Transcript of Universal Logistics Holdings, Inc. (ULH) First Quarter 2020 Earnings Call

Universal Logistics Holdings, Inc. (NASDAQ: ULH)
2020 first quarter earnings call
May 1, 2020, 10:00 a.m. ET

Content:

• Prepared observations
• Questions and answers
• Call participants

Prepared observations:

Operator

Hello and welcome to Universal Logistics Holdings’ First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A short question and answer session will follow the formal presentation.

During the course of this call, management can make forward-looking statements based on their best view of the business as it is seen today. Forward-looking statements related to Universal’s business objectives or expectations that can be identified using words such as believe, wait, anticipate and project. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expectations.

As a reminder, this conference is being filmed.

Now it is my pleasure to introduce you to your host, Mr. Tim Phillips, Executive Director; Mr. Jude Beres, Chief Financial Officer; and Mr. Steve Fitzpatrick, Vice President of Finance and Investor Relations.

Thank you. Mr. Phillips, you can start.

Tim Phillips – CEO and Director on the Board of Directors

Thank you. Good Morning. Thank you for joining Universal Logistics Holdings’ first quarter 2020 earnings call.

We started this year in a drastically different operating environment compared to how we left the first quarter. We create a success plan with high expectations for the year, but even the best described plans often need adjustments.

Universal’s team of employees and associates responded surprisingly to the conditions and challenges they faced due to the COVID-19 pandemic. For the past six weeks, I have witnessed our associates’ true resilience as the company adjusted course in a dramatically changed operating environment.

First of all, I would like to acknowledge the sacrifices of our drivers and contractors who answered the call and kept this nation’s critical assets in an extremely difficult environment. Our warehouse worker and dock staff have remained committed to the cause and were there on the front line, supporting the flow of essential goods.

Behind the scenes, our office staff continued to perform at a high level, providing solutions to our value-added clients and supporting our associates on the front line. I am extremely proud of the entire Universal team.

Before moving on to the quarterly details, I first want to take a minute and provide an overview of where we are related to our preparedness in response to the COVID-19 outbreak.

With operations located in the United States, Mexico, Canada and Columbia, we realized from the beginning that one of the keys to managing this crisis would be timely communication with our employees, contractors, customers and suppliers. I was in constant communication with our senior leadership to assess well-being, safety, volume trends, and customer needs, to quickly react to the changing landscape.

We provide real-time updates, giving people the latest guidelines from the Center for Disease Control, the World Health Organization, the state government and providing specific local information, to ensure that our people are updated with the latest and best information. practices to keep them safe not only at work but also in their local communities.

We continue to follow best practices for social distancing, personal protection, cleaning procedures, and the health workforce process. The general environment began to change rapidly at the end of the first quarter. The biggest shock to the system came in late March when car and truck production in North America was suspended.

Representing more than 25% of our combined revenue, leadership reacted quickly to balance workforce with volume. In addition to auto and truck production suspensions, several states and local governments began issuing an expanded shelter-in-place order limiting continued operations to essential businesses.

We [Indecipherable] These events are having a greater impact on business volumes. We made the decision in late March to suspend approximately 70% of the direct workforce and 30% of administrative staff through the service line. These were really difficult decisions, but necessary to preserve the integrity of the business model.

Accelerating our cost reduction and containment strategy, we evaluated our list of essential operating expenses, adjusted our deployment of capital expenditures, and took all necessary steps to preserve liquidity. We are actively managing the situation and will continue to adjust business rights to ensure success when life returns to normal.

I would like to offer some highlights from the first quarter. Yesterday afternoon, Universal released its first-quarter financial results, reporting $ 382.2 million in top-line revenue, a new record for first-quarter operating revenue. And earnings of $ 0.45 per share, which included $ 0.09 per share charge for non-monetary holding losses in our portfolio of marketable securities.

Given the rapidly deteriorating business climate we experienced in late March, I am pleased with the results for the quarter and I am proud of the way the Universal team took action to cope with events as the global pandemic developed. coronavirus.

While the shutdown of car and truck production had a sour effect at the end of the month, several of the other service lines were also affected.

