Hub Group, Inc. (NASDAQ:HUBG) Q3 2023 Earnings Call Transcript

Hub Group, Inc. (NASDAQ:HUBG) Q3 2023 Earnings Call Transcript October 26, 2023

Hub Group, Inc. misses on earnings expectations. Reported EPS is $0.97 EPS, expectations were $1.19.

Operator: Hello, and welcome to the Hub Group Third Quarter 2023 Earnings Conference Call. Phil Yeager, Hub's President and CEO; Brian Alexander, Hub's Chief Operating Officer and Geoff DeMartino, Hub's CFO, are joining me on the call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Any forward-looking statements made during the course of the call or contained in the release represent the Company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release.

Trucks from this company on the highway, transporting goods from one city to another.

In addition, you should refer to the disclosures in the Company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Phil Yeager. You may now begin.

Phil Yeager: Good afternoon and thank you for joining Hub Group's third quarter earnings call. Joining me today are Brian Alexander, Hub Group's Chief Operating Officer, and Geoff DeMartino, our Chief Financial Officer. Over the past few years, we have transformed our earnings, returns and free cash flow profile through a clear strategy of organic investment into our core business while enhancing capital efficiency through technology deployment and accretive non-asset-based acquisitions. In ITS, we have created a less asset-intensive model that provides industry-leading service and value while becoming more efficient through enhancements to our drayage and dedicated operations. In logistics, we have built a service leading end-to-end solution for our customers that provides best-in-class scale and technology.

This evolution of our business has resulted in Hub Group being a more diversified and resilient company with an improved customer experience as well as significant free cash generation. Our operating model changes have proven effective as we have managed through this challenging freight cycle with a full year forecast that we expect will likely be our second best year in our Company's 52 year history. With that performance in mind, and with the benefit of extensive feedback from our Board as well as existing and potential shareholders and equity analysts, we have taken the opportunity to reassess our capital deployment strategy. I'm excited to announce the results, which are also highlighted in the investor presentation which is available on our website.

First, we are establishing a long-term leverage target of 0.75x to 1.25x net debt-to-EBITDA. We are not in a rush to achieve this target and will do so methodically as we continue to invest in our core business, drove the acquisition and return capital to shareholders. Second, we have received authorization from our Board for a $250 million share repurchase program while retiring our current authorization, which had $83 million remaining. We believe this new and larger program demonstrates our commitment to returning capital to shareholders and the long-term value we see in Hub Group. Third, our Board has authorized a two for one share split that will be effectuated early in 2024 through a share dividend, which we believe will enhance liquidity in our stock and support long-term investment.

Last, in the first quarter of next year, we plan to begin paying a quarterly cash dividend equal to $0.50 per share annually on our new share account. The transformation of our business that I described earlier has provided us with the free cash flow and balance sheet profile that allows us to implement these four capital allocation initiatives, which will provide greater consistency regarding return of capital while allowing ample opportunity to continue to invest in our core business and execute on our acquisition strategy. Now, turning to the quarterly results and outlook. As we discussed on our last call, we felt as though the third quarter would be our most challenging and that did come to fruition. However, we saw improvement in demand throughout the quarter and increased tightness in the West Coast, indicating a need for some inventory replenishment.

However, peak season has been muted and we do not anticipate a sharp inflection in demand in the fourth quarter. Demand was soft through July and August, leading to volume declines in intermodal. Rail service has remained strong and we executed improved volumes per business day in September. While onboarding wins in shorter haul markets, we continue to focus on improving operations on the Street, reducing our cost to serve and maximizing the efficiency of our team. Although, we have made significant progress, we still have opportunity to improve operational fluidity and reduce costs. We believe there is considerable intermodal conversion opportunity in the upcoming bid season, and our commercial organization is focused on returning to growth.

Our rail partners have remained committed to providing a great service product, and we believe that the combination of quality service cost benefits versus truck and greenhouse gas emission reductions will lead to share gains from over the road and create improved balance and velocity in our network. Our logistics business performed well, once again illustrating the resiliency of our model. We executed well in brokerage, leading to share gains due to our strong service and value proposition, while driving new wins in organic expansion in our warehousing, managed transportation and final mile services. Our pipeline for logistics and dedicated opportunities is very strong, and we remain focused on excellent execution for our customers. While we are experiencing some improvement in demand, the length of time it will be maintained remains unclear.

