Universal Logistics Holdings, Inc.

Hello and welcome to Universal Logistics Holdings' fourth quarter 2023 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. 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 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 of Mr. Jude Beres, Chief Financial Officer, and Mr. Stephen Fitzpatrick, Vice President of Finance and Investor Relations. Thank you, Mr. Phillips. You may begin.

Thank you, Gary, and good morning, and welcome to Universal Logistics Holdings' 2023 Fourth Quarter Earnings Call. Once again, Universal's diverse service offerings continue to differentiate us in the transportation and logistics space. and provide a stable earning space for the organization in a changing trade environment. While we await a rebound in the transportation market that has been bumping along the bottom the past few quarters, we are pleased with the continued resiliency and performance of our contract logistics segment. Being deeply rooted in our customers' ecosystems has given us the opportunity to inject additional value, consistency, and visibility into their supply chains. which in turn demonstrates our strong business proposition and affords us tremendous opportunity for growth. In 2024, it remains our goal to streamline operations within our transportation segment, focusing on cost reductions, which extend additional value to our customers while continuing to produce consistent margins that fuel our future growth. We continue to see excellent opportunities in the contract logistics space, to simplify customers' logistics complexities while simultaneously showcasing cost savings and reliability. Our people-driven solutions require great talent armed with state-of-the-art technology. I'm extremely pleased with our build-out of the contract logistics team with excellent talent that is focused on continuous improvement in labor management as well as blueprinting the technological needs of our customers to advance our accuracy and enhanced visibility. We continue to stress a customer-centric approach that takes best practice while outlining a very individualized solution to our customer-specific needs. We continue to be extremely mindful of cost in our transportation businesses while we ride out the remainder of the inventory destocking and other market pressures. It is fair to say the opportunity to deeply evaluate cost has uncovered opportunities that will remain fundamental as we step out of the current environment. Each of our transportation businesses has outlined an operating strategy for 2024 that is focused on customer expansion and low growth while contemplating lane optimization and service standards. We will remain vigilant on managing our controllable costs and improving operational efficiency in every aspect of our business. The outlook for 2024 remains a bit murky, with a variety of signals from various market verticals. When we're not ready to predict a rise in volume from the current environment, we can explore potential pathways through the lens of our customers. The prognostication throughout the earnings season favors an uptick in the second half of 2024, which we also believe to be a possibility. but we need to see a meaningful movement in imports to help support the story. Import drage moves in our network were flat sequentially, but did show a slight uptick over Q4 of 2022. We will closely watch the low count in the first part of the year to support any material inventory restocking cycle that could be a catalyst for returning our transactional trucking businesses to their historic margins. Initial indications in the automotive space point to production cadence similar to 2023, Class A trucks, which had a robust year in 2023, and expectations are for some reduction in truck production in 2024. Projections remain a mixed bag with our heavy equipment agriculture customers, but we do expect solid contributions to 2024 revenue streams. Universal continues to build on our current customer footprint, leveraging our sales efforts across the enterprise. Sales leadership has strategically outlined a blueprint of cross-sale opportunities between our various operating segments. Our pipeline of new customer prospects remain robust with both new and cross-sale opportunities. We are extremely excited with sales opportunities within our current customer base as we look to build our transportation and logistics network in Mexico. A renewed focus on nearshoring has confirmed our need to expand with the current customers at a nimble pace. We remain committed to solving the customer's most complicated issues while evaluating the opportunity for fit within our various operating networks. As previously mentioned, our diversified operating footprint continues to produce balanced results. Contract logistics led the way, producing exceptional results while our asset-based truckload business with a variable cost model delivered muter results in Q4. Although lagging our expectations, we remain confident in the foundation of our intermodal and company-managed brokerage segments. Any incremental volumes and improvement in efficiencies will further drive the results in these businesses. Leadership has outlined strong 2024 strategic plans for the organization and are deeply focused on executing. Now for the quarter. In yesterday's release, Universal reported 2023 fourth quarter earnings of 81 cents per share on a total operating revenues of 390.2 million. Our operating margins fell in line with Q4 estimates, while operating revenues came in slightly above. Although behind our Q4 2022 results, Q4 2023 was the second best fourth quarter on record for operating income. And 2023 as a whole was the second best year ever for operating income and EPS. Now for some color in each of our service lines. In our contract logistics segment, the number of active value-added programs continued to increase and finish the quarter at 71 programs. We continue to launch new programs in a variety of verticals. We continue to have demand from both existing and new customers, for inbound material velocity solutions. We were able to spotlight our technology and people in real time while outlining the value of a single provider between transportation and warehouse management. 