Universal Logistics Holdings, Inc.

Hello and welcome to Universal Logistics Holdings third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. A brief question and answer session will follow the formal presentation. And 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 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 today. 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. Mr. Phillips, you may begin.

Thank you, Joe, and good morning. Thank you for joining Universal Logistics Holdings 2022 Third Quarter Earnings Call. Our Q3 2022 numbers are not only a reflection of our continued commitment to expanding shareholder value. They are also a testament to the cohesive team of associates at Universal who shared the same goal of being the best. I'm extremely satisfied with our progress over the first three quarters of 2022. Our focus on operations and customer service are at the center of our commitment to continuous improvement across all of our operating groups. We continue to keep the pulse of the economy close as we are transitioning into the last quarter of the year with particular attention on our transportation portfolio. Spot market rates have slid rapidly over the course of the last six months and will put pressure on upcoming customer contract negotiations. While both automotive and Class A production remain steady at most plants operated or serviced by Universal, part and chip shortages continue to keep the auto sector from obtaining increased production. Port fluidity has continued to improve because of decreased import shipments, but chassis remain tight in many markets. We are pleased with our progress in California. We successfully entered into an agreement with the Teamsters, which has helped bolster our port dredge fleet with quality drivers. While the equipment market has remained tight, our planning has secured hundreds of company trucks and chassis to support the growth in this market. We are very excited to be able to offer our valued customers a consistent and seamless service of compliant drivers and trucks. Now for the quarter. In yesterday's release, Universal reported 2022 third quarter earnings of $1.84 per share on total operating revenues of $505.7 million. Our reported 2022 third quarter performance once again reflects record results. Universal posted its highest operating margin and earnings per share in company history. This marks the third quarter of meaningful margin expansion and operational efficiency progress. While we will likely see a normalization of transportation rates over the next few quarters, our contract logistics business is well positioned to grow exiting 2022 and into 2023. Now for some color on each of our service lines. In our contract logistics segment, internal operation reviews, quality improvement initiatives, and new business guided the group to an outstanding quarter. While the SAR remained muted, the demand for vehicles remained strong. There were still bumps in the road, but production has tilted back to a somewhat normal state. Light truck and Class 8 production forecasts are solid for the fourth quarter and into 2023. We remain well positioned to service our current customers and have room for immediate expansion as needed. The logistics group continued to evaluate and execute operational improvement opportunities in the third quarter. Third quarter 2022 was the first full quarter we were able to achieve monthly profitability on a restricted production schedule for our operations servicing a highly publicized Detroit auto manufacturing facility. Our team worked intensively on operational execution and pricing to make this possible. We continue to see solid opportunity in the contract logistics space. Our sales pipeline continues to build with over a 40% increase in revenue opportunities compared to the same period last year. We have a handful of mid-size opportunities we are close to signing. Contract logistics offers multi-year pricing stability based on contractual nature and will remain a key focus of our sales and growth effort. Our dedicated transportation group continued to show upward momentum in the third quarter. I'm very excited about the launch and immediate execution of our dedicated transportation division in Mexico. We are very optimistic about the additional growth opportunities in the near future as we bring the same execution and service to Mexico that our customers have depended on in the United States. North of the border, we have continued to build density at new and existing operations, increasing our driver count by almost 400, or 23.5%, over the same period in 2021. New equipment, predictable schedules, and high driver pay are hallmarks of our dedicated brand and are the primary reasons why we continue to be able to attract and retain qualified drivers. Our intermodal drainage group continued to perform well, but did start to see volumes and rates step down over the last half of the third quarter. Load volumes continue to be challenged in some markets by congestion, equipment constraints, and we now have blank sailings back in the news. The group continued to rationalize customer rates and volumes in many of the markets around the U.S., steering our capacity to customers that best suit our operational needs. As with the general rate environment, our accessorial charges, such as demerits, Storage and per diem fell slightly from $33.6 million in the second quarter of 2022 to $31.3 million in the third quarter of 2022. Although sequentially down, accessorial charges remain elevated over prior years as congestion networks continue to unwind and equipment availability works towards normalization. We intend to continue to purchase new chassis and remanufacture our own as we work our way through persistent equipment shortages. Our goal remains consistent. Build our own fleet of chassis to provide our customers with seamless service. Our intermodal segments continue to enjoy year-over-year revenue growth with 27.6% increase in revenue, but a 14.8% decrease in low count over Q3 of 2021. Low count will remain a top focus as we continue into the fourth quarter. We will use our sales pipeline, which has expanded by about 24%, compared to the same period in 2021, to build low-count. Drivers and owner-operators continue to build a pipeline at an elevated level, which includes full-court press in California. We are pleased with the pipeline of new California company driver applicants and the additional assets we have moved into the market. Our 2022 third quarter driver count increased to 1,840 drivers or 10% over the same period in 2021 and 4% sequentially. Power only units increased to 433 or 50% over the same period in 2021. Our trucking segment has continued to excel in both the flatbed and specialized sector. Their customer relationships, coupled with a high level of service, has helped cement the agent group's success. While van spot rates have softened, specialized and flat rate rates have held firm. Revenue declined 7% year over year, which was a result of a 30.2% decrease in load volumes, as we rationalized underperforming operations in this segment. The decrease in volume was partially offset by 26.6% increase in revenue per load. While we believe the flatbed rates will come off their current highs, the group is well positioned to finish the year strong, with roughly 63% of the loads generated from flatbed equipment. Our work in the wind sector has remained consistent, and we expect to finish the year with stronger numbers than we saw in 2021. As a result of the declining market rates, the truckload group's agent pipeline is robust with plenty of conversion opportunities. We remain confident in our asset-light, variable-cost structured agent model and their ability to navigate choppy waters. Company-managed brokerage experienced another good quarter of operating margin while rates remained under pressure. We have continued to rationalize our margin profile in relation to the revenue opportunities, but understand the competitive nature of the current market. We will evaluate our pricing model during the upcoming business season and adjust accordingly. Operating revenue decreased 8.2% to $1,659 per load, and the load count was down 31%. As previously mentioned, our focus has been on margin control, but the market continuing to soften, we will listen to our customers' needs. We have begun operating several small drop trailer pools and have additional assets on our CapEx to continue this strategy. Broker carrier expectations have started to level set, and we will continue to collaborate with our carrier base to bring them the best rate at a fair price. There will be plenty of economic headwinds over the next several quarters. Inflation remains extremely high. Labor costs continue to increase. and inventory levels are on the rise. Ongoing challenges to final ratification on the rail workers and ILWU contracts also remain a concern. While I'm very encouraged by the transition of contractors to company drivers in the state of California, the long-term cost impact will need to be evaluated. The supply of some equipment is improving, and we are confident we will have deliveries to fill our growth and replacement needs. Many of these market challenges should mean opportunity for Universal. Finally, I'm extremely happy with the progress the Universal team has displayed over the past three quarters. Their efforts have laid the foundation for long-term shareholder and customer value. While economic downturn may cut into pricing, the operational foundation will continue to form at a high level. I'm extremely optimistic as we march to the end of the year and look forward to taking on the challenge and opportunities 2023 will present. I would now like to turn the call over to Jude.

