Hub Group Inc (HUBG) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 4 Hub Group's earnings conference call. (OPERATOR INSTRUCTIONS). Before we begin, the Company has asked me to read the following statement.

Today's presentation by management contains forward-looking statements within the meaning of the Securities Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which can cause actual results to differ materially from those indicated today.

These risk factors include changes in general economic conditions, recent geopolitical events, increased competition, work stoppages and slowdowns, exchange rate fluctuations, variations in the mix of products sold, fluctuations in effective tax rates resulting from shifts in sources of income, and the ability to successfully integrate and operate acquired businesses. Some information on these risk factors is included in the Company's filings with the Security and Exchange Commission.

I would now like to turn the presentation over to your host for today's conference, Mr. Tom White, Senior Vice President, Chief Financial Officer and Treasurer. Please proceed, sir.

Today I will discuss fourth quarter numbers, our 2005 earnings guidance, and the recent Board authorizations regarding common stock buybacks and the stock split. In the fourth quarter gross revenues grew 7.9 percent versus 2003. Gross margin, or net revenue, grew 10.4 percent. EPS grew to 66 cents per share versus 33 cents per share in 2003 on a diluted basis.

Now I will discuss some fourth quarter details beginning with revenues. Intermodal gross revenues grew by 3 percent. Truckload brokerage grew by 15 percent. Logistics grew by 32 percent. And Hub Group Distribution revenues grew by 15 percent.

The fourth quarter Intermodal revenue increase of 3 percent includes a year-over-year increase relating to pricing, fuel and mix, which amounted to 11 percent. This was partially offset by an 8 percent reduction in Intermodal volume. Approximately one-half of the decline was due to our ongoing efforts for margin enhancement, which resulted from the culling of unprofitable customers and lanes (ph).

We also experienced other declines due to rail rationalization, service deterioration, competitive factors, and unusually tight capacity in key markets. Truckload brokerage fourth quarter revenue increased 15 percent due to strong pricing, fuel and mix. We're beginning to see meaningful results from our efforts to enhance and improve the business. Logistics revenue increased 32 percent primarily due to new business and growth from existing customers.

Our net revenues increased at a rate in excess of our gross revenues for the second quarter in a row. We believe this validates our yield oriented strategy. This is possible due to hard work and intense focus from many people across the Company in various functions.

The fourth quarter costs and expenses were $900,000 lower than last year. As a percentage of gross revenue, costs and expenses were 8.8 percent versus 9.7 percent in 2003. Included in the quarter was $550,000 for restricted stock compensation expense compared with $180,000 in 2003. As you may recall, in the fourth quarter of 2003 we had just begun our restricted stock program. And finally at year-end 2004, our headcount was 1,172 compared with 1,223 last year, a decline of 4 percent.

The gross operating margin was 3.1 percent in the quarter compared to 1.9 percent in 2003. We are particularly pleased with the progress on this metric. We ended the quarter and the year with $17 million of cash on our balance sheet, and we have no debt. The capital expenditures for the fourth quarter were $800,000.

On February 7, 2005 the Hub Board of Directors authorized the Company to purchase $30 million of the Company's Class A common stock. In addition, the Board approved a 2-for-1 split of its Class A common stock, pending shareholder approval of an increase in authorized shares at our annual meeting. This is scheduled for May 4, 2005. After the split the relative voting power of the Class A and Class B shares will remain the same.

Now I will discuss 2005 earnings guidance. Given the current operating environment we are comfortable that the earnings for 2005 will be within the analyst range of $2.50 to $2.67 per diluted share. Capital expenditures are estimated at approximately $5 million for 2005. This compares with $3.2 million for CapEx in 2004. The 2005 guidance assumes weighted average diluted shares of 10.9 million. Please note the above EPS estimates do not reflect the impact of a stock buyback or a stock split.

And now I will turn it over to our CEO, Dave Yeager.

We were very pleased with the results for the quarter and the year. For the fourth quarter our EPS doubled versus the prior year. In addition, we have grown net revenue each -- by over 10 percent in each of the last 2 quarters. Our realignment, which took place earlier last year, has substantially improved our business model as well as our operating results.

The intermodal business continues to be the majority of our revenue and profit. While we faced service challenges in the fourth quarter, the railroads did provide fluid service throughout the peak shipping season. Throughout peak capacity was critical for all transportation providers, and certainly Hub was no exception.

