Universal Logistics Holdings, Inc.

Good day, and thank you for standing by. Welcome to the Universal Logistics Holdings Incorporated second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand a conference over to your speaker today, Mr. Tim Phillips, Chief Executive Officer. Please go ahead, sir.

Good morning, and thank you for joining Universal Logistics Holdings' second quarter earnings call. To start with, I would like to extend a big thank you to the hardworking associates throughout the Universal family. We have successfully navigated many of the supply chain disruptions that were prevalent throughout much of the quarter. Your efforts and a cannot-fail attitude have continued to deliver strong results for our customers and valued shareholders. Walking our way out of the COVID pandemic has presented many challenges for the transportation and logistics space. However, we have also seen significant opportunity both in the warehouse and on the roads. It's clear there will be a continued restocking of inventory, and there appears to be plenty of appetite by the customer. Your efforts have bridged these gaps, which have effectively supported our customer supply chain. Now for the quarter. In yesterday's release, Universal reported second quarter earnings of 95 cents per share on total operating revenues of $422.8 million. Second quarter operating revenues reflect Universal's highest quarterly revenue ever reported and exceeded our own estimates for the quarter. On an earnings per share basis, our results fell in line with our previously issued guidance after adjusting for non-operating gains. Top line revenue growth is a reflection of our previously mentioned contract logistics wins and a strong transportation pricing environment. Overall, I'm very pleased with the recovery in each of our operating segments, as we lap the height of the global pandemic. However, we are not immune to many of the challenges that the industry is currently experiencing. While demand remains strong for autos and Class A trucks, the continued chip shortage, a prolonged UAW strike at a heavy-duty truck manufacturer, supply chain disruption, and increased launch costs kept our contract logistics group from achieving its top and bottom line potential. As we mentioned in the release, contract logistics was adversely impacted by $5 million of losses associated with one of our recent launches. We experienced staffing challenges and weight pressure in conjunction with customer production schedule, which was far lower than previously forecast. As our customer ramps up and out of the extended launch phase, we anticipate approving volumes, which will translate into better results for us. I'm cautiously optimistic on the second half will improve as chip shortages and supply chain disruptions begin to stabilize. Additionally, we continue to add our wins in the contract logistics segment, securing an additional $22.5 million of annual business in this quarter. We anticipate these wins to be in full run rate in Q1 and Q2 of 2022. And many of these wins are on new customers in industrial, aerospace, and EV verticals. In our intermodal drage segment, we experienced 28.6% year-over-year revenue increase and also saw an improvement sequentially. The drage market has been experiencing some ongoing challenges as congestion at the ports and rails, combined with availability of equipment, adversely impact fluidity of the containerized freight. To combat these challenges and further enhance our ability to recruit, we have worked with our customers to increase rates. Some of these rate increases are reflected within the results, but not all. On average, we have increased our rates to intermodal customers about 14%. The second half will continue to be challenging, but we have positioned ourselves well with our customers to move into peak season. Our company-managed brokerage operations remain disciplined and continue to balance contractual and spot rates in a market riddled with capacity constraints and influenced by premium pricing. While revenue was up 58% year over year, the number of loads being handled decreased by 20.8%. We continued to focus on rationalizing our lanes to ensure acceptable level of profitability. Our aim is to capture consistent gross margin, and we made significant progress, finishing the quarter north of 12% in gross margins. The increased revenue was driven by higher spot market rates and better contract pricing. Currently, 99.4% of our freight is running under new rates. That would be business rated in the first half of 2021. Looking ahead to the second half, we anticipate to reprice approximately 21% of our brokerage business. Our trucking segment experienced both top and bottom line growth, highlighted by driver and contractor count increases. The truckload group saw the average rate to our customer increase by about 3.5%, I'd like to point out that this is an average. Rates are up as seen in our other company managed brokerage results. This quarter, 2021 experienced a bit of a weakness in our wind energy business, excluding when our rates were actually up about 20%. We anticipate sustained tightness in our customers' inventories and capacity throughout the industry for the near term, which continues to position us for additional rate increases with our customers. We recently received very positive outlooks for our wind customers, and the second half looks robust, which should have a positive effect on both our top and bottom line coming into the quarters. With ever-increasing burdens for small fleets, our agency-based franchises continues to offer competitive alternatives to entrepreneurs looking to excel in the transportation industry, and our efforts are paying off. In the second quarter, our agent-based division was successful in onboarding 16 new agents. Universal is truly a people-driven company. Every associate is significant and holds an important role in our success. Operational excellence is dependent on each team member contributing while navigating a demanding environment. I respect the hard work and efforts shown by all the Universal team members, and I thank you for your continued efforts. I would now like to turn the call over to Jude. Jude?

