Hub Group Inc (HUBG) 2008 Q3 法說會逐字稿

Good evening, and welcome to the Hub Group third quarter conference call. We'll begin with the discussion of the financial results lead by Terri Pizzuto, Executive Vice President and Chief Financial Officer and Treasurer followed by an overall business discussion to be conducted by David Yeager, our Vice Chairman and CEO. Our company will make a prepared presentation follow by a question-and-answer session. Mark Yeager, President and Chief Operating Officer will join us for the question-and-answer session.

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Comments made by Hub Group employees during this conference call may contain forward-looking statements. Actual results could differ materially from those forward looking statements. Our SEC filings contain additional information about factors that can cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the company or the SEC. Now I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group, please proceed.

Thanks, Denise, and thanks, everyone, for joining us, I want to begin by covering three things. First, we had a record quarter. Second, Hub's in a strong stable and safe financial position. Third, we're happy to see all three of our service lines growing in this tough economy. Here are the key numbers. For the third quarter, Hub's diluted earnings per share increased 7% from 2007 to $0.45. If we take out the one time $1.2 million tax benefit from 2007, our earnings per share would be up 15%.

The third quarter operating margin was 5.3%. That's compared to 5.9% last year. At the end of September, we had $63 million in cash and no debt. Now I'll discuss details for the quarter starting with revenue. Intermodal revenue increased 22%. This change includes a 9% volume increase, and a 13% price increase related mostly to fuel. Local east business was up 22%. What we mean when we say local east, is freight that moves exclusively on one of eastern rail networks. The Norfolk Southern or CSX. A few examples of lanes would be Chicago to Jacksonville, or New York to Atlanta.

Part of this local east growth is due to freight that was converted from truck to intermodal. Truck brokerage revenue was up 29% due to higher volume, pricing which includes fuel, and mix. One of our fast growing truck brokerage customers in the quarter was a government contractor. That contractor had a surge in business because of the hurricane. They chose Hub because of our expertise and proven track record in finding surge capacity.

One of our top five growing accounts is a manufacturing company who started doing business with us in July. This is a great example of a customer who left us a couple years ago for price, and then came back because of our superior service. It's also an example of successful cross selling since we won both their intermodal and truck brokerage freight. Logistics revenue was 20% higher than last year. This increase in revenue came from several new strategic customers that signed up with us in 2008. Our logistics business focuses on delivering savings, providing load visibility and ensuring carrier compliance. Customers want to drive savings and efficiency into their supply chains and we make that happen.

For example, we deliver savings by doing carrier bids for customer and then managing the carrier base. Hub's gross margin grew by $5.7 million in the third quarter - the biggest contributor to the margin increase was intermodal followed by truck brokerage and then logistics. Hub's gross margin as a percent of the sales decreased to 12.3%, compared to 13.8% last year. There are four major reasons for the margin expression compared to last year. Number one, intermodal pricing excluding fuel was down between 1% and 2%. That's the same pricing trend we had in the second quarter.

Number two, we grew with the number of large intermodal customers that have more challenging fuel and accessorial programs. Number three, truck brokerage yield deteriorated 100 basis points, compared to last year, due to soft market conditions and competitive pricing on accounts where we have significant potential to grow. Number four, logistics yield went down 400 basis points. That's because the mix of services we're providing changed, and because we priced more aggressively to land strategic accounts. Hub's total cost and expenses in the third quarter were $35.9 million compared to $32.8 million in 2007.

The major drivers of the cost increase in salaries and benefits are more employees, raises, and higher bonuses and commissions. General and admin expense is up due to a loss on sale of tractors, more marketing initiatives, and driver recruiting costs. We had 1,112 employees, excluding drivers at the end of the September. That's an increase of 26 people compared to the end of June. We added people in customer service, truck brokerage, and at Comtrak. We'll continue to critically evaluate all our costs. Hub's third quarter gross operating margin was 5.3%, which is higher than the 4.9% we had in the second quarter.