Chinese New Year came in early 2020 with factories idle in late January, which is typically a 7-14 day downtime. And in China, it lasted longer due to the coronavirus outbreak.

Chinese imports never recovered in the first quarter, as demand in the US USA It was also contracted due to the virus. Our load count decreased 40% at our operation in Southern California. We also continued to experience some pricing pressures in the truckload sector for much of the first quarter.

Excluding the effects of the car and truck closings and the influences of the COVID-19 outbreak, the normalized results for the first quarter would have been Universal’s highest revenue for any quarter on record. In our estimates, COVID-related revenue losses at Southern California operations amount to $ 8.2 million in top-line revenue and reduced our operating revenue by $ 2.7 million. The top-line revenue impact of the auto and truck manufacturing shutdown was $ 8.3 million and reduced operating income by $ 2.6 million. We believe that the cumulative effect on these two service lines affected EPS at $ 0.15 per share.

Now for a little color on every service line. Truckload ended the quarter with $ 58.9 million in top-line revenue, which was a 10.3% decrease compared to 2019. The decrease was primarily driven by a 7.2% decrease in cargo compared to the same period in 2019.

Open platform movements accounted for approximately 2/3 of the truck’s load that did not move. As the quarter progresses, we saw strong open platform decline movement, particularly in steel and metals. Our local and regional operating networks focused on food, beverages and consumer goods to mitigate the decline.

Brokerage Services was a story of very different operating environments that came and went in the quarter. Although revenue was flat at $ 85.9 million, the load count increased 13.9%. The number shows a very aggressive impulsive rate environment coupled with very small gross margins at the beginning of the quarter. Our company’s brokerage operations are heavily involved in food and beverages and experienced a drastic change in the last weeks of March.

The spot rate increased for consumers who stocked up on food and beverages due to the pandemic. And towards the end of the quarter, we saw an increase in our gross margin as the industry began to experience a decrease in truck load capacity, allowing our brokerage to ensure a lower transportation rate.

Intermodal service revenue increased $ 19.2 million or 21% to $ 110.3 million. The cargo count increased 19.7% and cargo revenues were relatively consistent. Legacy intermodal terminals performed well under the condition with the largest movements attributed to acquisitions made in 2019.

Countering some of the positive momentum was a drag on our operation in Southern California. In this market, we experience a significant drop in freight count, where customers have a heavy bearing on retail.

We are very satisfied with our acquisition integration in the intermodal transport sector. And we look forward to completing integrations for the newest acquisition, Roadrunner Intermodal Services by the end of the second quarter of this year.

I am extremely pleased with the cadence of the intermodal teams, combined with various entities, employees, contractors, and drivers. We are extremely pleased with the talent and employees and the rich customer base that were realized throughout this acquisition.

Our dedicated service revenue decreased 14.7% to $ 31.6 million. The cargo count increased slightly during the quarter to 139,000 cargoes due to additional shuttle movements compared to the same quarter of 2019.

The closure of the North American auto assembly plant had a severe effect on revenue in the last two weeks of March. In comparison, our dedicated fleet handled 21.1% more movements during January and February 2020 compared to the same period in 2019. But due to the automotive shutdown, the quarter ended just 3.8%.

Value added services revenue decreased $ 2.2 million to $ 95.5 million. The closure of the car and truck plants had a negative effect on our revenues at the end of March. Our value added group was operating on all cylinders before plants began closing at the end of the first quarter and we were on track to have a record quarter.

Universals has worked hard and diversified the service line, with the automaker as the largest piece with 29%, followed by retailers and consumer goods with 22%, the heavy truck industrial reserve with 12% and the industry aerospace representing around 2%.

Universal continues to support a strong portfolio as well as some exciting first quarter victories in our logistics segment. While the effects of COVID-19 are expected to have some impact in the implementation of those victories, we are confident that we will reap the benefit of those clients’ partnership in the second half of 2020 and 2021.

To add a little color, our value-added services group set aside $ 60 million in profit so far this year. Our dedicated transportation group, another $ 40 million in wins this year. We are also very optimistic about our agent portfolio and the fact that we got our 22 new agents in the first 13 weeks of 2020.

