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Edited Transcript of ULH earnings conference call or presentation 7-Feb-20 3:00pm GMT

Q4 2019 Universal Logistics Holdings Inc Earnings Call

Warren Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Universal Logistics Holdings Inc earnings conference call or presentation Friday, February 7, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jude Marcus Beres

Universal Logistics Holdings, Inc. - CFO & Treasurer

* Tim Phillips

Universal Logistics Holdings, Inc. - CEO, President & Director

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Conference Call Participants

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* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Jizong Chan

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst

* Michael David Vermut

Newland Capital Management, LLC - Founder

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Presentation

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Operator [1]

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Hello, and welcome to Universal Logistics Holdings Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions)

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 hosts, Mr. Tim Phillips, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer; and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations.

Thank you. Mr. Phillips, you may begin.

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [2]

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Thank you, Regina. Good morning. Thank you for joining Universal Logistics Fourth Quarter 2019 Earnings Call.

Yesterday afternoon, Universal released its financial results, rounding out a 2019 with $375.9 million in fourth quarter top line revenues and a reported $0.32 per share in earnings.

Our fourth quarter results were fairly solid given the current operating environment, and I believe a testament to the resilience of the Universal business model.

During the quarter, we persevered through challenges of the soft freight environment, the effects of strikes at both General Motors and M.A.C. truck and also settled a 2013 legal matter, which impacted earnings by approximately $0.08 a share in the fourth quarter.

Despite these challenges, we are happy with how we finished the year and have a lot of momentum coming into 2020. Our optimism is founded on the fact that we continue onboarding new business. Our fourth quarter wins were expected to account for over $50 million in annualized revenue while our consolidated pipeline remains over $500 million in opportunities, setting the table for a great 2020 and beyond.

Next, I'm going to step through the performance of each of our service lines, starting with the truckload group. Truckload services revenue decreased $15.3 million or 20.8% to $58.4 million. This reflects an 18% decrease in the number of loads hauled and a 2.3% decrease in revenue per load, excluding fuel surcharges.

Although the truckload business experienced softness both in terms of volumes and rates, there were some bright spots. We were thrilled to onboard 16 new agents in the fourth quarter of 2019 and continue to have a robust agent pipeline.

As we kick off 2020, I'm very optimistic about the future of our agent-based truckload business. We were also extremely excited to have made our sixth intermodal acquisition in the past 2 years. In November 2019, we announced the acquisition of Roadrunner Intermodal services, which brought with it 23 operating terminal and over 700 drivers to the Universal team. We went right to work on this acquisition. And we are well on our way to a successful integration of people, process and property.

In our intermodal services group, revenue increased $28.4 million or 33.8% to $112.3 million. Load count was up 29.8%. And revenue per load, excluding fuel surcharges, was also up 3.9%. While our legacy intermodal group performed well in the quarter, the majority of the revenue growth came from acquisitions. We are extremely pleased with where we are with our acquisitions and integration into the Universal network. Our selective and strategic acquisition strategy has provided Universal a tenured and talented employee base, along with exceptional blue chip customers.

Overall, our intermodal group outperformed in a quarter that saw both import and domestic container volumes decelerate in comparison to 2018.

Brokerage services revenue decreased $12.9 million or 13.1% to $85.3 million while load count grew 4.4%. The average revenue per load was down 12.2%, which was a result of a very competitive rate environment. We also saw compression on our gross margin as purchased transportation declined at a slower rate than the rates from our customers. Beginning in January 1 of 2020, we integrated our eighth regional truckload company terminal with our company brokerage operation in Nashville, Tennessee, forming our capacity solutions team.

The asset-backed brokerage concept will provide our customers with one-stop shop for all their truckload needs. We're very excited about this new offering and will keep you posted on our progress over the next few quarters. Our dedicated services revenue was down 11.7% to $33 million. We moved 21.4% less loads in the quarter compared to 2018.

Our dedicated services revenue was greatly affected by the GM strike in the first month of the quarter. And margins were compressed because of our decision to keep the Universal drivers hold until the strike was over. We've worked very hard over the past year in recruiting top drivers in a very competitive market. Our decision to keep the talent proved to be a solid one as the GM network came back up with a head of steam and continues to run an accelerated clip.