We're confident that we can improve our operating margin over the long-term, by being more efficient with our intermodal and drayage operations, managing equipment more effectively and increasing margin on specific customer accounts. Cross-functional teams meet every week to monitor detail action plans to improve the margin on these customer accounts. Part of the reason Hub is in such a strong financial position is because we're resilient in any economy. We have an asset light model and a diverse customer base. No one customer is more than 5% of our sales. Many of our customers are large stable companies. Products that we ship include toilet paper, soup, cereal, canned goods, baking soda, tooth paste and other staples that will be consume in any economy.

Now turning to the balance sheet and how we used our cash. We had $63 million in cash and no debt at the end of the September. Our cash is invested in treasury securities. Hub's $50 million revolving credit agreement expires in 2010. Free cash flow for the third quarter was $10 million. During the quarter, we spent $5 million on capital expenditures. Most of that was for tractors at Comtrak. For the full year we still think capital expenditures will be around $11 million.

We now have all our 1,000 new 53-foot containers. These containers were financed with operating leases, that have about a six-year term. We bought 38,800 shares of stock in the quarter, for $1.4 million in connection with the share buy back plan. With the turmoil in the financial markets we decided to cancel our share buyback plan in September until things in the credit market settle down. There is $73.6 million remaining under our current share buyback authorization, that doesn't expire until June of 2009.

Now, I'm going to discuss 2008 full year earnings guidance. For 2008, we're comfortable that our diluted earnings per share will be within the current analyst range of between $1.65 and $1.70. Partly because of the economy, we're estimating we'll come in at the low end of this range. As a reminder we had at one time $0.04 a share tax benefit in the fourth quarter of 2007, relating to resolution of a dispute with the IRS. The weighed average diluted shares will be about $37.5 million for 2008.

To wrap it up, Hub had solid performance in a weakening economy. Our operating income increased over 10% in the third quarter. We've only just begun to rev up our sales engine, and take operational efficiency to the next level. We're looking forward to executing on our strategy. And with that, I'll turn it over to Dave.

Great. Thank you Terri. Despite a sluggish economy we posted another record quarter, generated impressive intermodal growth and also saw double digit gains in truck brokerage and logistic revenue. Our intermodal business performed very well in the third quarter, as Terri said, intermodal revenue was up 22% with volume growing at 9%. This is the highest volume growth in well over five years. The structural changes we made a year ago were key factors in achieving this volume increase, and it positions us well for future growth. We are particularly pleased with this performance given the slow economy. Although our retail customers were down for the quarter, we were able to overcome that sector's declines by adding new customers, and growing our business in all other segments.

Intermodal service was quite good during the third quarter. Our metrics showed service improvements in many of our heaviest shipping lanes. The rails made significant investments in their infrastructure and these investments have resulted in quicker and more consistent rail transit. Intermodal capacity has generally been adequate. As expected, we did see capacity tighten considerably off the west coast as we entered peak season although the peak did start a little bit later this year than in '07. We also saw an improvement in our ability to move ISO containers near the end of the third quarter. These ISO containers were scarce earlier in the year, but currently are accessible in most markets. The container fleet is now over 15,600 units, and will grow to 15,900 by year-end.

Despite a slightly larger fleet, our utilization again improved the third quarter through a combination of improved rail service and our own improved equipment management. Fuel prices dropped considerably in the third quarter. But even with lower fuel prices, intermodal still has a significant price advantage over truck. We expect there will be interest in converting from truck to intermodal for the foreseeable future, particularly in this soft economic environment, where companies are eager to save money. Since it is more fuel efficient, intermodal is also more environmentally friendly then truck. The US Environmental Protection Agency recently awarded Hub Group it's SmartWay environmental excellence award. We earned this award because of our continued effort to convert business off the highway to intermodal.

This conversion results in reduced green house gas emissions in the environment. Hub Group was one of only three logistics companies to receive this award, and we do intend to continue to partner with our customers to help them reduce their carbon footprint by converting over-the-road business to the environmentally friendly intermodal product. We continue to be very positive about the future of intermodal even its potential growth. We expect to see continued intermodal volume growth in the fourth quarter.

