Universal Logistics Q4 2024 Earnings Call Transcript

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February 7, 2025

There are 4 speakers on the call.

Operator

Hello, and welcome to Universal Logistics Holdings Fourth Quarter twenty twenty four 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.

Operator

Statements that are forward looking relate to Universal's business objectives and 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. And it is now my pleasure to introduce your host, Mr. Tim Phillips, Chief Executive Officer Mr.

Operator

Jude Perez, Chief Financial Officer and Mr. Stephen Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin.

Speaker 1

Thank you, Ina. Good morning, everyone, and thank you for joining Universal's fourth quarter twenty twenty four earnings call. Our results demonstrated how Universal's diverse service offerings continue to set us apart in the transportation and logistics industry. Against the persistently weak freight backdrop, our comprehensive logistics solutions have once again driven exceptional performance. Before delving into the details, I want to take a moment to acknowledge the incredible efforts of the entire Universal team.

Speaker 1

The dedication and hard work of our 10,000 plus employees and contractors are the foundation of our success. It is the commitment of each team member that enables us to consistently deliver outstanding services to our customers and maintain our position as a leader in the transportation and logistics industry. Now let's discuss the quarter. Universal once again delivered solid results in the fourth quarter twenty twenty four. We grew top line revenues by 19% with 8.2% in operating margin and our earnings per share of $0.77 For the full year 2024, Universal reported $1,850,000,000 in revenue, 11% in operating margins and 4.93 in earnings per share making 2024 the second best full financial performance in Universal's history.

Speaker 1

While I'm pleased with Universal's overall performance, results continue to vary across reporting segments. Our contract logistics business continues to be a standout performer, consistently achieving double digit operating margins and serving as the cornerstone of our success. Our Trucking segment has also delivered strong results. Despite ongoing weakness in the truckload market, demand for our specialized heavy haul wind business remains robust, driving trucking to its highest operating margin in over two years. We expect this momentum to continue.

Speaker 1

However, our intermodal segment remains a challenge performing below expectations. That said, we are highly focused on reducing costs and improving efficiencies and our efforts are yielding results. The fourth quarter was the second straight quarter of positive EBITDA contributions from the intermodal segment indicating our cost control efforts have been effective. While there is still work to be done, I'm encouraged by the progress we have made so far. In our contract logistics segment, revenues increased 52.7% to $307,400,000 This includes $51,300,000 in revenues from our specialty development project, which was completed during the quarter.

Speaker 1

At the end of Q4 twenty twenty four, Universal managed 90 value added programs, including 20 new rail terminals from the fourth quarter acquisition of Parsec, up from 71 programs in Q4 twenty twenty three. Contract Logistics remains our most consistent and profitable segment. This was the twelfth straight quarter of operating ratios below 90%. I'm very pleased with the performance of our recent acquisition of Parsec, a market leading provider of rail terminal management services. Parsec had its highest Q4 revenue in its history and its highest lift volume since COVID.

Speaker 1

The acquisition has allowed Universal to build new customer relationships and will continue to provide opportunities of cross sell on our other services. We are extremely pleased with the early performance of this acquisition and believe there are further synergies to be recognized going forward. The Parsec acquisition was truly transformational for Universal and brings our contract logistics segment annual revenue run rate to over $1,100,000,000 We remain cautiously optimistic on the segment for 2025. We did see a slight downturn in the automotive industry in the fourth quarter with plants operating fewer ships and less weekend work. However, twenty twenty five volumes are expected to be similar to 2024 with the Star expected to remain elevated around 16,000,000.

Speaker 1

Class eight volumes are also expected to be similar to 2024 and twenty twenty five. Our Trucking segment performed very well despite the challenging transportation environment. Revenues increased 11.5% to $83,800,000 primarily due to our 30.5% increase in revenue per load excluding fuel surcharges. This was partially offset by 17% drop in loads haul. A key driver of our performance has been the strength of our specialized heavy haul wind business, which continues to deliver outstanding results.

Speaker 1

We made large investments in heavy haul equipment in 2023 and 2024 and it is paying dividends. We also acquired the operations of our wind agent in the third quarter of twenty twenty four, turning it into a company managed operation, which we expect to contribute an additional $3,000,000 of EBITDA on an annualized basis and further improving operating margins as well. Looking ahead, our specialized heavy haul wind business has significant long term growth potential providing stability for our trucking segment and helping insulate it from broader inflation in the truckload market. Specialized revenue made up 32.1% of the Trucking segment revenue in 2024 compared to 18.9% in the prior year. We expect our specialized business to continue to rise as a percentage of overall Trucking segment as we continue to deepen our relationship with existing customers and broaden our customer base in the coming year.