Our combined portfolio continues to represent $ 500 million opportunities. Times seem challenging now and we are excited about what the future will bring and remain highly optimistic about the long-term outlook for our business.

To provide an idea of ​​what we are seeing for April, revenue for the month decreased approximately 30% compared to last April. To respond to these declines, we conducted a comprehensive review of our operating expenses and continued to adjust proportionally.

We also evaluated our capital expenditures and were able to delay several purchases, either late this year or next. We will also realize the cost savings from completing the integration of our Roadrunner acquisition by the end of the second quarter. Understanding that one of our biggest costs is direct staff related benefit, we continue to look for ways to identify cost savings. And we’re doing it across the board, including the executive management team, where we have people taking time off each month during the second quarter.

Before turning it over to Jude, I wanted to reiterate my thanks and gratitude to the entire Universal family for their dedication to operating safely and effectively through a variety of stage closings and local government restrictions across the United States. Judas?

Judas Beres – CFO

Thanks Tim. Good morning to everybody. Universal Logistics Holdings reported a consolidated net income of $ 12.2 million or $ 0.45 per share and total operating income of $ 382.2 million in the first quarter of 2020. This compares to a net income of $ 17.3 million or $ 0.61 per share on the total operating income of $ 377.4 million in the first quarter of 2019.

Consolidated income from operations decreased $ 2.6 million to $ 23.9 million compared to operating income from $ 26.5 million in the first quarter of 2019. EBITDA decreased from $ 4.6 million to $ 39.8 million in the first quarter of 2020, compared to with $ 44.4 million a year earlier. Our operating margin and EBITDA margin for the first quarter of 2020 are 6.3% and 10.4% of total operating income. These metrics were compared to 7% and 11.8% respectively in the first quarter of 2019.

Universal’s financial results were adversely affected by a 40% reduction in intermodal loads in Southern California, loss of automotive production during the last two weeks of the quarter and, finally, pre-tax losses related to the revaluation. from market to market of our stock portfolio

Combined, we have estimated that these events have impacted our top-line income by $ 16.5 million for the quarter and operating income by $ 5.3 million or $ 0.15 per share. Below the line, the loss of securities represented a pre-tax charge of $ 3.4 million or $ 0.09 per share. On a pro forma basis, the combination of these factors reduced Universal’s operating margin by 100 basis points and earnings per share by $ 0.24.

Looking at the performance of our segment for the first quarter of 2020, in our transportation segment that includes our truckload, intermodal and freight brokerage businesses, operating income for the quarter increased 3.2% to $ 254.7 million compared to $ 246 million in the same quarter last year. While operating income decreased from $ 400,000 to $ 12.1 million to $ 12.5 million in the first quarter of 2019.

In our logistics segment, which is comprised of our value-added services, including where we serve the Class A heavy truck market and our dedicated transportation business, operating income decreased from $ 2.1 million to $ 11.7 million in $ 127 million of total operating income compared to operating income of $ 13.8 million and $ 130.4 million of total operating income in the first quarter of 2019.

On our balance sheet, we have cash and cash equivalents totaling $ 8 million and $ 6.3 million in marketable securities. The outstanding debt with interest net of $ 2 million of debt issuance costs totaled $ 478.8 million at the end of the period.

At the end of the first quarter, we have $ 41.7 million available under our existing revolving line of credit. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to the reported TTM EBITDA was 3.48 times. Capital expenditures for the quarter totaled $ 32.8 million.

For the rest of the year, we expect capital expenditures to be in the range of $ 35 million to $ 45 million and interest expense between $ 14 million and $ 16 million.

As mentioned in the statement, to further preserve our liquidity during these unprecedented events, we have decided to temporarily suspend our quarterly dividend in addition to the cost reduction measures Tim previously discussed in his comments.

Our goal is to preserve cash in the short term until there is more clarity in automotive production as well as future import and transport volumes. As a reminder, Universal’s dividend policy allows the company to pay up to 40% of our net income each year with a target dividend yield of 2% on shares. The quarterly dividend is an important part of our long-term capital allocation strategy, since Universal had paid more than $ 143 million in dividends since the beginning of this policy. We hope to review the considerations to restore our dividend in the second half of the year.

