Hub Group Inc (HUBG) 2006 Q4 法說會逐字稿

Good afternoon, and welcome to the Hub Group 2006 fourth 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 Dave Yeager, our Vice Chairman and CEO. The Company will make its prepared presentation followed by a question and answer session. (OPERATOR INSTRUCTIONS).

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 2007 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 included, but not limited to, the Company's reports on the Form 10-K for the year ended December 31, 2005 and Form 10-Q for the quarters ending March 31, 2006, June 30, 2006, and September 30, 2006. Copies of these filings 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. Please proceed sir.

Thank you and good afternoon. Before I begin, please note that all amounts to be discussed relate to continuing operations. Now I will highlight a few important items for the fourth quarter and full year.

For the quarter diluted EPS increased 55% from 2005. Secondly, our fourth quarter operating margin was 5.2% compared with 3.5% in 2005. And finally, for the full year 2006 we generated $68 million of free cash flow, or $1.67 on a per-share basis. And at year end we had $43 million of cash and no debt.

Now I will discuss the fourth quarter beginning with revenue. Intermodal revenue increased 2%. This change includes a 7% increase from the addition of Comtrak and a 5% volume decrease. The combined effects of pricing, fuel and mix was minimal. Regarding the volume decrease, approximately 1% of the decline is due to the year-over-year effect of exiting the domestic auto parts business, 2% is due to lower Wal-Mart business, and the remaining 2% relates to our decision to turn back certain loads for a large customer due to very low margins.

Truckload brokerage revenue increased 15% due to higher volume, pricing and mix. For the full year revenues are $306 million, or 15% higher than 2005. We are proud of these results and remain focused on growing this business, especially the yield.

Logistics revenue was 24% higher than last year due to new business. For the full year 2006 Logistics revenues are $131 million, or down only 4%. This slight decrease represents a a big improvement from the year-over-year decline experienced in the first half of 2006. We're working hard to increase the sales pipeline, while being careful to minimize our business risk.

Consolidated gross margin dollars grew by $12.7 million, or 28%. This margin expansion comes from our drayage business, strong results in truck brokerage, and our intermodal yield enhancement results.

Total costs and expenses were $36.3 million compared with $31.4 million in 2005. Much of the expense increase relates to the addition of Comtrak, which we acquired in February 2006. For the foreseeable future quarterly costs are expected to be in the range of $37 million to $39 million. Headcount at year-end, excluding drivers, was 1,089, an increase of 3 people in the fourth quarter.

The gross operating margin of 5.2% is the highest operating margin in Hub's history. We continue to focus on this important metric through margin enhancement teams, growth in truck brokerage, increase in our drayage operations, and finally, cost containment.

Now I will talk about our balance sheet and use of cash. During the quarter we spent $3.1 million on CapEx. And for the full year the total expenditures were $8.4 million. As stated previously, we ended the year with $43 million in cash and no debt.

As you may recall during the third quarter of 2006, we completed our $45 million share buyback plan by purchasing 2 million shares at an average price of $23 per share. In addition on October 26, 2006, we disclosed that our Board of Directors authorized the purchase of up to $75 million of common stock. This new authorization expires on June 30, 2008, and we have not purchased any shares under this new authorization.

Regarding acquisitions, we continue to look for drayage and truck brokerage candidates consistent with our strategic plan. We have recently taken a very close look at a few drayage acquisition candidates, but decided not to move forward after our due diligence evaluation. We will continue our acquisition efforts, but we will only do a transaction if it is a good cultural fit, a healthy business, and accretive to Hub Group.

Now I'll discuss 2007 full year earnings guidance. Each quarter end our standard practice is to compare our full year EPS forecast to the existing publicly available analyst range. For 2007 we expect earnings from continuing operations to be within the current analyst range of $1.25 to $1.40 per diluted share. For 2007 the weighted average diluted shares are estimated at about 41 million shares.

And now you'll hear from our CEO, Dave Yeager.

I'm pleased to be reporting on another record quarter that caps off a record year for Hub Group. Our intermodal operations remain the largest component of our revenue and a major driver of our profitability. While the 2006 peak season was not as robust as the last couple of years, there was still healthy demand for intermodal services.