Jude? Thanks, Tim. Good morning, everyone. Yesterday, Universal Logistics Holdings reported consolidated net income of $48.5 million, or $1.84 per share, on total operating revenues of $505.7 million in the third quarter of 2022. This compares to net income of $10.3 million, or $0.38 per share, on total operating revenues of $445.6 million during the same period last year. Consolidated income from operations was $69.8 million for the quarter compared to $16.7 million one year earlier. EBITDA increased $51.3 million to $84.4 million, which compares to $33.1 million during the same period last year. Our operating margin and EBITDA margin for the third quarter of 2022 are 13.8% and 16.7% of total operating revenues. These metrics compare to 3.8% and 7.4% respectively in the third quarter of 2021. Looking at our segment performance for the third quarter of 2022, in our contract logistics segment, which includes our value add and dedicated transportation businesses, income from operations increased $29.4 million to $35.4 million on $209.5 million of total operating revenues. This compares to operating income of $6 million on $156.9 million of total operating revenue in the third quarter of 2021. Operating margins for the quarter were 16.9% versus 3.8% last year. As Tim mentioned in his comments, our third quarter of 2021 results included a $7.1 million of operating losses incurred at a large contract logistics program here in Metro Detroit. We are pleased to report that that program is now profitable and meeting our expected return profile. On to our intermodal segment, operating revenues increased $33.4 million to $154.4 million compared to $121 million in the same period last year. And income from operations increased $26.2 million to $28.1 million. This compares to operating income of $1.9 million in the third quarter of 2022. Included in our third quarter of 2021 results were an additional $5.8 million of legal expenses related to the settlement of previously disclosed legal matters. Operating margins for the quarter were 18.2% versus 1.6% last year. In our trucking segment, operating revenues for the quarter decreased $7.6 million to $99.6 million compared to $107.2 million in the same quarter last year. And income from operations decreased $2 million to $4.8 million. This compares to operating income of $6.8 million in the third quarter of 2021. Operating margins for the quarter were 4.8% versus 6.4% last year. In our company managed brokerage segment, operating revenues for the quarter decreased $18.6 million to $40.6 million compared to $59.2 million in the same quarter last year, while income from operations decreased $700,000 to $1.1 million compared to operating income of $1.8 million in the third quarter of 2021. Operating margins for the quarter were 2.7% versus 3% last year. On our balance sheet, we held cash and cash equivalents totaling $14.6 million and $8.6 million of marketable securities. Outstanding interest-bearing debt net of $4.6 million of debt issuance costs totaled $389.2 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported TTM EBITDA was 1.33 times. During the third quarter of 2022, we also successfully closed on two syndicated borrowing facilities, raising a significant amount of capital for the company. We amended and restated our primary credit facility, not only extending the term out for an additional five years, but also doubled the size of our revolving credit facility from $200 to $400 million. We also raised an additional $90 million in the form of an $80 million term loan and $10 million revolver for one of Universal's wholly owned subsidiaries that closed concurrent with our primary facility. A special thank you for all those involved in getting these deals done on time in a challenging credit environment. Capital expenditures for the quarter were $48.3 million, $85.8 million year-to-date. For the full year of 2022, we expect capital expenditures to be in the $120 million range with interest expense between $15 and $18 million. Based on the current operating environment, for the fourth quarter of 2022, we are expecting top line revenues between $450 to $475 million and operating margins in the 10 to 12% range. And finally, Wednesday, our Board of Directors declared Universal's 10.5 cents per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on December 5th of 2022 and is expected to be paid on January 3rd, 2023. With that, Joe, we're ready to take some questions.