Our container fleets with the BNSF and Norfolk Southern provided guaranteed capacity for us during the time where equipment was in short supply. We were able to use this fleet to our advantage, providing needed capacity to strategic customers and higher margin for opportunities. Despite the rail service issues, we also managed better utilization of our fleets in the fourth quarter of 2004 versus 2003.

Our fleet currently consists of approximately 3,400 48 foot containers and 3850 53 foot containers. We have recently reached an agreement with BNSF to extend the life of our fleet contract. As part of that agreement, Hub plans to lease from a third-party 3,400 new 53 foot containers. We're finalizing the contract with the equipment manufacturer, but we anticipate taking delivery of these new 53 foot containers during the summer in advance of the peak shipping season. We plan on keeping our existing 48 foot fleet through peak, and then retiring these smaller boxes earlier next year, shifting our fleet balance to higher demand big boxes. At that time we will also evaluate the market demand for additional capacity to determine if we should expand our fleet in 2006.

We will file an 8-K disclosing the terms of this container acquisition and the financing once it has been signed. We currently plan to finance these containers with operating leases. As a result of these actions, we believe we're also well positioned in the market with committed access to the BNSF and Norfolk Southern rail networks.

Our rail vendors have recently announced various price increases which will be effective in March. Like last year we're focusing a great deal of energy on these price increases and believe that we will again be successful at passing these on to our customers.

Our truck brokerage business continues to gain traction in the marketplace. Truck brokerage revenue grew by 15 percent in the fourth quarter. And we continue to build both our customer and your carrier base. We have been shifting the focus of this service operating to a more collaborative business model. This approach involves larger volumes with more predictable capacity needs, and provides the opportunity for better economies of scale than our transactional business has.

In late 2004 we implemented a number of enhanced information technology applications specifically designed for our brokerage business. We also recently hired a number of new directors, additional dispatchers and other key management employees, including a Director of Carrier Development. We believe we now have the leadership team in place to continue growing this business in 2005 and beyond.

Our Logistics business also turned in a solid performance in the fourth quarter, adding new customers and increasing penetration with our existing customer base. We continue to carefully prequalify our Logistics opportunities in an effort to focus on profitable growth in this business line. We now operate this business from 3 strategic locations; that of San Francisco, St. Louis, and Boston. This provides us with the benefits of a regional presence as well as economies of scale.

We have also recently restructured our sales force. During last few months we reduced the size and upgraded the quality of our sales force. Much like the reductions previously made in our other business units, this restructuring is done -- designed to make us leaner and more nimble in the marketplace. In addition to adjusting the size of our sales force, we have also recently realigned our sales compensation plan and launched a sales management tool designed to provide more disciplined and greater visibility to our sales process. We believe that our sales team is now the right size, and has the right attributes to compete with both asset-based as well as non asset-based competitors.

While we intend to continue to focus on margin enhancement of our existing business, we recognize the need to grow our intermodal volumes. We believe we now have the right organization and sales structure, and intend to focus on growing volume with a reasonable return. We have several opportunities with major customers that will be the foundation of our targeted growth.

We have also added the capacity necessary to sustain the growth during peak as well as nonpeak periods.

In conclusion, we are pleased with our substantial growth in earnings for the fourth quarter and for the year. Hub is now debt free. We have cash on our balance sheet, and we're ready to implement our stock buyback plan. Our turnaround, while it is still in progress, is obviously for real. We're looking forward to building on our success in 2005.

With that, that concludes our formal remarks. If anybody would have any questions, I think we're ready for that.

(OPERATOR INSTRUCTIONS). Edward Wolfe of Bear Stearns.

Volumes are down in intermodal 8 percent you said. Yet by peak season you're ramping up the container load by one-third it looks like, realizing that you'll get rid of those containers after the peak season. Can you kind of take us from your minus 8 percent to their 33 percent more containers and what is going to -- why you're planning to see so much volume ramp, or are those containers replacing shared pools or anything else?

A very good question. I think one of the constraints that we had during the fourth quarter in an area that we could have candidly operated better was from a capacity perspective. Capacity has been a very constraining factor. At one point in time we were rolling over 500 loads per day in Los Angeles alone; hundreds of loads in Chicago. And so increasing our container capacity is of critical importance to us.

We also for this year we have -- we believe that our sales plan which we have in effect, which we will focus on key targeted accounts, increasing our volumes with them, and then feeding them with our smaller and mid-sized accounts, is going to again require us to have additional capacity available during the fixed peak shipping season.