During the fourth quarter capacity did become tight in certain gateway cities and off the West Coast, but the number of loads with delayed pick up due to a lack of empty equipment, was down 57% versus the fourth quarter of 2005, helping improve overall customer satisfaction.

The significant capital investments made by the railroads in track and locomotives definitely made a difference, as we saw improved service on each of the major railroads throughout peak. Although not perfect, this was the smoothest peak season we have experienced in a number of years. Service has continue to improve during the first quarter, and we believe that this improvement bodes well for our Company and intermodal growth in general.

Partly due to improved rail service and partly due to better equipment management, our fleet utilization again improved compared to the fourth quarter of 2005. We also repositioned 61% fewer empty containers during the quarter compared to the prior year. As expected, our intermodal volume was down for the quarter. We again reduced the number of money-losing loads and increased the number of profitable loads. These actions contributed to a 28% increase in consolidated gross margin and helped improve the overall profitability of the Company.

Drayage continues to grow in strategic importance as we look to more efficiently service our customers and compete for new business. We are pleased that Comtrak's performance has exceeded our expectations. To drive change and improve our operations, we are converting our proprietary drayage network Quality Services over to Comtrak's technology platform, systems and work processes. We have already converted Kansas City, St. Louis, Atlanta, Jacksonville, and plan to convert our remaining QS terminals to the Comtrak platform in 2007. With each conversion we're better able to coordinate all of our drayage activity and improve productivity.

As of December 31, 2006 our drayage fleet consisted of 865 owner operators and 424 Company drivers. We plan to continue to expand our driver base through out 2007.

Our truck brokerage business continues to gain momentum. Our revenue was up almost 15% for the quarter and 15% for the year. Throughout the year brokerage leadership did a nice job of winning business from new customers, and expanding the services we provide to our existing customer base. We continue to grow our higher margin brokerage offering, which consists of specialized project work, as well as more traditional brokerage services.

The current market for truck capacity has been relatively loose, although during the first fourth quarter we did see some tightness in certain specific corridors. We do anticipate that we will be seeing quite a bit of bid activity early in 2007, as shippers look to gain price concessions from their truck vendors. We believe our brokerage business is well-positioned to compete for this business by securing favorable pricing from our carrier base.

While our overall corporate headcount has remained flat, we are investing in the brokerage business, adding 21 employees during the year. We now have 175 professionals dedicated to this service offering as of the end of 2006.

Our Logistics Group continues its turnaround. After a slow start in 2006, our Logistics business had an impressive end to the year. For the quarter Logistics revenue was up 24%.

We continue to generate impressive savings for our customers with our technology-based solutions, which optimize shipments by carrier and mode and consolidate LTL shipments into full truck loads. We've also been managing more bids for our customers and have been able to better leverage their transportation spend through this process. Although this business has a long sales cycle, our pipeline continues to look promising.

As we look to 2007, we will continue to focus on growing the Company, particularly our gross margin and net income. To help drive that growth, we have slightly changed the compensation metrics for certain executives. The leaders of our business units will continue to receive a significant portion of their bonus based on our earnings per share, but will also have a component of their bonus tied to specifically meeting the goals for their individual business unit. We think this change, although minor, will help keep our leaders focused on the right priorities.

As those of you who have been following the company know, over the last few years we have taken several significant steps to improve our results. In 2006 we continue to build on this foundation, and had another great year. Last year we were able to accomplish numerous strategic and financial objectives that enhanced our value. To mention a few, we acquired Comtrak and began the process of integrating Quality Services into Comtrak.

We grew our highway business impressively for the second year in a row. We sold the non-strategic assets of HGDS for $12.2 million, while improving our operating income as a percentage of revenue from 3.5% to 5.2%. Hub generated $68 million in free cash flow, which was used partially for the repurchase of $45 million worth of Hub stock, and we finished the year with $43 million in cash.

We also split our stock on a two-for-one basis for the second year in a row. And most importantly, 2006 saw Hub increase its net income by over 48% over 2005's record earnings. We take all of this positive momentum into 2007, and look forward to another great year.

