Hub Group Inc (HUBG) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the Hub Group second 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. Ma'am, you may proceed.

Thanks, Jerry, and thank you all for joining us. I want to begin by covering three things. First, we had a few one time costs related to switching the majority of our Western Rail business over to the Union Pacific. Second, the margin enhancement programs are producing better yields compared to last year and last quarter, when you exclude the one time expenses. Third, we continue to be vigilant in controlling our costs.

Here are the key numbers. For the second quarter, Hub's diluted earning per share was $0.22. If we add back the one time expenses related to the switch to the Union Pacific, we made $0.24 in the quarter. Hub's second quarter operating margins is 3.7%. That's compared to 4.9% in 2008. At the end of June , we had $113 million in cash and no debt.

Now I'll discuss details for the quarter, starting with revenue. Intermodal revenue decreased 28%. This change includes a 14% decline for fuel, a 10% volume decrease, a 3% price decrease, and a 1% decrease for unfavorable mix. While we don't like to see our intermodal volume decline, we protected our market share during the recent bid. Almost 60% of our total volume loss came from our wholesale and ISO businesses.

Wholesale is down, because of price pressures due to excess capacity. ISO business is lower for two reasons. Number one, customers' business levels are down. And, number two, competitive pricing ,where we decided not to price below cost. If we take out the wholesale and ISO business, our intermodal volume would only be down 5% for the quarter.

Our comparable was tough this quarter. Since last year, we grow intermodal volume by 5% in the second quarter. We also have a difficult comparable in the third quarter, since intermodal volume was up 9% in 2008. Truck brokerage revenue decreased 28%, due to 7% lower volumes, 15% lower fuel and 6% unfavorable price mix. Mix changed because our length of haul went down by 55 miles or 7%. The asset based carriers are still pricing the longer haul freight more aggressively. That 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. Although we did add a number of new customers in the quarter, volume is also down, because we didn't replace lost business with new business quickly enough. One of the bright spots in truck brokerage is that gross margin as a percentage of sales increased by about 400 basis points compared to last year. Logistics revenue was 9% lower than last year for three reasons. Number one, lower sales to existing customers. Number two, new business didn't ramp up as quickly as we had hoped. And, number three, we haven't yet lapped some customer losses from last year. While we're disappointed we didn't grow our logistics growth this quarter, we're optimistic that logistics sales will be flat or slightly up for the last half of the year, since we recently landed a few new customers.

Gross margin as a percentage of sales was 12.6%, excluding the one-time cost, our gross margin was 13%. That's up from last year and last quarter. Total gross margin went down by $14.1 million. The biggest chunk of the decrease came from intermodal. Because of fierce price pressure from competitors, weak demand and elevated bid activity, intermodal prices were down 3% this quarter. We saw a decline in price as the quarter progressed.

Mix also contributed to the intermodal margin decline because the length of haul went down and we had changes in customer mix. Our length of haul was down 50 miles or 3%. Another contributor to the decrease in intermodal was Comtrak, our drayage company. Comtrak's gross margin was about 15% lower than last year because of price pressure. We had one time costs of $1.2 million related to switching the majority of our Western Rail business over to the union Pacific. These expenses include dray and container costs that shouldn't recur.

In the long run, our strategic shift to the Union Pacific will help us improve yield and service to our customers, as we build more dray density and increase box and chassis utilization. We have made good progress on our margin-boosting projects. For example, on the drayage front, we're now matching up and inbound and outbound load one and a half times as much as we did in the first quarter. We're also realizing lower cost because of the dray bid.

Another area where we're seeing improvement is accessorials. For instance, we're reducing storage costs, by a more critical view of transit time. Total cost and expenses were $32.3 million in the second quarter of 2009, compared to $35.8 million in 2008. The main drivers of the decrease in costs are lower head count, bonuses, travel, professional fees and commission. We have 1,016 employees, excluding drivers, at the end of June. That's an increase of 12 people compared to the end of March. We added people in logistics from new customers we're bringing on board and at Comtrak for our new terminals. We expect that our quarterly cost and expenses will be in the range of between $32.5 million and $33.5 million for the rest of 2009.

