Hub Group Inc (HUBG) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to the Hub Group third-quarter conference call. We will begin with a discussion of the financial results led 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. At this time, all participants are in a listen-only mode.

We would like to start by noting that statements made in the course of this conference call that state the Company's or management's projections, intentions, hopes, beliefs, expectations or predictions of the future, including projections regarding 2005 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 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 ended December 31st, 2004 and Form 10-Q for the quarters ended March 31st, 2005 and June 30, 2005. Copies of these findings may be obtained by contacting the Company or the SEC. Now, I would like to introduce Tom White, the Chief Financial Officer of Hub Group.

Thank you and good afternoon. In the third quarter, gross revenue grew by 10.3% versus 2004. Net income grew 23% to 9.6 million and diluted EPS grew 24% to $0.47 per share. Please note that when we compare 2005 earnings to the third quarter 2004, we are comparing to the adjusted 2004 amounts. The adjustment adds back the debt prepayment penalty incurred in 2004.

Now I will discuss revenue details. Intermodal revenues increased 9%; truckload brokerage grew 21.7%; logistics was up 4.8%; and Hub Group distribution revenue was even with 2004.

For our intermodal business, we are seeing some good progress on many fronts, especially our volume trends. The 9% third-quarter revenue improvement includes an increase of 10.4% relating to pricing, fuel and mix, which was partially offset by a 1.4% volume decline. This 1.4% decline is much lower than the decline of 11.4% in Q1 and 7.9% in Q2. Truckload brokerage revenue increased due to higher volumes, pricing, fuel and a more favorable mix. We are pleased to report that this is the fourth consecutive quarter of double-digit increases in gross revenue.

Logistics revenue increased 4.8% on a year-over-year basis. We remain focused on minimizing risks, controlling our costs and enhancing our profitability in this business. Consolidated gross margin as a percentage of gross revenue was 12.3% versus 13.3% in 2004. It should be noted that the 2004 amount was particularly high due in part to our aggressive timing of rate increases. As anticipated, for 2005, there was pressure on gross margins due to the competitive marketplace, our growth initiatives and an ever-challenging environment to pass on all costs to our customers.

The current quarter costs and expenses were 33.7 million compared with 34.1 million in 2004. Total headcount was 1,171 at 9/30, an increase of four people when compared with June 30, 2005. We continue to press hard on containing our costs while we grow our revenues.

The gross operating margin was 3.9% in the quarter, which is comparable to the third quarter of 2004. For the nine months ended September 30, 2005, the operating margin is 3.4% versus 2.7% for 2004, an improvement of 70 basis points.

Our effective income tax rate for the quarter was 39.4% and 40.6% for the nine months. This is down from our recent historical rate of 41.5%. The rate decrease is due to state tax restructuring actions that we have implemented at Hub. Our tax rate going forward is estimated to be 40.5%.

We ended the quarter with cash and investments of 26.8 million. During the third quarter, we spent 1.4 million on CapEx and realized 573,000 in proceeds from asset sales. As disclosed on August 22nd, 2005, the board authorized a new stock buyback plan of up to 45 million with an expiration date of December 31st, 2006. To date, we have made no purchases under this plan. In the first half of 2005, we did repurchase 1.1 million, common shares at a cost of 30 million under a prior board authorization.

Now I will discuss 2005 full year earnings guidance. For the full year 2005, we are comfortable that our earnings will be within the analysts' range of $1.45 to $1.53 per diluted share. CapEx is estimated to be approximately 4.5 million for 2005. Weighted average diluted shares are estimated at 20.8 million.

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

Great. Thank you, Tom. Our $0.47 per share profit represents the best quarterly result in Hub's history. As Tom had noted earlier, we've made significant progress during the third quarter, turning around our intermodal volume declines. Our intermodal volume was down 1.4% for the third quarter compared to a 7.9% volume reduction in the second quarter of this year. Our performance compares favorably with domestic intermodal loadings, which, according to preliminary IANA data, were down 1.6% for the quarter. More importantly, our trend is now toward growth. Our intermodal volume was in fact up in September. We achieved this growth despite our reduction of business with two large, unprofitable accounts during the third quarter.