Value-added services revenue decreased $6.2 million to $86.9 million. Revenue was dampened by the GM and M.A.C truck strike as well as a ramping down of services as a result of major customer plant closure. We're also experiencing slower -- slowing Class A truck production in comparison to the record levels in 2018. I am extremely excited about leadership and the degree of talent that has been built at all levels in our value-added services line. We are extremely well positioned to take advantage of new opportunities, many of which we already have in our pipeline. The value-added group has continued to review each operation for efficiencies and cost containment. We are well positioned entering 2020.

Understanding a couple of the challenges we faced in the fourth quarter, each service line continued to launch and integrate new customers, optimize assets and provide extreme value to our customer base. Although the soft freight volumes may continue in the first half of 2020, we are well positioned to explore and win new market share with our focus on operational excellence for our customers. We will continue to evaluate acquisition opportunities from a very disciplined and strategic standpoint. We are committed to grow our core business units, both organically and through acquisitions as we have done over the past few years.

Universal will continue to be very conscious of operating safely. As the transportation industry continues to experience increased insurance premiums pressured as a result of nuclear verdicts. We will continue to allocate time, resources and talent to continue elevate driver, contractor in workplace safety.

I'm looking forward to a prosperous 2020 and would like to thank Universal's over 12,000 professionals for what they do each and every day.

Jude will now give you more color around our financials. Jude?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [3]

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Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported net income of $8.7 million or $0.32 per share on total operating revenues of $375.9 million in the third quarter of 2019. This compares to net income of $9 million or $0.32 per share on total operating revenues of $386.4 million in the fourth quarter of 2018.

Included in our 2019 operating income was a pretax charge of $2.9 million or $0.08 per share for a previously disclosed legal matter.

Consolidated income from operations decreased $2.4 million to $15.5 million compared to operating income of $17.9 million in the fourth quarter of 2018.

EBITDA increased $6.3 million to $37.7 million in the fourth quarter of 2019, which compares to $31.4 million 1 year earlier.

Our operating margin and EBITDA margin for the fourth quarter of 2019 are 4.1% and 10% of operating revenues. These metrics compared to 4.6% and 8.1%, respectively, in the fourth quarter of 2018.

Looking at our segment performance for the fourth quarter of 2019. In our transportation segment, which includes our truckload, intermodal and freight brokerage businesses, operating revenues for the quarter rose 0.2% to $260.9 million compared to $260.5 million in the same quarter last year. And income from operations decreased $7.7 million to $11.6 million compared to $19.4 million in the fourth quarter of 2018.

In our logistics segment, which is comprised of our value-added services, including where we service the Class A heavy truck market and our dedicated transportation business, income from operations increased $8.6 million to $6.7 million on $114.8 million of total operating revenues compared to an operating loss of $1.8 million on $125.5 million of total operating revenue in 2018.

On our balance sheet, we held cash and cash equivalents totaling $7.7 million and $9.4 million of marketable securities.

Our interest-bearing debt net of $2.1 million of debt issuance costs totaled $457.6 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported EBITDA was 3.2x.

Capital expenditures were $19 million for the quarter and totaled $79.8 million for the full year. For 2020, we are expecting capital expenditures to be in the $70 million to $80 million range, and interest expense between $16 million and $18 million.

Finally, on Wednesday, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on March 2, 2020, and is expected to be paid on April 6, 2020.

With that, Regina, we're ready to take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [2]

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Yes. I guess I wanted to start on the truckload market. Can you guys give us a sense of sort of how things developed as you went through the fourth quarter, understanding that there's probably some disruptions from customer issues early in the quarter? But certainly, the broader market, how that progressed through December than maybe what you're seeing so far in the first quarter?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [3]

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Yes, Chris, this is Jude. So I think the -- as many of our other public peers have reported, it was kind of a slow crawl to the bottom on the gross margins from Q1 all the way through Q4. We did see a little bit of life the second week, the last 2 weeks of the end of the year, where the gross margins and the brokerage operation got a little bit better incrementally. But really, it was really soft in the second half, all the way through Q4.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [4]

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Okay. Any comments on sort of how you're seeing things develop? Or is it too early to tell from 1Q?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [5]

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Yes. I think the gross margins have been a little bit better early in January or late in January, early into February. But once again, I mean, it kind of remains to be seen.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [6]

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Okay. Okay. No, that makes sense. Maybe 2 more questions, if I could. First, on the intermodal side. Obviously, you've been busy on that front. Can you talk a little bit about kind of conceptually how you see 2020 shaping out for the intermodal business?

