Hub Group Inc (HUBG) 2009 Q1 法說會逐字稿

Good afternoon, and welcome to the Hub Group first quarter conference call. We will begin with a discussion of the financial results led by Terri Pizzuto, Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The Company will make its prepared presentation, followed by a question-and-answer session. Mark Yeager, Vice Chairman, President and Chief Operating Officer will join us for the question-and-answer session.

At this time, all participants are in a listen-only mode. Comments made by Hub Group employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could 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.

Thanks Nikita, and thank you all for joining us. I want to begin by covering three things. First, we generated $28 million of free cash flow during the quarter. Second, we had a few one time costs. And third, management is focused on maximizing gross margin. Here are the key numbers. For the first quarter, Hub's diluted earnings per share was $0.17. If we we add back the one time expenses for bad debt, severance and income taxes that I'll talk about later, we made $0.20 in the quarter. Hub's first quarter operating margin was 3%. That's compared to 4.9% in 2008. At the end of March, we had $113 million in cash and no debt.

Now I'll discuss details for the quarter, starting with revenue. Intermodal revenue decreased 19%. This change includes an 11% decrease for fuel, a 5% volume decrease, a 2% price decrease and 1% for unfavorable mix. While we don't like to see the intermodal volume decline, we did preserve our market share, since overall domestic Intermodal volume was down in the quarter.

The biggest chunks of our volume decline came from two customer bankruptcies and declines in our wholesale and ISO businesses. Linens 'N Things, a former customer that liquidated, and Smurfit-Stone, a customer that went bankrupt this quarter, accounted for about 35% of our volume decline. Wholesale and ISO accounted for about 90% of our volume decline. If you exclude our wholesale and ISO businesses and the bankrupt customers, Intermodal volumes would have been up 1%.

Truck brokerage revenue decreased 24% due to lower volume, lower fuel and unfavorable price mix. Mix change, because our length of haul went down by 70 miles or 8%. Some of the asset-based carriers are pricing the longer hauled freight more aggressively. This contributed to both our volume decline and the shorter length of haul. Truck brokerage volume is down because of the slow economy and because some of our customers are converting freight from truck to Intermodal.

Logistics revenue was 18% higher than last year due to new customers we landed in 2008 and an increase in business with existing accounts. This group is off to a fabulous start in 2009. We were recently awarded business from several new customers. In this economy, customers are looking for savings, and that's exactly what logistics delivered.

Gross margin as a percentage of sales, was 12.8%, which is a little higher than the last half of 2008 . Last year we told you about an issue with truck brokerage taking freight with unacceptable margins. We fixed that problem. In fact, truck brokerage yield improved significantly compared to the last half of 2008.

Total gross margin went down by $12.3 million. In order of magnitude, this margin decrease came first from Intermodal and then truck brokerage. Intermodal pricing was down 2% for the quarter. We saw prices decline as the quarter progressed. Mix also contributed to the Intermodal margin decline because our length of haul went down and we had changes in customer mix. Our length of haul was down by 100 miles, or 5%. That's because we grew our local East business and our Transcon business was down. Another contributor to the decrease in gross margin was Comtrak our drayage Company. Comtrak's gross margin was lower than last year because of lower volumes and pricing pressure. Maximizing our Intermodal margin is a top priority. Dave will tell you more about some of our margin improvement initiatives in just a few minutes.

Total costs and expenses were $34.5 million in the first quarter. That's compared to $36.5 million in the first quarter of 2008. Most of that decrease relates to lower bonuses and head count. We also had lower commission, professional fees and travel and entertainment. These decreases were partially offset by an increase in bad debt expense. As I mentioned earlier, one of our customers went bankrupt, and that cost us $0.5 million in bad debt expense. We had 1,004 employees, excluding drivers, at the end of March. That's down 95 people compared to the end of the year. We successfully executed our restructuring plan and had $900,000 of severance in the quarter. We expect that our cost and expenses will be in the range of between $33 million and $34 million a quarter for the rest of 2009. The gross operating margin was 3%, compared to 4.9% last year.

The effective income tax rate for the quarter was 42.3%. In February there were changes in the California and Wisconsin state income tax laws. Because of those changes, we had a onetime cost of $400,000 in income tax expense. For the rest of the year, we're estimating a 39% effective tax rate.