Now I'll discuss 2009 full year earnings guidance. For 2009, we're comfortable that our diluted earnings per share will be within the current analyst range of between $0.80 and $1.04, assuming that there's no further deterioration in the economy. We think we'll come in at the low end of this range. Our weighted average diluted shares for 2009 are estimated at about 37.5 million.

Turning now to our balance sheet and how we used our cash. During the quarter, we spent only half a million dollars on capital expenditures, and we think that we'll spend another $4 million on capital expenditures for the rest of the year. Free cash flow was down this quarter. That's because our payables are lower since we caught up on some rail equipment charges, and we paid certain carriers quickly to take advantage of discounts.

To wrap it up, we're holding our own in this extremely challenging freight market. We'll continue to work on the margin boosting projects in controlling our costs to build a stronger foundation for the future. And now you'll hear from our CEO, Dave

Great. Thank you, Terri. Like most companies, Hub Group's business has been challenged by this very difficult economy. However, we are generating respectable profits even in this environment and we're taking important steps to position the Company for even greater success in the future. Our intermodal volume was down about 10% for the quarter. As Terri said, the majority of that decline was in our wholesale and ISO business lines, with the remainder of the decline was primarily due to lower business levels at our major customers.

We're now through the 2009 bid season which saw an extraordinary amount of activity. As you would expect, soft demand coupled with an overabundance of supply produced an extremely competitive market, especially for transcontinental business. This, of course, translates into an aggressive pricing environment. Despite this, we did hold our own in the bids. And although we held some lanes to pricing that can only be described as irrational, we held on to most of the business, maintained a presence in all major accounts, and developed some new relationships that should help us grow when the economy improves.

These bids have put pressure on our margins, but we continue to take a long-term view of the market. We believe we're better off maintaining certain accounts with some short-term margin compression rather than losing these customers altogether. To offset this margin compression, we have made progress with the transportation related cost reduction initiatives I discussed last quarter. We continue to work on better routes and equipment optimization, and reducing our drayage costs by matching inbound and outbound loads more effectively. We have tightened controls on our costs and expenses with a $3.5 million reduction in this area for the quarter. To further drive efficiencies, intermodal operations are now conducted from only five locations. This results with improved service for our customers. As we've demonstrated, we have the ability to staff up or down as required by economic conditions.

Like most of the first quarter, there was ample 53-foot capacity throughout the quarter. We did see some spot shortages of the ISO equipment during the second quarter. And while we managed through these shortages, we undoubtedly lost some volume as a result.

Service remains very good on all of our rail partners. We have seen improved on time performance, enhanced rail transit and fewer containers left on the ground. Based on our discussions with the rails, we're very confident that when demand improves, the railroads will be able to maintain these service levels going forward. In a strategic shift for Hub Group, effective June 8th, we began the process of moving our 8400 HGIU containers from the Burlington Northern to Union Pacific. Once this process is complete, we'll have a fleet of 12,400 containers on the UP NS networks and approximately 1400 containers on the BN.

We made this change for three major reasons. First, we expect improved operational efficiencies from operating primarily on one western network. By concentrating our freight on one network, we will have the ability to improve our dray reload percentages and reduce operational complexity for both our internal operations group and most importantly for our customers.

Second, we're looking to take advantage of UP's excellent rail network. Union Pacific has invested over $25 billion in its infrastructure over the last ten years. We carefully monitor UP service and these investments have paid off. Service has been steadily improving over the years and is now consistently on a par with the BN, and in fact, in several corridors, such as the West Coast to and from the southeast, the UP has a distinct service advantage due to a shorter mileage route structure that results in one day less transit. And, third, the UP's intermodal model is more consistent with Hub's asset light model as we're able to continue to use our fleet but we have the availability to use UP-owned equipment as well.