With that, Amy, we are ready to answer some questions.

Questions and answers:

Operator

[Operator Instructions] Your first question today comes from Citi ‘s Chris Wetherbee line. Your line is open.

Chris Wetherbee – Citigroup, Inc. – Analyst

Yes cool. Thanks Tim. Good morning guys

Tim Phillips – CEO and Director on the Board of Directors

Good morning Chris.

Chris Wetherbee – Citigroup, Inc. – Analyst

I suppose it was helpful to get the update in April, as well as some of the vertical concentrations within revenue for you as well. Given that you have a fair amount of customer exposure to the end markets that are currently closed, can you give us an idea of ​​how to think about the type of restart? Does that happen in Q2? Is it some kind of May and June event? Any color you can give to give us an idea of ​​what is negative $ 30 [Phonetic] Could it be the cadence type for April as we go through the quarter?

Tim Phillips – CEO and Director on the Board of Directors

Well Chris, this is Tim. I guess it can be said that there is a lot of uncertainty when speaking, many of our executives are on the phone with clients every day. And I think there is a lot of uncertainty in his mind based on some of the government shelters in place and just the whole flow, the pandemic. But what we can say is that in the conversations in the automatic space, we finally have hope, and I use the word hopeful that we will see things start again somewhere in the middle or end of May. It’s like they are kicking the can on the way, you never have a truth until you really get here. But that is what we expect.

And I think we mentioned some of the falls in Southern California. Well, Southern California, on our intermodal side, has a lot of flavor in retail. And some of the conversations we’ve had about the retail space, as you know, many of the closing retailers and so on, we can’t go to the store to shop right now. So they are in a little dilemma to say what we do. Because we are not sure how states are going to pick up shelter requests in place and what season we are going to shop at, then we can make sure we establish our load current flowing in the United States. So there is also a lot of uncertainty there.

And then, the phase that seems to have been quite successful and continues to give us a little flavor is food and drink and consumer goods, through the work we do with them. We stay relatively [Technical Issues] going to be reasonable projected – Chris, are you there?

Chris Wetherbee – Citigroup, Inc. – Analyst

I’m here. I’m here in the background too.

Tim Phillips – CEO and Director on the Board of Directors

Yes. It is something, one of the lines was cut, not our line. One of the lines. Just to finish my comment and then we will try to correct it very quickly. What we are seeing on the consumer side is that they are receding a bit from the original second quarter projections, but it is not drastic. And we are still seeing that our beverage type customer still says they will be within 5-10% of their regional forecast for us. Food is even slightly less than that, perhaps less than 5%, and consumer goods range from 5% to 10%.

One of the areas where we are not very clear, but we know that in the short term, some of our open deck things like steel and metal have been very successful. And we hope it will be a final success until other industrial things come online.

Operator

And your next question comes from Bruce Chan’s line with Stifel. Your line is open.

Bruce chan – Stifel, Inc. – Analyst

Yes, good morning, gentlemen. And thanks for the question. Tim, I’m sorry if I missed this. There was some echo or line interference. But you were talking about the $ 40 million and $ 60 million earnings in dedicated and value added respectively. And maybe you just want to understand a little better, how much of that is bankable and what is the effect of the current situation on those numbers? And then also, where do those gains come from in the end market and the type of customer?

Tim Phillips – CEO and Director on the Board of Directors

Yes thanks. The ringtone interfered. In the end market, those wins come from the automotive sector, and we expect there to be a push out of those projects’ initial releases only based on uncertainty and when the cars will start again.

What we would expect is that we will realize and experience some of the revenue later in the second half of the year and in 2021. But through constant conversation, we are very optimistic that these releases will still take place. We think they will probably be delayed for several months.

And I say it with an asterisk, of course, because it seems that every week, in communications, things get out of place. And much of it is not for the industrialist. It’s just because we are all trying to figure out what the individual shelter-in-place rules are and when we can safely return to work.

