Hub Group Inc (HUBG) 2004 Q3 法說會逐字稿

Good morning and welcome to the Hub Group's Third Quarter 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 discussion to be conducted by David Yeager, our Vice Chairman, and CEO. The Company would like to make its prepared presentation followed by a question-and-answer session. At this time all participants are in a listen-only mode. We would like to start by noting the statements made in the course of this conference call that state the company's or managements projections, intentions, hopes, beliefs, expectations, 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.

Additionally information concerning factors that could cause actual results 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 not limited to the company’s reports on Form 10-K for the year ending December 31, 2003; Form 10-Q for the quarters ending March 31, 2004, and June 30, 2004. And the prospectus dated June 28, 2004. Copies of these filings may be obtained by contacting the company or the SEC.

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

Thank you and good morning. I will discuss third quarter numbers, the results of our recent follow-on offerings and our 2004 earnings guidance. From an overall financial perspective, the following points were worth noting; gross revenue grew by 6.7% in the third quarter versus 2003. Gross margin or net revenue grew 10.5%. Adjusted EPS increased to 103% to 75 cents a share on an adjusted fully diluted basis compared to 37 cents a share last year. Lastly I am pleased to report that as of September 30, 2004 the company has no outstanding debt. This is the first time since 1995 that Hub has been debt free.

Now I’ll discuss in detail on the financials starting with gross revenues. For the third quarter gross revenues increased 6.7% including intermodal which grew by 5.9%. Compared to last year intermodal volume is down 2%. Price increases in fuel more than offset this amount and I will talk more about these points in just a minute.

Truck load brokerage, gross revenue is up 4.5% and this increase relates primarily to pricing and fuel. Logistics was up 5.4% and Hub Group distribution services revenues increased $4 million for quarter. On the gross margin; gross margin dollars were net revenues were up 10.5%. Majority of this increase relates to our core transportation related services. At Hub Group under our new organizational structure we have been very intense in our focus on improving yields. In February 2004 we instituted a centralized yield management group they served as the driving force for margin enhancement. We work hard to get ahead of vendor rate increases, identify and take action on low margin customers, unprofitable transactions and equipment utilization. We then use this information in rapid fashion to implement change to various parts of the company, such as operations, pricing, customer service and sales.

Here are some key points on gross margin for the quarter. We proactively passed along rate increases for fuel and increased costs from our transportation suppliers. Next we implemented company wide increase -- next we increased company wide margins by eliminated business where we do not receive adequate returns. During mid 2004 we walked away from some business. This has resulted in a decline of intermodal volume. While people don’t normally like to talk about lower volume, we are comfortable with our decisions. They were made at the corporate level with our shareholders in mind.

And lastly we are not accepting or perusing logistics opportunities where the risk of loss is high. Again focus on what we do best and work to enhance operating margins. So to summarize our gross margin dollars increased 10.5% compared to our 6.7% increase in gross revenue. We think this is a good thing and Dave is going to comment more about this in his section.

Now let's talk about cost. Cost and expenses were $2 million lower than last year. As a percentage of gross revenue cost and expenses were 9.4% versus 10.7% in 2003. This includes salaries and benefits down over $500,000 due to lower headcount, and headcount as of 9/30/04 was 1172. SG&A expenses were $2 million lower due to a decrease in expenses for equipment leases outside services, legal, travel and entertainment and office supplies. Interest expense decreased during the quarter due to the elimination of our debt. As stated earlier our debt balance is zero as of 9/30/04. Last year the debt balance was $75 million. In determining our diluted EPS for the quarter the number of diluted shares was 10.3 million compared with 7.9 million last year. This increase includes 1.8 million shares from our follow-on offering and 600,000 shares from stock options and restricted stock,

Lastly in 2003 the company stopped issuing stock options and began issuing restricted stock which lasts over three years. In connection with our new organization we issued restricted stock to a 105 employees. Since we recognized compensation expense for restricted stock, the third quarter includes $550,000 of such expenses. For the same period last year this amount was zero.

