acquisitions and the last one being the roadrunner acquisition, we put terminals together, contractors and drivers together. And there was a little bit of fallout from that, but it had to happen because we wanted to get the profitability back to where we needed to be to execute on the Universal side of things.

Christian Wetherbee

Okay. Yes. No, that's fantastic. And if you will indulge me with just one more. I just wanted to kind of touch on those start-ups that you have, I think you could ramp up by two - fully ramp by 2Q of next year, I believe. Can you just maybe put a little bit of numbers around the potential size of these opportunities? Where do you think that might be, either from a revenue perspective or a profit perspective or a volume perspective, however you want to think about it?

Tim Phillips

Yes. You were talking about the awards that I had mentioned in my prepared remarks?

Christian Wetherbee

That's right.

Tim Phillips

Yes, yes. So we expect that to start to implement in Q2 of this year, I believe that we'll layer in. Now what we're looking at is we've had quite a few awards that have been on the transportation and the value-added side. But we expect that to layer in that $20 million to be full run rate by next year. I would just take it and kind of equal allotments. The first quarter of - Q2 of 2021 will be a start-up, but then it should be close to runway by Q3, Q4 at that $5 million a quarter mark.

Operator

We do have a question from Bruce Chan with Stifel. Please go ahead.

Bruce Chan

Great result this quarter, and congratulations. I just want to start off with a follow-up on the intermodal side. I understand some of the drivers of the volume declines there. But maybe you can help us understand why we're encountering a little bit of that revenue per load pressure because at a basic level, it would seem like in a market like this where capacity is so tight, you'd be able to make a little bit more traction there. So just curious what's kind of driving that yield pressure.

Tim Phillips

That's a great question, Bruce. And we have an algorithm on the board right now to try to explain it because the normal human that looks at it kind of scratches their head. But what we've evaluated and what has happened is when we entered Q1 of 2020, we were fully on-boarding the most recent acquisition at that time, which was Roadrunner, which had a longer length of haul and some very unprofitable business. We made some tough business decisions that took some regional type work and cut it back into, okay, now we're going to go out and explore more of a local network that we're so fond of.

So I would say our length of haul from Q1 2020 to Q2 - Q1 2021 was reduced by about 29% and the actual revenue, if you look at the stats, the actual revenue per mile went up about 25%. So then you say to yourself, well, that should mean that your load count also went up because you're doing a shorter length of haul, you should have better optimization of the asset. And I would say, yes. Then I go back in and start looking at the congestion factor and then our turn time and the turn times per truck didn't reflect the shortened length of haul.

So there's where you get into - if we had more trucks, we could have experienced better numbers, but we also, on top of that, when we merged everything and through some of the COVID fallout, had less trucks about 11% or 12% less trucks in the marketplace to handle those shorter loads in a congested fashion.

So I think what you're - you're going to start to see is that as we build to better normalcy on turn times, I hope that you'll start to see the revenue per load will start to go up. Now once again, we continue - our average length of haul is pretty short. It's under 100 miles. So that's the major factor with it just kind of a relook at what our freight was, the type of haul and length of haul it was.

Bruce Chan

Okay. Got it. So long story short, this is mostly down to post roadrunner mix changes intermingled with some of what's going on in the congestion side?

Tim Phillips

Yes. Well, let me go one step further. Yes, it is - it does have to do with the mixture from Roadrunner. And then when we went back and evaluated what business works best for Universal, it's more of a local business. So we now start bidding on more that type of business, that's under 75 miles. Now you have a length of haul that could be as short as ten miles. You're going from port to DC to 50 miles. So we had a lot of those types of bids that we were extremely successful in on-boarding. Now it's just when congestion and fluency picks up, we should see the benefits of those local moves. We should see the turn times, the turns per truck increase, which should benefit the organization in the long run.

Bruce Chan

Got it. So just putting this together with some of your other comments around the flow of goods into the country next quarter, I suppose, this quarter, Q2, we're likely to see continued pressure there, but maybe towards back half, we start to see some inflection?

Tim Phillips

Yes, there'll be some continued pressure on the flow of goods, especially you guys read much more than I probably do, and the demand is not letting up. So there is going to be continued congestion issues that revolve around the fluencies at the ports, around the number of assets that are to pick up those loads. And then we didn't bring the customer up in this whole conversation, but they're not fully back to full speed on their DC's.

So what used to be a load that would be potentially dropped at a large DC for a day or two now is extending four days or so. And it's just creating a bottleneck because now we need the chassis to go back into the facility to pick up the next load, and it's not emptied out yet. And there's only so many chassis in many of these major metropolitan markets.

Bruce Chan

Got it. Okay. That's great color. Then just moving over to the contract logistics side for a moment. Good to see the continued wins in that business. Just wondering if you can give us a little bit more color on where those wins are coming in? Is that existing customers or new customers? Are we within the same auto vertical? Or are we starting to see some progress in new verticals?

Tim Phillips

Yes. We are starting to see some progress into some new verticals. Not all of them are purely new. Some of them would be in the industrial type space that we play in now, but it is with customers that we've not done business with before. So pretty excited about that because I think our footprint in the auto in our velocity approach and accuracy approach has really sold well in other spaces.

And as you know, the contract logistics space is not a short-term sale. So we got a lot of these things that we're in front of customers now showing them what we can do in other verticals besides auto, it's finally starting to show some positive with some wins in the first quarter. And some things that we have that are still under hat that we hope we can talk positively about in the next time we get together.

So there's good things happening, and we're also seeing some real interest in the electric space because we're already involved in it in a couple of locations, and we're gaining a rapid knowledge and being able to really sell well to the customer on the services we can perform for them. So we're pretty excited about that as well.

Bruce Chan

Okay. That's terrific. And then just last one here. In terms of the mix profile and margin profile of these new contract wins, are they fairly similar in terms of, again, margin and length as some of your core legacy business?

Tim Phillips

Yes. Absolutely, Bruce, historical margins and in the range of three to five-year contracts.

Bruce Chan

Got it. Awesome. Okay. And maybe I can just sneak in one very last one here. It was really good to see the agent wins coming in. Wondering in terms of feedback, what you're hearing as far as what's driving that? Is that a need from these independent guys to access capacity? Is it something else that's changing fundamentally with the business that's increasing that agent win rate?

Tim Phillips

Oh, the - you broke up in the middle of your remarks there, your conversation, and you were talking about the agent base?

Bruce Chan

Yes, exactly. Just good to see those wins. Is there something in particular that's driving those inflows? Is it - are those guys needing capacity or something else?

Tim Phillips

Yes. Well, I think they need a good home that has supportive management as well as some of the dynamics on insurance and some of the other things that you have to carry when you run your own small trucking company just continue - those prices continue to escalate. They see a well-run organization with a back-office taking care of, and it's a good place to call home. And I would say this, we have put forth a very detailed effort to go out there in the marketplace and recruit in heavy fashion.

So we're always looking at new opportunities. And let's be frank, the opportunities we look at, we look at a lot. The pipeline is big, but we're going to be frank with the agent base, and they're going to be frank with us. We want it to be a fit for them as they come aboard. So the pipeline remains full on that side. We'll remain diligent in how we approach closing on new agents. We've added some business development personnel over the year. And we continue to see good success with that.

So I think as long as the market remains hot, I think that we'll continue to see a lot of opportunity out there to close on new agents and bring them into the company.

Operator

[Operator Instructions]. Okay, and at this time, I'm showing no further responses. And at this time, I'm showing no further questions.

Tim Phillips

Super. Well, I appreciate the questions today. Thanks for dialing into the call, and we will look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.