At this time we will open up the line to any questions.

(OPERATOR INSTRUCTIONS). Edward Wolfe, Bear Stearns.

Can you talk a little bit to when you look at your different business lines intermodal, truck brokerage and Logistics, directionally which of these have the better yield and which of these have the better operating margin characteristics about them?

We don't bust them out separately. What we try to talk about is, if you take our truck brokerage operation, for example, we have in our benchmarking universe, Landstar and Robinson are the two comps that we look at. And so I would point there as directionally where we want to be.

Then if you look at the rest of the Company, intermodal is 70% of the overall Company, so as intermodal goes, so goes the Company. So I wouldn't say that Logistics has any radically different operating metrics than the overall.

On a gross yield perspective, given the rise in Logistics and the big expansion in margins, should we assume those two are related in some way?

No.

When you look at the 240 basis point of yield improvement year-over-year, we should think that there's some of that coming from all three areas?

Yes, and you've got to remember that Comtrak was added at the end of February '06. Comtrak does have higher characteristics. And we did look to have Comtrak also increase our Company owned drayage operations.

Did I hear you right that ex Comtrak basically revenues and volumes both were down about 5% for intermodal?

Yes.

You gave a share count guidance of 41 million fully diluted I believe for '07?

Yes.

Where did your share count end the year? I got 39.8 averaging for the fourth quarter. Where did you end the fourth quarter?

I think for the fourth quarter we used 39.6 in our diluted calculation.

You are assuming that there's no share repurchase, I'm guessing then, and that there is some option activity?

Yes, right. There will be some more vesting of restricted shares. And we don't have any share repurchase baked into our forecast. And I didn't mention that, so thank you for pointing that out.

But directionally, I'm guessing if the Board authorized it, and you have a cutoff date of July, should we expect to see some share repurchasing or not?

To clarify, it is June '08. So we've got -- we've got a year and a half to do it. But I will let David answered the directionally.

Of course, number one, what we would like to do is we would like to be able to make some acquisitions. We're going to be -- continue to go on that quest and on that road. But certainly the share repurchase is not necessarily out of the picture for 2007, but we would really like to use our cash to make some more accretive acquisitions.

On the acquisition front, what is the kind of sweetheart size range you are looking for? And I think Tom said drayage and truck brokerage -- I just want to confirm those are the two areas you're looking mostly at, but can you talk about the size as well?

There is really not a lot of large drayage companies that you can purchase. I think Comtrak, who was the best -- is best in class -- is probably about the size that we would be looking at, probably even smaller. Maybe on a magnitude of anywhere from 20 to 30%.

From a truck brokerage perspective, there is still the -- of the guys that are private that are potentially salable, we really haven't identified anybody that has gotten into a realistic value for what their business may be worth. So I would say if I was a betting man that any acquisitions will probably more so be towards the drayage than it would be for the truck brokerage. But again we will be opportunistic with the truck brokerage if it occurs.

And when you think about the environment out there in your core business, we are obviously seeing rail volumes that have come down materially in intermodal. How do you think about the profitability of your business in a weak volume environment for the railroads versus a strong one?

You're able to expand some yields here. How sustainable is that? And over time would you prefer -- I'm guessing you would prefer a stronger volume environment than a weaker, but yet your growth has accelerated on a net revenue basis.

Right. But I think the good news is is that our business model really does work in any economic environment. We definitely -- would we desire to increase our volumes? We certainly would. But we're going to continue to focus on our yield. And if we're given a choice of intermodal growth versus yield growth, as in either or, we're going to go with yield every single time.

And we have been taking a hard line on margins and saying no to business with inadequate margins. We have also been taking a firm stance on recovering our accessorial costs. So I really do think that we are well-positioned. We're going to continue to maintain that focus, because we think that is how we're going to get better and better return for our shareholders.

If we talk about the economic conditions, if they do slow, what we have traditionally been able to do is, if in fact we do have to reduce our rates, we are usually able to reduce our costs that we're paying to our suppliers. In addition to that, I do think that if the economy does slow, customers look for ways to save money. If we're anything with intermodal, we are less than the truck. Many people may put up with the extended transit during an economic slowdown to convert to intermodal.