So am I hearing it right that you can't really improve the volume growth at this point? You can improve the revenue, because you're going to get more rate come March 1st, but you can't really improve the volume count until you get more capacity?

During peak I would say that that is true. Yes. Right now I mean there is available capacity, because we're in the slower shipping periods. We will be for the first half of the year. But --.

So where should minus 8 percent volume in fourth quarter be during a period where you have a little bit more capacity seasonally, should it be flat right now?

Could you clarify that? I don't quite --?

Well, if volume was minus 8 percent because you were constrained during the peak with capacity, and now we're in a seasonally slower period where there is more seasonally more capacity you have, can you go -- will your volume year-over-year look better than minus 8 right now? I'm guessing it is closer to flat as a result of that.

It will be better than minus 8. If you look at the overall losses in business, about 50 percent was from accounts that we had prior. 25 percent were some accounts that we have temporary loss due to service issues, in addition to just the capacity constraints not being able to provide enough equipment. So, yes, it should be less than the 8 percent we experienced in the fourth quarter.

Okay. And Tom, how do you report for this big surge in leasing? Where do I see that? Is that in the SG&A line or is that above the net revenue line?

Dave was talking about the future. We have come to terms with the equipment manufacturer as well as BN. And so we will be entering into operating leases come probably second quarter. So it is not here yet.

But where will I see them in the second quarter?

Those will be --.

Are they transportation costs or are they operating expenses?

They should be --.

They should be transportation costs.

They should be transportation costs, yes.

Yes, because we're currently -- I mean the operating leases we currently -- those fall into our transportation costs right now, because the fleet of 7,400 falls into that area, so I would assume that it would continue.

When you talk about -- or you announced the 30 million share repurchase. Can you talk a little bit about do you plan stocks down a point on my screen, assuming there's not a blackout -- should we expect you to be buying on a day like this, or are you going to be buying consistently? Do you think it is going to take a year to do the buyback sooner? Kind of give us some timing, and what do you expect from that?

From a timing perspective we're very committed to get it done this year. I think that our view is that we will be opportunistic. So if we've got a day when it is going down, yes. I would suggest you that we would be in the marketplace on that.

Are you come in fact blacked out today or could you be in the market today?

According to our -- we're blocked out until Friday.

But just to be clear, Dave wasn't signaling that $1 reduction would cause us to buy. I want to be clear on that.

But the sense I got was that the 30 million is expected to be bought at least within the year?

Yes.

Yes.

The truck brokerage, out of it feels like nowhere all of a sudden you get this massive spike in gross revenue. How sustainable is that? And how should we think about that in terms of profitability versus say the IMC business?

I think on the sustainability, as you know, we have been -- it it has been a work in process over the last year. And our Head of Highways has been working hard at rebuilding the team and strengthening the team. So from a sustainability expectation, we believe that it is sustainable. So that we think he has turned the quarter and got a lot of things moving in the right direction. Also, as you do know, we do not disclose profitability by business group. And so we really can't comment there.

Directionally? I mean is there a major difference between one or the other when you look at operating profit?

As I think I have -- as I come to think about it, if you look our overall gross margins in the 12 percent range, you compare somebody like a big truckload brokerage competitor is probably in the 15 percent range. We strive to get north of our average in truck brokerage, and feel comfortable that we're getting there. Can we get to our big competitor? We don't know. But that is what our goals are.

So in other words, CH is at 15, 16 percent. Your overall is at 12. The implication is that truck should be higher than the 12.

Higher than the average, yes.

Just in terms of rail service, just a little more flavor, David. Is the UP now cleared up enough and the track open enough on the West Coast that you're back to levels you were in at least in the fourth quarter at this point, or is it better, worse, different?

It is getting better. If you look at the AAR stats their velocities increased somewhat. We do anticipate it will get incrementally better through the second quarter. They've got an awful lot of capital projects which are due for completion in April and May, and so we are looking for the improvement there.

Plus we've got the benefit of just a lesser volumes right now, so that eases the congestion somewhat. So we do think that this year will be better than last year. Is it going to be as good as it was in 2003? I think not. And that is, again, going to be a primary focus for our sales force is to make sure that we're effectively managing our customers' expectations, while at the same point in time when we are -- when service is better, pointing that out to our customers and making sure that they are building into their inventory the right transit times.

Is there any direct impact to earnings in the first quarter as a result of that or anything else?