We did see faster volume growth at the beginning of the third quarter than at the end primarily due to the economic slow down. As a result of the slower economic environment, we do not expect a particularly long peak season this year. And given these economic issues and tougher comparables in '07, we expect our intermodal volume to grow between 3% to 6% in the fourth quarter.

Our brokerage business growth was impressive during the third quarter with revenue up 29%. We continue to generate new brokerage business with some of our existing intermodal customers, and have been successful in generating interest from some customers that are completely new to Hub. In some markets, truck capacity was tight during the third quarter, but overall, truck capacity was better than we had expected, at the time of our last call. We continue to see capacity exiting the marketplace, but with a slower economy, there is also less freight to handle and as a result, capacity as we speak is generally plentiful.

Our Unyson Logistics business also had a nice quarter with revenue up 20%,, as we completed on boarding of two significant new pieces of business during the quarter. Unyson recently won the Quest for Quality award from Inbound Logistics magazine. This prestigious award is determined by customer survey data. We're proud that Unyson, despite being quite a bit smaller than some of the competition was the number one ranked 3PL. We believe our top ranking indicates the value that Unyson is bringing to its customers.

As I said earlier, our growth has been helped by the changes we made in our sales organization one year ago. Since this change, we have had 15 salespeople leave the organization, and we've added 18 new sales professionals. We've also added a layer of professional managers, whose job is to help our sales people understand our customers, our product, and our network needs. We also created an enterprise sales group, which is made up of our top performing salespeople whose job it is to focus on multi-million it dollar opportunities, and develop collaborative relationships with these large customers. And finally, the re-alignment of our pricing group within sales, rather than yield has helped us price more strategically.

In conclusion, we're proud to deliver another record quarter. We grew our intermodal volume by 9%. Our truck brokerage revenue by 29%, and our logistics revenue by 20%. We have a more directed and energetic sales force, and with our flexible asset light model we're well positioned for the future. We look forward to continuing our growth as we finish 2008, and at this point in time we'd like to open it up to any questions you may have.

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Your first question come from the line of Ed Wolfe from Wolfe Research, please proceed.

Hello Ed. I don't believe he's there.

Hello.

Oh, hi Ed.

Hey, I'm sorry I was talking, but the mute button was on.

No problem.

First of all, my condolences for your father.

Thank you very much.

Can you talk a little bit about the change in the model. If you look at the last two quarters, instead of the focus being on operating margin improvement, the focus being on volume growth obviously, how much of this is kind of planned and how much of this is kind of taking what the market gives you. And when we look out at what point do you expect to start to see margin improvement as well as growth?

That's a very fair question, Ed. I think that first of all, we have become more aggressive in trying to grow our overall volumes, and that's really in all segments of our business. We are at the same time, working toward margin enhancement. While it may not be reflected quite as obvious with the numbers that we just posted, we are being very aggressive. We're having meetings on a regular basis to expand the margins.

Any time you take on large new customers, a lot of times it may be a smaller margin levels, but those again are something we worked at before. We've been able to expand the margins over time as we better learn the business, as we get better balance in certain markets and segment as we find new carriers who may be interested in the highway business, and so this will be an ongoing process, and I am hopeful that we'll be able to reap some benefits from this pretty quickly.

The intermodal volume is up 9%, what's the visibility as you go forward. You were obviously last quarter, said I've got great visibility. We feel like this is outside of the market and it's -- we're comfortable, how comfortable are you the world's slowed down again that you can continue to grow volumes like this.

Well, we think that the 3 to 6 range in the fourth quarter is certainly very reasonable. You know our retail business was down 1% again in the third quarter, despite the fact that we did add, we actually gained some share and added a significant retailer to our overall portfolio, so it's a very tough market for that, which is a very large business segment for us. But we've been able to make it up in consumer products, etc., so we do feel very good about the growth, where we are right now, despite the fact that retail is down and we've also had some market deterioration in handling other transportation company's business.