I think the last, but not least thing, is that with our asset light model, we only own 23% of the containers that we ship on a daily basis. Thus we have 77% which is owned by other entities, such as railroads. And in case of a slowdown we can flex down. Truck brokerage, we own no assets. Drayage, we purchase 70% of our overall services from third-parties. And of the 30%, two-thirds of that that we do own -- well, through contract -- is owner operators. We have very little exposure.

When I see your yields that expanded so much in this quarter, 240, how should we think about that? You're giving less rate to the railroads than you are getting from your customer in some form right now. Do you think of that because the steam ship carriers that you compete with to some degree are raising their rates higher all of a sudden, which gives you a little bit of push in with your customer?

As long-term contracts come up should we think of it as a transloading versus direct impact? Should we think of it as the returns on assets for the railroads are somehow helping your margin? How do we think of about the expansion on the intermodal side?

I think there is a couple of things. Number one, we are seeing better returns with the railroads. When we look at our fleet, it is actually operating today substantially better than it did even several months ago. So that has helped. We're also learning. We're relatively new, if you will, to the network -- acting as a network versus a transactional player. We're getting better and better at managing our network effectively, and so that is helping us increase our margin overall.

To your one point with the steamship lines and some of the contract renewals, I'm sure you may have seen Maersk's announcement that they are going to restructure their inland services, and basically reduce the number of inland shipments they have from 250,000 down to 50,000. That in my mind is going to be a tremendous boom for domestic intermodal.

One last question, and I will let someone else have it. How should we think about the impact of fuel as year-over-year fuel is down for the first time in a couple of years? Was there an impact, a benefit, or a hurt on fuel net net as you look at it? How do think about that?

As far as fuel, we are pretty straightforward in as much as we don't really set fuel for most of our customers. 70% of all fuel surcharges that we bill our customers is that customer's fuel surcharge. So we have got about 30% where it is set by us. And that is basically adjusted on a weekly basis according to the price of diesel. We're really focused on -- what we don't want to do is lose money on fuel. So I think in any fuel environment going forward that we're pretty well situated at this point.

In the quarter though versus other quarters, was there benefit or worse than other quarters or kind of similar to what we have seen recently?

What you have seen -- this is Tom -- what you have seen in quarters past with us, we usually talk about a volume component. And then there is usually a pricing fuel mix component that usually has a positive number to it. This quarter it was pretty much flat when all that stuff gets put together.

Michael Halloran, Robert W. Baird.

Just a question on the demand trends in the quarter. I know you talked about the Wal-Mart volumes and the auto volumes contracting a bit here. But could you just comment how demand trended through the quarter and then into this year as well?

I can comment on how it did for the quarter. Again, the peak was not as strong as it had been in the prior two years. But certainly in all the key gateway cities, and particularly on the West Coast, we had -- demand exceeded supply at that point in time. Was it a little bit smoother? Was there more intact shipments? I think all of that may have contributed to it. But certainly as the steamship contracts are coming due with the railroads and they are seeing the significant change in up to what domestic market pricing may be, I think that will be a real opportunity for intermodal in the coming quarters.

It seems to me you are saying that on the volume side of things the outlook remains pretty decent. Could you couple with just a qualitative discussion on when you look at your intermodal portfolio, and you're doing a pretty good amount of yield management over the last couple of quarters, how much more opportunity is there still outside of your baseline continually looking at the yield part as more of a broad base significant platform there?

I think the good news is that we have been able to make a lot of improvements in the network. And maybe the good news is that there is still more juice in there. The bad news is we haven't squeezed it all out yet. So we do believe that there is more opportunities within our network to continue to expand our margin. But it takes hard work. There's really no one light switch that you turn on and off in order to do it. And it is basically plodding away and saving pennies to let them create nickels, quarters and dollars.

Fair enough. Last one here then. Just looking at '07 and then CapEx and then your expectations for bringing containers on, what kind of CapEx are you looking for? And then additionally do you guys have plans on bringing containers in for next year as well?