Turning now to our balance sheet and how we used our cash. During the quarter, we spent $1.4 million on capital expenditures. As I said earlier, we ended the quarter with $113 million in cash and no debt. We generated $28 million of free cash flow. We're continuing to look for acquisitions that are consistent with our strategic plan.

As we look ahead to the rest of 2009, the economic environment is very uncertain. This makes it difficult for us to estimate our earnings. We received some feedback on bids, but it's hard to tell if the volumes that we were awarded will materialize and what will happen with pricing. We know that price willing be down; we're just not sure how much.

Rather than providing annual guidance, we decided it would be better to look at two ends of the spectrum, with Intermodal volume and pricing to determine how our earnings might fluctuate. At one end of the spectrum, we looked at a scenario where Intermodal pricing is down 5%, and Intermodal volume is down 10% for the rest of the year. If that happens, we estimate our diluted earnings per share for the year would be about $0.78. On the other hand, if intermodal pricing is only down 1% and volume is only down 5% for the rest of the year, we estimate our earnings per share for 2009 would be around $1.23.

To wrap it up, we feel we're in a good position to weather this freight recession. We're financially stable, with no debt, $113 million in cash, a talented team and very strong cost controls. And now you'll hear from our CEO, Dave

Great. Thank you, Terri. As you heard from Terri's review of the financial results, we had a decent quarter, relative to the challenging environment we're now facing. As Terri said, our Intermodal volume declined by 5% for the quarter with the bulk of this decline in our niche wholesale and 40-foot ISO businesses. Our wholesale business is extremely price competitive. In some cases our wholesale customers were able to find spot pricing at more favorable rates. Our ISO business struggled with capacity, especially in March, due to a significant decline in imports, while the volume of our big box customer direct Intermodal business was basically flat during the quarter.

Our Intermodal customer base is extremely loyal, thanks to our combination of service, price and capacity. We continue to enjoy good relationships with our top accounts and have been able to maintain our market share with these strategic customers. We've also consistently been adding new customers and have started to grow our share with a number of high potential clients. As we discussed during the last call, there was an unprecedented level of Intermodal bid activity during the first quarter. Thus far, we're pleased with the preliminary results. We've either formally received or expect to receive awards that will protect our market share despite the aggressive bid environment. We now face the annual challenge of integrating this business into our network and working to improve the profitability of the awards.

The railroads continue to maintain fluid networks, and service on all major railroads is excellent. Intermodal equipment capacity was also quite plentiful during the first quarter. As Terri said, our Intermodal pricing was down 2% for the quarter. In order to reduce margin compression, we have made the purchasing of Intermodal services a top priority. We've had numerous discussions with our rail partners about the softening market and the need for railroad pricing to adjust. We have had some very limited success thus far with the rails on these initiatives, but these discussions will remain a work in progress. But we're not relying solely on our rail partners to reduce costs, as we believe there are substantial improvements to be made to our internal operations. An area of opportunity is route optimization. One of Hub's advantages is that we can source equipment from numerous fleets, including our own. Each of these sources has different costs and service levels. We currently utilize the optimal route less than 66% of the time. Now there's not a simple fix to this opportunity, but we're very focused on it and prepared to makes asset and lane adjustments where appropriate to enhance our margins. And consistent with our operating model and strategy of route optimization, we currently have about 2,600 of our fleet containers parked. Pricing remains fluid, and we will adjust the number of containers that are parked based on market conditions.

We're also working to purchase our drayage services more cost effectively. We're bidding out our drayage work to take advantage of the soft truck market. We're also expanding our efforts to match inbound and outbound loads to reduce our overall drayage spend. The drayage reload initiative has created some real savings thus far and we expect additional savings as this initiative progresses.

Lastly on the margin improvement front, we have an initiative in place to get back to the basics. We've reengaged our low margin teams, accessorial teams and equipment teams. The teams meet regularly to make sure issues are addressed in a timely manner, and then Mark and I receive progress reports each week. We have faced and solved this margin problem before, and we will do it again.