Now I will discuss 2004 earnings guidance. On July 2, 2004 the company completed its follow-on offering priced at $33 per share. The proceeds we used to repay our long-term $50 million debt and 9% notes and pay the [make] whole premium to 6.8 million. Attested to press release is a reconciliation of our GAAP results to the adjusted amounts. For the three months ended 9/30/04, the per share impact of the debt extinguishment expenses was 41 cents a share. So if you add this one time non-recurring charge of 41 cents to the reported third quarter results of 34 cents you arrive at the adjusted EPS of 75 cents for the quarter ended 9/30.

Now I will discuss earnings guidance. For the fourth quarter 2004 earnings guidance we are comfortable that the earnings will be within the analyst range of 52 cents to 55 cents on a diluted basis. For the full year 2004 this equates to a range of $2.13-$2.16 on a diluted basis. The full year amount excludes the one time after-tax charge of $4.2 million for debt extinguishment. Total cost and expenses were unusually low in the third quarter due to lower outside services, travel entertainment and office expenses. We expect fourth quarter costs and expenses to be more in the neighborhood of $35 million dollars. Capital expenditures for the nine months year-to-date were 2.4 million we expect capital expenditures to be in the range of 4 to 5 million for the full year 2004. And this guidance assumes a weighted average diluted share of 10.6 million in the fourth quarter of 2004. Now I will turn it over to Dave Yeager our CEO.

Great thank you, Tom. We are pleased to report another record quarter. We are benefiting from our continued cost cutting efforts, margin enhancement initiatives in the strong freight transportation market. Well we did grow our topline during the third quarter by 6.7%. We grew our gross margin by 10.5% as our primary focus has being generating better returns in this capacity constrained environment. We took the opportunity to upgrade our business mix at this time with a view towards long-term yield improvement. While our intermodal business unit enjoyed a solid quarter we spend a great deal of time and energy on two issues; that of A; passing on rail price increases and B; dealing with rail service challenges.

Early in the third quarter we learned that our rail vendors were instituting a series of additional rate increases in August, despite having raised rates as recently as June. Our yield management group determined the impact of these increase we have on our underlined rail costs and as our financial results indicate our sales force then did an excellent job obtaining the necessary price increases from our customers to ensure that we covered these increased costs. While no shipper welcomed the increase, the vast majority understand the transportation environment and our need for the increase.

As you know rail service could be better. We spend a great deal of time in communicating with our customers while managing their expectations in this environment. CSX service rationalization in the South East substantially reduced our volumes on that key carrier. In addition the series of hurricanes in Florida produced significant service issues in the South East which are just now being result. However, we are pleased that while it is still in the early stages, it appears several of the major railroads are in fact delivering incremental improved service levels. In this challenging environment we have controlled our operating costs and improved our margins.

Intermodal capacity remains tight and there is a very limited supply of equipment in various key cities around the country. Our fleet is seeing good utilization and its welcome capacity in this very tight market. We opened up a drayage operation in Northern California during the third quarter to supplement existing drayage capacity in that important market. We believe these drayage operations which were located in Chicago, Kansas city, Saint Louis, Atlanta and now stocked in California give us a competitive advantage as we seek to provide reliable, cost effective intermodal services to our customer.

Well revenue for a highway business grew by only 4.5%. We improved our gross margin, strengthened our operations and improved our business mix. Since implementing our new structure in February this year, we have brought new leadership to 25% of our offices significantly upgrading our talent level for this important business segment. Much like our intermodal leadership this new team is committed to growing our business with appropriate returns. We were standardizing our highway processes of cross or field operations and has significantly increased the level of cooperation between field offices. Our highway team made a concerted efforts to expand our over the road capacity heading into peak season. In fact during the third quarter alone we activated 316 new over the road carriers with the focus on growing relationship with smaller carriers in order to obtain additional capacity at favorable prices.

Logistics saw the similar story. In the third quarter we experienced a modest revenue increase as we improved our business mix and controlled our costs resulting in an improvement in our overall contribution of this business unit. Consistent with our team we are carefully pre-qualifying our logistics customers to ensure both topline and bottomline growth from new business.

It's now been a little over eight months since we realigned our operating structure. In this short period of time we have already seen substantial benefits from our new structure including reduced costs, improved earnings and better operating metrics. We now have better communication between our pricing, sales and yield group which has enabled us to effectively pass on recent rail increases. We will be focusing on improving our sales growth in the coming months but not at the expense of [inaudible] and profit improvement.