This transition is now over 90% complete and has gone smoothly with no operational issues. We're extremely pleased with the efforts that have been made by the UP operations team, as well as our own operations and customer service teams. Thanks to these efforts, the change has been seamless for our clients. As a part of this transition, we will be reducing our fleet size by 2,000 containers. We think a slightly smaller fleet makes good sense in these economic conditions as it reduces our fixed cost exposure and enables us to move our containers from storage. Once we see any signs of an economic rebound, we have retained our ability to grow the fleet to meet the needs of our clients.

Our Comtrak drayage operations continues to provide excellent service for both Hub and other third party customers. Contract performed 32% of Hub's drayage during the second quarter, up from 30% in the first. Although Comtrak is facing the same pressure on its margins as the rest of the Hub Group, they're continuing to build their nationwide drayage network. During the second quarter, Comtrak continued to add drivers at its new Harrisburg terminal. And during the third quarter, Comtrak plans to open a new terminal in Philadelphia, Pennsylvania. This new terminal will help us grow our driver base and also increase the percentage of Hub drayage performed by Comtrak.

Our drayage volume declined in the second quarter. We continue to make progress on buying better and did see our gross margin percent improve. We also improved our per load operating productivity by 22% year-over-year. There continues to be a tremendous amount of excess supply of capacity in the truckload marketplace. While this excess of capacity has allowed our brokerage operation to buy better, there is no doubt that the capacity excess in the truckload market has made it tougher for this business as asset based players price at or below cost directly to many customers.

From a logistics perspective, due to the slower than expected ramp up up for some new accounts, our logistics business did not grow as we had expected at the time of our last call. However, we do believe the second half will be better as logistics continues to add new customers due to its proven ability to save them money.

In conclusion, each of our business lines is generating respectable returns even in this difficult freight environment. Just as importantly, we continue to take steps to position Hub Group for the long-term. Despite a highly competitive bid season, we've managed to protect our share and our strategic accounts. We've also expanded our relationship with one of our key partners, Union Pacific. We believe this will be a beneficial change that will reduce our operational complexity and enable us to more effectively service our customers. We're convinced that we have the balance sheet, the customer relationships and vendor relationships necessary to make it through this downturn and thrive when the economy rebounds.

At this time, we would like to open up the line to any questions.

(Operator Instructions). And your first question comes from the line of Edward Wolfe with Wolfe Research. You may proceed.

Thank you. Good afternoon.

Hi, Ed.

Hi.

Can you start by maybe giving us a breakout, Terri, by month of intermodal volume and intermodal yields. I think you said they averaged down ten for volume and three for pricing. Was that right?

Right. For the quarter we were down 10% volume and 3% price. And we saw that price decline as the quarter progressed. So we don't want to get into details by month as to how the pricing declined. But what I can tell you is that we think for the rest of the year, that price mix will be down around 6%.

In a similar mix of 1% mix?

That 6% would include price and mix, yes. So we can't exactly differentiate right now based on our best guess. But that whole lump, the majority of it would be price.

Okay.

The rest would be mix. And the total 6%.

Right. Now, we have most of the bids in as we said in the prepared remarks. So I think we've got a pretty good handle on what we'll see for the remainder of this year.

How about volumes on that side then?

Probably a decline of 10 to 12% is what we're forecasting.

Right. Okay. Can you talk a little bit, Dave, about the switching costs. The $1.2 million or whatever it is. I think, Terri, you said it was $0.02. So let's call it a $1.2 million. If I add that back I get a 13% yield. It sounds like it's in the transportation costs. But what exactly were those expenses? I think you said there's nothing left. But there's still 10% of the business left to switch. So are there some expenses still in this quarter?

First of all, I think we're a little bit beyond the 90%. We shouldn't see any more of the switching costs in the third quarter or beyond. It was things such as having to dray over a container and chassis to the Union Pacific. And then once the container was put on the rail, then we would have to come back, get the chassis. At time, of course, chassis in rail yards are pretty fluid. So sometimes they become lost or used elsewhere. So it's just kind of a management issue regarding that. But that's to a large extent what, in fact, we incurred.

