Hello, and welcome to Universal Logistics Holdings First Quarter 2024 Earnings Conference Call. [Operator Instructions] During the course of this call, management may make forward-looking statements based on their 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 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. It is now my pleasure to introduce your host, 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 now begin.

Thank you, and good morning, everyone. Thank you for joining Universal's 2024 First Quarter Earnings Call. There's a lot to unpack in this quarter but let me start off by thanking our nearly 10,000 team members who worked tirelessly to make Universal the best-in-class transportation and logistics provider we are today. We couldn't do it without your hard work and dedication. I also want to thank our customers for continuously recognizing our efforts and the value we bring to their supply chains. The long-term partnerships we have built with some of the most recognizable brands in the manufacturing space are what would truly differentiate Universal business model in the space. Now for the quarter. Our performance in the first quarter vary greatly dependent on the individual business segment. Our contract logistics segment delivered outsized results, while our intermodal and company-managed brokerage segments continue to fall behind our performance expectations. Trucking was steady as she goes, delivering mid-single-digit margins as our specialized heavy haul business buoyed their results. Q1 was certainly a challenging environment for our transactional transportation business, but overall, I'm extremely pleased with our results. The first quarter 2024, Universal reported $491.9 million of revenue, $1.99 of earnings per share and an operational margin of 13 -- 15.3%. This was the best earnings per share and operating margin for any quarter in Universal's history. In the contract logistics segment, revenues increased 48.4% to $313.5 million. This was largely due to our recent program award that ramps up in Q1 and will be completed by the end of 2024. At the end of Q1 2024, Universal managed 71 value-added programs compared to 65 at the end of Q1 2023. We believe we will continue to see strength in the contract logistics segment for a number of reasons. First, Q2 is…

Thanks, Tim. Good morning, everyone. Yesterday, Universal Logistics Holdings reported consolidated net income of $52.5 million or $1.99 per share on total operating revenues of $491.9 million in the first quarter of 2024. This compares to net income of $24.9 million or $0.95 per share on total operating revenues of $437.4 million during the same period last year. Consolidated income from operations was $75.1 million for the quarter compared to $38.2 million 1 year earlier. EBITDA increased $40.2 million to $96.9 million, which compares to $56.7 million during the same period last year. Our operating margin and EBITDA margin for the first quarter of 2024 are 15.3% and 19.7% of total operating revenues. These metrics compare to 8.7% and 13%, respectively in the first quarter of 2023. Looking at our segment performance for the first quarter of 2024. In our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations increased $53.7 million to $81.5 million on $313.5 million of total operating revenues. This compares to operating income of $27.8 million on $211.3 million of total operating revenue in the first quarter of 2023. Operating margins for the quarter were 26% of total operating revenues compared to 13% 1 year earlier. As previously disclosed, in the first quarter of 2024, we launched a significant new contract logistics development program, which is expected to be substantially complete by January 1, 2025. For the full year 2024, we expect to recognize total operating revenues on the program of approximately $228 million, of which $95.3 million or approximately 42% was recognized in the first quarter of the year. Revenues generated for this program are reported as value-added services revenue and the associated costs in operating supplies and expense. The result of this program are included in our contract logistics…

[Operator Instructions] Your first question comes from Bruce Chan with Stifel.

Congrats. Clearly, the market is liking the results here this morning. Just want to clarify a couple of things on the contract logistics program that you talked about, namely whether this entire program is expected to be completed by next year or if you're just talking about the ramp-up. I'm assuming that this is just kind of a one-off thing. Is that correct?

Yes, correct, Bruce. It's a 1 -- this project will be substantially complete this year. It's a 1-year phenomenon with the possibility of additional business in the future. But the economics of this particular business that we described is a 2024 phenomenon.

Got it. Okay. So clearly, a very beneficial contract here, which is not to undersell the progress in the rest of the contract logistics business. But maybe towards that end, can you just help us to kind of parse out what portion of the big margin uplift here is coming from mix from this program? And then what's kind of leverage on existing contracts? And ultimately, what a safe, sustainable margin run rate should look like for this business once you kind of sunset the program?

Yes. So we're not going to get into the specific customer economics on this one, Bruce, but what we can just basically reiterate is we had $95 million of the business of this contract was in Q1. We think there's going to be around somewhere between $54 million and $75 million of additional revenue in Q2 then $44 million in Q3 and $35 million in Q4. I would just say that after this particular business -- this particular development, our contract is over at the end of this year. The business will continue to operate at its run rate that we've seen over the past 6 or 7 quarters, a little better than 15%.

