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.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chris Weatherby from Citi.

Hey, thanks. Good morning, guys. I wanted to touch base on contract logistics and make sure I understood sort of, you know, the dynamic going on there. There's obviously the one contract that's being somewhat challenging. maybe unpack the loss from that specific contract and give us a sense of how much maybe is due to labor and then maybe what are the other factors that are kind of coming in there and impacting the profitability of that? I guess it's been maybe two quarters, but it doesn't look like it's necessarily going to get better next quarter either.

Yeah, correct, Chris. This is Jude. So the labor component was about five. It was a combination. The plant is not running at full production, so we have a revenue shortfall in that operation because the plant is only running at about 60% of what their build rate should be. So we have a combination of a deficit of revenue, and then we're at full run rate for labor. So we're paying at a full run rate of labor with a plant that's operating, you know, 40% less than it should. And that's about $5 million of the loss in the quarter. $2 million of a loss in the quarter was due to charges that were pushed down on us for downtime associated with the launch. So we have $7 million altogether, $5 million, which is a combination of labor and the plant not running at capacity, and then $2 million for what we call debits or CLDs related to various errors that our operation made from launch to the end of the Q3.

Let me piggyback on this. This is Tim, Chris. Let me piggyback on that. Labor was... and remains an issue, but we're pretty optimistic and happy with where we have the labor pool there. We're to the point now where we've identified, and you can imagine, we went from zero to 100 miles an hour in a matter of a couple months. We staffed almost 1,000 people inside those walls and in the trucks, so we were really happy with that. With that in combination with this current environment, wage inflation really took a grip. So we had to successfully launch it. We're in the process of metering back what we need exactly for labor to make sure we're right on spot. And then we're also in continued conversation with the customer on a component of wage inflation and how we approach that mutually effectively. to get us up to where we need to be, as well as any potential scope changes, because the best laid plans move as you're launching not only a new warehouse that we're operating, but a new plant that our customer's operating. So we are in continued conversations with them, and we're optimistic that through our partnership and collaboration, we will put this thing on the right course. The only thing we can't get a full beat on it. I don't know if anybody can right now. It is the flow of parts and chips and how, as Judith mentioned, it affects the production rate because it's hard to get a good glass on that one, a good set of glasses. But we know it will continue to affect us in quarter four and into the beginning of 2022 with the availability of chips and how that affects production.

Okay. And so still an issue in 22, but maybe not negative seven. Is that the right way to think about it? Just want to make sure I understand. Yeah, that is the right way to think about it. Okay. Okay. That's helpful. And I'm guessing there's not really a significant, maybe taking a step back for a second and thinking about broadly your auto and sort of, you know, heavy equipment manufacturing and market business. You know, can you give us a sense of roughly how much of the portfolio within contract logistics is running in you know, at or close to full production versus how much that might be running kind of below full production because of various supply chain shortages and chip issues?

Yeah, I don't – this is Tim. I don't think we have a gauge on the percentage, but I will tell you this. The launch isn't the only plant that's been affected, of course. Any – you can read the news, and any of the major – production facilities have had some course of slowdown or even some downtime as a result of chip and part shortages. The one thing, and I think we talked about this in the last quarter, the one thing that we do have going from us from an automotive space is that we just so happen that we supply goods and labor to the plants that are the, you know, have the vehicles that are in the most demand. So from that standpoint, we are somewhat confident that those plants get the preferential service when it comes to parts hitting the United States and getting divvied up between the plants. But I can assure you that the other automotive operations had some disruption, as well as some of the Class A production, there was some disruption. I just don't have a set percentage for you.

Okay. No, that's helpful. And then last question, just on intermodal, wanted to get a sense of maybe how you guys think about fluidity in the fourth quarter, box turns, those kinds of things, and then maybe commensurate rate to help kind of offset some of the pressures that we're seeing there, I guess. I'm just kind of getting a sense. Is that something? We understand the contract logistics issues. Do we think that intermodal profit can accelerate as we move forward, or are there still some challenges that we need to face for Q1Q?