Our Comtrak operation continues to provide both Hub and contract's third party customers with excellent service. Thanks to the economic downturn, the pool of available drivers is larger than unusual and is also of higher quality. Comtrak opened a new terminal in Harrisburg, Pennsylvania, during the first quarter. Before the opening of this terminal, Comtrak did not have a presence in the Northeast. But despite being new, this terminal already has 33 owner operators working from this facility. As a result of this terminal and the addition of drivers elsewhere, Hub is once again growing with Comtrak.

Our truck brokerage business struggled a bit in the quarter, but it's taking the right steps to get back into a growth mode. Toward the end of the last year and the early part of this year, our brokerage business did not move aggressively enough to replace lost business. During the quarter, this began to improve as we bid out our top lanes to take advantage of lower market pricing. We were then able to use the more favorable pricing in bids and secured some nice wins as a result.

We reduced head count in the quarter by 17 people to make sure that this business is right sized for the current economic environment. Due to these reductions and as a result of improved efficiency, our operating metrics improved substantially in March. This business was a little slow to react to the downturn, but it now has a more appropriate cost platform and is taking the necessary steps to improve revenue and margin.

On the bright side, our Unyson logistics business had a great quarter, with revenue up 18%. We continue to add new customers to this business, signing up three during the first quarter. These customers are attracted by our proven ability to more efficiently purchase transportation, thereby saving logistics dollars. And thanks to our excellent track record, the sales pipeline remains quite robust.

In conclusion, despite the depressed freight market, we generated $0.17 per share of income and $0.74 per share of free cash flow for the quarter. Our logistics business used its proven ability to generate savings to garner new accounts and grow existing accounts. Our truck brokerage business, despite a slow start to the quarter, is making good progress. And our Intermodal business held its own during the quarter. We will continue to focus on the initiatives that I reviewed earlier to ensure we're maximizing our margin opportunities. While we manage through this downturn, we remain extremely well positioned to benefit from the eventual economic recovery. At this time, we'd like to open up the line to any questions you may have.

Thank you. We would appreciate it if each of you limit your questions to no more than two questions each. (Operator Instructions) And our first question comes from the line of Ed Wolfe with Wolfe Research. You may proceed, sir.

Hey, good afternoon, guys.

Hey, Ed.

Hi, Ed.

Can you talk a little bit about -- you said that you started the talks with the railroads, and it's proceeding, but it's tough. How does that work? Do you have to wait for contracts to come up? How long are the contracts? Are different parts of the country different? Can you just give us some sense of those conversations?

That's a really good question, Ed, because particularly in the case of our fleets, there are indexes involved. It's just that these are lagging indexes. And we're not actually so much asking for reductions in prices, but more so trying to move up when these contracts would look at what's going on in the market pricing, and adjust. So it's not just price reductions, discussions. It's also that.

I don't think I got that, Dave. So you're saying that there's -- you're talking about moving up the volume charts, or--?

No. I'm sorry. There are some indexes -- within our contracts where there are areas for price adjustments according to certain indexes. The only thing is that these are very much lagging. The indexes lag too much. We want to get them more real time so that we wouldn't get an adjustment for 2009 until September of 2010. That's just obviously far too delayed. So we're just attempting to move them up to what the more current market conditions are.

Okay. Just a little more detail around the two scenarios that Terri gave about the guidance, depending on the Intermodal volumes. First of all, I'm assuming that since you didn't discuss it, that brokerage and logistics, you have some kind of steady run rate in both scenarios for them?

We do. We have them at their budget amounts.

I'm guessing you're not going to share that with us, but is it somewhere around first quarter annualized?

What we can share with you is that for truck brokerage, we're shooting for gross margin that was equal to last year, and for logistics, a similar run rate to where we're at this quarter.

Okay. And then same question, where does mix stand in these scenarios? Mix was down 1, and you gave pricing and volumes? Do we ignore mix and assume, regardless of that, it won't impact profitability?

For the scenarios I gave, Ed? Is that what we're talking about?

Yes.

It's hard for us to know how mix will impact it until we get the results of all our bids.

Okay. So for now we should just assume kind of 0 for mix in both?

Right.

All right. And then, last one is do you have an underlying rail pricing? Is rail pricing up X in both of these, or down? How do you think about rail pricing?

Actually right now I'd say that we have it more on a flattish mode.

