HUBG

Hub Group, Inc. (HUBG)

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Hub Group, Inc. (HUBG)

Q3 2008 Earnings Call

October 23, 2008; 4:30 pm ET

Executives

Terri Pizzuto - Executive Vice President, Chief Financial Officer and Treasurer

Dave Yeager - Vice Chairman and Chief Executive Officer

Mark Yeager - President and Chief Operating Officer

Analyst

Ed Wolfe - Wolfe Research

Alex Brand - Stephens

John Barnes - BB&T Capital Markets

Todd Fowler - Keybanc Capital Markets

Jon Langenfeld - Robert W. Baird

Presentation

Operator

Hello 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 Vice Chairman and CEO.

The company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, President and Chief Operating Officer, will join us for the Q-and-A 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 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.

Terri Pizzuto

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 were 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 the eastern rail networks, the Norfolk Southern or CSX. A few examples of lines 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 of 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 saving, providing load visibility and ensuring carrier compliance. Customers want to drive savings and efficiency through their supply chains and we make that happen. For example we deliver savings by doing carrier bids for customers 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 percentage of sale decreased to 12.3%, compared to 13.8% last year.

There are four major reasons for the margin compression 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 a 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 that were 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 commission.

General and admin expense is up due to a loss on sale of tractors, more marketing initiatives and driver recruiting costs. We have 1,112 employees excluding drivers at the end of September, that’s an increase of 26 people compared to the end of June. We added people in customer service, truck brokerage and at contracts. 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 are 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 detailed action plans to improve the margin on these customer accounts.

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