Universal Logistics Holdings, Inc.

Hello and welcome to Universal Logistics Holdings' third quarter 2021 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. During the course of this call, management may make forward-looking statements based on their best view of the business as seen today. Statements that are forward-looking relate to Universal's business objectives or expectations and can be identified by the use of the words such as 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 Barris, Chief Financial Officer, and Mr. Stephen Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin.

Thank you, Benjamin. Good morning, and thank you for joining Universal Logistics Holdings' third quarter earnings call. Before we get to the quarter, I would like to thank all our Universal associates for their continued efforts in supplying crucial services to our customers who have come to depend on it. Our team continues to adapt to a supply chain environment that can change daily. We continue to collaborate with our valued customers to customize supply chain solutions that allow them to optimize and execute their business strategies in a very challenging environment. We have worked tremendously hard to navigate a tight labor market and staff our new business wins. Attracting and retaining talented employees will remain a priority. With all the great work that has been done, there is still much to do to further shape each of our service lines so they meet their operating goals. Now for the quarter. In yesterday's release, Universal reported third quarter earnings of $0.38 per share on total operating revenue of $445.6 million. As detailed in the release, third quarter earnings included $0.36 per share of litigation related charges and operational losses incurred at a recent contract logistics launch here in Detroit. Third quarter operating revenues reflect Universal's highest quarterly revenue ever. However, we fell well short on our earnings expectations. Now for some color on each of our service lines. In our contract logistics service line, we experienced headwinds highlighted by production downtime due to chip and part shortages at several of our key value-added operations. We continue to remain bullish on autos and Class A truck demand in 2022, but there is no end in sight to the current headwinds the industry is facing. These macro headwinds are exacerbated by the operating challenges with our recent launch, as mentioned in Quarter 2. Here, the Contract Logistics Group saw another $7.1 million of losses associated with the operation for the quarter and now totaling $13.9 million for the year. We've also experienced a tremendous amount of wage inflation while staffing these operations in conjunction with continued production schedule challenges. We are working with our customers to review the impact of wages on all our major operations. Chip supplies continue to hamper steady state production, which we expect to carry through fourth quarter and well into 2022. We are pleased with a recent launch of business serving a major manufacturer in the Midwest, and we expect to operate at full pace in short order. Our contract logistics pipeline remains healthy, and we continue to review and position for intelligent growth. We continue to see many opportunities in our dedicated transportation space, which has allowed us to optimize our assets, but further growth in new markets is predicated on the delivery of new equipment, which has remained a challenge. For intermodal, we've experienced operational friction due to congestion, equipment availability, and stagnant driver numbers. Intermodal segment results had additional drag on earnings due to recent litigation charges incurred in the third quarter. Intermodal segment revenue includes $23.3 million in other accessorial charges, such as rail and port demerge, as well as per diem, which has historically operated low to no margin, further impacting the segment's profitability. The Intermodal Group did realize 28% year-over-year revenue increases and 13.5% improvement sequentially, but this was not enough to achieve the results we expect out of this group. We worked very diligently with our customers evaluating our pricing to combat wage inflation and assist in our ability to recruit additional drivers. In addition to drivers and contractor supply, we are also adding additional chassis to our fleet as quickly as equipment becomes available. we expect to see additional benefits from recent rate increases moving through the fourth quarter, which will present ample load opportunities at higher prices. In our truckload segment, revenue growth was strong due to increased volumes and strong pricing. We experienced both top and bottom line growth, highlighted by rate increases and better utilization. Revenue was up over 29%, which was the result of moving 12.4% additional loads and an average of 13.6% higher revenue per load. We were very pleased to see our wind business pick back up in the quarter and expect to see tailwinds in this sector to finish 2021. We anticipate sustained tightness in the truckload market with favorable pricing the remainder of the year as capacity will remain tight, with customer spending in favorable spot with plenty of inventory to restock. Our agent group has positioned themselves well by taking advantage of their entrepreneurial spirit. Our company managed brokerage operation continued to evaluate and reprice their book of business in the third quarter while successfully managing the balance between spot and contractual business. Capacity has remained tight most of the third quarter and we foresee it remaining that way the rest of the year. Tight capacity has continued to support premium pricing in the spot market While the average operating revenue per load was up 18.9% year over year, the number of loads being handled decreased by 17.4%. As mentioned in Q2, we continue to focus on rationalizing our lanes to ensure acceptable levels of profitability. We were very pleased with our gross margin of 12.1% in Q3 and aim to keep within that range to finish the year. We've experienced many customers going to mini-biz as the year has progressed and expect to reprice roughly 40% of our business in Q4. Finally, the human asset will remain on the forefront of all our internal conversations going forward. We are committed to providing a work environment that allows new and existing associates to excel and take their careers and the company to new heights. People are job one in a very demanding environment. Thanks again to all our hardworking associates at Universal. I'd like to now turn the call over to Jude. Jude? Thanks, Tim.

Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $10.3 million, or $0.38 per share, on total operating revenues of $445.6 million in the third quarter of 2021. This compares to net income of $13.6 million or 50 cents per share on total operating revenues of $365 million in the third quarter of 2020. Included in the third quarter of 2021 operating results were pre-tax charges of $4 million for a previously disclosed legal matter and an additional $1.8 million charge for an unrelated legal settlement. Additionally, in the third quarter of 2021's operating results, included $7.1 million of operating losses incurred at a recently launched contract logistics program. These items adversely impacted our operating ratio by nearly 300 basis points and were a drag on our earnings of approximately $0.36 per share. Consolidated income from operations was $16.7 million for the quarter compared to $22.1 million one year earlier. EBITDA decreased $5.4 million to $33.1 million, which compares to $38.5 million during the same period last year. Our operating margin and EBITDA margin for the third quarter of 2021 are 3.8% and 7.4% of operating revenues. These metrics compare to 6% and 10.5% respectively in the third quarter of 2020. Looking at our SEC performance for the third quarter of 2021, in our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations decreased 5.6 million to 6 million on 156.9 million of total operating revenues. This compares to operating income of 11.6 million on 127.7 million of total operating revenue in the third quarter of 2020. Operating margins for the quarter were 3.8% versus 9.1% last year. Our contract logistics business incurred a $7.1 million loss in the third quarter at one of our launches supporting an automotive OEM here in Detroit. Based on that program's current operating performance, we expect a similar loss in the fourth quarter. Year-to-date, this operation has generated a loss of $13.9 million, impacting segment margins by 3%. In our intermodal segment, operating revenues increased 28% to $121 million compared to $94.5 million in the same period last year, while income from operations decreased $6.9 million to $1.9 million. This compares to operating income of $8.8 million in the third quarter of 2020. Our intermodal business incurred $5.8 million of legal charges and settlements in the quarter. These charges adversely impacted our intermodal segment operating margin by 480 basis points. Including these charges, operating margins for the quarter fell to 1.6% in the third quarter of 2021, compared to 9.4% 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 29.2% to $107.2 million compared to $82.9 million in the same quarter last year. And income from operations increased 43.1% to $6.8 million. This compares to operating income of $4.8 million in the third quarter of 2020. In our company managed brokerage segment, operating revenues for the quarter declined 0.6% to $59.2 million compared to $59.6 million in the same quarter last year. And income from operations increased $5 million to $1.8 million. This compares to an operating loss of $3.2 million in the third quarter of 2020. Operating margins for the quarter were 3% versus a loss of 5.4% last year. On our balance sheet, we held cash and cash equivalents totaling $13 million and $7.8 million of marketable securities. Outstanding interest-bearing debt net of $1.2 million of debt issuance costs totaled $443.6 million at the end of the period. Excluding lease liabilities related to ASB 842, our net interest-bearing debt to reported TTM EBITDA was 2.4 times. Universal's target total leverage ratio is between 2 and 2.5 times EBITDA. Capital expenditures for the quarter totaled $9.3 million due to the limited availability of new equipment. We are expecting capital expenditures to now be in the $30 to $35 million range. Interest expense for the year is expected to come in between $12 and $14 million. Based on the current operating environment for the fourth quarter of 2021, we are expecting top line revenues between $400 and $425 million and operating margins in the 4% to 6% range. For 2022, we are expecting total operating revenues between $1.8 to $1.9 billion and operating margins in the 7% to 9% range. Capital expenditures for 2022 are expected to come in at approximately $95 million and interest expense in the $15 to $18 million range. We anticipate our capital expenditures in 2022 to be somewhat higher than normal due to the limited availability of new equipment for most of 2021. Finally, 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 December 6, 2021, and is expected to be paid on January 4, 2022. With that, Benjamin, we're ready to take some questions.