Our targeted selling strategy has added a number of mid-sized customers and also saw a significant increase in our Sears, Target and Home Depot business. Our Wal-Mart award has also helped our volume growth although not as much as projected due to a slower start and lower than anticipated volume levels.

In our last conference call, we estimated that our intermodal volume growth would be at a positive run rate of 2 to 3% by the end of the year. We continue to believe that we will be able to achieve this goal. We are also very pleased to do have recently been named Home Depot's Intermodal Carrier of the Year for the second year in a row.

As expected, equipment capacity has been tightening with the onset of the peak shipping season. As is typically the case, equipment is in short supply off the West Coast and in certain key gateway cities of St. Louis, Memphis, Kansas City and Chicago. We are seeing our efforts to better balance our freight flows into deficit markets pay off. The number of rolled loads, or loads that we cannot handle on any given day due to a lack of capacity or equipment, was down sharply in the third quarter in our key markets. Also on the capacity front, we have now received 3300 of our new 53-foot containers. We expect to receive the remaining 100 containers within the next month. Despite the increase in our fleet size, our fleet utilization does remain stable.

As is usually the case this time of year, the increased freight volumes have caused delays on some of the major rail carriers. We continue to proactively communicate any delays to our customers and work around congested points whenever possible. Despite the delays, rail service does remain fluid.

Our truck brokerage business had another great quarter and continued to build on its positive momentum. Revenue grew by over 21%, our fourth consecutive quarter of double-digit revenue growth. Much of this growth is due to the successful execution of our target account strategy. Late last year, our brokerage team targeted 30 key accounts for significant growth. During the year, our sales force and brokerage directors have aggressively pursued this business and due to these efforts, our brokerage is up 62% this quarter for these target accounts.

As expected, truck capacity is tight as we are in the middle of peak season. In spite of the tight market, we have managed to grow revenue significantly during the quarter. Our brokerage group continues to develop our carrier base to ensure sufficient capacity for our customers, adding over 1100 new carriers during the third quarter. We've also been adding brokerage employees in key markets to support our growth plans. We have added some good talent to the organization and increased our brokerage headcount by over 10% compared to this time last year.

Our logistics revenue grew by about 5% in the third quarter. During the quarter, we were informed by one of our large, high revenue, low-margin accounts that they will cease using our services in October. While this will have an impact on our fourth-quarter logistics revenue, it will not have an appreciable impact on our margin. This group continues to develop new business and has a very full pipeline of prospective accounts that are well into the sales cycle.

In summary, I'm very proud of the hard work done by our employees and pleased to be able to deliver these record results to our shareholders. And now, we would like to open up the lines to any questions you may have.

(Operator Instructions). Alex Brand, Stephens Inc.

I guess I want to start with the revenue, which was very good. Volume decline was minimal, so obviously, some of your initiatives are working. But I'm a little confused I guess that you didn't see the flow-through to your net revenue and therefore you didn't see as much flow-through to the bottom line. And maybe your interpretation is different, but I guess I thought that when we got to the point where you started to really leverage the volume that you would get more through to the bottom line. And I guess I don't feel like we are seeing that. Is there anything in the numbers, fuel pass-throughs or something that is impacting that yield in the short run?

That's a good question, Alex. This is Tom. I think first off, we've got to look -- and as we've talked about before, the 2004 third quarter was unusually high at 13.3%. I think that was perhaps the highest gross margin we've had, due in part to our getting in front of the rate increases last year. And so number one, we are comparing to a high bar.

Looking at this quarter, the marketplace is getting more competitive. As we grow and add new accounts, such as Wal-Mart and others, we're going to have to focus on the margins and make sure we get new accounts on board with minimal impact negatively to the margin line, as well as other growth initiatives when we are going after big business. Some of that big business may be at margins that may be a little bit less than the average.

And then lastly, as you know, the railroads, the fuel, there's more and more costs coming at us that we have to make darn sure we pass through to our customers. So I think the best thing we can do is kind of put this into the -- last year was high and these other issues are putting downward pressure.