Okay. Can you talk a little bit about what is the ISO business that you referred to?

That's the 40-foot business that is basically repositioning containers back to the West Coast port so that the ocean carriers can get the containers back to the far east. It's primarily, there is some very inexpensive freight for those clients that ship dense commodities. So if you can get a full truckload into a 40 footer versus a 53-foot container, the economics can be quite compelling. Now, naturally because exports have been up somewhat and imports down, the amount of the containers, the availability to reposition back to the West Coast has been much more limited than it has in the past. So we had some shortages. And, in fact, did, therefore, lose some volume as a result.

Was your intention in breaking out the ISO and the wholesale to show the ISO is generally less margin business?

It's actually fine margin business. That wasn't the intent at all. It's just that it was part of the business that was down. And so I think we're just trying to be as transparent as possible with -- that's how we also look at the business with ISO wholesale and then our retail big box business.

Okay. Can you talk a little bit about local east. I didn't hear anything about that. Are those volumes still growing at this point or no?

It was down 2%. We're still seeing some conversion, though, from truck to intermodal with customers. And local east was down this quarter because in some cases, customers changed their distribution patterns and so they're shipping via truck. Or their overall business levels are down. Another customer closed the facility. And so that's why we lost that local east business. But it wasn't down much .

Okay. Last question and I'll let someone have it, with the cash balance, any change or thought towards repurchasing stock again or what's the market like on the acquisition side?

We've actually been getting closer on several acquisitions. One we thought we had, and unfortunately it appears as though we may have lost it. But we still continue to believe that the best use of cash is acquisitions. And we are out there on the prowl attempting to secure some.

The share repurchase expires when?

It did expire. On June 30th.

Okay. And at this point there is no thoughts of reauthorizing that?

We'll talk to the Board in our August meeting.

Okay. Thanks a lot, guys. I appreciate the time.

Thanks ,

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

Hello.

How are you doing? I guess I'm trying to figure out, the east seems like the growth opportunity, the truck conversion opportunity, as service improves, that's where maybe it's the less mature market. And I guess I'm surprised actually. Can you talk about how you're attacking the market? Is the contract new facility and having more control over your own drayage, is that part of how you are thinking about attacking that market?

Actually the Comtrak expansion is more opportunistic than anything. In the case of Harrisburg, we were able to take over a small company that was having some issues and we were able to turn it around quickly on that. And Philadelphia, in all candor, a very qualified person became available and we thought that it was, again, opportunistic to jump on that.

We do see the east as having tremendous opportunities with truck conversion. We're disappointed to see that it declined in the second quarter. But, again, we do see it as a much less mature market to your point, Alex from an intermodal perspective. And it's not just conversion from the trucks. It's also some of the innovations of the Norfolk Southern that is doing with the Meridian corridor and the Crescent corridor, which is going to open up areas to intermodal that were just not available in the past. The service just could not compete.

And I think, Alex, it's important to point out that while it did shrink, obviously it shrank less than the other regions. And the shrink is largely attributable to some supply chain changes at a couple of significant customers. So I don't think you're seeing an aggregate shrink in that marketplace as much as you're seeing some sort of specific secular trends that relate to a couple of large accounts. So we think that over the long-term, local east will be a significant growth engine for Hub and for the whole intermodal industry.

On the pricing front, it seems like pricing maybe got more aggressive than expected. It sounds like in your scenario analysis, we're at the worst case for pricing and maybe we tipped it past that line a little bit. Now that bid season is done, are you starting to see any of that competitive aggressiveness abate at all, or is it just more that you have visibility so you think you know where that sort of bottoms out?

It's a point that we have visibility now. The largest portion of the bids that we'll see are done. Like right now, we are getting 5 or 6 smaller bids and there is a few large companies that have yet to bid their business. But we've seen the majority of it.

Most of the business that we, in fact, were the incumbent. We have seen it tossed in the air and know the results now. And it was -- there is a tremendous amount of supply and just not a whole lot of demand at this point in time. So several of our competitors became extraordinarily aggressive, and the result is what we forecast as a 6% decline overall for pricing for the second half of the year.