You know, our operations people, I think did just an excellent job. As soon as they heard about all the track washouts they aggressively captured every empty piece of BN equipment that we could find. Was there some impact? Yes. Was it material? I would say no. We were rolling over maybe 100 trailers, 100 orders a day in Los Angeles for about a week. But I don't think it would be anything material.

Tony Castillo of BB&T Capital Markets.

I wondered, Dave, if you could talk a little bit about -- you have done such a good job at culling away unprofitable business, and that has been sort of the focus. And I'm assuming we're pretty much close to being done there. How do you go about -- and how are you getting your sales force now at least shifted to begin to focus on driving volumes a little bit and getting more profitable business when they have kind of them doing sort of the opposite for such a long period of time here?

That's a really good question because -- and there are several other things which distracted them. It is the service issues that I had mentioned earlier. I mean, managing the customer expectations, making sure that they were educated on what the transit times were doing, in addition to securing price increases. We have put a tremendous amount of focus into that for the basic reason that we were going to have additional costs in the $20 million range last year, regardless of whether we passed them on to our customers or not. So obviously we were very aggressive in having them making sure that those were passed onto our customers.

We are going to have some diversion at the beginning of this quarter. We have several rate increases which are going to be taking place in early March and early April. And our sales force has got to focus on that. But in addition, we -- our strategy for growth this year is to focus on the core group of targeted, large accounts growing their revenues substantially. We feel as though we have great opportunities to do that. And then feeding the capacity requirements that those targeted accounts generate with our smaller and mid-sized accounts.

So we do believe that it is very well positioned on a weekly basis for monitoring and measuring those targeted accounts, where they stand in the sales process. You know one of them we had mentioned -- obviously Target, which is one of our substantial accounts. But an account we do nothing with -- with Wal-Mart, which has a $2 billion bid going out. So there is a substantial amount of opportunity. And we're very, very focused on the growth, as we have been on that margin enhancement.

I would emphasize one thing though we will not be going and generating business just to increase our volume. We're going to focus on our yield. We're not going to chase the volume.

And that's very helpful. And looking then -- just a follow-up to an earlier question. Capacity additions for next year, what is the lead time that you need to in order to take on a sizable amount of capacity? When would you have to be placing orders for next year? Obviously I want to see how volumes are shaping up and such, but do you have any comments on that?

Do you mean for 2006?

Yes.

Just give you an example, the production has been apportioned to us and we give formal approval last week. We're supposed to start getting delivery of these units beginning in May, to be completed through August. That is what the manufacturer has been committed to. So the lead time isn't necessarily as great as you would think.

Bill Fisher of Raymond James.

Just on the container additions that you're making. Do you have a rough handle on what the percentage of your total loads, the containers you control yourself represent?

Of our total volume?

Yes.

That's a good question. It is probably about 60 percent of our volume on BNSF. So if you extrapolate that out, it is probably in the range of -- it is under 20 percent of our total loads.

And would you say that Mexico is up over the next year, just by the amount of the additions?

We're actually -- we feel as though it is very important that while the BNSF and Norfolk Southern are very important to us, our relationships with UP, CSX and Pacer are equally important. And so we intend to grow our volumes with all our carriers. We don't want to grow at the expense of one or the other. Our substantial position would with each of the carriers is a very important strategic aspect of our strategy.

Alex Brand of Stevens.

Dave, is the addition capacity, is this part of the strategy in getting your larger customers -- to win those bids? Is this kind of a requirement on their part that you have available containers that you're prepared to commit to them ahead of time?

I think that one of the questions that any of our large accounts will ask us, and has been asking us, is how are you going to expand capacity in 2005? Why should we commit more business to you when you had difficulty covering, as all transportation providers do during peak periods? What are you going to do so that you have more capacity for me for next year?

So it is a direct response. It is also candidly a direct response to the BN. The Burlington Northern does not want to be putting the assets on their balance sheet at this point in time. And so we have a very strong desire to have our fleet all 53 footers, and this is the way to accomplish that at this point. And the major reason, of course, we want to shift to 53 is just that 48s are not utilized -- the utilization rates are probably about 10 percent worse.

I know you have said that growing the truck brokerage was sort of an important growth avenue. And I guess I have a two-part question. In your opinion do you think that Hub's execution has gotten that much better on the truckload brokerage, is it just good timing because you're trying to get better at the same time that capacity is as tight as it is?

And the second part of my question is, are you trying to tie in this container commitment with your larger bids to your brokerage effort, and trying to tie the services together? Is it a tied together strategy on the sales process?