Yeah, I think that intermodal is faced with some Q4 challenges. As you read in the news, I don't know. If some of the congestion alleviates itself before the end of the year, I'm going to say no. But this is the way we're approaching it. We understand that the turn times for trucks, some of the efficiencies that we're used to seeing have kind of deteriorated, both on the port and rail side, but also on the customer side with throughput. Now customers are importing a great deal of commodity goods, So they're filling up the warehouse. The drop lots are full. And you can listen to a ton of others talk about this. The turn time on equipment has risen significantly. So for us to be efficient, we have to be able to use that iron, that chassis, to go back in and get the next load. And if we don't have that chassis and the rotation, so equipment fluidity has really created some inefficient actions within the group. And then, of course, when you have port congestion, you have containers sitting in customer lots for an extended period of time. Now we become exposed to per diem and demerge that we have to handle with our customer, sometimes on behalf of them with the ports, the rails, and also dealing with the per diem, which is the amount of time the container's out. So there's a lot more for the operational people to keep their eye on other than just turning a truck in and out of the quarter rail to customer and back. So we think that those situations will continue. I think what we've done or will continue to do is repriced our book of business, so we are rating it to meet some of those congestions. So we align ourselves pricing-wise with what we're able to do from an efficiency standpoint with our customers. And we'll continue to look at that on a week-by-week basis. And we need to get our arms around those accessorials to make sure that we are in proper position either, A, to accommodate the request for the customer, or B, to push back and look for another solution besides us trying to carry some of the burden of these large accounts. And that's one thing I will tell you on the intermodal side. We've worked really hard to position ourselves in front of some great customers. But with great customers becomes great volumes. And when these things hit the shores... In large, large numbers, it's just not easy to get in there and pick up those at a pace that you need to to get them out before some of these accessorial charges start to add up.

Okay. Yeah, no, that's super helpful. I guess if I could squeeze one last quick one in here just about margins as we think about next year. So 7% to 9%, I think, is the guidance for next year. presumably you're going to start maybe with some continued pressure lingering in a couple of the segments because of what's going on from the market. So it implies, you know, pretty solid back half or at least maybe last three quarters of next year. I guess I just want to make sure I understand sort of the confidence that you have, you know, in getting that and what kind of line of sight you have that, or do you need a few things to kind of break your way to kind of get into that full year seven to nine? Just want to make sure I understand sort of the dynamics that puts and takes within that. Thank you.

Yeah, I mean, the two real headwinds are just the intermodal business and then getting past this Georgia, this loss that we have at the contract logistics business launch. I mean, once we get that past us, which should be by Q1, Q2 and Q3 are historically Universal's strongest quarters. So we feel real confident that by March of next year, most of this stuff should be behind us and that we have a pretty clear runway, all things being equal, to really hit our stride and get those margins in-house. But as you mentioned and as Tim just mentioned in his comments, You know, the contract logistics headwind is one location. All the rest of our locations are operating very, very well. And the intermodal is really specific to Southern California and Chicago. And, you know, if there's a little bit of alleviation of the pressure there, we should perform very, very well in that segment as well.

Okay. That's great, Collin. Thanks for the time this morning, guys. Appreciate it. Thanks, Chris.

Once again, if you wish to ask a question, that's star 1 in your telephone keypad. Your next question comes from the line of Bruce Chen from Stifle.

Hey, thanks, and good morning, gents. Tim, you mentioned the pricing alignment on accessorials in intermodal, and I'm just kind of wondering where you are right now in terms of recruitment, or excuse me, recruitment. Are you at compensatory levels now, given the current congestion, or do you still have a lot more work that you need to do as we look at next quarter and next year?