In conclusion 2004 has really been a breakthrough year for Hub. During this year we have realigned our organization, paid up our debt and returned to healthy profitability despite capacity constraints, service challenges and significant increases in underlying transportation costs. We believe we now have the right structure, people and services to continue to profitably grow the company going forward. And now we would be more than happy to answer any questions you may have.

Ladies and gentlemen this is your question and answer session. If you would like to ask a question and make a comment please key “*”, “1” on your touchtone phone. If your question has been answered and you would like to withdraw please key “*”, “2”. Again it is “*”, “1”. One moment while we compile a list of questions; our first question comes from Rob Wiley (phonetic) from Bear Stearns. Please proceed.

Hi guys good quarter.

Thank you.

Was looking at the intermodal volumes, you said they were down 2%, I wondering if you could give us a feel for how much of that was business that you eliminated because of the core margins and how much of that was due to rail service levels?

Overall we eliminated or acquired 3% accounts for that slight decline. You compound that, we did have some as a result of rail service but I think that’s been relatively limited and the reason it's been relatively limited is not because people are pleased with rail service but because there is not a heck of a lot of options right now. As trucking capacity as you guys are aware is very tight as well. We did also as I alluded to my prepared remarks, we are down significantly with CSX as you may be aware they did restructure their network just abandoning certain lanes and I think that the impact on that has been greater than we expected. So that also contributed towards the slight decline in volumes that we saw overall. That coupled with of course they had several hurricanes and shut down service into Florida. Florida actually represents about 5% or 6% of our overall business as we aggregate that out.

The drayage operation you mentioned are we looking at any added headcount for that or are we still kind of expecting modest reductions going forward?

This is Tom. The drayage operation includes primarily owner operators, we will have little bit of headcount but it's very negligible. So I would expect going forward that headcount should remain reasonably stable, possibly moderate turnover but nothing significant.

And what sort of revenue impact on the gross side from that have you been expecting?

I mean that I think Dave has been filling the blanks, but our strategic imperative here is to add drayage capabilities and capacities in critical markets and show points, and we want to make sure that we have got adequate alternatives on the west coast especially in California. So this is less about growing the topline and more about providing the capacity that we need out there.

Right now I would agree with that Tom. Because it is albeit the drayage market for drivers is it a lot better than the over the road driver market, just because people do stay at home. But it's still a tight market from a labor perspective and certain key markets that we just feel as though we need to be able to guarantee our customers that we are going to have adequate capacity. So you may see us looking at other markets to supplement the pre -- the existing drayage capacity that we currently contract for.

Okay, and the last one can you just comment on first two weeks of October and kind of what you expect here for the peak season how long that should go on?

I’ll go out on a limb by saying that we have given fourth quarter guidance and I don’t know David we have a policy of coming in the current quarter items that’s.

Right and overall I think if you look at it the transportation market they are still -- is still very strong intermodally and I think our volume levels were reflecting some of that. It is an interesting question as far as how long is this peak going to extend historically after Thanksgiving. We really do see it the business levels go down significantly. There is still a fair number of vessels which are waiting to get into L.A that are anchored right now off of the coast. So this could be an extended peak it could go through mid-December.

Okay that helps, thanks very much guys.

Thanks.

Again ladies and gentlemen if you would like to ask a question or make a comment please key “*”, “1” on your touchtone phone. Our next question comes from Alex Brand from BB&T. Please proceed.

Thanks I guess obviously you had some -- an impressive quarter, you had had some impressive quarters but if I could just focus sort of on sustainability, can you talk a little bit about you are cutting out less profitable business that seems like strategic decision that you are making it also make it hard to kind of tell. What's the underlying business doing, I mean can you give a even in general terms some sort of growth rate or growth outlook for sort of the organic business that you are keeping -- I just heard you say Dave that your volume is growing, but we really can’t see that, so can you help out with that little bit?