And I know as you transition to UP, I know there is a lot of efficiency expectations you hope to get and streamlining for yourselves, steam lining for your customers, which you guys haven't quantified. I assume you don't want to take a shot at quantifying what that means. But from a timing perspective, how long does it take for the results, the financial results, to really start to reflect that? Can we see some this year, or is it really more as you gain share and build some more scale on one network?

Well, Alex, certainly I think we'll see the economic benefits continue to build over the next few quarters. I think we actually have seen some already. And I think we're seeing some dray efficiencies. I think we're seeing some equipment utilization improvements and things like that that are creating some lower transportation costs for us, even as we speak. But we do expect that we'll be realizing those gains this year, and they'll obviously continue on ongoing forward. And you probably won't see them at their full maturity level until the fourth quarter or the first quarter of next year. But we really think we're making strides as we speak in that regard.

Okay. Thanks for the time, guys. I'll let somebody else have it.

Thanks, Alex.

And your next question comes from the line of Michael Halloran with Robert W. Baird & Co. You may proceed.

Good afternoon. Just a quick question, a clarification on the pricing side. I know you've talked about the aggression getting a little bit more so as you move through the quarter. And that projected call it 5% or so pricing declines for the back half of the year. Is that just really related to the contracts being fully vetted, that you signed during the first half of the year and fully --

It's related to the bids, Mike. And the results for the bids.

Okay.

Because we promised we would tell you what we thought would happen once we got all of the results of the bids. And so our best guess is price and mix together will be down 6% for the last half of the year, and the bigger hunk of that is obviously priced.

Perfect. Great. I was just making sure there wasn't increased aggression beyond that bid season.

Yes.

On the cost side, you guys did a great job there. It seems like the G&A is as low as it's been in a really long time. Anything specific there other than just really butting it down the coast. Is that as low as the cost will go?

It's pretty low. The main driver of the cost decrease is lower bonuses, lower professional fees, lower travel and lower commissions. So we're really keeping a close eye on all of the cost. And we manage them very closely. So that is fairly low. You're right.

With the new U&P, switching the lines to Union Pacific, how did the customers react to that? Have you seen any customers onboarding because you're using Union Pacific now or any customers who are pretty tight with the BN line and BN network moving away from you guys?

We haven't really experienced any of that.

Obviously we do still have a BN offering for those few customers who have a preference for the BN. But really most of our customers have viewed this very positively. A number of the large ones see it as a way for them to diversify their use of western carriers and view this as a very positive development. So we haven't seen much push back at all.

As David mentioned, I think the UP service is very comparable. And their main concern is that we're able to meet the level of service commitments that we've made to them. And with the environment that's out there and the level of performance that UP is showing, we've been able to do that very smoothly. So it's been a good transition thus far.

I think a very common response from our customers from the shift was I don't buy intermodal from BN, I don't buy it from UP, I buy it from you. As long as your price and service remain constant, we're not going to have any issues. So we were very pleased with it. And, again, in my prepared remarks, I commented on the Union Pacific operations group. They did an extraordinary job in assisting us on this and working us through this. And, again, our own internal staff did an excellent job as well. It has really turned out. It surpassed my expectations as far as the number of hurdles and issues that we faced.

Great. I appreciate the time.

Thanks, Michael.

(Operator Instructions). And your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. You may proceed.

Hey, good afternoon, everybody.

Hi, Todd.

Todd.

Just a couple of questions, I guess, and some clarifications on the numbers that we've already talked about or you've already mentioned. But the pricing that you're expecting, the down five or down 6%, that is for the third and fourth quarter, not for the full year?

Correct. That's for the last half of the year. We think we'll be down that 6%.

Okay. And then the same question on the volume side, the down 10 to 12. Is that for the full year or is that for third and Fourth Quarter.

Third and fourth quarter.