Thanks Tim. Good morning everyone. Universal Logistics Holdings reported consolidated net income of $25.6 million or $0.95 per share on total operating revenues of $422.8 million in the second quarter of 2021. This compares to net income of $6.2 million or $0.23 per share on total operating revenues of $258 million in the second quarter of 2020. As mentioned in the press release, During the second quarter of 2021, Universal recorded a $5.7 million pre-tax gain or $0.16 per share related to a favorable legal settlement. Consolidated income from operations was $31.3 million for the quarter compared to $10.8 million one year earlier. During the second quarter of 2021, Universal reported all-time record highs for revenue, operating income, as well as EBITDA. EBITDA increased 23.6 million to 53.7 million, which compares to 30.2 million one year earlier. Our operating margin and EBITDA margin for the second quarter of 2021 are 7.4% and 12.7% of total operating revenues. These metrics compare to 4.2% and 11.7% respectively in the second quarter of 2020. Looking at our segment performance for the second quarter of 2021, In our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations increased $15.2 million to $15.9 million on $154.8 million of total operating revenues. This compares to operating income of $800,000 on $71.8 million of total operating revenue in the second quarter of 2020. Operating margins for the quarter were 10.3% versus 1% last year. As mentioned in Tim's comments and our release, our contract logistics business incurred a $5 million loss in the second quarter at one of our launches supporting an automotive OEM. We expect a similar loss in the third quarter, but moving closer to break even as the quarter progresses. In our intermodal segment, operating revenues increased 28.6% to $106.6 million compared to $82.9 million in the same period last year. Income from operations also increased $1.4 million to $6.2 million. This compares to operating income of $4.7 million in the second quarter of 2020. Operating margins for the quarter improved marginally to 5.8% in the second quarter of 2021 compared to 5.7% during the same period last year. Both driver and equipment shortages, as well as a lack of port and rail fluidity, continue to hamper the results of this segment. In our trucking segment, which includes both our agent-based and company-managed trucking operations, operating revenues for the quarter increased 58.4% to $99.8 million compared to $63 million in the same quarter last year, while income from operations increased 80.4% to $6.5 million. This compares to operating income of $3.6 million in the second quarter of 2020. In our company managed brokerage segment, operating revenues for the quarter rose 51.3% to $60.4 million compared to $39.9 million in the same quarter last year, while income from operations also increased $700,000 to $2.4 million. This compares to operating income of $1.7 million in the second quarter of 2020. Operating margins for the quarter were 4% versus a 4.3% margin last year. On our balance sheet, we held cash and cash equivalents totaling $13.1 million and $7.9 million of marketable securities. Outstanding interest-bearing debt net of $1.3 million of debt issuance costs totaled $432.2 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported CTM EBITDA was 2.3 times. Capital expenditures for the quarter totaled $12 million. As Tim mentioned in his comment, the availability of equipment, including the procurement of new equipment, has been extremely challenging. As a result, we are lowering our forecasted capital expenditures now to be in the $40 to $50 million range before any additional business wins in our contract logistics segment and strategic real estate purchases. We expect to make up for this year's equipment deficit by increasing our capital spending next year. Interest expense for the year is expected to come in between $12 and $14 billion. If the business environment remains stable for the third quarter of 2021, we are expecting top line revenues between $420 and $450 million and operating margins in the 7.5% to 8.5% range. Additionally, while we are reaffirming our full year guide on total operating revenues between $1.6 and $1.7 billion, we are now lowering our top end 2021 expected operating margins by 100 basis points from 7% to 9% to now between 7% and 8%. Launch losses in our contract logistics service line, as well as continued operating challenges within our intermodal business, are the primary reasons we tightened our expected operating range for the full year. Turning to our dividend, yesterday our board of directors declared Universal's 10.5 cent per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on September 6, 2021, and is expected to be paid on October 4, 2021. Finally, in yesterday's release, Universal also announced its Board of Directors has authorized a new stock repurchase plan. Under the new plan, we are authorized to repurchase up to 1 million shares of ULH common stock in the open market. With that, Jamie, we're ready to take some questions.