In reference to the first part, I think that it is a combination. The timing, there's no question, the timing couldn't be better. But our execution -- I'm really pleased with what David Marsh and his team has been able to do with our brokerage business.

As we have discussed in the past, we turned over about 50 percent of our staff in the brokerage area, brought on brokerage professionals. David has invested the right money in information technology so that our various brokerage locations can network. Can all see what loads need to be covered. Can all see what capacity is available. And so the execution has been enhanced far quicker than I thought. I honestly thought this would be a work in progress through 2005. But I think that they certainly are showing signs that that turnaround is being made now.

As far as the tying the service together, you know we have never done that as effectively as I would like. We were discussing that the other day. And that is an opportunity, but it is certainly is not the primary strategy for us to grow brokerage or to tie in the container commitments to enhance our brokerage volumes.

When you're going for truckload brokerage, primarily you're leading with brokerage versus rail, and then tie in the truck piece?

Right.

Yes, that's correct.

(OPERATOR INSTRUCTIONS). John Langerfeld (ph) of Robert W. Baird.

Maybe you just answered the question, but I just want to make sure. On your business on the intermodal side, that you're not able to service here in the fourth quarter because of capacity constraints and what not, do you have a feel for how much of that you're able to roll over into the truck business?

That's a really good question. And that was something else we were discussing the other day. It is something we have not done as effectively as we should. I would say it is a very small percentage, certainly under 10 percent, possibly less. And that is something that we are working to become much more aggressive on. We obviously have the orders in hand, and we should be more aggressive on it. And that is something that we will be in this coming year. But historically we have not performed that very well.

Okay. So nothing -- nothing changed dramatically in how that would have benefited the fourth quarter versus previous quarters based on what you're saying?

That is correct. But that is something that we intend to focus on for this year.

Right. It seems like a great opportunity. And then I guess if you look at that truck growth, I know you don't split out profitability of the given units. But if you look down the net revenue line in truck would the growth be similar to the gross revenue of truck 15, 16 percent?

I think if you look at overall our growth in net revenues was 10 percent versus the 7 percent growth in gross revenues. So we had acceleration of the net. I think it is safe to say that the truck brokerage had an acceleration of net revenues that was greater than the whole Company.

That's helpful directionally. And then on the cost line, Tom, I know you have talked about it in the past being able to hold that cost line relatively flat. Is it still your opinion that that is the case? And is that something that as you look out over 2005 you should be relatively flat there?

It is sure an objective. And when I talk about costs I look at in aggregate salaries and benefit, SG&A and depreciation and amortization. And if you look at a total number for '04 is about 139 million. It is our expectations that we hold that in the 130 -- under 140 million. That is our expectation. And anything we can do better than that will all be positive.

The key driver, I think 60 percent of our costs are people costs. And so we're going to have obviously an increase in wages just for pay increases. We have got another year of restricted stock. So those are the forces that driving it up. And then I think operating efficiencies and other things will drive it down, as well as depreciation being lower in '05 than '04.

Thanks. That's helpful. And then finally on the intermodal side, when do you get to the point where the culling of the portfolio -- you have kind of anniversaried that point? That would be the first question. And secondly, the freight that is actually moving away from you that you're walking away from, any idea where that is going?

Let me cover the first one, and maybe I'll give Dave the second one. I will take the easy one. Culling never ends, but the big culling I think was done in Q2 of last year. And so I think the anniversary, although it is hard to model it out specifically, the anniversary is probably closer to the beginning of this third quarter. But again we're always looking at culling, but we had a couple of big culls last year that accounts for a lot of it.

Right. And as far as where it is going, I don't know. We would assume in all candor with some of the accounts that we walked from that they did go to other carriers. Probably paid the prices that we were requesting, but just weren't going to give us the satisfaction of a rate increase that would be something that would compensate us adequately.

Do you think most of it stayed intermodal or do you think some of it shifts mode?

I would think because it was so price focused that it stayed intermodal. I would doubt that it converted to truck. You know we have had some business which has converted to truck. Some 3 major accounts that I can think of off the top of my head, which account for about 25 percent of our volume loss, which was because of rail service. That is business we will regain ultimately when rail service gets back to a more consistent level. But in all candor, we're very upfront with the accounts. We tell them exactly what we are able to do and what we're capable at this point in time. And then they need to make a decision whether they converted to truck or intermodal.

At this time you had no further questions. This concludes your question-and-answer session. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Thank you.