CapEx for '07 is estimated in the $10 million to $11 million range. And that is exclusive of containers, if we are to buy any. Right now although our plans aren't finalized, we would expect bringing in 1 to 2,000 containers into our network.

That is net additions?

Yes, net it could be closer to -- yes, net would be 1 to 2, right.

Todd Fowler, KeyBanc Capital Markets.

I guess a couple of more follow-ups on the volume side during the quarter. First with Wal-Mart, was that loss of business? Was that a reduction in Wal-Mart volumes? Maybe a little bit more color about what is going on there. And then how do you think about Wal-Mart kind of on an ongoing basis in 2007?

They of course are a very traditional retailer. They have significant needs off of the West Coast. We prefer with our retailing relationships to have those which are -- whereby we are used in the aggregate, and not primarily as just a peak carrier. This year our available capacity candidly went to those which are customers which are a little more year-around in nature. So on a going forward basis I don't see a tremendous amount of volume going up with Wal-Mart.

I guess with overall volumes in the quarter, was most of the pressure from the truckload market on the pricing side, or did you actually see some intermodal volume go back to the trucks during the quarter?

That is a good question. I don't think we saw a lot of conversion back to truck at this point in time. I mean the trucks are going to get more aggressive, there is no question, with the softness in demand currently. But I don't -- they will go after shorter haul freight. And they will expand maybe from the 600, 750 mile range to 900 miles, 1,000 miles. Our core businesses for the most part is transcontinental in nature. So we don't see them having as much of an impact.

But there is some impact, I guess, on the pricing side though?

We are seeing truck rates at this point being very soft.

That is helpful. Then I guess looking at Comtrak, the sense that I get is that it has been progressed at least in line with what some of the original guidance that you put out there was, if not slightly better. Is there more opportunity for organic growth for Comtrak into 2007, more opportunity for yield improvement with Comtrak on a go forward basis as well?

This is Tom. On the yield side, we got good benefit from Comtrak this year in the yield, both Comtrak improving its operation, as well as Comtrak improving our Quality Services operation. We talked about the margin expansion that was included in the fourth quarter. Some of that margin expansion was in fact the addition of Comtrak, and then Comtrak improving our own operation. Will they be able to improve our own operations as much next year? It is hard to say. I don't know if I would count on that again. But relative to Comtrak's growth and expanding into new markets, Dave, do you want to cover that?

Yes, I feel very strongly that we can grow organically, and we will continue to do so. We would like to make some tuck-in acquisitions into Comtrak. But either way we will be growing that operation. So yes, we do intend to grow it.

I think I get the idea. Then I guess just to follow-up with that, Dave, with the acquisitions it sounds like there were a couple ones that you guys were pretty close on. Would you care to comment in particular why those acquisitions didn't come to fruition? Was it from an evaluation perspective, or some of the other metrics that you guys have laid out in the past?

Really it was -- the companies that we're looking for are ones that definitely will fit in to our culture as well as our business. The valuations really weren't initially much different than the Comtrak valuation, which was in the 4.5 to 5 range. But then as we looked to forward-looking visibility, that is where the -- once we started getting really digging into that, that is where it caused us to maybe back away. So maybe expectations were a little bit too high going in. And then as we did our work and really got behind the numbers, we said that it doesn't make sense.

Alex Brand, Stephens.

Nice quarter guys. I wanted to drill down a little bit with you, Dave, if I could on what -- just help me understand what the strategy has been that is driving the yield improvement. In other words, did we progress from a customer focus to now you're doing something that is different on a lane basis or a load basis? I would like you to, if you can, tie that into -- historically I don't think your Q4 yields ever went up from Q3. Was that just Comtrak this year, or is that part of this bigger picture focus?

It is Tom. If we look at items resulting in the expansion, I would say number one was Comtrak. Number two was truck brokerage, and number three was kind of everything else. In that order of magnitude.

Okay. Fair enough.