Last one then I'll pass it forward. The share re-purchase, I was a little confused by the comments, have you temporarily frozen it, or is the $73.6 million remaining been wiped out and you've got to get reauthorization to start-up at some point.

No, that's still out there Ed. We had a 10-B five plan in place, but we canceled in September, with all the market turmoil. But our $75 million authorization that we had originally is still out there and there's $73.6 million remaining on it.

And are you still using that or is that frozen temporarily?

No, that's not frozen. We have a board meeting coming up. The authorization is not frozen. We have a board meeting coming up November 4th. One of things we'll discuss is share buyback. The plan itself that we had in place was cancelled.

Right, when we saw the credit markets begin to fail and it was right on September 29th, we kind of - -we had -- it was falling below the mark that we had for our plan, and so we just stepped in and thought it would not be a prudent use of cash at that time to be purchasing shares, until we understood better where the credit markets were and everything else.

Okay. thank so much for your time. I appreciate it.

Thank Ed.

Your next question comes from the line of Alex Brand from Stephens, please proceed.

Thanks. Hey Dave, hey Terri.

Alex.

Is Mark around there somewhere too.

I am Alex.

Hey Mark. Terri, can you give us some of the industry vertical growth rates or declines as you have you have in previous quarter?

Sure. Our retail as Dave said was down 1%, and in Q2 it was down 13% That is predominantly because we added some big new retail accounts and grew with some existing accounts. Consumer products was up 15% in Q3, and it was only up 7% in Q2. That was predominantly food companies. And then durable goods was up 8%, where it was only up 4% in Q2. Primary drivers of that are electronics and white goods. And then transportation, which was up 32% in Q2 of '08 was only up 13% in Q3 of '08.

Okay. So what percent age now is retail, is it under 20% now?

No it's 23.2% of our sales in Q3.

Okay. And then you know, I guess, Dave, sort of wrapped all into Ed's question on profitability. I'm trying to understand the gross margin pressure, Correct me if I'm wrong on this, but it looks to me like your EBIT margin deterioration is really a function of your gross margin deteriorating, and I just want to make sure that that's not because you're pricing more aggressively, is that more related to, just takes time for you to ramp up and you haven't grown volume like this in years, as far as I can recall. And so we should expect that to kind of work itself out, how are you guys thinking about that?

Well, Alex I think across all three business lines you did see some significant ramp ups right and anytime you're bringing on new business, there are costs associated with that. In addition, you're not as effectively optimizing that mix as of yet. So I think that is certainly a part of the equation. I think you also have to look enterprise accounts are up 19% for us in the quarter, and enterprise accounts are inherently more competitive than smaller shippers. So when you're going to grow with enterprise accounts there's a need to price more aggressively, however we are confident that over the course of time, we're going to be able to improve the performance of that new business.

Yeah, it's difficult, you know, to manage the accessorials so we need our operations and customers service team to be in lock step, communicating timely with the customer and when you're initially bringing on a lot of new volume for a customer that's hard to get straight the first time. You've kind of have to work through it. For example, we set up pool for certain customers. Setting up those pools we can't bill them for, so it's an initial ramp up cost.

And finding the right freight capacity, making sure you're finding right solutions, once you learn the behavior your better able to make sure you get the right fit for that particular customer. And you know, the same is true with finding capacity on the highway side, and also with realizing savings on the logistics side, so anytime you're in a start-up mode, generally speaking your costs are going to be a little higher and you're margins a little bit more narrow than when the business is matured.

I guess I'm trying to understand then, it seems hard for any of us to make a bet on the volume growth continuing in '09 in a recession. And it sounds like you guys are pretty confident that you can sort of go back to focusing on profitability, until you get through this, and grow your earnings, and you know, comment on that if I'm reading that wrong with you that's what I'm hearing.