Got it. And then just one final question here. Is there any reason to believe that you'd be able to attract similar opportunities like this one? Or should we be thinking about this as really just a kind of onetime windfall?

Well, the one thing, Bruce, is that we have a great balance sheet. We are slightly levered. So we have been able to -- since the founders of this company started this contract with logistics business in the mid-80s, we've been able to grow a business from one location in Flint, Michigan to 71 programs across four countries. So I would just say that Universal is the go to for any type of solution that a customer wants. And we are going to continue to be open for any type of opportunities that are presented to the team.

And I think I would add -- Tim, Bruce, I would add to that. We look at this as a holistic logistics solution. And we'd be willing to court many more of them when we think we have the level of expertise to excel and offer exceptional value.

Okay. Yes. I appreciate that color. And then maybe just to follow up on some of your comments, Tim, on SAAR, just maybe looking to get a little bit more color there. If I'm not mistaken, we're still below kind of prepandemic levels here. I think there's some probably good pent-up demand for consumer fleet refreshment. Any color that you can give there as far as what your customers are saying and what they're expecting for the ramp-up?

Yes. What I can say is that the facilities that we are servicing in our contract logistics portfolio are very high-demand type units and there really hasn't been any talk of any falloff aside from the overall SAAR in those facilities. In fact, we've gained a couple of additional programs, which you saw in that ramp up to 71 that we think there's a good chance throughout the rest of this year, we could be on the program to service as a whole overall increase in units.

Great. Super helpful. And then just pivoting over to the intermodal side here. I understand the headwind on yield from the assessorial comp, but I guess just on the volume decline here, a little surprised, maybe not at your result, but just overall in the industry to see the pressure on the drayage business, given the strength that we've seen in import volumes and what we've heard anecdotally about transloading activity. So maybe just a little insight from your side about what's happening with the demand side on the intermodal drayage business?

Yes. I think that if you look around the country, different regions have different pockets of flow and volume. We have not seen that pick up. Kind of like I mentioned in the remarks, a lot of our retail customers on the coastal cities, especially on the West Coast, we've seen steady volumes, but not that type of increase that you might read in the news. And some of those increases on the West Coast that were recently published, we have not seen those double-digit margins make it into the inland environment where we service in major cities. So we're a little speculative on how that will go over the next, let's call it, Q2. But we have a full-blown salesforce out there looking to fill the pipeline with opportunities to expand our footprint. Because ultimately, what we need to drive the business, we think we have, as I've mentioned, a good leadership team in place. We have a good terminal network in place. We're investing in the business from a property and where we're going to place ourselves to do business standpoint. We need some wood and the wood chipper to be able to optimize those assets. So I think that's just around the corner. As hard as it's been from an economic side of things, as hard as it's been from a volume flow, I think it's given us the opportunity to take pause, step back and look at these facilities and make sure that we're looking at it the correct way, making sure that we have a secure and direct plan to optimize the assets. And I think when we come out of this, we'll be in a better position to take advantage of that increased volumes.

Okay. Perfect. And then maybe just one more from my side, and I'll turn things over. Just looking for an update on the Southern California operation, I know that had been a focus for kind of turnaround. So if you could give us some detail on how that process is going would be great.

Yes, Bruce, this is Jude. Yes, overall, the business operated on an adjusted basis at slightly breakeven in March. We did, throughout the quarter, performed better as a lot of the optimization efforts that Tim's been talking about over the past couple of quarters have come to fruition. So although not obviously the result that we're looking for, the business is operating markedly better than it was at the trough of the cycle in the middle quarters of last year.

And Bruce, let me just add a little bit of color to that financial remark and other, not only from an optimization process, but we're extremely confident that we bring a compliant program to Southern California. And what I mean by that, you've seen AB5 back in the news, some of the things that's done at some of the businesses that are trying to operate on that playing field. We truly believe over a period of time, you will see some of these, others that may not be operating in the same manner, filter out of the market. So we positioned ourselves once again with property, new assets, and running things in a clean and compliant fashion. So when we do see the uptick there, we're going to be able to service our customers and offer them the value that they deserve.

Okay. Well, that's great. That's all for me. Again, congratulations, and I appreciate all the color.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Tim.

Well, thank you. Appreciate everyone dialing into the Q1 call. We look forward to having you continue the journey with us in Q2, and we'll be happy to report again on our earnings call on July 26, 2024. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.