Sure Alex and that is a very good question. You know as I think we have -- on our various brochures and formal presentations have tried to outline this year we really did not believe we were going to get much sales growth. We were going to be focusing on getting the right business at the right margin levels. We are targeting for 2005 to grow and to get at a level of growth that at least equals or exceeds what the overall intermodal industry is growing by, the domestic industry. We believe we can do that through a number of ways. And is as always just focusing on some of our very large accounts and growing them internally; we also have a lot -- there is several major bids which are coming up in the near term this quarter, where we have limited participation today that we feel is though with our capacity and our ability to expand capacity that in fact we will be able to -- those can be some key instigators of additional growth for us. But I do want to stress, we intend to grow the topline -- but we're going to focus on our net revenue. We are not going to grow at the expense of our net income. We had gone down that path at one point it's not a smart thing to do in this capacity constrained environment you really need to be selective and focus on growing the bottomline over all and that’s going to be our primary focus.

Okay so what I hear you saying is that your focus is more like net revenue growth like may be some of the other logistics companies in gross of course it does drive that but you really -- you don’t really care what gross looks like. And if I look at net revenue in the quarter for transportation looks to me like it was up probably 8% or may be a little more. That’s what you care about and you think that you can continue to effectively manage to these better growth rates for your transportation net revenue?

Absolutely Alex that’s a good summary of it that’s exactly what we were focusing on.

Okay great now as far as continuing to call out less profitable business I have two questions on that. The one is; so where do you think you are in that process and the second part of the question is as you are calling out what are your sort of your return metrics for who should get cut out versus cap or maybe to put it differently, the business that you want to keep and that you want to add what are your return requirements on that?

I will take that one Alex, Tom here. We look at all of our customers profitability and one level you can just take absolute net revenue to gross revenue margins and take the lowest of the low and start working on there. And we worked on that list last year quite expensively. But that isn’t the only piece of the story because where there is a strategic account that's supplying a lot of equipment to deficit markets such as the west coast we may look at that differently or supplying equipment into Saint Louis or another area where we need equipment to balance out our network. So on one level we look at kind of the bottom core tile of returns in our portfolio and we either try to get price increases, eliminate unprofitable lanes, work with the customer and ultimately we have made the call on a few larger customers mid-year that is was not going to get better. So we are obviously not going to disclose where our absolute metrics are, you know we are better than that, but you can be rest assured that we start at the bottom and move up. So is that answers your question Alex or--?

Well so you are saying its lane specific is I think the primary thing is its lanes and customers and how those two match up which make sense, but the question about how much longer on the [calling] can you answer that?

Well I used to use the base analogy based on nine innings and based on the recent last couple of gains. 12 seems like the norm, so I would say Dave we haven’t roughly pinpointed, we are at least half way there but--.

Yeah it's an ongoing effort and the good news and the bad news is that there is still room for improvement. So the good news is being of course that there is room for improvement, the bad news being that it's there right now, so--.

Yeah, the two we walked away from this year they were on the radar screen for a good couple of years. We are trying to do everything we could so you know. It's really hard to stay out you are never done, but do we have -- I don’t know if have big ones that are on the screen network.

No we are absolutely going to be eliminating completely I'd said we're beyond that as far as -- but we could be allaying specific areas that if we can’t increase the pricing that will abandon that customer on that lane.

Okay great thanks guys I will let somebody else have it.

Well thanks Alex.

Our next question comes from John Hudson (phonetic) from [inaudible] Capital. Please proceed.

Just real quick what is the plan for the [HTTS] business now, at one point I was under the impression that was kind of going away or wasn’t strategically important but looks like it's growing again?

Good question, how are you doing John. We are continuing to evaluating what to do with upward distribution as it relates to our strategy. So really no news to report here on that front, but I can assure you that we are continuing to evaluate it, it's Dave--

Well you commented on the revenue, yes it did increase for the third quarter, it is a project oriented business that really is not aligned properly with the overall organization really doesn’t have a lot of strategic value. But when its humming it's a great business and what it -- the projects just aren’t there, it can be a real dog. So but right now the business is increasing as our single largest customer has been is back on attempting to advertise to the broader public. So at this point in time it is a pretty decent business for us.

Okay and then not sure if you commented on this earlier but with the debt gone now what moves to the top of the charts in terms of use of cash flow priorities?