Bruce chan – Stifel, Inc. – Analyst

Okay, that’s a great color. That makes sense. And then maybe just a follow-up to your comments on agent additions in the first weeks of the year. How have those trends been going now given what has been happening in late March and April? Are they slowing down, are they speeding up as if perhaps they were joining a larger system and a larger network looking more attractive than flying so low? And what are your expectations for those trends in the future?

Tim Phillips – CEO and Director on the Board of Directors

Yes and yes I suppose we have seen a couple of different phenomena. There are some unique opportunities that are emerging here early in the second quarter due to decisions made by other companies on how they want to streamline their processes.

Our pipe is still very full. And those of us who are there and feel that we have a very good opportunity to obtain them, there is a high level of interest from that group of agents. The only thing holding them back is that they want to make sure, as they make transitions, that their customer base is on board with that. So they’ve done it somehow – they haven’t dropped their feet, they’re just a little behind to make sure their customers are comfortable with it.

We are open to business and ready to make the transition as you feel comfortable. And we can do it in a fairly quick time.

So if I look at the end of the quarter and our portfolio, I am still very optimistic. We still have good traction. So I don’t see an atmosphere of slowdown. The only thing that has really changed is his face-to-face conversations now with those guys. Much of this is done remotely and over the phone. So, you lose a little bit with that, but we’re still doing pretty well.

Bruce chan – Stifel, Inc. – Analyst

Okay, that’s useful. And then maybe just one last one here. As for the fleet capacity, what are you seeing in terms of retention and what is happening with the capacity group, both within Universal and outside? And what are you doing to protect some of those numbers and part of that retention?

Tim Phillips – CEO and Director on the Board of Directors

Yes, from a transportation capacity point of view, there are a couple of different things we can see here. We know that, of course, with the decline in business, the number of active drivers, both contractors and drivers being used, is less than it would be in a normal environment. We know that the funny thing is that we have tried to keep a large group of them busy, although we have had to stretch the work a bit. I looked at the turnover numbers or really looked at the loss numbers the other day, and our loss to contractors and drivers in the last eight weeks and specifically for April has been very minimal. I mean it is below a percentage.

So basically, our contractors and drivers stay right now. And as things, and we are in constant communication with them. As things start to get better, drivers will reenter and contractors will return to the active cycle they had before the slowdown.

Bruce chan – Stifel, Inc. – Analyst

Excellent. Well, I will deliver it. I appreciate the time, as always.

Tim Phillips – CEO and Director on the Board of Directors

Thanks Bruce. Thank you.

Operator

And we have Mr. Wetherbee’s line open again. We had some interference there. So, I will join Mr. Wetherbee, so you can continue with the question.

Tim Phillips – CEO and Director on the Board of Directors

Perfect.

Chris Wetherbee – Citigroup, Inc. – Analyst

Excellent. Hi, thanks guys. Can you hear?

Tim Phillips – CEO and Director on the Board of Directors

If we can.

Steve Fitzpatrick – Vice President of Finance and Investor Relations

If we can.

Chris Wetherbee – Citigroup, Inc. – Analyst

Excellent. Thanks for letting me go back. There must be something going on with the line there. I’m very sorry about that. But in terms of … I guess my follow-up question was going to be on the flip side of income variability. When you think of the cost side, you mentioned part of the direct workforce. Can you talk a little bit about how you’re positioning the disadvantage on the cost side? How much of the costs are really variable given the business model when thinking about the decrease in income?

Judas Beres – CFO

Hi Chris, this is Jude. So when we look at the Q2 based on the acceleration of the auto industry, I mean, the delta in our top-line revenue could be at a low end of $ 250 million and at the high end of $ 300 million. So we have a delta of roughly $ 50 million based on when car companies can restart in mid-May and commit to the production schedules they’ve presented to us in the past few weeks.

When you look at our costs, I mean, on most service lines, the variable nature of the cost ranges from 70% to 80%, of those, of our total revenue. So, it’s a significant number of those, from our business, it’s a variable cost structure. That is why we are still paying debts, we can still pay our bills. We simply don’t have a fixed cost that many of our competitors have in space.