2023 Class 8 production levels exceeded the previous year with year-end figures in the neighborhood of 336,000 units versus 315,000 units in 2022. While the SAR remained very similar both Q4 and 2023 as a whole, Q4 productions of plants we service were negatively affected by the UAW strike and estimated to have cost the company somewhere in the neighborhood of $2.2 million in missed operating income. The overall impact of the UAW strike against the Big Three was less impactful than expected as many of the plants we service were not affected. Our sales pipeline is filled with prospective customers in a variety of verticals, including automotive, agriculture, and class A trucks. We did successfully launch one major customer in Mexico in Q4 and are prepared for several launches in January, or had several launches in January of 2024. The dedicated transportation group remained very stable throughout 2023, providing a high-velocity platform that syncs closely with complex inbound material manufacturing needs. Our dedicated segment is focused on yard management, local shuttles, and regional work. Over the past three years, we have had organic-focused growth strategies. We have made significant investments in new tractors and trailing equipment that has given us the ability to scale and attract drivers. up over 57% from the end of 2021. We remain confident in our operating model, which provides an extremely high level of service made possible by an experienced team of seasoned professionals. Revenue for the quarter was up slightly, driven by five new launches in 2023, two of which were in Q4. We are extremely excited about the Q4 launches, which continued our growth with a significant dedicated automotive opportunity in central Mexico, followed by a late quarter start with a large agriculture manufacturer in the southeast United States. Offsetting some of the new business revenue was a drop in operating revenue at several of our operations servicing the automotive industry. Lack of six-day operations in the UAW strike were key contributors. Our dedicated model continues to attract attention with a healthy pipeline of new opportunity and several launches slated for Q1 of 2024. Our intermodal drainage group continues to navigate a restricted import environment, as previously mentioned. Pricing and volume continue to be the storyline, with slight sequential deterioration of revenue, which is driven by seasonality. While load count was up 1.8%, This was more than offset by 19.9% decline in revenue per load, ex-fuel, as the market remained extremely competitive. The segment will also be watching the drama in the Red Sea in the increased sale time as it affects ships' arrivals and potential inventory levels. The Panama Canal continues to give shippers problems with transiting the route due to water levels. In the ever-changing geopolitical landscape, our intermodal franchise is ready to serve our customers' needs on the East Coast or on the West Coast. Overall, top-line revenue was down 30.6% due to depressed freight rates as well as non-driver-related accessorials. Accessorials continued their steep decrease as ocean volumes remained in deficit and supply chains were fluid. Accessorial charges declined over 61%, or $13.8 million, and fuel surcharge declined 42%, or $9.4 million. While we have made positive traction with our Southern California operation, it continues to be a drag on overall results. Southern California rates remain muted and were challenged sequentially in Q4. We continue to optimize the fleet size and driver base by evaluating our lanes, our port turn times, and our driver utilization. Losses in a number of our California operations negatively impacted our EPS by 13 cents per share. Despite these current headwinds, our long-term strategy of having a strong West Coast intermodal president remains undeterred. We are preparing to introduce new trucks to all of our California operations in 2024, which will offer additional truck efficiency and repair savings. The new truck order will also include a handful of electric trucks that we will begin incorporating into our operations in the latter part of the year. Our drainage sales pipeline remains full of quality opportunities, which will continue to be bid in an extremely restrictive pricing environment. We do believe our intermodal franchise has a competitive advantage as we have an expansive portfolio of operating terminals, parking, and a large fleet of company-owned chassis. Our agent-based trucking segment continued to face headwinds in our van and flatbed modes during the last quarter of the year. Our wind transportation also saw a significant and seasonal fall-off in revenue from Q3. Industrial goods led the slide in the open-deck sector, with steel and metals down sequentially, but up slightly Q4 over Q4 of 22. Consumer goods led the decline on the van side. Overall load count was down 3.9%, and the revenue per load was down 8.6% to $1,673 per load. The overall drop, the agent-based growth, brokerage services experienced the steepest fall-off, down over 18% compared to 2022. Top-line revenue of $75.2 million was down 15.5% for the quarter, while operating income decreased $3.3 million to $2.5 million compared to $5.7 million last year. Continued flat and van headwinds coupled with a seasonal drop in wind transportation moves led to the decreases.

Our agent-based model continues to contribute to the bottom line with its variable cost structure and entrepreneurial spirit.