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Contrarian Peak Season Call From Universal Logistics


While management teams at some of the nation's largest truckload (TL) carriers have been talking up the potential for a solid peak shipping season, Universal Logistics Holdings, Inc. (NASDAQ: ULH) has seen peak season sentiment move the opposite direction among its customer base in the last couple of weeks.

ULH's Chief Executive Officer Jeff Rogers and Chief Financial Officer Jude Beres were on hand today, September 5, at the Cowen and Company 12th Annual Global Transportation Conference to provide an overview of the company and the market.

Rogers said that intermodal volumes are still slow and that they haven't seen the seasonal pickup they were anticipating thus far in the third quarter.

ULH's intermodal business provides port drayage services. The company focuses on container movements in the ports and isn't directly involved in domestic railroad intermodal movements. Historically, ULH's intermodal business sees the bulk of its revenue in the third and fourth quarters of the year.

Rogers said, "Inbound drayage is typically huge in the third quarter getting ready for the holiday season [supplying all the retail], but we have not seen a pick up yet which is unusual. It's not scary yet because the volumes are still okay, but it's just not what I would call a normal buildup for peak season."          

When asked if ULH's customers are expecting a peak season, Rogers said that their customers hadn't indicated plans to change their positive outlook around peak season as recent as two to three weeks ago. This was similar to the commentary J.B. Hunt Transport Services Inc.(NASDAQ: JBHT) provided at the same conference the previous day. However, Rogers said that in the last couple of weeks their customers are "hedging their bets a little bit" and "backing off" of their initial expectations for a "gangbuster" peak season.

Rogers said that the economy is still "decent" along with a "strong" consumer. He said that one of its largest customers – Walmart Inc. (NYSE: WMT) – is still "pushing record volumes" through ULH's distribution centers. Walmart reported its strongest U.S. sales growth in more than a decade in its second quarter earnings report three weeks ago. Rogers contended that the company's drayage comparisons are still favorable to 2017, but not to 2018, which included some inventory pull forward ahead of tariffs.

At the same conference, third-party logistics and multimodal transportation services provider, Radiant Logistics, Inc. (NYSE: RLGT) didn't really have a call on expectations for this year's peak season. The company's founder and Chief Executive Officer Bohn Crain said that the company was seeing some freight pull forward, but that coastal warehouse capacity is largely tapped out, making it difficult to pull forward a material amount of goods. Of Radiant's $900 million in total revenue, $200 million is truly exposed to international air and ocean freight forwarding.

Driver market update

Rogers provided an update on the current driver market. He said that ULH has the largest pipeline of new hire drayage drivers ever. He believes that most drivers are chasing the freight, leaving the capacity-oversupplied traditional over-the-road market in favor of more consistent freight. He believes that the company is having success seating drivers in its dedicated offering and noted that they are currently looking to hire 300 drivers in Fort Wayne, Indiana for a piece of dedicated business. He said that irregular route, over-the-road, agent-based drivers are "unicorns."

As far as driver wages are concerned, ULH implemented a large driver pay increase in 2018. Rogers said that this is the new baseline for driver pay and that they aren't able to go back to the driver to reduce pay rates simply due to declining TL rates. Increased driver wages due to multiple rounds of wage increases in tighter TL markets have created a bit of a margin squeeze for many carriers. The squeeze is less of an issue with ULH's owner-operator drivers because they receive the same portion of the freight bill, it's just lower year-over-year. ULH renewed a union contract recently, which allows a modest 2 percent to 2.5 percent increase in driver wages.

ULH looking to more than double the side of its drayage unit

While ULH's port drayage business represents a small portion of dray movements in U.S. ports, management estimates that the company is a top-five port drayage provider by market share. That is a position they would like to improve upon in the future.

ULH is attempting to grow its intermodal (drayage) business to a $1 billion franchise, significantly higher than the $250 million revenue mark the company reported in 2018. That said, the division has already reported $185 million through the first half of 2019 with the expectation to reach $450 million in drayage revenue this year. ULH has made five acquisitions in the space, two in Chicago, two in southern California and one outside of Salt Lake City.

Now the company is focused on the Atlanta market and would like to do something at the Port of Savannah and ULH is potentially looking into Gulf Coast ports in Texas as well. Rogers believes that the revenue goal will be achieved most likely through immediately accretive acquisitions, similar to past acquisitions. He believes that this is the only way to quickly scale the business to the billion dollar mark. The legacy portion of the business is likely to grow at a 5 percent to 10 percent organic growth rate.

Financial anecdotes

ULH is using its capital to replace rolling stock on a standard replacement cycle for the first time in its history. Additionally, the company is integrating all prior acquired units to the same transportation management system. This should be accomplished by year-end 2020 and improve operations by 100 basis points. The company also plans to build a national footprint in drayage, pay down debt, return up to 40 percent of net income in dividends to its shareholders and repurchase its stock. ULH recently increased its tender offer to purchase up to 600,000 shares of its common stock. Additionally, the company recently announced that the Moroun family, which owns slightly more than 70 percent of the company's outstanding stock and occupies two board seats including the chairman position, may tender up to 600,000 shares.

Shares of ULH were up more than 3 percent on the day.

Universal Logistics Holdings is an asset-light provider of truckload, brokerage, intermodal, dedicated and value-added transportation and logistics services throughout the United States, and in Mexico, Canada and Colombia.

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