So that is the benefit of our business model. The reason we have continued to invest in business and our M&A strategy was related to these independent contractor businesses, and we will continue to do so once we get out of this rut.

Chris Wetherbee – Citigroup, Inc. – Analyst

Yes, Ok. Now that’s very useful. And obviously, the first quarter performance was quite strong, excluding some of the dynamics that stood out there. I guess when we start thinking about a bigger picture and beyond this, I think maybe I’m trying to understand their position in terms of advantages, the dream about when we get out of this and think about the potential opportunities there. I guess maybe the question focuses more on the portfolio of new business opportunities and how quickly you think you can convert them. And then, as you think back in ’21, maybe this has to do with the shape of the recovery. But it could be set in a scenario where revenue at least approaches where it had been at an execution rate before that.

So there are a lot of pieces to that question, but I wanted to get an idea there. Porque claramente, estás comenzando a mostrar algo de ese apalancamiento operativo y expansión de margen. Entonces, ¿solo quiere tener una idea de cómo está pensando en la cartera de negocios, tal vez la reactivación de negocios existentes y los nuevos negocios ganan?

Judas Beres – Director financiero

Sí, comenzaré y luego Tim podrá responder las preguntas sobre la tubería y la conversión. Entonces, Chris, quiero decir, como hemos estado diciendo en los últimos años, creemos que los volúmenes de negocios que tenemos actualmente, antes de COVID-19, el negocio debería estar operando entre 7% y 9% de márgenes operativos. Y nosotros creemos eso.

Como saben en el pasado, hemos tenido vientos en contra legales, hemos tenido un drama con lanzamientos y todo ese tipo de cosas. Pero sobre una base de tasa de ejecución, del 7% al 9% creemos que es donde se encuentra el negocio hoy.

A largo plazo, a medida que continuamos ganando apalancamiento y escala con las inversiones que estamos haciendo y las propiedades inmobiliarias adicionales, así como nuestra estrategia de fusiones y adquisiciones, vamos a comenzar a enfocarnos, a medida que crecemos , para obtener ese margen del 8% al 10%.

Y a largo plazo, nuestro objetivo de margen operativo a largo plazo para Universal es del 10%. Nos llevará un tiempo llegar allí, pero creemos firmemente con las líneas de servicio que tenemos y la ponderación de esas líneas a medida que crecen, particularmente nuestro intermodal, nuestro valor agregado y nuestro negocio dedicado, porque los márgenes están dentro de esos rangos ya, que podemos ampliar sobre ellos a medida que escalamos.

Y se lo entregaré a Tim para que lo discuta sobre la tubería.

Tim Phillips – CEO y Director en la Junta de Directores

Si, gracias. Nuestra cartera desde la perspectiva del cliente, aún, como he mencionado, sigue siendo sólida. Nuestra comunicación y contacto con ellos ha sido un poco más oscura en las últimas cuatro semanas. Pero todo lo que tenemos en la cartera en todos los lados del negocio ha respondido bien.

Mientras hablamos al principio sobre la actividad y las victorias que obtuvimos en el lado logístico, hay algunas otras cosas que están en camino en este momento que sentimos con bastante fuerza que tenemos la oportunidad de agregar a ese número bastante grande. Y estamos realmente seguros de que podemos ejecutarlo. Es solo una cuestión de a qué puntos de precio entra.

Desde una perspectiva de camiones, mencionamos el nuevo agente agregado y algunas de las cosas en la tubería que traeremos. Más aún, en el lado local y regional, realmente estamos analizando detenidamente la redirección de nuestros servicios a una mayor cantidad de alimentos, bebidas y bienes de consumo locales. Por lo tanto, estamos muy interesados ​​en tomar activamente cambios adicionales en ese tipo de carga para continuar construyendo esa red. Por lo tanto, somos bastante positivos y optimistas en ese proceso.

Y luego, en el lado intermodal, la tubería está llena, los clientes simplemente no pueden; no pueden decirnos con certeza cuándo volverán algunas de estas cosas. Tenemos algunas cosas bastante importantes en la tubería funcionando, solo esperando ver cuál será la cadencia en el transporte internacional. Y con suerte, sabremos algo de eso tarde o temprano.

