Hub Group Inc (HUBG) 2004 Q2 法說會逐字稿

Good morning and welcome to the Hub Group's Second Quarter 2004 Conference Call. We will begin with a discussion of the financial results lead by Tom White, Senior Vice President, Chief Financial Officer and Treasurer followed by an overall business discussion to be conducted by David Yeager, our Vice Chairman, and CEO. The Company will make its prepared presentation followed by a question-and-answer session; however, at this time all participants are in a listen-only mode. Before we begin this morning, please note that statements made in the course of this conference call just state the Company's or management's projections, intentions, hopes, beliefs, expectations, or predictions of the future, including projections regarding 2004 earning are forward-looking statements. It is important to note that -- we will begin again. Please note that the statements made in the course of this conference call that state company's or management's projections, intentions, hopes, beliefs, expectation or predictions of the future including projections regarding 2004 earnings are forward looking statements. It is important to note that the Company’s actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning factors that could cause actual result to differ materially from those projected in such forward-looking statements is contained from time-to-time in the Company’s SEC filings, including, but limited to the Company’s report on Form 10-K for the year ending December 31, 2003, Form 10-Q for the quarter ending March 31, 2004, and our Prospectus stated June 28, 2004. Copies of these filings may be obtained by contacting the Company or the SEC.

I would now like to introduce Tom White, the Chief Financial Officer of Hub Group.

Thank you Aren, good morning. I would discuss second quarter numbers, the results of our recent follow-on offerings and our 2004 earnings guidance. From an overall financial perspective, the following points that were of special mention for the second quarter. Transportation-related revenue grew 7.2% in the second quarter versus 2003. Operating income grew 40%. Free cash flow was $35.2 million, an increase of 36%. On a per share basis, free cash flow was over $3 per share. Our free cash flow per share is double the amount of those companies in the non-asset-based logistics sectors. And lastly, earnings per share increased a 140% to 48 cents a share compared to 20 cents a share in 2003.

Now, we will discuss the more details on the financials. Transportation-related revenue increased 7.2%, which is comprised of intermodal growing by 5.7%; truck brokerage, up 7.3%; and logistics up 17.1%. Overall consolidated Hub revenue increased 5.2%. This includes the 34% decrease in Hub Group revenue due to the reduction of installation business from their largest customer. Overall gross margin dollars were essentially flat at 43.7% -- $43.7 million for the quarter compared to last year. Increases in transportation-related gross margin dollars were offset by decreases in gross margin dollars for Hub Distribution. Stated in another way, if you pull Hub Group Distribution, gross and net, net revenue in transportation grew at a rate comparable to gross revenue.

Costs and expenses were $2.1 million, lower than last year. As a percentage of gross revenue, costs and expenses were 10.1% versus 11.3% in 2003. This includes salaries and benefits, down $620,000 due to lower headcount and as a percentage revenue salaries and benefits were 6.4% compared to 6.9% in 2003. Headcount as of June 30, 2004, was 1,176.

SG&A expenses were 14.8% lower due to decreases in expenses for equipment leases, legal, office rent, and supply. Interest expense decreased 16.2% due to reduction of our debt. Our debt balance as of June 30, 2004, was $62 million or $30 million lower than last year. The debt was comprised with two pieces; one, bank debt of $12 million and two, $50 million of the 9.14% private placement debt. I will talk more about the retirement of the $50 million through the debt in just a minute.

As I mentioned earlier, diluted EPS for the second quarter was 48 cents a share compared to 20 cents a share in 2003. The number of diluted shares was 8,469,000 or 8% higher than the average diluted shares in the second quarter of 2003 -- continuing -- now this has got some more matters including 2004 guidance. First item, in late 2003 the Company started issuing stock options and began issuing restricted stocks which vest over three years. For the quarter ended June 30 2004, pre-tax expense recorded for restricted stock was approximately $550,000 versus zero last year. Next, capital expenditures for the 6 months were $1.7 million. We expect capital expenditures not to exceed $5 million for the full year 2004.

On July 2, 2004, the Company completed its follow-on offerings priced at $33 per share. Net proceeds were $56.1 million from the 1.8 million shares sold by the Company. The proceeds were used to pay the $50 million of 9.14% debt and the make-whole premium of $6.8 million. Because this deal closed in July, the accounting for this transaction will be recorded in the third quarter. This will include recording of a pre-tax charge of $6.8 million for the make-whole and $500,000 write-off of deferred financing cost related to this debt. Applying a 42% cash rate to these charges will result in an after-tax one-time charge of $4.2 million for the third quarter of 2004.

