Universal Logistics Holdings, Inc.

Hello and welcome to Universal Logistics Holdings second quarter 2024 earnings conference call. At this time, all participants are in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing star 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's business objectives or expectations and can be identified by the use of the words such as believe, 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, Ludi. Good morning, everyone. Thank you for joining Universal's 2024 Second Quarter Earnings Call. Once again, the theme of the quarter can be summed up in four words. Diversity is our strength. Universal's diversity service offerings are what differentiates us from our competitors in the transportation and logistics space and is what allows us to deliver outstanding results even during this prolonged transportation down cycle. But before I dig into the results, I would also like to take the moment to thank the entire Universal team. The tremendous work and effort of our 10,000 plus employees and contractors are what make these results possible. This is what allows us to deliver outstanding service to our customers and continue to be the best of breed transportation and logistics provider. Now let's move on to the quarter. Overall, Universal once again delivered outstanding results in the second quarter of 2024. We grouped top line revenue by 12%, delivered double digit operating margin, increased our earnings per share by 30% compared to the same period last year. We did all this during one of the longest and deepest freight recessions I've experienced. Universal's second quarter results, however, were mixed and varied considerably amongst our different business segments. Our contract logistics business continues to outperform and deliver excellent results, while our intermodal and company managed brokerage segments continue to perform below our expectations. The trucking segment performed well despite softness in the overall truckload market, on the back of our specialized heavy haul wind business. Q2 was another challenging environment to navigate in the transportation market. However, Universal's diversified business model is working as designed, and I'm very happy with the outcome. For the second quarter of 2024, Universal reported $462.2 million of revenue, $1.17 of earnings per share, and an operating margin of 10.2%. This was the second best revenue, earnings per share, and operating margin for the second quarter in Universal's history. In our contract logistics segment, revenues increased 26.2% to $263.6 million. This was largely due to our previously announced specialty development program. At the end of Q2 2024, Universal managed 68 value-added programs unchanged from Q2 2023. Contract logistics remains our most consistent and profitable segment. This was the 10th straight quarter of operating ratios below 90%, with six of the last 10 below 85%, and the last two were below 80%. We expect the strength in this segment to continue going forward. The outlook for automotive industry remains positive, with the SAR for June at $15.3 million and $15.9 million expected for the full year of 2024. As the landscape for a transition to electric vehicles continues to evolve, we will stay closely in tune with the needs of our customers. As customers demand to drive their production forecast, we remain well positioned to support their inbound logistic needs for both EV and ICE platforms. Class A production also remains stable with a large backlog of expected builds for the full year of 2024. Overall, our trucking segment is also doing quite well given the depressed transportation backdrop. Trucking segment revenues increased 12.6% to $91.4 million. This was due to a 28.5% increase in revenue per load, excluding fuel surcharges, while loads hauled decreased 11.1%. Trucking segment results were bolstered by an uptick in our specialized heavy haul wind business. We expect this to continue throughout the rest of the year as we have a full pipeline. This should be a secular headwind for years to come, allowing solid trucking segment performance sheltered from fluctuations in broader truckload markets. Outside of specialized freight, the truckload market remains soft. Flatbed volumes were down once again, and we did not see the increase in rates that we expected. We expect the weakness in the broader truckload market to persist, until excess capacity comes out. The intermodal segment continues to face significant headwinds. In the intermodal segment, revenues decreased 14.8% to $78.1 million in the second quarter of 2024. Compared to Q2 2023, our intermodal segment experienced a 4.1% decrease in volume, while rates decreased 5.9%. Additionally, Accessorial charges decreased $5.4 million, and fuel surcharge revenue decreased $2.7 million. While it is too soon to say if we have turned the corner, we have seen some improvement and reasons for optimism. Our intermodal segment had its best results for the year in the final month of Q2, showing our cost-cutting measures are beginning to bear fruit, and we are seeing our highest truck productivity in several quarters. We could see a strong second half of 2024 if 2025 volumes get pulled forward in anticipation of higher tariffs on imports. There could be additional pull forward to get ahead of any labor disputes at the East Coast ports. Any increase in volumes will contribute to our profitability after streamlining the business and cutting costs, our Southern California operations are ready for whatever the market throws at us in the back half of the year. As far as rates go, we expect to see an increase in spot rates as we get into peak season later in the year. The company managed brokerage segment also continues to underperform. Revenues decreased 4.9% to $28.1 million, and the business continues to struggle to meet our profitability expectations. The revenue decline was primarily due to 21.9% decrease in revenue per load, which was partially offset by a 20.1% increase in load count. Overcapacity continues to put a damper on pricing and squeeze our gross margins. We were able to take some share back in the quarter, but had to sacrifice margins to do so. The brokerage market is extremely challenging, and some experts do not expect it to recover until these excess capacities come out of the market sometime in 2026. As a result, we are taking a proactive approach in evaluating the brokerage business, looking to right-size the business as soon as possible, and look to cut costs where possible to improve efficiencies and return to profitability. M&A remains a key part of our strategy with the objective of penetrating new markets, gaining new customers, or densitizing an existing market. We're constantly looking for acquisition targets that would be a good fit for Universal while also staying disciplined. A quality target must operate within our core competencies, add to our existing service lines, fit within our target margins, and must be available at a reasonable multiple. Any addition to the portfolio must be accretive to earnings and large enough to move the needle. We are beginning to see more opportunities becoming available and will continue to seek acquisition targets that can be add value to Universal. As we look ahead, we are encouraged by a robust sales pipeline brimming with opportunity. Specifically, value-added and dedicated opportunities alone account for nearly $750 million. This strong pipeline enables us to be selective, ensuring that we only bid on programs aligned with our core competencies and desired margin profiles. Additionally, we are constantly exploring cross-selling opportunities with our existing customers, aiming to deliver more value through diverse service offerings. Our contract logistics segment serves a wide variety of industries beyond auto OEMs, including aerospace, defense, agriculture, heavy truck, consumer manufacturing, and e-commerce. We continue to discover new and exciting opportunities within these sectors. I'm extremely pleased with our performance in the second quarter of 2024. Universal continues to provide the resiliency and durability of our diverse model in any environment. Once again, I would like to thank all of Universal's stakeholders for their contributions. I remain optimistic for the rest of 2024 and confident about our future. I would now like to turn over to Jude to provide more color on our financials and expectations for the upcoming quarter. Jude?