Y luego, como puede ver en este momento, la vida dedicada en nuestra base de clientes estuvo bastante involucrada en el sector automotriz. Y esa es otra área que analizaremos detenidamente. Y en nuestro libro, estamos viendo no solo a los clientes actuales para hacer la transición de parte de eso, sino también en las conversiones que podemos buscar.

Entonces, la tubería es saludable. No estamos seguros de cuánto tiempo lleva salir de este arrastre COVID en el que estamos ahora. Pero, estamos bastante seguros de que al estirar las piernas más adelante en la segunda mitad del año, veríamos resultados continuos como resultado de la tubería.

Chris Wetherbee – Citigroup, Inc. – Analista

De acuerdo, eso es realmente útil. Agradezco el tiempo Gracias chicos.

Judas Beres – Director financiero

Gracias Chris

Operador

[Operator Instructions] Su próxima pregunta proviene de la línea de Jeff Kauffman de Loop Capital Markets. Tu línea está abierta.

Jeff Kauffman – Loop Capital Markets – Analista

Muchas gracias. Buenos días a todos.

Tim Phillips – CEO & Director on the Board of Directors

Good morning, Jeff.

Jeff Kauffman – Loop Capital Markets — Analyst

I just want to go back and make sure I interpreted some of your commentary correct. Did you say on capex you’d spent about $33 million year-to-date, and I’m assuming this is gross, not net, and that the rest of year was going to be $35 million to $45 million? So, we’re going to total something in the $69 million to $75 million range?

Tim Phillips – CEO & Director on the Board of Directors

Si. Probably it’ll end up being more in the $70 million to $80 million range. But yes, you’re in the ballpark.

Jeff Kauffman – Loop Capital Markets — Analyst

Okay, got you. And the decision to postpone the dividend, and again, your guidance is that your goal has always been about 2% yield. So, am I right to think that we’re not going to worry about what we used to pay if we reconsider reinstating it that the goal is about a 2% yield and you can spend up to 40% of net income?

Jude Beres – Chief Financial Officer

Si. So, what we just tried to do with that, Jeff, is that we want to have a steady quarterly dividend, right? And so, we grew the dividends, the $10.50 per share, and we’ll continue to grow that dividend once we get out of the situation that we find ourselves in.

It’s just that the abrupt nature of what happened to Universal in the third week of March and of course the volumes on our dedicated business going from $12 million a month to zero and our value add business going from $30 million a month to zero, we just had to make some very difficult decision. And of course, Tim, myself, in conjunction with conversations with the Board, just felt it was prudent for us to do that in particular with the number of people that we have laid off and in addition to the uncertainty related to the future.

But the dividend is a huge part of what we do. It’s a huge part of our capital allocation strategy. Like I mentioned in my comments, I mean, we’ve returned a $143 million to shareholders since the policy was implemented a number of years ago, and we’ll continue that policy once we have a little more clarity on the future.

Jeff Kauffman – Loop Capital Markets — Analyst

Bueno. So, I guess my question is, by getting rid of the dividend and abolishing it basically for an unknown period of time, you’re driving away investors that would own the stock for yield or have a yield requirement. Why not, since we’re talking about a savings in the $2 million to $4 million range, based on my understanding your language, why not reduce the dividend to a 2% yield and at least send the signal that we think we’re fine and our cash flows are OK?

Jude Beres – Chief Financial Officer

Yes, I mean, I think that was just the decision that we feel very comfortable, Jeff, with what we did. We have to make sure that we can preserve the integrity of our balance sheet, that we can fund the business that we have today, that we can fund the capital expenditures for the launches and the business wins that Tim mentioned earlier in his comments. And it was a decision that we made on our capital allocation strategy. And yes, there may be some investors that are pushed away as a result of that. But if you can’t pay your bills, there’s a lot bigger problems than you can have than worrying about someone that’s chasing yield. It’s just the reality of where we are today. And like I said, we’ll look at it in the back half of the year and make the decision at that time.