Right.

At this point.

Right.

So I think the railroad's -- again, back to the pricing issue. I think they're empathetic and sympathetic to the realities of the market right now, but they seem reluctant to participate in the downward pricing trends. So we're certainly not going to give up, but that's one of the reasons that we're taking into account so much that we can't rely on the rails to react quickly to these changing conditions. And it's going to be incumbent on us to be absolutely ruthless in our purchasing of transportation, operational execution and also equipment selection.

But it sounds like, even if you're not successful this year, that your rates should be coming down with the rails then in 2010. Is that a way to think about the lag?

Depending upon how rates turn out for the year. And I can't get too far into it, because it is a contractual obligation, but if it ended as of right now that would be correct. The way that the indexes work, it does account for the entire calendar year.

Can you give us an idea of percentages, volume is down 5%. How they proceeded through the quarter and into April?

Okay. If you look at it month over month, it was relatively consistent. But if you look at it on a same date basis, March was a little worse, because we did have an extra day and all, so.

And are you seeing that in April now that you lost a day?

We really don't comment on the current quarter.

Okay. Thanks for the time. I appreciate it.

Thank you, Ed.

Our next question comes from the line of Alex Brand with Stephens, Inc. You may proceed.

Hey, guys. Good afternoon.

Hi Alex.

Can I have two questions like that?

Sure.

Let's see. I guess I'm curious on the cash flow which seemed to be lot driven by working capital. The receivables didn't surprise me so much, but looked like you got a little benefit from the trade on the payables side, too. Is there any timing to that, Terri, or how should we sort of think about the run rate on cash flow generation from working capital?

You're right. It was both receivables and payables and working capital. We just watched the payables a little closer.

Okay. So it's not just a timing issue?

No.

Okay. Terri, you generally, every quarter, give us a breakdown by the verticals of how much the volume changes were? Can you give us that?

Sure. I can give you the primary ones. Retail was down 4%. Consumer products up 4%, durable goods down 12%, and transportation down 13%.

All right. Thank you.

And transportation would be a lot of our wholesale business.

Exactly.

Okay.

I have wholesale broken out separately if you're interested in that. That was down 47 %.

Super. All right. I'm going to slip the third question in here. With regard to your outlook, you've got these scenarios out there. Can you just talk about, -- you're still in the bid process. How far along are you in terms of the awards and having real clarity on volume? And then, as we think about pricing, is pricing potentially still to get worse, because these bids are going to have that much more pressure and a lot of them are going to come to fruition in the second quarter?

Yes. This is Mark. I'll take that one. We don't have as much visibility in the bids as we had probably hoped for, and that's predominantly two reasons. One, we're seeing customers who are going to more multiple rounds than we had anticipated. So bids that we thought we would have wrapped up at this point have yet to be finalized. We've also seen some customers who were not planning on going into the market as of April decide that they are, in fact, going to go to the market and bring some level of business to bid. So there's a little more activity maybe than we had anticipated, and it's a little bit longer than we had anticipated as well. We are pleased, as David said, with the preliminary results we've seen. We are somewhat skeptical -- skeptical about how much of that materializes into bonafide freight. We have seen some price erosion out there and I think, as we think about the market, we're likely to see some further price erosion from where we're at currently, largely as a result of the bid activity that's out there.

All right. That's good color, Mark. Thanks. I appreciate the time, guys.

Thanks, Alex.

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. You may proceed.

Hey, good afternoon, everybody.

Hi, Todd.

I'd like to follow-up to Alex's question, and I'm not sure how you'll count that, so. Count it half for him, I guess. Just with regards to the bid activity, to get a sense of how much of your freight at this point has gone through the bid process and how much is still outstanding? Is it 50%? Is it a quarter? Where is that number actually at?

We've had about 30% of our incumbent business go through the bid process.

Okay. And based on what you're seeing from that, is the pricing you're seeing on some of those bids -- how does that compare to the down 2% here in the first quarter?

It's really pretty difficult to tell, only because we had some changes in mix with customers. And we've got some customers that we're working on where they didn't do a formal bid. They did more an informal bid. So that's why we gave the scenarios we did, because it's just too hard to predict now what is happening with the pricing.

