HUBG

Hub Group, Inc. (HUBG)

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Hub Group Inc. (HUBG)

Q3 2009 Earnings Call

October 21, 2009 5:00 pm ET

Executives

Dave Yeager - Chairman and CEO

Terri Pizzuto - EVP, CFO and Treasurer

Mark Yeager - Vice Chairman, President and COO

Analysts

Edward Wolfe - Wolfe Research

Alex Brand - Stephens Inc.

Ben Hartford - Robert W. Baird

Todd Fowler - KeyBanc Capital Markets

John Barnes - RBC Capital Markets

Kevin Sterling - BB&T

Presentation

Operator

Good afternoon and welcome to the Hub Group third quarter conference call. We will begin with the 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 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.

Terri Pizzuto

Thanks, Sherika, and thank you all for joining us. I want to begin by covering three things. First, operating margin is higher in the third quarter than any other quarter this year. Second, intermodal volume improved as the quarter progressed. And third, Hub yield initiatives have significant gross profit potential.

Here are the key numbers. For the third quarter, Hub's diluted earnings per share was $0.26. Hub's third quarter operating margin was 4.1%, that's compared to 5.3% in 2008. Operating margin is higher than the 3% we had in the first quarter and the 3.7% we had in the second quarter of this year. At the end of September, we had a $123 million in cash and no debts.

Now I’ll discuss details for the quarter, starting with revenue. Intermodal revenue decreased 27%. This change includes a 12% decline for fuel and 9% volume decrease, a 4% price decrease and the 2% decrease per mix.

While our intermodal volume was down 9% for the quarter, our customer direct 53-foot business, which is the biggest piece of our intermodal business, was only down 4%. Our wholesale business, which is the business we do with other intermodal marketing companies, was down 61% due to price pressure.

ISO business, which is business that we handle, that’s mostly in 40-foot international containers, was 28% lower than last year. ISO business was down because of periodic shortages of equipment and competitive pricing. ISO and wholesale together represent only 8% of our total volume.

We’ve now experienced the full impact of the bids, which is why price and mix were down 6%. We expect that trend to continue into the fourth quarter. Truck brokerage revenue decreased 27% due to 4% lower volume, 15% lower fuel, and an 8% decrease for price and mix.

Mix changed because our length of haul went down by 4% or 31 miles. Truck brokerage volume is down 4%, but it was better than the 6 to 7% volume declines that we saw in the last three quarters. We also had a tough comp this quarter, since we had the hurricane-related work in 2008.

A couple of other highlights in truck brokerage are the gross margin as a percentage of sales increased by about 250 basis points, compared to last year and we had 40 new customers in the top 50 growing customers.

Logistics revenue was 2% higher than last year since we brought on a few new customers. We think this sale trend will continue in the fourth quarter.

Gross margin as a percentage sales was 12.4%, that’s up slightly from last year. Total gross margin went down by $15 million. The biggest driver of that decrease was intermodal. In order of magnitude, the intermodal margin decrease was due first to price, second to mix and finally to volume. These declines were partially offset by cost reductions that came from better management of our drayage operations and other margin initiatives.

Total costs and expenses were $32.3 million in the third quarter of 2009, compared to $35.9 million in 2008. The main reasons for the decrease in costs are lower headcount, bonuses, commission and travel.

We had a 1,029 employees excluding drivers at the end of September, that’s an increase of 13 people compared to the end of June. We added people in logistics for new customers that we are bringing onboard and a contract for our new terminals.

We think that our cost and expenses in the fourth quarter will be between $32.5 million and $33.5 million.

Now, I will discuss 2009 full year earnings guidance. For 2009, we are comfortable that our diluted earnings per share will be within the current analyst range of between $0.82 and $0.91, assuming there is no further deterioration in the economy. Weighted average diluted shares for 2009 are estimated to be $37.5 million.

Turning now to the balance sheet and how we used our cash. During the quarter, we only spent $600,000 on capital expenditures. We'll probably spend $3 million on capital expenditures in the fourth quarter. Free cash flow was $9 million in the third quarter.

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