Speaker 1

The intermodal segment had another challenging quarter capping a very difficult year. In the intermodal segment, revenues decreased 15.9% year over year to $73,100,000 Compared to Q4 twenty twenty three, our intermodal segment experienced a 15.3% decrease in volume while rates decreased 2.2%. Additionally, fuel surcharge revenue decreased $3,900,000 Volumes and rates have been relatively stable throughout 2024 leading us to believe this is the bottom for this segment. We are transforming this segment into a leaner more efficient operation positioned for strong turnaround once the rate and volume environment improves. We have brought in a new intermodal sales team to target volume shippers in key intermodal markets with a focus on capturing more share in the markets that matter.

Speaker 1

Across the enterprise, we are excited about the strong sales pipeline filled with promising opportunities totaling over $800,000,000 This robust pipeline enables us to be strategic in our approach, allowing us to focus on opportunities that align with our core competencies and margin objectives. By maintaining this disciplined strategy, we are well positioned for long term success while continuing to deliver exceptional value to our clients. I'm incredibly proud of our performance in both the fourth quarter and the full year 2024. I'd like to take this opportunity to express my gratitude to our employees. Their hard work, dedication are crucial to our success.

Speaker 1

I also want to thank our customers for continuing to put their trust in Universal. As we look ahead, I remain optimistic about the rest of 2025 and confident in our future. I will now turn the call over to Jude to provide color on our financials and expectations for upcoming quarter. Jude? Thanks, Tim.

Speaker 2

Good morning, everyone. Yesterday, Universal Logistics Holdings reported consolidated net income of $20,200,000 or $0.77 per share on total operating revenues of $465,100,000 in the fourth quarter of twenty twenty four. This compares to net income of $21,400,000 or $0.81 per share on total operating revenues of $390,900,000 during the same period last year. Consolidated income from operations was $38,300,000 for the quarter compared to $34,100,000 1 year earlier. EBITDA increased $18,700,000 to $73,500,000 which compares to $54,800,000 during the same period last year.

Speaker 2

Our operating margin and EBITDA margin for the fourth quarter of twenty twenty four are eight point two percent and fifteen point eight percent of total operating revenues. These metrics compare to 8.714% respectively in the fourth quarter of twenty twenty three. Looking at our segment performance for the fourth quarter of twenty twenty four, in our contract logistics segment, which includes our value add and dedicated transportation businesses, income from operations increased $7,000,000 to $39,100,000 on $307,400,000 of total operating revenues. This compares to operating income of $32,100,000 on 201,300,000 of total operating revenue in the fourth quarter of twenty twenty three. Operating margins for the quarter were 12.7% of total operating revenues compared to fifteen point nine percent one year earlier.

Speaker 2

Included in the contract logistics operating results was $6,000,000 of depreciation and amortization related to Parsec, which lowered the fourth quarter twenty twenty four operating margin in this segment by 200 basis points. During the fourth quarter of twenty twenty four, we completed our specialty development program and recognized an additional 51,300,000 of operating revenue during the period. For the full year 2024, we recognized total operating revenues on the program of $228,000,000 Revenues generated from this program were reported in value added services and the associated costs in operating supplies and expense. The results of this program were included in our contract logistics segment. Onto our intermodal segment, operating revenues decreased $13,800,000 to $73,100,000 compared to $86,900,000 in the same period last year.

Speaker 2

And income from operations decreased 8,700,000 to an operating loss of $9,700,000 This compares to an operating loss of $1,000,000 in the fourth quarter of twenty twenty three. Operating ratios for the quarter were 113.2% versus 101.1 last year. In our Trucking segment, operating revenues for the quarter increased $8,700,000 to $83,800,000 compared to $75,200,000 in the same quarter last year and income from operations increased $3,300,000 to $5,800,000 This compares to $2,500,000 in the fourth quarter of twenty twenty three. Operating margins for the quarter were 6.9% versus 3.3%, reflecting strong results in our specialized heavy haul wind business. On our balance sheet, we held cash and cash equivalents totaling $19,400,000 and $11,600,000 of marketable securities.