Well, in an ideal world we'll do both. [ LAUGHING ] I think that, you know, I do think that we feel as, though we're very well positioned from a growth perspective. I think, this sales force re-alignment and some of the changes we've made within that and within the pricing area, I think have been, the effects are just being felt, and I think that we'll continue to see improvement in that, but again, at the same point in time, Alex we're not going to forget our roots. We're going to be very aggressive on margin enhancement and figuring out how to create operating efficiencies so that in fact, we get up to all the accounts up to a reasonable margin level.

Okay. That's good color. Thank for the time, guys.

Thanks, Alex.

Your next question comes from the line of John Barnes from BB&T Capital Markets

Hey afternoon guys.

Hey.

Following up on your last comment there, getting all your accounts up to an appropriate margin level, what percentage of your accounts do you believe fall below that right now?

You know, there's a lot fewer that are negative, especially on the truck brokerage side right now. We don't have any negative margins to speak of, so that did get better. There's, some freight that we took strategically where we priced it in order to get it. And as Mark said earlier, with those big enterprise accounts, that we want to penetrate and so as that works into the system, we should be more efficient on the cost side, and so we think it will improve.

Yes, we don't have a lot of customers that in the aggregate that are under performing in acceptable levels and there are some lanes and specific transactions that offer us some room for improvement. A lot of that is getting to know that business better and understanding how to operate it more effectively. I don't have an exact number for you. It's too much, no doubt we are going to work on it. We are working on it every day. But it's also just an actual part of the onboarding process. And John, to pibby back on Mark's comments, it's no so much necessarily each customers specific margin, it is more lane specific. Right. And so that's where we'll be focusing on, and again that could be through dray efficiencies, it could be through finding a better highway carrier. There's a lot of options available, a lot of tools in the tool kit that we'll be deploying.

All right. Is there, you know, can you give us an idea, I mean of the average account that's below the appropriate margin level. Are we talking a couple percentage points, are we talking -- you've got a double the margin in that business to get it where it needs to be, just on average how much improvement are we talking about?

It really depends on each customer, because every one is so different.

There is no average. I would say that, you know, there is some large accounts we just brought on that we may want to double or even triple the margin.

Sure.

But again, if you start off with a, a small margin, it's a much easier to get some kind of a multiplier effect.

But we do have a target margin for all of the low margin accounts that we have identified. We've got a dollar amount that we're shooting to get.

But those are customer specific because, for example, we would have a tolerance, a higher tolerance for shippers who are year-round off the west coast in term of what's an acceptable margin versus somebody who's a peak shipper, maybe out of Seattle for example in October, or a customer whose feeding the west coast. Clearly our margin tolerance would be lower for them, than what it might be for someone who's doing business with us on a spot basis.

All right. Taking your comments about, you know, cancelling the [ten B five] program and trying to get a feel for the credit markets and that type of thing has that changed your thought process in terms of acquisitions?

No. We're still actively pursuing acquisitions. We very much would like to go in that direction. We just thought at, at the time, because an acquisition obviously I think is going for more accretive at this time a than just a stock buyback, we just felt with the turmoil that was taking place within the market, that it would be better to have some cash on hand. In all candor, this turmoil could result in some decent acquisition opportunities arising.

Do you have anything in the pipeline currently?

I wish I could say, yes. No, we -- .

Okay. Very good. All right. Nice quarter, thanks for your time guys.

Thanks John.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Todd Fowler from KeyBanc Capital Markets.

Hey good afternoon everybody.

Afternoon Todd.

Dave or maybe Mark, can you talk about the impact of fuel here during the quarter, I guess, maybe just generally, I'm assuming that your plan -- you have a lot of general fuel surcharges with your customers, than the rail carriers, but is a fuel a net benefit or net negative in a declining fuel environment like we saw during the quarter. And any context around the impact on margins would also be helpful?

Well, I think we said in past conference calls about 70% of the fuel surcharges that we charge our clients are developed by our clients. And so we made the decision years ago when this first became an issue, to look at the customer in the aggregate.