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [7]

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Yes. This is Tim. Yes, I think that we came out of 2019 with a very nice set of teams. We continue to integrate the acquisitions. From the business front, we see in our pipeline, some really good things. So we're very optimistic about pushing forward on the intermodal front. Yes, there's some uncertainty with the virus and things that are going on out there right now. But we feel, because of our pipeline, the density we've built in various marketplaces that we are positioned very well to have a very successful year on the intermodal front.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [8]

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Okay. And just so we understand, like loan growth. How should we be thinking about it? Obviously, there's organic and inorganic growth. But any sort of help you can give us in terms of thinking about loan growth in intermodal?

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [9]

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Yes. Loan growth organically in a -- just positioning ourselves from an acquisition standpoint, we'll continue to look on that side, if it's very strategic and very right for the organization. But organically speaking, we feel our footprint, the customer base, the pipeline give us the ability to grow organically this year on the intermodal front. So yes, I would think that we would expect organic growth from where we're positioned in the marketplace right now.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [10]

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Okay. Great. And then maybe my last question, if you will, is on the Class 8 side. So some conflicting numbers kind of around the market. Obviously, it's going to be a weaker year for production in 2020. I guess when you think about the outlook for 2020, is there a certain number on the Class 8 side that's sort of embedded in your expectations? And how do you sort of adapt to variability, particularly, if it ends up falling to the lower end?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [11]

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Yes. I -- Chris, this is Jude. Yes, we forecast at the lower end based on the most recent ACT numbers that came out. So I mean, we're expecting a 40% decline in roughly 50% of our Class A business because half of it relates to the Class A production, and the other half relates to this a machining business that we also own as a part of that group. So we're forecasting at the low end of that business with expectations that, that 40% year-over-year decline in the ACT will continue throughout 2020.

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Operator [12]

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Your next question comes from the line of Jeff Kauffman with Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [13]

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Congratulations.

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [14]

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Thank you, Jeff.

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [15]

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Thank you.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [16]

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A couple of questions. Post some of the new business wins and the Roadrunner acquisition, can you help me understand the geographical footprint on the intermodal side? How -- exposed is a wrong word, but if I take the 80/20 rule, and where your intermodal strength and density and where your commitment is in the network. How big is California relative to the whole? And kind of what are the key markets that I should think about from an intermodal growth standpoint?

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [17]

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Sure, Jeff, this is Tim. Yes, California is a key market for us. It probably is attributable about 20% of the overall gross revenue. We've aligned ourselves to what we see as other key markets servicing the United States. And those would be geographically, size-wise, Chicago, of course, being the biggest inland port in the United States. We've also, through acquisition and organic density -- are large in the southeast. So Savannah, Charleston, we find ourselves with a great deal of density. And we think that is a key play on the East Coast as intermodal volumes continue to build and grow over the years. We're also very dense in the Texas market, the Dallas and Houston market. We think those have long-term growth potential. And we continue to look around the United States for places that we would need additional density. Now we have a whole -- another tier of secondary place. But I would say those are the main market that we're playing in a very large revenue dense fashion.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [18]

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Okay. So can you give us an update on what's going on with AB5 in California? I know it potentially can affect your intermodal dray, but couple of other businesses out there? And what the strategy is depending on how this progresses with the court?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [19]

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Yes. Well, obviously, there's a stay in place. And so we feel pretty good about federal preemption as a number of courts have ruled over the past couple of months. So our expectation is that this current version of AB5 will die, either a -- most likely a slow death because it's California. But there's always going to be the labor-related drama and some legal challenges operating in California. We're doing all of the things in that market to protect ourselves to the extent that we can, however, our business model in California is independent contractor. And we will continue to operate as long as it is legal, an independent contractor model in that state.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [20]