Now, your point about once we get the volume turned around, we would start to see growth, you know, we think we are almost there on the volume front, but I don't think we're at a point where we feel good about 1.9% volume decrease. It's getting there.

Right. Yes. I think number one, our run rate in September was positive. We felt very good about that. And to add to some of Tom's comments there, we did have some startup costs with, like Wal-Mart as an example. Their distribution centers that we were awarded are not exactly local to Chicago ramps, etc. So they are kind of in the hinterlands so you've got some startup costs with positioning equipment, that type of thing.

And to Tom's other point as far as accessorial costs, etc., passing those on to the customers is a challenge. There has been a fair amount of change in a lot of the railroad accessorial rules and so again, it's focusing on those cost controls and making sure we pass them onto the customer.

I guess on the -- in terms of where you see that going, I mean I hear you, you haven't actually turned positive on volume, but I would think J.B. Hunt is raising prices and they probably will have to do that some more with their arbitration decision. That's got to be at least something potentially out there to help your yields. And is there anything else internally that you can do to balance lanes, where you have a bigger customer at perhaps a slightly lower margin, but you can offset that with smaller customers that carry a higher margin? Can you balance the mix or do anything internally to boost that as we look ahead?

Yes, I think several things. First of all, as far as Hunt is concerned, we do assume that they will in fact be taking some rate increases. We have not seen that in the market since their arbitration has been finalized with the BN. But we do assume that that's an accurate statement; they certainly aren't just going to absorb those price increases. So that is one positive. We are very focused also, I mean, on the accessorials and on making, looking, at our lower margin accounts again and putting increased emphasis on that. I think an awful lot, Alex, of what we are trying to focus on is similar to what we experienced a couple of years ago. We are not going to be in the culling stage at this point, but certainly, the process is in place to make sure that we are collecting the funds that are due when there is breaches from the railroad rules, would be very powerful. Because our accessorial billings have increased pretty dramatically over the last year.

You know, on the operating margin, Alex, lastly, our operating margin stayed constant 3.9%. You know, are we happy that it stayed constant? No. Did others in the industry actually deteriorate? I think the answer is yes if you take out the unusual stuff. So in a roundabout way, we're not pleased but we are not overly disappointed where it stands. But we've got a ways to go.

Okay. And if I could just ask a question about truckload, and then I'll turn it over. Dave, you said you added 1100 carriers to your base. So what does that bring you up to now and is the biggest risk to that growth pattern at truckload your ability to access capacity, or are you starting to feel pretty good about that?

Well, no. I think that that is one of the things that we have learned is we've refocused on the brokerage over the last several years, obviously is. We never had a capacity procurement or development group before. This group now, that's their sole focus and it's a critical item, not just to create capacity for your customers, but also to be able to effectively hit the right costs to be competitive with other truck brokers that may be in the marketplace. Obviously, the more carriers you have, the better your options as far as finding a carrier that has a specific need to get from a location to a location.

And what's the total count now?

Total count now? You know, I'm not exactly positive. It's got to be upwards of 6 to 7000, and as far as what we use on a regular basis, that's something, Alex, I'll get for you, because I don't have that off the top of my head.

Ed Wolfe, Bear Stearns.

Can you break out -- I think you said that the volumes were down 1.9 and the yields, fuel and mix were up 10.4. Can you break out the 10.4, what was fuel there anyway?

Yes, you know, Ed, this is Tom. As you know, we don't buy fuel. Fuel is just a component of price. Fuel is charged to us by both the draymen and the rails on the truck side. So we don't break fuel out separately and we combine it as one number when we talk about it.

All right. How about mix? What percentage do you think is mix?

That's the hardest item to put your finger on so, you know, like I said, we'll talk about the overall percentage increase and that's about as far as we can go, we intend to go.

How about yield, then? Isn't that part -- that you should know? I mean just look at the pricing side of that? Or again, you won't do that?

Yes. We just disclose the overall number. Sorry.

Okay. Let's talk about a couple of different things if we could. The cash flow was pretty enormous in the quarter, yet what I think I saw was you didn't buy back any stock in the quarter?