Let me pick it quick down the list in somewhat our priority but not necessarily. Considering not on the drawing board but considering possible moderate dividend we are -- continue to remain we feel the growth for it so we don’t want to drive at that category, but possible moderate dividend but there is no decision that's eminent. Secondly, possible stock buybacks when it appears strategically that could make sense; third, possible yet we are not looking at [enquiring] right now. You know possible trucking acquisitions and the area where we could point to would be our truckload brokerage business. If there is a series of markets we were not there and we could get there quicker through some small acquisition that would be on our radar screen some to considered. Secondly, if there is some technology out there that could get us proven technology applications in existing businesses that would be beneficial we would look at him. And then lastly as you know down this capacity constrained environment, you know we look at what can we do to assure we have adequate capacity be in the asset like players, it's a good thing but as capacity gets tighter we want to make sure that we have got that available capacity, so we are -- particularly around that deals on how to deal with that.

Right on what we may or may not have to do with equipment ultimately. We do believe we like our asset laced model, but certainly the world is continuing to evolve in the intermodal market the Burlington Northern has made it evident that they don’t intend to longer term the supplying boxes and so we will be asking to make some decisions on that longer term as well.

Okay great that’s very helpful thanks guys.

Our next question comes from Bill Heinz (phonetic) from Sage Assets, Please proceed.

Good morning great quarter. Couple of questions, you talked about service levels and some of those maybe starting to get little bit better and I wonder if you could just get a little more specific. Obviously you Union Pacific and in the CSX are the two were there have been issues, and I wonder if you could just comment on you know how that's progressing relative to what they have told you and when do you think, what quarter next year perhaps it might be good enough back to normal so that it will be easier for you guys to get more capacity and go after more business. And then secondly if and when they get back to that point do you think there is some late in demand for intermodal relative to truckload that hasn’t been able to be satisfied because of the capacity issues and therefore do you think intermodal could actually take market share from truckloads next year. And then third, may be you could just give us an update on what the pricing gap is roughly obviously it's going hear it [inaudible] but between intermodal and truckload, thanks?

Okay great. First of all the service levels we do see that -- again and these are incremental improvements. These and we have a long way to go, but Union Pacific has definitely improved their overall service levels. We have seen the brilliance in northern remain fluid and Norfolk southern has actually been pretty stable throughout most of this issue. What so really the service levels weren’t just on UP and CSX. BN was having some issues as far as and one of its just capacity issues because their intermodal volume is up so substantially. But we are seeing small increases in the locomotive speed as an example which is a very important metric that we watch. As far as when, in the first quarter what we will see is the pipeline, the networks will begin just because there is much business, will begin to clear out and I am hopeful that, that will allow the rail roads with a lot of the investments they have made in personnel and in locomotives that will set them up for a pretty solid 2005 from a service perspective. I guess the caveat to that is that if in fact we see intermodal grow at double digits again while service levels will improve I think that that will make it more difficult for it to get the service levels to get back to where they were a year ago. As far as the, can intermodal take additional share off the highway, I certainly believe that it's the trucks have a long-term. The major publicly held truckload carriers having a long-term issue and that is in securing drivers. Until the pay reaches a level, that’s going to be adequate to attract that group they are going to have that. That is not a short term fix. You have got the candidates, the pool of potential drivers really is right now they are being employed at higher paying jobs in whether it construction or whatever were they or at home every night or with their friends or whatever they choose to do. But they are not on the road five days a week. And so again I think that intermodal certainly is well positioned to be able to take share from the truckers because they are just not going to be able to add capacity over the near term.

And then -- thanks that’s great -- and then the price cap?

Price you know again to your point there is no question that it is length of haul driven. If you are going French continentally, we are probably -- intermodal is probably still even with the increases we have had 40% cheaper minimally. May be its 40%-50% lets say. If you get to the shorter length of all, the 700 mile, the 1000 mile it's probably within the 10% range at this point in time may be 15%. Again I think one of the things that intermodal is able to give customers though is that capacity, that surge capability which the motor carrier industry has a little bit more difficulty in fulfilling.

Terrific thanks very much I appreciate.

Thanks.

Ladies and gentlemen thank you for your participation in today’s conference this concludes your presentation you may now disconnect. Good day.

Thank you.

Thank you.