Jeff Kauffman – Loop Capital Markets — Analyst

Okay, I understand. Gracias. And on the mark-to-market adjustment for the quarter, I understand that the market was down substantially. Can you talk a little bit about marketable securities and given the market, are we going to have a potential mark-to-market adjustment upward just based on where today is, as let’s say markets didn’t change to the end of June? I just want to —

Jude Beres – Chief Financial Officer

Absolutely, Jeff. So, normally the portfolio doesn’t cause this much drama as it did in Q1. Our portfolio is heavily weighted toward banks and oil companies that pay dividends. And so, we kind of used that as a mitigation against our interest expense and generate a little bit of cash.

So, you think about what happened in Q1 with the banks, obviously interest rates going basically to zero. And of course, as a result, their net interest margin going to zero or negative. And of course, the oil price war between Saudi Arabia and Russia that’s pushed at one-time our West Texas to negative $30 a barrel. It just had a real detrimental impact on that portfolio in Q1.

We’ve already experienced some of those gains back in Q2. So, yes, our expectation is that that thing will slowly crawl back to hopefully even, which is about $9.3 million that we finished the year with. And yes, we should expect some gains in Q2 based on at least what we’ve seen up until yesterday.

Jeff Kauffman – Loop Capital Markets — Analyst

Bueno. And then just one detailed question and a thought question because I couldn’t hear you with the line interference that we had. When you were giving guidance on interest expense, I thought I heard you say rest of your $14 million to $15 million, does that sound right?

Jude Beres – Chief Financial Officer

It’s $14 million to $16 million, I believe, in the commentary.

Jeff Kauffman – Loop Capital Markets — Analyst

For the rest of year, not full year, correct?

Jude Beres – Chief Financial Officer

That’s full year.

Jeff Kauffman – Loop Capital Markets — Analyst

Okay, full year. All right. So, given this unusual environment we’re in, you’re not the only company to be conserving cash. And generally, you’re in an acquisition mode and I got a picture there’s a lot of opportunities you’ve been looking at that have become distressed over the last couple of weeks. Given what you’re doing with dividend, given what you’re doing with cash flow conservation, is it fair to assume the strategic decisions are off the table at this point?

Jude Beres – Chief Financial Officer

No. This is Jude. No, I would not say that at all. I mean, I think we’ve laid out what our focus is as a company. I mean, we’ve mentioned it a number of times, we’re paying down debt, evaluating acquisition opportunities and returning capital to shareholders.

Universal is not changing that strategy. We believe that’s the right strategy for the company. We’re always looking at acquisition opportunities. The difficult thing is just like what Tim mentioned with the pipeline is that everything is over the phone or via email. There’s no way to visit management or fly someplace. So, I think if any of these — if any deal comes to fruition, it’ll just have to be later when things open back up and we’re able to talk to people and get more information.

As you guys are probably well aware, there’s so many people working from home that don’t necessarily have access to all of the things that they do when they’re at their job. So, our policy isn’t going to change. We’re still looking at M&A and we’ll continue to do that. And of course, if the opportunity is right, we’ll look at it in the back half of the year.

Jeff Kauffman – Loop Capital Markets — Analyst

All right. Well, thank you for the answers. Terrific results in a very difficult environment, and good luck. Gracias.

Tim Phillips – CEO & Director on the Board of Directors

Thank you, Jeff.

Operator

[Operator Instructions]. And at this time, there are no further questions in queue. I turn the call back to the presenters for any closing remarks.

Tim Phillips – CEO & Director on the Board of Directors

Yes, thank you. Once again, apologize for any of the interference that we had. I think this sums up what we’re looking at right now in the second quarter. There’s no clarity to a lot of the things, but hopefully we answered the questions, gave you some indication to the best of our ability. Appreciate everybody dialing-in and we’ll talk to you soon. Gracias.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Tim Phillips – CEO & Director on the Board of Directors

Jude Beres – Chief Financial Officer

Steve Fitzpatrick – Vice President of Finance and Investor Relations

Chris Wetherbee – Citigroup, Inc. — Analyst

Bruce Chan – Stifel, Inc. — Analyst

Jeff Kauffman – Loop Capital Markets — Analyst

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