Okay. And then also kind of along the same lines, with the guidance, the range that you put out, the $0.80 to $1.04, does that include or exclude the $0.02 of transition cost here during the quarter?

It would include it.

So it's using a $0.22 number for the second quarter?

Correct.

Okay. Perfect. Great.

Yes.

Okay. Good . That was kind of the details ones that I had. With the fleet downsizing, Dave , can you talk a little bit about, I guess, number one how that happens. Are those the short-term containers that you're basically just turning back in. And then, secondly, are there any costs associated with that right now in the P&L that we would see going forward in the third and fourth quarter, either in the G&A line or in the PT line that you get some relief on by turning those

Yes. What we're going to be doing is we're going to be turning in some of the older UPHU or rail controlled boxes. And then we're going to take our boxes that are currently in storage and have them remarked to UPHU and put them back in service. So it really is a very cost effective mechanism for us. We don't have our steel containers sitting there in Chicago rusting, so it eliminates that cost and expense as well. So that's essentially why we're going -- what we're going to do. As I said, again, in the prepared remarks, we do have the ability to expand the fleet. But, again, one of the other key issues with the Union Pacific is they do supply equipment as well. So we can easily participate in the E&P fleet and not necessarily have to go increase and our fleet and increase our volumes overall and have the proper amount of capacity for our clients.

Okay. And then with gross margins here in the quarter, excluding the transition costs, around 13% or so, it's an improvement of between the second quarter of last year, I'm assuming some of that is probably related to fuel and both the top line and the transportation cost number last year not being in there this year. But what's the expectation going into the third and fourth quarter? It sounds like there is some pricing pressure on the top line but I would think drayage cost are going come down. What's your expectation for where gross margins can be in the back half of the year?

Yes, Todd. Excluding the unusuals, our gross margin percent of sales for the first half of the year was about 12.9%. Our goal is to maintain that yield and we'd be delighted to do that. We do expect intermodal pricing and mix to be down around 6% the second half of the year. So like you said, that would hurt our yield. But, on the other hand, we're working on the margin boosting initiative, which is the dray bid, the dray reload, and accessorial improvements to offset that decline.

Okay. That's helpful. And then just the last one here, Dave, do you care to comment on the acquisition that's you were taking a look at, any sort of color on what those businesses were, the nature of those businesses, any kind of thoughts of where you guys are focused right now from an acquisition standpoint?

The one we have furthest along was a truck brokerage operation, and that's been the one that's gone the furthest. We talked to and had initial conversations with several others, including a dray firm. But we don't have anything right now that is imminent. So we remain very open to other IMCs, as far as an acquisition would be a good fit for us. Certainly a truck broker that, in fact, might have a different model than we do, would be very interesting to us. And certain drayage companies may be of interest. But it would have to be a very special set of circumstances for us to really go further in that.

And what was the hangup on the acquisition that didn't materialize, the truck brokerage one? Was it valuation or was it something else?

There was another bidder that basically went about it differently. As far as what the structure of the agreement post acquisition. And they obviously preferred that.

Okay. I got you. Thanks a lot for the time.

Thanks, Todd.

And you have a follow-up question from the line of Edward Wolfe with Wolfe Research. You may proceed.

Hi, Ed.

Mr. Wolfe, your line is open.

Hey, sorry. We're all sitting around a fire here. Terri just more clarification. The first quarter when you give the full year guidance, are you considering that $0.17 or $0.20?

We were considering the actual number, the $0.17.

The $0.17. Okay. So $0.17 and $0.22, $0.39 through half the year. And you confirmed the range of $0.80 to $1.04 towards the bottom end?

Correct.

Okay. Thank you very much. That was it.

Okay, Ed .

And with no additional questions in queue, I would now like to turn the call back over to Mr. Dave Yeager for closing arguments. You may proceed, sir.

Thank you, again, for taking the time to listen to our conference call. As always, if you have any additional questions, et cetera, please do feel free to contact us. Thank you again.

And we thank you for participating in today's conference. This concludes the presentation. You may now disconnect and have a great day.