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Okay. Can I switch gears for a second to cash flow. Taking your guidance and depreciation and your CapEx guidance, it looks like you're going to have the quality problem of trying to figure out what to do with about $70 million-ish of free cash. Can you talk about your cash priorities, acquisition versus debt pay down versus share repo and kind of where your head is right now?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [21]

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Yes. So I would label them -- those are obviously great choices. Number one is debt pay down. Absolutely. I -- what -- mean -- if all the free cash that we have will go down to reduce our debt load. Second will be M&A with just acquiring 6 businesses. I mean Tim and his ops team are going through and integrating all of those. So if it's magical, we'll jump all over it. If it's not, we'll pass. And then third would be share repo. We just took advantage of the market last year. If you remember, we were trading at easy to EBITDA of like 5x or below. So it was prudent for us to take about 1.1 million shares off the table. But our real focus is to reduce our leverage this year with all excess free cash.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [22]

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And do you have a target leverage range, where in a perfect world, you say, okay, this is the right level of leverage for us, now we change cash priorities when we get to this leverage level?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [23]

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Yes. So I would say that I think in a perfect world, we'd be levered at 1x EBITDA. But we're very comfortable levering up to 3.5x EBITDA, if the acquisition makes sense for us. So we're -- on a run rate basis, adjusted, our EBITDA is around $180 million a year at our current business volume. So I mean, we have a lot of flexibility with our debt because it's -- in quotes, "If all things being equal, we're going to have $180 million to play with on an annual basis." So we're not afraid of that. Universal has been inquisitive over its -- since 1981, when the business was founded in Dearborn. We've done about a little less than 50 acquisitions over that period of time. And we'll continue to lever up the business and then pay down as appropriate.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [24]

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Okay. Well, congratulations in a challenging quarter.

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Operator [25]

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Your next question comes from the line of Bruce Chan with Stifel.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [26]

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Just wanted to start off here on the margin guidance. Obviously, we won't have some of the big headwinds like the GM strike. But as you're looking at what's probably going to be a pretty tough backdrop still in the first half as we're looking at truck and auto production that's still under pressure. You've still got this 7% to 9% margin outlook, which is a pretty healthy step-up from last year. Can you just help us to bridge those 2 numbers? And maybe help me understand where we're going to see the bulk of that improvement and maybe the cadence or pace of the improvement over the year?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [27]

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Yes. So we don't obviously provide quarterly guidance. We try to give a range of where we see the business over the next 12 months. That -- though, the performance outlook that we provided in the earnings release is the exact same performance outlook that we provided in 2018, with the assumption that we weren't going to have a truckload rate collapse in March that we experienced. So we're looking at the business as we always have. We step through each one of our service lines. And we have a low-end margin guidance and a high-end margin guidance that we publish in our investor presentations. So you go through the -- some of the part, you look at the high to low margin expectations of each one of the service lines that we report, and that's how you get to 7% to 9%. It's bridging the gap, if you take the $63 million -- or $65.3 million of operating income that ULH reported for the year, I mean, there's $39 million of legal and strike headwinds that no matter what the environment is in 2020, knock on wood, won't be there in 2020 from 2019. And so on an adjusted basis, you're taking that $65.3 million, you're adding $39 million of op income related to legal and strike and you're at $104.3 million, which is about 6.8% of operating income. So we're ending the year on an adjusted basis, basically at 7%.

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Jizong Chan, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP & Equity Research Analyst [28]

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Okay. All right. That's fair enough. And then maybe just a broader question, Tim. I mean, obviously, you're fairly new to the business here. But as you've kind of gotten acclimated, is there anything that you feel is going to change or needs to change about the strategy and the direction the company is headed?