Now for the 2004 earnings guidance, the Company expects to earn between 84-90 cents a share in the second half of 2004 on a diluted basis. This excludes one-time after-tax charge of 4.2 million related to the follow-on offerings previously discussed. The guidance assumes weighted average diluted shares of 10.6 million for the second half of 2004 and a tax rate of 42%. On a full year basis, the Company expects diluted earnings per share, once again excluding the one-time charges, to be between the $1.65-1.71. And finally, in the second quarter of 2004, Hub Group was added to the Russell 2000 index. And now I'll turn it over to Dave Yeager, our CEO.

Thank you, Tom. Our recent realignment has been a tremendous success and it's enabling us to better manage our business. All of our key employees are now focused on growing Hub Group's bottom-line as opposed to individual local P&L. Our operations are stable and we now have a lower cost structure that allows us to focus on growth. Our transportation-related revenue increased by 7.2% in the second quarter. And while this growth rate does not meet our long-term expectations, we are pleased to again be increasing our business at a healthy rate. The intermodal market continued to grow nicely in the second quarter as truckload capacity remains tight. Over-the-road carriers remain slow to invest in additional equipment due to continued driver shortages. Meanwhile, the overall freight economy remains strong and we expect healthy demand for truckload transportation as we move towards the peak shipping period. We remain focused on attracting new intermodal business with new customers while continuing to focus on growing our business with existing customers.

We are delighted to regionally be named the Intermodal Carrier of the Year Target Corporation, which is our second largest account, and while we continue to look to strengthen our partnerships with our diverse customer base. After only a few months of our corporate realignment, our intermodal operation's administration had already been significantly streamlined with 22 fewer employees in this area at June 30 versus compared to December 31 of last year. In addition, and for reviewing our intermodal operating center locations, we decided to eliminate operations in Portland, Indianapolis and Worchester, New York and transfer the account responsibilities to other offices. Our remaining intermodal offices are evaluated on their cost per loads on a monthly basis. Due to improved training and process improvement these cost per loads have been steadily declining this year.

Overall, intermodal rail service is not currently where we would like it to be. Although service is generally stable, we do not anticipate significant improvements in service for the remainder of 2004, as we head into the busy season. We do believe, however, that the changes being implemented by the rail carriers will bring significant service improvements in the first quarter of next year. Although, the service is not at the desired level, it is manageable and it does continue to be fluent. Our major challenge would be to effectively communicate expectations to our customers. We do not believe our business will be negatively impacted by the service issues because of the tight truckload capacity market, which is being fueled by a strong economy.

We are once again in a growth [mode] in brokerage. For the full year 2003, our brokerage business declined more than 7%, whereas in the second quarter, our brokerage business regained traction and grew more than 7%. We continue to retool this business line, aggressively recruiting high quality employees and carriers while working to securing this business. We believe we can to continue to grow this business at healthy levels as we move towards working together as a network, adding more capacity to our carrier base, while taking advantage of Hub’s great customer franchise.

Our logistics business has also benefited from our realignment. After taking a few months to evaluate our logistics strategy, we decided that we could more effectively compete in the space with three logistics operating centers rather than five. This transition is now complete. We now have highly focused logistics centers in San Francisco, St. Louis and Boston. We also looked at our marketing strategy for logistics and implemented a more disciplined approach. All potential logistics opportunities are pre-qualified by our senior management to ensure that they fit into our core competency and generate appropriate returns. This disciplined will ensure we continue to grow logistics profitably and deliver focused value added solutions to our customers

As I have stated before, our current mission is to grow our business. Our sales team has done a fine job of securing the business for us this past quarter as it evidenced by the growth in our transportation related business. We've been able to increase our business with core customers while gaining awards from new customers. Our top 50 accounts, which represent about 53% of our business, were up just under 9 % in the second quarter year-over-year. We have been awarded in addition to $17 million in revenue by one of our top 20 accounts while winning awards of $4 million from [Staffy] paper and $3 million from International Multifoods both of whom are new accounts at Hub Group.

At the same time we will continue to examine the profitability of our low margin accounts and our focusing on either reducing our underlying cost or increasing the rates for those accounts. And [inaudible] sales, we are prepared to walk away from unprofitable business. In fact our intermodal revenue would have been $6 million higher in the second quarter if we had not fired two unprofitable customers. We believe that in today's environment we can call up the low margin accounts, while continuing to grow our top line. As a side note, we have increased our fleet of dedicated containers from 6,750 at the end of March to 7,250 today. This controlled equipment program continues to be beneficial for Hub Group and it does give us a significant capacity advantage as we speak to secure new business.

In conclusion, we are very pleased with the strong net income we earned in the second quarter and a return to growth in all three transportation-related business lines. We believe we have solid momentum going into the second half of the year and will continue to aggressively pursue new opportunities to grow our business and increase our net income. With that we will open it up for any questions that you may have.

In a moment you will hear instructions for the question-and-answer session. When prompted to ask a question please introduce yourself and include your company affiliation. Please hold for the first questions. This conference is in question and answer mode to alert the speaker that you have a question, press "1" then "0". Each question will be asked in the order it was received.