No, we didn't.

Can you talk a little bit about what the psychology is on buying or not buying stock as we go forward?

Yes. You know, we met with the board awhile ago. We got the authorization for the stock buyback, but we did have a long discussion about timing of the buyback and I think we all agreed that we are more comfortable bringing it out to the end of '06. We view it as a very opportunistic buyback. And we also have -- we are still just finishing up looking at our Company-wide strategy and we want to make sure that's done, and have a good handle on our strategic alternatives and actions that we may intend to take before we start buying back stock.

When you say opportunistic, does that mean, is there a certain valuation or a certain dollar amount or somewhere where you are getting more aggressive?

Yes, there is, and that's not an amount we would be willing to share.

Okay. But there is something in your head that kind of says at this trigger, this is where we go kind of?

Oh, yes, correct.

Okay. You talked a little bit about Wal-Mart starting up slower than you thought and also culling of a couple of accounts. Can you tell us what volume would have looked like without culling of those accounts or how much volume you did cull? And also a little bit about Wal-Mart, where we are. I think it was a 62 million annual contract, where are we on that?

Yes, I can. I'll handle the last one first. It is, you know, we can't get into the exact numbers with the Wal-Mart because we still don't know how this will shake out. This is a new account for us. It is significantly less than what we had anticipated, so we don't -- we haven't fully been through this first peak, Ed, and so I'm reserving judgment because their peak shipping really didn't start until just within the last several weeks. But it will be I think significantly less than the 62 million that we were originally awarded.

In the other question, your first part, was as far as those two culled accounts, I know one of the accounts, which we no longer -- we have completely eliminated -- was probably on a quarterly basis about 3 to $4 million.

I think the entire -- this is Tom -- the entire '05 was 5 million.

Okay. Because they had already been predominantly culled and this was just ending the relationship. And then the other account probably on a longer basis was probably 12 to 15 million as far as reduction in overall revenue.

So on an annual basis, there was about 17, 18 million that's gone here and we could take a quarter of that and get a sense of it? Is that what you're saying?

Yes.

That's on a revenue or --?

From a revenue perspective.

Okay. And Wal-Mart, I think you did a year ago in '04, you said 8 or 9 million without a contract. Are you ahead of that so far on a kind of year-to-date basis (multiple speakers)?

We actually -- it was 7 in '04, and yes, we are certainly ahead of that. That's not an issue. But it's somewhere in between there that we will end up settling.

And what is your sense of why that hasn't ramped up? Is it them, is it you, is it pricing? Is it another player? What's going on there?

I don't think it's another player and I don't think it's pricing because obviously we were granted the business based upon the pricing that we offered in the bid. I think that it's one that it did start later. Also that some of the distribution centers with us trying to ramp up took some time. When you've got to get to Statesboro, Georgia, there's really no Intermodal ramps that are anywhere close to it. And I think last but not least is that possibly, there may have been within the bid award, it might have been slightly inflated versus what they thought they had versus what ended up coming into being as far as the actual traffic flows.

Okay. And in terms of other accounts to cull, should we kind of look at it as you've been through it or is this going to continue as we go forward?

You know, I think you always look at what's the most valuable piece of business and attempt to always optimize it, especially when you are in a capacity constrained environment such as we are. But no, I don't see any other accounts that we will just cull at this point in time. I think that, you know, we have got another very concerted effort to enhance our margins again on the lower margin accounts, but I do not see us culling further.

Okay. The extra leases that you have for the 32 boxes that have come in, do we see that as part of your gross yield or is that in an operating expense somewhere? Where would I see that?

It's in transportation expense.

Okay. So is that part of what's pressuring the yield too versus a year ago?

No, not at all. Not at all.

Why wouldn't it? Why wouldn't we see it there as a cost that we didn't have a year ago? What am I missing there?

This is Tom, Ed. If you think about it a year ago, we were buying -- we were securing that capacity on the spot market, which is probably more -- perhaps more costly than our lease expense. So I don't think it's -- at best, it's a push.