Thanks, Tim. Good morning, everyone. Yesterday, Universal Logistics Holdings reported consolidated net income of $30.7 million, or $1.17 per share, on total operating revenues of $462.2 million in the second quarter of 2024. This compares to net income of $23.6 million or $0.90 per share on total operating revenues of $412.6 million during the same period last year. Consolidated income from operations was $47.1 million for the quarter compared to $36.4 million one year earlier. EBITDA increased $29 million to $84.8 million, which compares to $55.8 million during the same period last year. Our operating margin and EBITDA margin for the second quarter of 2024 are 10.2% and 18.4% of total operating revenues. These metrics compare to 8.8% and 13.5% respectively in the second quarter of 2023. During the quarter, Universal took an $11.3 million charge depreciation expense. This charge was due to revisions made to the useful lives and salvage values of certain pieces of equipment, primarily class eight tractors. Prior to COVID, it was not uncommon for four to five-year-old tractors to retain a 40 to 50% salvage value when sold on either the open market or traded in for new models. Now, after the extreme bubble experienced in the used truck prices during COVID, we have seen a massive unwind in the value of used tractors. we are now seeing residual values fall to 20 to 25% of historical costs. This update to the estimated residual values on certain tractors resulted in the additional depreciation expense impacting our operating ratio by 245 basis points. Looking at our segment performance for the second quarter of 2024, in our contract logistics segment, which includes our value-add and dedicated transportation businesses, Income from operations increased 20.1 million to 52.9 million on 236.6 million of total operating revenues. This compares to operating income of 32.8 million on 208.8 million of total operating revenue in the second quarter of 2023. Operating margins for the quarter were 20.1% of total operating revenues compared to 15.7% one year earlier. We continue to make excellent progress on our specialty development contract logistics program. During the second quarter of 2024, we recognized an additional $44.6 million of operating revenues related to this program. This brings our year-to-date total operating revenues on this program to $139.8 million. As a reminder, during the full year 2024, we expect to recognize total operating revenues on this program of approximately $228 million and continue to expect this program to be substantially complete by January 1st of 2025. Revenues generated from this program are reported in the value-added services line and the associated costs in operating supplies and expense. The results of this program are included in our contract logistics segment. Based on its current cadence, we expect this program to generate additional revenues in the range of $14 to $50 million during the third and fourth quarters of 2024. Our guidance that I will discuss momentarily reflects the expected impact of this program during the third quarter. Onto our intermodal segment, operating revenues decreased $13.5 million to $78.1 million compared to $91.6 million in the same period last year. And income from operations decreased 8.1 million to an operating loss of 8.3 million. This compares to an operating loss of 200,000 in the second quarter of 2023. Operating ratios for the quarter were 110.6% versus 100.3% last year. In our trucking segment, operating revenues for the quarter increased 10.2 million to 91.4 million compared to 81.2 million in the same quarter last year. and income from operations remained flat at $4.4 million during both quarters of 2024 and 2023. Operating margins for the quarter were 4.8% versus 5.4% last year. In our company-managed brokerage segment, operating revenues for the quarter decreased $1.5 million to $28.1 million compared to $29.6 million in the same quarter last year, and income from operations decreased $1.5 million to an operating loss of $2.2 million. This compares to an operating loss of 800,000 in the second quarter of 2023. Our company-managed brokerage segment reported an operating ratio of 107.9 to 102.7 in the second quarter last year. On our balance sheet, we held cash and cash equivalents totaling 7.5 million and 11.6 million of marketable securities. Outstanding interest-bearing debt net of 4 million of debt issuance costs totaled 483.8 million at the end of the period. Excluding LACE liabilities related to ASD 842, our net interest-bearing debt to reported TTM EBITDA was 1.65 times. Capital expenditures for the quarter totaled $77.1 million. For the full year, we are expecting capital expenditures to be in the $315 to $330 million range and interest expense to come in between $30 and $32 million. Based on the current operating environment and the expected cadence of the new contract logistics program mentioned earlier, for the third quarter of 2024, we are expecting top-line revenues between $450 and $475 million and margins in the 9% to 11% range. Finally, Wednesday, our Board of Directors declared Universal's $10.50 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on September 2, 2024, and is expected to be paid on October 1, 2024. With that, Ludi, we're ready to take some questions.