You're right, as right far as where have we been historically, we have focused on a variety of yield enhancement areas. The very first thing we began to look at was by customer. Then we went by lane. And the most recent yield expansion that we have had a lot of success with has been that for each transaction. And determining -- we were rather surprised when we first discovered that we were actually losing money on transactions. And now some of those could make sense if you're positioning equipment from -- to a deficit market or something. But a lot of them made absolutely no -- had no strategic value at all. So we have been very aggressively looking at each of those transactions and either trying to bring up the revenue, reduce the cost, or get rid of the business.

Is part of that -- I guess just trying to understand how you do that. Are you trying to take new business that is sort of density fill in the lanes where you're more profitable, and try to cut back on loads that are elsewhere, or is that -- am I oversimplifying what is a complex process?

That is certainly a part of it, is to try and focus on -- this is where we've gotten some benefit with the fleet is on focusing the fleet in those markets where -- gives us the biggest yield. And using the more traditional rail equipment those areas where they -- where fleet is not as profitable.

We still may have the same type of profitability by using an independent box, but it is just that fleet doesn't work well there. That has been an ongoing effort. I would love to say that we have fixed it, and we're just zooming right along. But it does require more work, and we do feel as though there is yet more opportunity on how we manage the fleet to its peak yield.

That's kind of good news, because if you already had it all then the outlook wouldn't be as good.

That's true. It is good news and bad news.

My last question, on the competitive landscape, I would like to get a little color as to how you feel that is. Because I'm a little confused by Pacers commentary, which seems to be surprisingly weak. Your seems more kind of neutral, okay, not great. Is there somebody out there that is being nasty and taking share or cutting the prices like there was earlier in '06, or has that kind of cleaned itself up?

It has I think, cleaned itself up to a degree. We are seeing once in a while from that same irrational player from early 2006. Once in a while you will see spurts, but it is much less than it was earlier in the year. And so I do think we are seeing a more rational pricing environment at this point in time.

Well that continue with business levels being soft? I'm not sure, but I do think again that with Maersk, and with other lines, looking at changing and reducing the amount of inland shipments that they will have, that that could have a very -- that could have a significant impact on prices, because customers who do try and compress their rates off of the West Coast may very well pay for that when it comes to the point in the peak when they need that domestic equipment.

Edward Wolfe, Bear Stearns.

What should we think about in terms of gross and net revenue within your guidance of the range of $1.25 to $1.40?

Looking forward we don't talk to individual components on the income statement.

But you did give us guidance on the expense line of $37 million to $39 million.

Correct.

Let's talk to that a little bit. I'm guessing depreciation is going to come off of what will be a bottom here in the fourth quarter, is that fair?

Depreciation will come off of what?

That $1.1 million. Is that going up from here?

Depreciation for the full year shouldn't be going up.

So where are we going to get these expenses up $1 million to $3 million from where you were in the fourth quarter? Is it people in certain places? What should we think about?

We do have two things you ought to think about, in addition to just normal economics -- economic increases. Number one, we did put that performance share plan in place in May of '06. And it is possible that -- in our estimates we've got about $2.8 million of performance share accruals.

What did you have -- what did you pay in '06 in performance share accrual?

If you recall, the performance plan says that for the three-year period '06, '07, '08 there is an aggregate metric that if we hit that metric then the $13.8 million of performance shares will be earned, and then they will vest over the following three years. Basically if you take $13.8 million divided by five years, which is '07 on forward, you would get $2.8 million a year.

And that $2.8 million gets amortized evenly over the year?

Yes, we've got to evaluate it, but yes, if we start booking on 1/1, it does.

And that would be in salaries and benefits?

Correct. And the second item I said, there's two items, we are looking for some headcount increase this year in different business lines, but that would be your other component.

Would you increase your headcount if your volumes were negative?

We would definitely increase our headcount if we had a higher Logistics business. We would definitely increase our headcount with higher truckload business and with drayage. But we're not going to throw headcount over a business with lower volumes.

Can you reduce your headcount in intermodal?

We are always looking at ways to increase our efficiencies.

(OPERATOR INSTRUCTIONS). At this time there no questions in queue. On behalf of Hub Group, thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.