I think that's fair to say. It varies by corridor. Some corridors are much more competitive than other corridors. And I think it would be natural that business that is up for bid is likely to see a greater, in the aggregate -- you know, a greater decline than your entire book of business. Right. So that's going to be the driver behind any accelerated pricing declines that we would see. So you're probably going to see prices fall more than 2% for bid activity that's out there. It's more of a question of what you're able to maintain with your existing book of business to offset that.

No. That makes sense, Mark. That's helpful. What are some of the lanes or corridors where pricing is aggressive and some of the lanes in the quarter where pricing is maybe a little bit more stable?

Certainly Transcon business is very aggressive right now, particularly, and somewhat oddly, to the West Coast, because we're not certain that we're going to see the type of equipment tightness that we have seen off of the West Coast in the fall. So it's a little surprising to us seeing some of the numbers that have come out very aggressively pursuing Westbound business. Obviously we need to compete for the business, because it is important that we can service our customers at peak. But I would say that Transcon business -- because you have seen a large decline in the amount of Transcon business that's out there as well. So we're seeing a lot of price competition on the Transcon side of things and we've seen less competition intensity on the local East.

Then just one last one here. Thinking about the (inaudible) outcome for the year, obviously the Intermodal volume comparisons are going to be more difficult in the second and third quarter. Is there a chance based on where volumes were in the first quarter -- or should we expect -- I guess I should ask it this way -- that we're going to see an increase in the rate of decline during the second and third quarter and then some normalization in the back half of the year. Is that the best way to think about your expectations for volume as the year progresses?

You are right that the comps are tougher in Q2 and Q3. In Q2 of last year we were up 5% Intermodal volume and Q3 we were up 9%. Those would be the toughest to get over, Todd.

And a lot of that is going to be dependent on how we fare, with the bid season. And certainly most of that will be geared toward implementation in early June.

Okay. Thanks a lot for the help.

(Operator Instructions) Our next question comes from the line of Jon Langenfeld with R.W. Baird. You may proceed.

Good afternoon. Can you give us some perspective on the truck brokerage side. You talked about how things are getting better. Maybe one way to couch that would be to talk about volume trends you've seen there, maybe fourth quarter and then how the first quarter progressed showing some of that progress?

We don't disclose volume for truck brokerage; but if you wanted to know about the revenue decline in truck brokerage in the first quarter, the biggest driver of that would be fuel. That was about 9%. Then volume and then price mix.

And how did that volume component maybe generically trend through the quarter?

It was pretty consistent.

So, Dave, when you talk about progress on the brokerage side, where exactly are you seeing that? You talked about having -- and I think, Terri, you even mentioned in your prepared remarks, what's the progress? How do you know you've fixed it relative to these results? Or am I looking at the wrong metrics?

Well, A, it's not fixed. I think it's still a work in progress as well. What we've seen is margin enhancement. We did not react quickly enough to the excess capacity in the truck market. We've gotten a lot better than that. And so that's where we're seeing most of the progress at this point in time is in the margin.

So the gross margin dollars, by month, then, on a year over year basis would have improved?

What we're saying, specifically improved was the gross margin as a percentage of sales.

Right. And how do you separate that from the fact that freight rates have fallen so much? I mean, gross margins, I think, in general would have expanded, all else being equal. Is there a way you can look at that and separate out what's the market falling freight rates versus what you're doing internally?

While prices may have declined within the markets that we're competing in, we've also been able to buy at an even better level. That's why our gross margins as a percentage have been able to increase.

And then one last thing on that. Your comment on the target Terri, for the -- or the budget for truck brokerage, you said gross margin, to approach last year. Was that gross margin dollars?

Yes.

Okay. So gross margin dollars for 2009, equalling '08 would kind of be your target?

Yes.

Okay. Thank you.

Sure .

Next we have a follow-up from the line of Ed Wolfe. You may proceed.

Ed?

Hello?

Your line is now open. You may proceed.

We -- he must have -- his question must have been answered.

And it appears at this time there are no additional questions.

Okay. Great. Well, thank you, again, for joining us for our first quarter conference call here. And if there are any questions, please do not hesitate to get a hold of any of us at any time. Thank you.

This concludes today's presentation. You may now disconnect. Good day.