Speaker 2

Interest bearing debt net of $3,600,000 of debt issuance costs totaled $759,100,000 at the end of the period. Excluding lease liabilities related to ASC eight forty two, our net interest bearing debt to reported TTM EBITDA was 2.31 times. Capital expenditures for the quarter were $37,400,000 For the full year 2024, capital expenditures were totaled $248,300,000 For the full year 2025, we are expecting total operating revenues between $1,700,000,000 to $1,800,000,000 and operating margins in the 7% to 9% range. For the full year of 2025, we are also expecting capital expenditures to be in the $125,000,000 to $150,000,000 range before any purchases of strategic real estate and interest expense to come in between $48,000,000 and $51,000,000 For the first quarter of twenty twenty five, we are expecting top line revenues between $390,000,000 and $410,000,000 and operating margins in the 6.5% to 7.5% range. EBITDA margin for Q1 of twenty twenty five will be in the 14.5% to 16.5% range.

Speaker 2

With increases in depreciation and amortization expense related to our recent acquisitions, as well as the associated interest costs on borrowings, we believe EBITDA will become a more meaningful measure of Universal's operating performance in 2025 and in the years ahead. The tick down in our operating margin guidance includes four discrete items. Number one, the roll off of the previously mentioned specialty development program that was completed in 2024, the additional depreciation and amortization expenses expense increases due to recent acquisitions, softness in our automotive customers production expectations for the first quarter and continued headwinds in our intermodal segment, specifically in Southern California. Our guide neither includes any potential negative impact of tariffs on either our Canadian Mexican operations nor positive impacts on our business related to changes on the regulatory policies specific to tort reform, independent contractor classification rules at the federal level or changes in tax policy. We'll update our guide each quarter reflecting any changes in policy that will impact our current or future results either negatively or positively.

Speaker 2

Finally, Wednesday, our Board of Directors declared Universal's zero point one zero five dollars per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on 03/03/2025 and is expected to be paid on 04/01/2025. With that, Anya, we're ready to take some questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Bruce Chan from Stifel. Please go ahead.

Speaker 2

Hey, good morning guys.

Speaker 3

Thanks for the questions here. Maybe just starting from the top, I know there's been a lot of news flow on the automotive OEM side and you guys usually get some pretty good visibility into production. So thanks for the color there. But maybe if you could just address what your customers are saying as far as the different tariff scenarios on Canada and Mexico. I know it's early and hard to say, but if we think about kind of a worst case scenario here, would that maybe look like 2021 esque scenario where we see plant closures?

Speaker 3

If you could just help us to maybe quantify the risk there?

Speaker 1

Bruce, I'll

Speaker 2

start. So first of all, our Canadian business is only about $10,500,000 of annual sales and our Mexican business is just south of $50,000,000 So Universal's foreign exposure to tariffs is not very big, right? So around 3% to 3.5% of our 2025 guide. That being said, I mean, I think similar to what happened in during strikes or when there was some challenges in the supply chains in Mexico, there's a lot of components that come from either overseas or from Mexico. So, although I don't think there's really been specific guidance given to us about those items, I would expect that if there is any challenges at the border or any challenges on tariffs that relate to specific components, it definitely could impact us.

Speaker 2

But I don't really think we have any insight into that as of right now.

Speaker 1

Yes, Bruce, this is Tim. I would agree with that. All of our conversations with our customers have really shown what Judah just said. There's been no real guidance, but we feel comfortable in everything that we have positioned right now if something should happen. I mean, this is a long term play in Mexico.

Speaker 1

We continue to build that out. It's going to be part of the global supply chain right near Shoring. And that's truly what's happened over the years. It is a global supply chain and the autos of the different brands do depend on the global network. But we think we're positioned both in Mexico, we think we're positioned also from an import standpoint on the drayage side of it to be able to capture what will continue to be a global supply chain network.

Speaker 3

Okay. That's really helpful. I know it's not just you guys, so I appreciate that perspective. But maybe just sticking with contract logistics here,

Speaker 1

I know you typically see a little bit

Speaker 3

of seasonal degradation in the margins from Q3 to Q4, but it looks like it was a little bit more pronounced this year. So maybe you could just help us to parse out how much of that was the mix from Parsec and Jude maybe what the right way to think about structural margin impact from Parsec on the segment would be like going forward?

