A small bit of red ink at Universal in an otherwise strong quarter

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In an earnings season full of nothing but good news and record profits, Universal Logistics joined in the overall celebration. But one of its segment was unprofitable, for reasons that show just how strong the market is.

According to the company’s first quarter earnings statement, and a transcript of its earnings supplied by Seeking Alpha, Universal’s Dedicated segment was unprofitable in the first quarter, despite an increase in revenue of 12.8%. “Our Dedicated unit turned unprofitable in Q1, primarily due to contractual business, where we had to secure outside transportation at higher then contracted rates,” CEO Jeffrey Rogers said in the conference call.

The red ink would have been created then by a squeeze with silver linings: increased demand for its services, not enough capacity to fulfill it, and a need to turn to outside providers at higher rates that were unprofitable.

Rogers noted that all of the company’s dedicated business is on a contract pricing basis. (He also said the customer base consists of “about” five companies). “You end up getting upside down from a pricing perspective because you lock into a price and because of the increased need to go out and acquire outside capacity,” Rogers said during the Q&A portion of the call. “Everybody is well aware of the pricing impacts.”

The seasonal nature of the first quarter is partly to blame, Rogers said, “but at the end of the day, it’s really all about the rates that we’re getting on contractual business that is just not enough in today’s environment when we have to go out and secure outside capacity.”

Rogers was more specific in discussing the level of contract negotiations negotiated in the first quarter than most other CEOs have been on conference calls. Rogers said Universal had just booked a 6% increase on one dedicated lane, “and we’ve asked for 15% for another. So it just kind of depends.” While dedicated is 100% contractual business, Universal’s intermodal and truckload businesses are about 50% each contract and spot.

In those business, Rogers said the lowest contractual renegotiated rate is for a 7% increase, with the highest at 15%. “The vast majority of them is in the 10% to 12% (range), which is very, very solid for a contract renewal rate, and we feel pretty good about that.” Rogers said.

Another way to ensure profitability in the dedicated sector: hire more people. New hires are “tough, but we’re getting that done, so we don’t have to go outside and hire,” Rogers said.

The overall performance of Universal was strong. Its revenue for the quarter was the third consecutive record three-month period. “We blew the top off with $335 million in revenue, an increase of $50.7 million or 17.8% over last year,” Rogers said.

Earnings per share of 37 cts was the best first quarter since 2013, which Rogers said was the company’s peak earnings year. Revenue for other key sectors was also up: truckload services, up 8%; brokerage services, up 34.8%; and intermodal 29.7%.

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The overall performance of Universal was strong. Its revenue for the quarter was the third consecutive record three-month period. “We blew the top off with $335 million in revenue, an increase of $50.7 million or 17.8% over last year,” Rogers said.

Earnings per share of 37 cts was the best first quarter since 2013, which Rogers said was the company’s peak earnings year. Revenue for other key sectors was also up: truckload services, up 8%; brokerage services, up 34.8%; and intermodal 29.7%.

Other benchmark numbers were strong. In its truckload division, average operating revenue per load, ex fuel, was $930 compared to $807 in the first quarter of 2017. Operating revenue per mile was $2.66 vs. $2.36.

In the brokerage segment, the number of loads rose to 45,998 from 42,358. Operating revenue load rose to $1,648 from $1,280.

Rogers addressed a question that has come up in other earnings calls but responded with an answer not often heard: the surge in orders for class A trucks is not going to do much to ease a driver shortage. Given provisions in the new tax law on investment, and the ability to immediately expense that investment, “why would you not reinvest and replace every damn piece of equipment you’ve got, which is what we’re doing,” Rogers said.

“A lot” of those class A orders are driven by that, Rogers said, and they aren’t going to ease the squeeze, “because there are no drivers to increase capacity,” he said.