Yes, because basically, when we're buying an Intermodal service from a railroad using rail equipment, they build the cost of that equipment into the rate that they quote us and charge us. So this is just broken out then. It's just an unbundled product that we are actually paying directly for the equipment and just buying the underlying transportation. So it actually -- it would not have negative impact on the margin.

Okay. And then can you talk about you both used the word competitive market. Who are you seeing, if it's somebody that's being more competitive, and what's your sense of the trend of that as we look out over the next several quarters?

Well, you know, it's always a very competitive market. You've got -- Hunt is always the price setter. I mean, that’s consistent. They always have been. We'll see if in fact the settlement of the arbitration is going to have any impact on their pricing. But when you think of price competition, we immediately think of them.

And to date, you haven't seen them change since the BNI announcement?

No.

Okay and one last question is there is a 357,000 benefit in other net. Can you just explain what that is and if that's onetime?

Yes, Ed. During the quarter, we had a building in Ohio that we had a partial ownership of that we sold. It was a gain on sale, so it's a onetimer.

Bill Fisher, Raymond James.

Just back on that fuel surcharge, just big picture, looking from the September quarter through the October/November do you have a sense of what the fuel surcharge is from like BN or up from that period?

I'm sorry, Bill --?

How much they have increased the surcharge to you, the fuel surcharge?

You know, I'm not sure off the top of my head. We of course, what we've done -- we have a scale that is priced on a weekly basis, based on the national price of diesel fuel that we automatically put onto our customers' invoices. And that does take into account the scales that the railroads have filed with us as well. And I'm not sure off the top of my head, Bill, exactly what the BN fuel surcharge, what the percentage is it increased to date.

Do you feel like you -- do you capture any gross profit dollars off of that? I mean I guess it impacts gross margin percentage, but do you pick up any gross profit dollars on those surcharges?

Well, you know, that's something we always try to calculate. We try to make it so that it's revenue neutral, is our basic goal. We don't intend to exploit the fuel situation to the detriment of our customers, but we definitely do try to cover our costs in all instances.

Okay. And you mentioned mix, is that more of customer mix, or are you seeing any change in the lanes, any elimination of shorter-haul lanes or longer-haul lanes or how is that going?

As far as mix, I think that we continue because we are an Intermodal-based company, we are for the most part in longer hauls. The short-haul business is not attractive just because the Intermodal cost is not as attractive. We have seen I think somewhat of a mix shift in our brokerage business with additional shorter-haul business and very likely we'll continue to see that occur.

Okay. And the long haul, say the L.A., Chicago Intermodal side, are you seeing favorable spreads there on the truckload side versus the truckload side? Has that narrowed or --?

Actually, it has narrowed. As you know, the railroads have been quite aggressive over the last 18 months with price increases. We in fact had a major customer that recently had a bid and they anecdotally told us that they were shocked that some traditional Intermodal lanes were no longer -- there wasn't the large spread that there was at one point, that in fact truck was competitive. So I think we are coming to a point where rail increases have brought it so that there’s much more parity with truck than it has been in the past.

Jon Langenfeld, Robert W. Baird.

Just on the volume side first, nice job swinging that from the first half. To clarify the number, 1.4 and 1.9% was both thrown out. Which was it?

Our Intermodal volume was down 1.4% for the quarter. I think -- the IANA data was -- and that's preliminary IANA data -- was that domestic loadings were down 1.6% in the aggregate for the industry.

And that would include -- the IANA number -- that would include the transloading that occurs out in the ports?

That includes transloading, that includes the truckload carriers. It's the domestic truckload business.

Do you get any sense from your customers why -- the numbers we've seen and have been able to back into the transloading volume have been down slightly this year, kind of the first time in several years. Do you have any idea why that has happened?

You know, I don't have an explanation as to why but I do know that it is a trend that appears to be accelerating, that several major retailers have in fact publicly stated that they do intend to go more intact next year. Many are trying to circumvent the West Coast ports and go through the canal. So we are seeing some trends that is shifting some of what was transload business before.

Okay. So you would expect that to continue into next year?

Certainly, at this point in time, it seems like it's going to.