Yeah, I think there is still some work to be done in the nuts and bolts out in the field. I don't think that what has happened in the phenomena is that, as I explained before, there's such a push or a rush coming in of imports, and some of the customers that we service have just huge chunks of business coming in. So what we're doing is we're stepping back and talking one by one of how we can rationalize and support them while they're helping support us on how we get these things out of a port system that's backed up, how we get the container or work with the container out of the customer's facility coming back in to alleviate some of that per diem time. So I would say we didn't just start this exercise. This exercise has been ongoing. We're just taking a more acute look at it in the fourth quarter. And if we have to push back on some of the services that we offer accessorially, So we're going to ask our customers to please help us out with this until we can get – and it's almost like it's an act of God with some of this that has just lingered since last year and the congestion that continues to plague. So we're asking for their help and collaboration. as we service some of these large accounts. So the level is set. We've been working on it very hard through the third quarter, but we're going to put some definite conversations in place at the beginning of this quarter so we can lift our head above water and make sure that it's not, as I had mentioned in the comments, a break-even or a small profit, so that there is some margin there that we can enjoy and the customer can enjoy the freight being moved.

Okay, Alex. very helpful. And, you know, just speaking about act of God and, you know, costs that you have to bear that maybe aren't, you know, your fault or necessarily your responsibility on that contract logistics facility, you know, obviously, you know, that's been a pretty meaningful impact in terms of the production shortfall. So just, you know, maybe you want to get your thoughts on the potential to exit that contract. Are there penalties to doing that? Or, You know, do you have enough line of sight into, you know, when things normalize next year that you're comfortable, you know, sticking with it and maybe, you know, eating that L for, you know, another quarter or two before it normalizes?

Yeah, great question. Because it is the biggest impact to the corporation right now. And I would say this, that, you know, conversations are ongoing about how we approach this business. We're so crucial to this particular customer's plan that we have had open discussions about what we both need to do to be successful. But I will tell you this, that if we were to have to transition, we'd have that conversation, but I feel at this particular point in time that there's ongoing conversation going on between us and the customers about how we both work our way out of this. As I said earlier, We spent a tremendous amount of time putting just near 1,000 people inside those four walls and in the trucks that provide the shuttle services to the plant. So we've done the heavy, heavy lifting. We just have to come to some agreements on the wage inflation, which is real, and the scope change in some of the job functions, which is real. And I think we can get there. But I will say this. we won't let this particular opportunity weigh the organization down for an extended period of time. We want to get this done expeditiously. And if we can't, then we need to figure out a way that we can both, as partners, find a transition strategy for the business.

Okay, that's great. And then maybe just a final question here on brokerage. You've done a lot of good work there in terms of rationalizing the business you know, we had another kind of 17.4% load volume culling this quarter. Assuming that the spot market continues to stabilize here, albeit at a high level, when do we sort of expect that load volume count to inflect?

Well, that's a good question. The load volume count right now is, you know, we're metering in and we're rationalizing everything. Everything, all indications I would say right now indicate that there's going to be a continued heaviness in the spot market through the fourth quarter. We are, as we rationalize our lanes and percentage between spot and contract, we also know that there will be a reset point within the industry, that spot market won't become something that everybody eats off of. You have to have some contracted businesses. It pushes you forward. So we've kept a real open line of communication with our customers to make sure that we're in front of them. And we'll be looking ahead to make sure as the market starts to shift that we continue or maybe even increase our contractual content of the business. But at this point, we've still tried to stay pretty healthy in a split of contract and spot market rate. But we do know the day will come that – Contract business will start to swing and we want to make sure that we're in the ring to enjoy that when it happens Great and then I don't know if I missed it, but did you give that contract the spot split earlier in the ball?

What was that Bruce Just wondering if you have that split handy between contract and spot right now I

The majority of the time we're operating about a 50-50 split. We've seen it swing as high as 60-40 over the quarter, so 60% spot versus 40% contract. We're back down to probably closer to a 50-50 split right now.

Okay, awesome. Thanks for the time.

My first, thank you.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Phillips.

Thank you, Benjamin, and thank you all for dialing in. I look forward to our next call and to highlight our progress that we've made throughout the fourth quarter. Thanks again.

This concludes today's conference call. Thank you for participating. You may now disconnect.