You have a question.

Yeah, hi it’s Tom Wadewitz for Bear Stearns. Good morning.

Hi Tom.

Let’s see. Dave, a question for you, it sounds like you are continuing to hear some real good things on the cost side and the good news in terms some of the contracts and you are getting some additional business with customers, so that’s good to see. I am wondering if you could comment a little bit on the pricing environment that you are seeing in and also what the constraint is on your growth, just from the limitations of the rail capacity right now? And is that -- if do you think that’s going to free up as you go forward or do you think that's a meaningful constraint on your growth, so you know both the pricing and the growth side?

Okay from a pricing perspective we are seeing the underline rail carriers being more impressive today. We’ve been -- we actually didn’t take announced in early July a 4% increase to our customers, which is in anticipation of a series of increases that are taking place in today’s environment with capacity constraint etc that the pricing increases. So we overall have been able to pass on any increases that we have seen. We do see of course for the peak season, wherever it's traditionally to have a peak surcharge, which again our customers are very used to us increasing our rates during that period of time, so I really don’t see any problem there.

As far as the growth and the constraint there with [inaudible] rail service, it is very manageable right now Tom, I mean it's not good, but it is definitely manageable. A good example is one of our large accounts -- we're still maintaining 90% plus on time performance. We would prefer to be at 95%, but certainly within today’s environment we -- the service will allow us to grow our top-line. Obviously it's a matter of setting the proper expectations with that customer overall to make sure that they have a solid understanding of what the service is going to be.

A follow-up on the pricing side. Are the railroads noticeably more aggressive this year than they would have been last year in terms of peak season surcharge increases and just broader rate increases? And do you get squeezed at all on that or -- you said you are clearly being proactive with it, but are there places where you run the risk of getting squeezed a little bit?

There is -- undoubtedly there are some customers that you have under contract, but we always attempt to bridge that by trying to railroad into those types of multi-year agreements. So there is always limited exposure. You have some customers that are going to push back quite aggressively. But in all [cinder], I mean I had commented on the low margin accounts, if a customer just refuses an increase, at that point in time we have to evaluate if we can in fact use that capacity better elsewhere. And so that while we would prefer to be able to come to some kind of accommodation to customers, there certainly is the option to take that capacity elsewhere if you can’t pass the increases s on. But again for the most part, I think, our customers have really been very willing to accept increases to this point because they understand the market as it is today.

The railroads themselves -- are they more aggressive? Absolutely. I think as far as the peak season fuel surcharges, they are not necessarily more aggressive than last year what they are is more focused where there have been larger increases that on shipments that would go off, of their system because they, I think they believe that their overall profitability enhanced by maintaining the equipment within their network, so I wouldn’t say that they are more aggressive is necessarily but may be a little bit more or different focused.

Okay great. One last one, in terms of the dynamic amongst the IMCs if you look at versus JB Hunt and Pacers and your primary competitors, is that dynamic pretty constructive as you look at these bids in the new business you are winning.

It is much as do we see overall a rational pricing.

Yes, right

Yes I think everybody right now is more focused on rational pricing. You don’t see -- obviously at any point in time, someone is going to higher price a piece of business that fits into their network properly. But no, the pricing has been very rational on the bits we have seen and really a lot of it has been more capacity focused and more value-added focused than they may have been as years passed.

Right, okay. That's good to see. Thank you for the talk, Dave.

Thanks, Tom.

Next question.

Hi this is Mike Malloy from TransportTopic.

Hi Mike.

Hi

Hi David and Tom, I was going to sort of ask the same thing about the pricing in the rails that was -- I was just wondering when you said about the 4% increase, is that across the board to all your customers or -- would some of these customers that you were may be considering calling, would you have to raise those prices more?

Yes, we do have obviously, we have been working on with specific customers where the margins are too low and the business is not profitable. And that would be in addition to the 4%. And obviously you have some accounts which you have contractually multi-years which the 4% may not apply to. But again, we always try to tie the real carriers in three-way agreements when we guarantee prices over a multi-year period.

I was just curious -- you said Target was your second biggest, who is your biggest customer?

Our largest account is Sears.

Okay, thanks a lot.

Okay.

Hi guys. Alex Brown (phonetic) how you doing?

Good Alex, how are you?

I guess I want to start with -- you didn’t talk about in your opening comments, the work stoppage which I am assuming impacted your results for the quarter and I am wondering if you could comment about maybe how much it affected yield in terms of maybe number of loads as well as financial impact to the corner?

Alex, this is Tom, I can handle that. We lost about 1520 loads due to work stoppage. With margin and other costs, it was about $400,000-500,000 of pre-tax cost for the quarter. We didn’t feel it was -- as we indicated in our prospectus under recent development, we didn’t feel that it was overly significant to comment. But yes, there was about 400,000-500,000 of pre-tax cost charges in or losses in that second quarter that were impacting operations.