Okay. And then on the truck brokerage side, some very strong growth there. What do you think the volume growth was that backed that up?

I think -- this is Tom, John. I don't have it right in front of me, but my recollection is it's 5 to 6% volume.

Okay. 5 to 6% of volume.

But to us, volume is a lot less relevant on the truck side because of length of haul and type of business and etc.

Sure. Okay. And then on the peak season surcharge, back on the Intermodal piece, did that end up getting passed through and if so, was that like a month later this year than last year and how does that compare to previous years?

That's a really good question! You know, we don't -- John, this year, there is not one. I think that the railroads -- we had a 4% increase with our customers on September the 1st, and I think with the amount of increases that the railroads have taken over the last 18 months, that they wisely chose not to try and assess a peak surcharge because I don't know that the market would have been nearly as receptive as it has been.

And by putting in the rates, it becomes a permanent thing (multiple speakers)

Right. (multiple speakers). Well, that too.

I state the obvious.

Yes.

And does that -- I mean if you look at what your customers are telling you and the price increases they are taking, do the rails need to improve their service before they can get more on the rate increase side, or do you think -- if they were able to just maintain their service, they would still get the rate increases moving forward?

Well, the rails -- we don't have a crystal ball as far as what 2006 is going to bring us in the form of rail increases. You know, the rails, they've got some bright marketing guys and hopefully, they are seeing that the customers are beginning to push back, and I think that they are becoming somewhat fatigued with the amount and the frequency of the rate increases. So I think regardless of service that we need a bit of a respite. I do think that improved service would help out dramatically in late '06 if we could see some large improvements. We're trying to get a sense right now for the rail forecast on service for 2006. But certainly, service improving would make it a lot easier to deliver the message that prices are going up.

From the numbers we are looking at, it doesn't seem like the service has helped you out at all here over the last quarter.

No, no. In fact, we basically -- all this year, we've been telling customers that basically peak season of '05 from a service perspective would look very similar to '04 and for better, or for worse, we were pretty accurate with that projection.

Okay. And then finally on the overall margin side, and as you look out over the next couple of years, how much room do you have on the margin? You know, your flat here. I'm assuming that will start to pick up again as you kind of normalize through some of these issues. But do you think you can do 10, 20, 30 basis points a year, more than that, less than that? What would be your thoughts there?

John, are you talking about operating margin?

Yes. As a percent of gross revenue.

As you know, we benchmark against some pretty tough competitors in the truckload and truck brokerage business and those competitors have operating margins in the 5, 6, even up to 11%. And a couple of years ago, we were at one point something percent. So we feel like we made some good progress, but we are always attuned to trying to get the thing up. We've got to get gross margins up and we've got to also keep the costs contained as we grow the top line. So we sure are focused on increasing it. We haven't given any '06 guidance or '07 guidance so we wouldn't want to tell you how many basis points are in our plans, but we are finalizing those things right now.

Okay. Maybe a different way to ask it, when you look at the Intermodal piece of your business and you put that up against some of the domestic truck brokerage units out there or even your own truck brokerage unit, do you think they can do similar margins?

I'm not sure I understood the question.

Well I mean you kind of referenced the CH Robinsons and the Landstars having, you know, pretty strong margins out there. But that tends to be a much (technical difficulty).

Woops, hello? John? Is it us or him? Corey, are you there?

Yes, sir. Mr. Langenfeld's line has dropped but we will try to retrieve him.

Okay. Well, I think I can answer. It seems where John was going is can we in fact in Intermodal, can we elevate that to the gross margins of where many of our truck brokerage benchmarks are? And the competitive landscape has been such that normally within Intermodal, we have not been able to achieve that. I mean it's a great target but a difficult one to get to that level.

Mr. Langenfeld, your line is open.

Okay.

Oh, okay, John.

You've got it. You got it. You're right on the ball. That's what I was looking for. Thank you.

But our goal is to get it increased every year. We just haven't come -- you know, when we produce our annual results, we'll come out with next year guidance.

Okay. Thank you.

At this time, there are no further questions in the queue. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

Thank you.

Good day.