Speaker 2

Yes, for sure. So just a couple of things. One is that the Parsec, the company that we bought historically had between 812% operating margins. But when you start factoring in the purchase accounting that's required for GAAP, it's going to layer in about $6,000,000 to $8,000,000 of other costs specifically related to of intangibles and some additional amortization on equipment purchases. So that margin that we bought at like eight to 12 for GAAP is going to go down to one to two.

Speaker 2

So that's one of the reasons that we are going to start talking a little bit more, Bruce, about EBITDA because we believe EBITDA will be a much better reflection because we're not going to shy away from buying really great companies just because there's a purchase accounting hit to our operating margin. So I would say Parsec is one piece of that. And also what we started seeing in Q3, Bruce, was that especially in our dedicated transportation group, we really started seeing some plants operating from six days to five and then going from three shifts to two. So that had a larger impact on dedicated margin in the quarter just because you have all those fixed costs associated with tractors and trailers. And if you're not getting that utilization out of the assets, there's going to be a little bit of margin degradation.

Speaker 2

So although the autos have guided, I think as you're aware, around a $16,000,000 SAR for 2025, which will be very similar to what happened in 2024. It just looks like that ramp up may be more a mid to late year story than really starting off gangbusters in Q1.

Speaker 3

Okay, got it. That's also really helpful color. And then maybe just one more before I turn it over and hop back into queue. On the intermodal side, obviously some continued challenges there. I know you're making some changes, but if you could just give us a little bit more insight into what the specific drivers of the kind of outside degradation in the segment were and what the kind of path to progress or the path to improvement, especially in SoCal looks like as you think about 2025?

Speaker 1

Sure. Well, I want to highlight a couple of things because as you can imagine that's been all of our focal points is to make sure that we put the intermodal division on a path to profitability and success. So we looked at it from a top down approach and the top down approach would mean some new leadership being brought into that segment to help us better plan and accelerate where we think we need to be. We also included in that leadership a new sales executive as well as a large increase in our sales force. We kind of rationalize that on where we want to attack the different customers in The United States.

Speaker 1

So we feel really good about where we are positioned going into twenty twenty five from a touch point with our customers and being able to evaluate and sell and close new deals. In conjunction with that, we thought we needed a new level of visibility for our customers as well as our employees. So we're instituting some new technology that will roll out over the year 2025 to better position our people to be successful to give our customers a clear look at where their freight is in the intermodal supply chain. So we're also excited about that. There's been a lot of heavy lifting for all these things to get it positioned so we can have a full crack at it in 2025.

Speaker 1

The other thing that we've worked pretty hard on is the efficiencies, right? So what have we done to in Southern California in specific, we've really rationalized the headcount. We've consolidated potentially facilities where it makes sense. We've rationalized our leases. We've looked at should we be subleasing.

Speaker 1

And we also did some property rationalization. We are investing in the future and we want to make sure that when we make those commitments, we have a solid foundation to see that particular business growth. In conjunction with that in Southern California and the rest of the intermodal unit, we'll be looking for additional efficiencies from a centralization process of how we conduct our interfaces with our customers and our interface with our drivers. So we'll continue to report on that and you'll see the results of that in the coming quarters with our successes as we climb out of that. And although the Southern California market has been a big challenge, we think we have some good position on a pipeline.

Speaker 1

We're really being aggressive on how we approach customers in the first quarter and beyond to make sure that we continue add additional volume into the network. And I think that's the biggest thing. We've rationalized costs with consolidated facilities. We've optimized our team to be ready for that uplift. And now what we need to do is fill the funnel full of freight and the basket's full.

Speaker 1

We just have to be very competitive because we'll tell you this, we have not on the intermodal side walked out of a very competitive capacity environment. There's still capacity in the hopper as some of it's falling out, but it's very competitive from a rating standpoint. So as we see that start to relieve itself and we start to grow some legs out of that, you'll see exponentially we'll make some continued progress not only in Southern California, but we'll see that type of opportunity around The United States, Bruce.

Speaker 3

Okay, great. And is the demand environment right now conducive to that or do you need to see any further upward inflection in the market in order to get that done?