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [29]

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No. I think that some of the ground strategy that's already been set up is sound. I think that my job -- and job one will be to get into some of the different business units and making sure that we're executing the strategies that we put forth before, both from a revenue standpoint and from a cost containment standpoint. I think that as I stepped out of my prior position and into this, I looked across the enterprise. And what we have in place from a leadership standpoint and a support standpoint, we're situated in excellent basis. Now we have -- we just have to execute what we put forth in front of the leaders to hit the points we want to hit. So I'm very comfortable with where we sit going into February with our strategic approach to 2020.

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Operator [30]

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(Operator Instructions) Your next question comes from the line of Mike Vermut with Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [31]

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Just -- I've (inaudible) the time of, I don't think I've ever seen a company of this quality and size trade at this valuation, along with the 22.5% dividend yield to boot. So one of these days, that'll fix itself. You've done a rough estimate of your -- of the guidance you put in there for 2020. I'm getting anywhere between [260] and [370], at the midpoint, around [316]? I don't -- hopefully, that's correct. And then the translation is roughly $100 million of free cash flow or over $3 -- $3 to $3.50 of free cash flow per share at the midpoint. Is that correct? What I'm trying to think about modeling this out 2020, 2021 that we could pay down roughly $200 million of debt over those next 2 years? Or is there something that I'm missing here, ex acquisitions or whatnot?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [32]

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Yes. So I think there's -- the debt pay down would be only impacted by additional CapEx for new business wins. So obviously, we believe that between that $70 million and $100 million a year is the number that would be available to us to pay down debt. But obviously, if we continue to grow the business, if we continue to win customer awards that require investment, we're going to make those investments in the business for the future. So that would be the only limiting factor, Mike.

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Michael David Vermut, Newland Capital Management, LLC - Founder [33]

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Excellent. And then when we look at buy -- it's hard not to buy -- when we're trading at 6x earnings and 4.5x EBITDA, it's hard not to buy back stock. But that would be the next use of capital after the debt paydown, I assume?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [34]

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So it's debt -- yes, so it's just debt paydown, M&A. And then we would look at any type of shareholder issue with redistributing -- or just acquiring shares or dividend. So we need to lighten up the debt load a little bit so we can continue the M&A strategy. And you're only going to do that if you have more available. And so that's what we're going to focus on over the next couple of years.

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Michael David Vermut, Newland Capital Management, LLC - Founder [35]

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Excellent. Okay. All right. These valuations here are absurd but finishing. Two more quick questions for you. The synergy -- when we're looking at, you've done, I guess, 3 acquisitions, is it? Over the past year?

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [36]

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We've done 6 in the past 2. We did 2 acquisitions last year. Michael's Cartage, we closed in April and then Roadrunner, we closed in November.

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Michael David Vermut, Newland Capital Management, LLC - Founder [37]

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Excellent. Now when we're looking at the integration, the synergies, are they better than originally planned? And how are they going? If you can give a little more detail on this.

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [38]

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So I would say that we're probably in -- of a 5-phase plan, we're probably in about Phase 2. We're still working through a number of the back office and technology synergies. So we're still -- there's still a lot of low hanging fruit out there for us to get, especially as we combine some of these larger market operations together. So it's -- we've done what we can do over the past couple of years. But this year with some of the changes that we're making with our technology platforms, we should realize more in the later half of this year and, of course, into 2021.

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Michael David Vermut, Newland Capital Management, LLC - Founder [39]

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Excellent. Okay. And then just a suggestion here is most companies give us an adjusted EPS number. I know you give us all the charges out there. But to consider down the road giving us an adjusted number, so we don't have to kind of go through the rest of the release to find out what's to add back or not, to make it apples for apples with all the other companies in the group that report.

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Jude Marcus Beres, Universal Logistics Holdings, Inc. - CFO & Treasurer [40]

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Okay. Mike, we'll take that under consideration. We appreciate the idea.

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Operator [41]

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And we have no further questions at this time. I'll turn the conference back over to management.

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Tim Phillips, Universal Logistics Holdings, Inc. - CEO, President & Director [42]

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Well, I appreciate it. Thanks for dialing in. We're extremely pleased and look forward to positioning ourselves and pushing forward. Look forward to speaking to you all in a couple of months. Have a great day. Thank you.

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Operator [43]

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Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.