Okay. Now you talked a little bit about the sort of the underlying revenue trends and Dave you talked about your top 50 accounts. But I guess just for clarification, since your net revenue is not growing or appears not to be, are you making a point if we strip out distribution, you have some good underlying growth? And I guess, just run through that again and talk about sort of your comfort level on visibility and your confidence on continuing to see that transportation growth in the back half of the year?

That’s a good point, Alex, and I’ll cover that, it's Tom again. If you look at our transportation related revenues -- if you look at our overall revenues and net revenues and you strip out Hub Group distribution net revenue and gross revenue, our underlying transportation net revenue grew at a pace consistent with the 7.2% sales growth. So yes we did have growth in transportation net revenue, but because Hub Group distribution has higher gross margins, it offset that, so the overall net revenue appeared to be not growing. Does that answer it?

Well, it does. So that -- you -- in the third quarter you get to fairly easy comparison on distribution, so is that imply that there -- whatever we seen in the top line growth on Q3 and I guess going forward to all periods will more -- should more closely be reflected growth in about the same.

Yes.

Okay. Now yesterday in CH Robinson's call they talked about -- they had tremendous deceleration in there intermodal growth and they talked about getting squeezed on some cost by the rails, which I think is probably specific to them. But I don't know if you listened to their call, perhaps you could comment on what you think might be impacting them where you guys seem to be able to manage that pretty well?

Well, I really don’t know their contracts or exactly what maybe affecting them, Alex, but from our perspective with the cost increases, we are very much tuned in relationships with the railroads. We're constantly talking though and they always give us plenty of advance notice on any pricing increases that they may in fact be contemplating. Obviously we have a tremendous amount of volume with being to the rail carriers. So I think as a result of that we immediately would -- we're aware of any type of pricing initiative. We communicate very, very effectively to our customer base on this. That’s been one of our primary focuses, and so -- I think that communication that we have with the railroads and then directly to our customers does facilitate a pretty smooth transition of being able to pass those price increases on as they may occur.

And is this possible that you’re less impacted, because your contractual arrangements with the rails, and, of course, you have some of your own capacity that you can provide?

That is very possible. Certainly again not knowing their contracts but they are -- yes because we do -- with the increase in capacity we have to complete etc. we do have some overall flexibility there.

And when the JB Hunt Burlington Northern came out in the news, there was some confusion as to what that meant for you positively or negatively. I guess probably it means nothing right now. But it seems to me that if JB Hunt has to move up towards more market rates would be in, assuming that's what BN is trying to do, wouldn’t that be good thing for Hub a or good thing just for the marketplace in general?

It would be a very positive thing for the market place in general, because I would assume those cost go up somewhat but they would want to maintain their current operating ratios and they may have to increase their pricing in the market, and that certainly would benefit the overall market where there is a lot of upward pressure. And certainly if they joined in, that would be a very positive factor.

Okay and just a housekeeping question for you, Tom. The -- how much was the restricted stock expense in the quarter?

In the quarter ended June 30, 2004 restricted stock expense was $550,000 on a pre-tax basis versus zero last year second quarter.

That's a big number I guess that's a good indication of the improvement that you are seeing. Okay I think that about does for me, thanks a lot.

Thanks Alex.

Thanks Alex.

Hello.

Hello.

Hi this is Tom Spiro (phonetic), Spiro Capital (phonetic). Good morning..

Hi Tom, how are you?

Great quarter guys -- great quarter.

Thank you.

David I had a question about the organizational realignment. I imagine for the realignment to succeed that has to be accompanied by a profound portfolio change within the Company. If I am right about that, I wonder how portfolio change is progressing?

Okay, it's a great question in -- Tom -- we have studied this for about a year prior to actually implementing the change. And if I knew where we would be today last December, I would have implemented it a lot quicker. It's been very well received within the organization. We have people focused on what they do best -- our logistics people are doing just logistics now, our best sales are purely focused on sales, it's been extremely well received. I think anecdotally about how our employees overall received it, we sent out offers to 106 people for restricted stock if they would sign and don't compete in a non-solicitation agreement that was effective for a year after their employment ceased to count. We had 105 of those 106 who have turn signed. So I think employees have faced this very well. I think they all saw that in order for Hub to compete in the future that we have to be a network and certainly the new structure facilitates backing as a network and making us much more competitive in the market. So, it's been moving along very, very well -- the cultural change here.

Thanks a lot and good luck.

Thank you, Tom.

This concludes our Second Quarter 2004 Conference Call. Thank you for participating. As a reminder this call will be available for replay by dialing 1-877-471-6581. The conference ID number is 726468. The replay will be available after 1 PM Eastern Time today.