HUBG

Hub Group, Inc. (HUBG)

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Hub Group, Inc. (HUBG)

Q2 2008 Earnings Call Transcript

July 24, 2008 1:00 pm ET

Executives

Terri Pizzuto – EVP, CFO and Treasurer

Dave Yeager – Vice Chairman and CEO

Mark Yeager – President and COO

Analysts

Edward Wolfe – Wolfe Research

George Fickle [ph] – Stephens, Inc.

John Barnes – BB&T Capital Markets

Todd Fowler – KeyBanc Capital Markets

Jon Langenfeld – Robert W. Baird

Presentation

Operator

Good afternoon and welcome to the Hub Group second quarter conference call. We will begin with the discussion of the financial results led Terri Pizzuto, the 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&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 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. Please proceed

Terri Pizzuto

Thanks, Denise and good afternoon. We are glad to have you all with us. I want to begin by covering three things. First, we had a record quarter on a difficult comp. Second, we are excited that we grew net income and intermodal volume in spite of the challenges that we face from the sluggish economy, an owner operator strike in Northern California, and the service delays caused by floods in the Midwest. Third, we maintained our cost discipline and we started to see some results from our sales growth strategy. Here are the numbers. For the second quarter, Hub's diluted earnings per share increased 14% from 2007 to $0.40, Hub’s second quarter operating margin with 4.9% that is compared to 5.5% in 2007. At the end of June, we had $54 million in cash and no debt.

Now, I’ll discuss details for the quarter starting with revenue. Intermodal revenue increased 17%. This change includes the 5% volume increase and a 12% price increase related mostly to fuel. Last year, we also grew intermodal volume by 5% in the second quarter, so we are feeling very confident about our ability to grow our volume this year.

The two biggest increases in volume during the quarter came from our consumer products and transportation customers. Volume with our consumer products customers was up 7%, mostly in the food and beverage segment. Volume with our transportation companies was up 32%. This includes our wholesale customers that travel on the BNSF railroad and third-party logistics company.

We have been successful in holding on to existing business and winning new business during bids. Some of the customers we grew with converted freight from truck to intermodal. Truck brokerage revenue increased 34% due to higher volume, pricing which includes fuel, and mix. Some of our fastest growing truck brokerage customers are retailers. We were again able to grow with both new and existing customers because of our collaborative approach and differentiated service. Many of our truck brokerage customers think of us as the core carrier since we use a consistent carrier base and have a high level of on-time performance. The pipeline of business in truck brokerage looks promising.

Logistics revenue is 50% higher than last year due to the most part to new customers. We are continuing to bring on new logistics customers and save them money. For example, we recently landed business with another bottle manufacturer that'll start up in December. Gross margin grew by over $2 million during the quarter. The two biggest contributors to this $2 million increase were logistics and truck brokerage. These increases were partially offset by cost related to the owner operator strike in Northern California.

Let me give you the story on the strike. Owner operators from the major drayage companies in Northern California staged a work stoppage most to the month of May. The owner operators wanted more pay because of skyrocketing fuel cost. We have 68 owner operators working in Stockton before the strike. We think that our fuel program was fair and closer to the top end of market. In fact, we didn't have any problems hiring or keeping drivers before the strike. Our drivers were intimidated by threats of violence and so they chose not to work. We then had to pinch head by flying in employee drivers from our other location and running tractors for them. A couple of our carriers helped us by providing dedicated drivers. Hub's intermodal operations management would stage an on site discussion to help ensure things run smoothly.

Our drayage cost for the month of May were more than twice what they would normally be in Stockton. We spent an extra $1 million related to the strike. We're proud that our team worked diligently and creatively to make sure there was minimal disruption in service and that loads were covered. To prevent this from happening again, we're moving towards a mixed operation in Stockton, this made up of both employees and owner operators.

We currently have 63 drivers in Stockton a little less than a third of that are our employees. You can see that our yield in the quarter was 12.2% compared to 14.4% last year. The 14.4% growth margin last year was unusually high. The four major reasons for the yield compression are, number one, intermodal pricing excluding fuel was down between 1% and 2% it's competitive out there. We're protecting our base of business and bringing on new business at slightly lower margins. Once we have that freight in house, we work on improving the margins. Number two, truck brokerage margin deteriorated 200 bases points since capacity started to tighten and we covered loads with less than desirable margins. I'm going to tell you how we'll fix that in a minute. Number three, because of dramatic jump in fuel cost and some costumers lagging with fuel charge adjustment, fuel negatively impacted our yield compared to last year. Number four, the strike in Northern California cost us an extra $1 million in drayage. Total cost and expenses for the quarter were $35.8 million. That's compared to $35.6 million last year. We expect that our quarterly cost and expenses will be in the range of between $36 million and $38 million for 2008.

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