Universal Logistics executives held their first earnings call with analysts since its possible precedent-setting deal with the Teamsters in California and the few references to the AB5-driven agreement were, not surprisingly, positive.
The company, which has a major drayage operation in Southern California, signed the deal in late August and did make public statements on it at an investors conference soon after.
On the earnings call Tuesday, CEO Tim Phillips, in reviewing the company’s strong quarter, added information on the status of that initiative to hire more drivers and presumably use fewer independent owner-operators to stay in compliance with California’s AB5 law that sets out strict guidelines on what constitutes an independent contractor.
Phillips said Universal Logistics (NASDAQ: ULH) is “pleased with the pipeline of new California company driver applicants” in the company’s intermodal segment, which includes its drayage activities. He said the driver count for the third quarter of 2022 stood at 1,840 drivers, which was up 10% over the corresponding period in 2021 and was up 4% sequentially from the second quarter.
During the call, Phillips made multiple references to the slowing volume of business in the intermodal sector at Universal. Between the new push to make drivers employees and that slowing market, Phillips suggested there are decisions ahead on its stable of independent owner-operators.
Elsewhere during the call he said the deal with the Teamsters has helped “bolster our port drayage fleet with quality drivers.”
Phillips also reiterated what he said at the Cowen & Co. investor conference last month: The costs of the transition toward more company drivers “will need to be evaluated.” However, at Cowen, Phillips did put a number on it: as much as a 20% increase in costs because of the transition.
The ABC test that is at the heart of defining an independent contractor versus an employee under AB5 contains the B prong, which says an independent contractor “performs work that is outside the usual course of the hiring entity’s business.” A company like Universal Logistics with a large drayage operation in the Southern California ports, and with a workforce heavily made up of independent owner-operators, ran the risk of not complying with AB5, and its deal with the Teamsters to settle a labor dispute by offering employment to many drivers was seen as its move toward coming into line with AB5.
During the call, Phillips made multiple references to the slowing volume of business in the intermodal sector. Between the new push to make drivers employees and that slowing market, Phillips suggested there are decisions ahead on its stable of independent owner-operators.
The independents owner-operators have “had a pretty good stretch of run where they’ve been able to pick and choose what they want, and I think that we realize that, but I think that we’ll have those continued conversations about the stepping down in the marketplace and maybe their reconsideration of how they point their business going into the latter half of this year and into 2023,” Phillips said, according to a transcript of the earnings call. “So we’re going to definitely have those conversations.”
Drayage operations at Universal “did start to see volumes and rate step-downs over the last half of the third quarter,” Phillips said. “Load volumes continue to be challenged in some markets by congestion, equipment constraints, and we now have blank sailings back in the news.
“We still have markets that haven’t unwinded the chassis problem where the chassis are sitting loaded with containers on them at warehouses so we can keep them in the cycle for rotation,” Phillips said.
Universal has a long-term strategy to build more of its chassis supply, but purchases from outside suppliers will also continue. “We intend to continue to purchase new chassis and remanufacture our own as we work our way through persistent equipment shortages,” Phillips said. “Our goal remains consistent: build our own fleet of chassis to provide our customers with seamless service.”
Among financial highlights for the third quarter at Universal:
- Its earnings per share of $1.84 under GAAP accounting beat Wall Street consensus forecasts by 50 cents per share, according to SeekingAlpha, while its revenue of $505.7 million topped forecasts by $11.4 million. Despite that, at approximately 1 p.m. EDT, Universal stock was down a little less than 2% on the day.
- Third-quarter operating revenue of $505.7 million was up 13.5% from the third quarter of 2021, while operating income of $69.8 million was up 13.8% over last year and was a record for the third quarter. The company’s EBITDA margin for the quarter — EBITDA as a percentage of operating revenue — was 16.7% compared to 7.4% for the corresponding quarter of 2021.
- The intermodal segment posted a 27.6% gain in revenues to $154.4 million. But higher rates overcame the fact that volumes were down 14.8% year over year.
- The largest segment at Universal is contract logistics, which includes its value-added and dedicated services. Quarterly operating revenues at $20.95 million were up 33.5% while its operating income of $35.4 million was up 16.9%.