Speaker 1

I would say that the market's been somewhat flat, but I'm optimistic and I'm optimistic for a couple of things, right? We're also seeing additional throughput on bids and opportunities on the truckload sector. We're seeing some additional opportunities on the intermodal network. And I think those two going hand in hand, if truckload also picks up at any degree or rate, it also takes some of the capacity and sometimes that capacity shifts to truckload and opens up a more dynamic environment for intermodal and not as much capacity being addressed to that intermodal type of freight. So I still think the rates are somewhat like I said in my prepared remarks, I think we've seen the bottom and now it's just a matter of how we climb out prepared remarks, I think we've seen the bottom and now it's just a matter of how we climb out of it.

Speaker 1

Remember, the first part of twenty twenty or February will encompass the twenty ninth was the Chinese New Year. So we'll see some softness in the February and March. We know that's coming. It's just how we climb out of it after that. So I expect as we get into second quarter, we should see some additional opportunities come.

Speaker 3

All right, great. Thanks. I'll hop back in the queue. Appreciate it.

Speaker 1

Thanks, Bruce.

Operator

Thank you. We have a follow-up question from Bruce Chan from Stifel. Please go ahead.

Speaker 3

All right, great. Well, second bite of the apple, it's all right. I've got plenty of questions here. Just on the trucking demand side, nice little bump up in the fourth quarter. Any sense of whether that was project related or recovery related?

Speaker 3

Or is that more core demand that you think could stick around into the first quarter, into the early part of twenty twenty five?

Speaker 1

Yes, we probably both could comment on this. But the demand in the fourth quarter especially was driven by the wind division. We continue to see opportunities based on the fact of our execution and also the fact that we've invested a lot in the equipment to make sure we stay current and provide the freight. I see that being because we're putting a lot of effort into it. We're putting a lot of effort into the specialized piece of the truckload and we're putting a lot of effort to make sure we stay connected with the customers to see that freight continue.

Speaker 1

We've seen a little bit better first quarter so far in the wind environment. So we're happy with that. We've still seen a drag on rates on your standard van and flatbed. But the promising point on the truckload other than the specialized is we've seen a real good increase in the bids coming in that we've had the opportunity to review. So the bid activity has picked up in the first four or five weeks of the year.

Speaker 3

Okay. So is there a risk to that wind business from some of the regulatory and policy changes as far as what you're hearing from customers or does that seem okay at this point?

Speaker 2

Right now, Bruce, it seems okay. Most of the Exos that were executed by the President related specifically to projects on federal land and the projects that we are currently operating and normally operate are not on federal land. So right now, we really don't expect any impact. Yes.

Speaker 1

Let me just add to that from a customer standpoint, exactly what Jude said. It's a dynamic environment that has some private connotation to it. And remember some of these projects that begin this year started two or three years ago upstream planning from a civil standpoint. So there's been a lot of time and effort extinguished to get it to the level it's at now. So we feel we have a somewhat clear trajectory on what's out there and we just need to be competitive and continue to service the customer to continue to get the award.

Speaker 1

The other thing I would say, we really put a push on to expand our customer base on the specialized side. So that will be one key initiative of this year just to expand our expertise into other customers to diversify the portfolio.

Speaker 3

Okay, great. And then just one final one here, Jude, on the operating expense side, personnel costs picked up a bit here. I know you mentioned some headcount rationalization in intermodal. Was that just tied to Parsec or was there something else going on? And then on the other expense line, can you just remind us of what goes into that bucket?

Speaker 2

Yes, for sure. So no, you're absolutely right, Bruce. That was specifically related to Parsec. If you remember, Parsec brought in about 2,100 new employees of which, what, 1,300 ish are union, so very similar to the to our contract our legacy contract logistics business. And then in the other operating expense line, one, a couple of things, that's where we have our specialty development program that ran through that expense line throughout the course of the year.

Speaker 2

It's also that has like our general operating expenses related to transportation like fuel and license plates and permits and things along those lines. But 93% of the change in that number was specifically related to the specialty development program. Okay, perfect. Thank you

Speaker 3

so much. Really appreciate all the time.

Speaker 1

Thanks, Bruce. Talk soon.

Operator

Thank you. There are no further question at this time. I will now hand the call back to Mr. Tim Phillips for any closing remarks.

Speaker 1

Thank you. We have taken a strategic and thoughtful approach on who we want to be and what it will take to get there. We have a deep focus on providing a customer centric approach in segments that allow us to truly integrate in our customers' supply chain. We believe this offers our customers a high level of support and builds a level of stickiness, which will ultimately support our long term value to our shareholders and employees. Thank you and I look forward to catching up on our Q1 earnings call in late April.

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