We have certain clients which have very punitive fuel surcharges so when they do, what we do is we have a very aggressive margin focus and price focus on them, so you, so that when we look the aggregate margin on that account. Fuel is just one component of that cost. And so we try to, fuel is just a component more so than anything else.

Yes, I think just to add to that from a timing perspective, basically our costs and our fuel charges are closely linked from a timing perspective. Most of them are adjusted on a weekly basis. We have some customers that have a lag a month or quarter, so obviously as fuel went down that would be a benefit. There's one large rail carrier that only adjusts on a month, so that would be a head wind in, in a declining fuel situation. But basically the majority of our business, our costs are aligned with our, our charges.

Okay. So if I kind of understand all of that basically, either it's difficult to really, kind of put a number or quantify what fuel is at the quarter or maybe it all come out in the wash and there's not a significant impact one way or another.

It's not a significant impact.

That's exactly right.

Okay.

I think you guys are aware, we don't have any kind of below market fuel deal with any of our underlying providers either.

Right. Right. I guess I'm looking at the growth in the local east. I would assume that because those are (inaudible) the margin of shipments are a little bit lower, is that a fair assumption, also at this point, what percent age of overall movements are local east versus the traditional transcontinental moves.

Yes, the margin on those Todd is pretty comparable to the margin on our other freight. So it's not any lower, and I think it was about 25%.

Yes, a little more. A little more than 25 this year.

25% in the third quarter?

A little higher than that, I think Terri's doing the math right now.

Oh, okay. I think my next question is for Terri so I'll let her get through the math and then ask her.

Yes, it's about 28, it's about 28%.

28%. So obviously our mix is shifting.

Sure.

Toward the local east.

Yes, our average length of haul actually went down about 3%.

Okay. And then Terri you mentioned some hurricane relief work during the quarter, was that all that on truck brokerage side and any point of information from an earnings standpoint on how big an impact that might have had.

You know Todd it was all on the truck brokerage side, and it was a couple million dollars in revenue.

Okay. And then just lastly, Dave, if you could, refresh your memory, if I remember correctly last year, it seemed like the peak season started a little bit later during the fourth quarter, During your prepared remarks, the capacity seemed tighter off the west coast, but it seems like your a little bit cautious in the outlook, but rightfully so given whats going on in the environment. If you had to think about the chances of seeing a later peak, based on what you saw last year, is there anything that would kind of line up and give you an indication that we could see a similar trend or, is really the expectation that what we've seen recently is probably going to continue for the rest of the year?

As far as the peak, this actually '07 was a little bit delayed but not a great deal versus '06 and '08 is even more delayed than '07. We started it see some contraction in the overall availability of equipment on the west coast. Probably about three weeks ago, and then late last week, it actually capacity became quite available in the port cities, which I think is just a reflection of the very weak retail demand you have right now. The imports just aren't coming in.

So we have that within our volume forecast. We're accounting for that, but retail, we don't believe retail is going to have a stellar rebound by any stretch during this quarter or the first quarter of next year. So that's all built in there. I was talking to one railroad executive, and he mentioned that he had understood that some of the lines may begin to be looking, because fuel and fuel surcharges are dropping so much, may be looking again to reduce some of they're all water service from the far east to the east coast. Of course, that could benefit us as well, but I think that has yet to be seen as far as what the outcome will be with, with the steam ship companies.

Okay. good. Now that's helpful, thank a lot.

Thank, see you, Todd.

Your next question comes from the line of Jon Langenfeld from Robert W. Baird. Please proceed.

Good afternoon. Dave, just kind of started to answer this question, but I wanted to know if there are any didn't --(static) I'm sorry. Hello?

You have static here.

Hold on a minute here. How's that? That's I'll catch you guys offline.

Sorry about that. Yes, that was definitely his end.

We have no further questions in queue. I'll now turn the call back over to Dave for closing remarks.

Okay. Great. Well thank you again thank you for joining us on the call. As always, if there are any additional questions that come up or etc., please feel free to call Terri, Mark or I. Again, thank you, very much, for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.