With bid season approaching, we are focused on returning to growth in intermodal, leveraging our strong service and cost structure to drive conversion from truckload. As bid award realization rates improve, capacity attrition accelerates due to less spot rates and customer demand increases, we will be in a strong position to support those opportunities. Given our excellent team, creative solutions and available capacity. We will maintain our focus on providing world class service and efficiently operating our business, while executing on our long-term investment plan. With that, I will turn it over to Brian to review our operating results.

Brian Alexander: Thank you, Phil. I would like to start by thanking our talented team for their efforts and dedication in leading and executing through a changing freight environment and positioning us for growth with our customers. I will now discuss our reportable segments starting with our intermodal and transportation solutions. As Phil mentioned and we anticipated, our third quarter was challenging with ITS revenue declining 30%, driven by softer intermodal volume that declined 16%. Transcon volume declined 9%, the local west declined 18% and the local east declined 14%. Continued soft import volume, elevated seasonal inventories and an oversupply of truckload capacity generated softer volume and lower assessorial revenue in the third quarter, which led to a decline in ITS operating income.

Throughout the year, we have improved our cost structure and feel well positioned going into the upcoming bid season. In retrospect, we held the line on price for too long in 2023, which has impacted our volume. We have made the appropriate structural and process changes that are focused on regaining velocity and balance in our network and feel confident in our timing and disciplined approach for the 2024 bid season. We continue to be pleased with our dedicated trucking growth and yield expansion along with a strong pipeline of confirmed wins scheduled to onboard in the fourth quarter and early in the first quarter of 2024. As I’ve mentioned in our previous calls, we have been improving our intermodal cost structure throughout the year. Our new rail agreements are helping us move with the market to provide compelling volume for our customer base and rail service improvements have helped us better manage our equipment costs.

On the Street, we have continued to improve our dray cost by increasing our insource dray from 62% last year to 78% and have lowered our cost of third-party purchased dray. We continue to execute and see additional opportunity to improve our Street economics through regional planning improvements and fixed cost reductions. We will continue to defend our incumbency and have incremental wins that will set us up for long-term success. In addition, the recent expansion of our cross border rail solutions have already generated new wins that will expand in 2024. We will continue to invest in our intermodal business for the long-term and are confident that these investments, along with improved rail service, will help support further conversions from over the road to intermodal.

While the near-term results are impacted by low volume, we are confident that our actions will position us for growth and deliver high levels of service for our customers with sustainable profitability. Now turning to our Logistics segment. As we continue our diversification strategy to deepen our value with our customers with our integrated approach to supporting an end-to-end supply chain, we are once again successful in expanding our logistics operating income as a percent of revenue by 40 basis points. Despite the challenging freight environment, our brokerage team continues to stand out with growing volume and margin expanded throughout the quarter. Our third quarter brokerage volume was up 5% led by share gain with existing customers and continued new customer onboardings.

Our overall Logistics segment experienced a revenue decline of 12% in the third quarter, but has a strong pipeline of confirmed wins with onboardings in the fourth quarter and start of 2024. In addition, we continue to harvest cross-selling synergies with our most recent non-asset logistics acquisitions. While we continue to drive logistics growth, we are also improving our cost as we leverage our ability to establish new multipurpose logistics locations to support our growth and lower our cost. As mentioned in previous earnings calls, these locations are strategic to our hub network of freight as they enable the continued growth of our LTL, final mile and e-commerce solutions, and support inbound and outbound multimodal hub volume to service our customers supply chain needs.

We saw the benefits of these new locations in the West and Central regions supporting the growth of our LTL solutions in the third quarter, and we expect this success to accelerate heading into 2024 We will also continue to invest in our non-asset based final mile offering as we continue to onboard new customers and build more density, driving stronger service and enhanced margin performance. Our logistics pipeline remains strong with larger deal sizes and improved close ratios. Our non-asset based logistics growth strategy is playing out well, and we are in a great position to continue our trajectory of profitable organic growth and continue to integrate future acquisitions. With that, I’ll hand it over to Geoff to discuss our financial performance.

Geoff DeMartino: Thank you, Brian. Despite recessionary freight market conditions, we generated revenue of over $1 billion for the quarter and an operating income margin of 4.2%. Our diluted earnings per share for the quarter was $0.97. We generated $88 million of EBITDA and ended with over $400 million of cash on hand. During the quarter we purchased 208,000 shares of our stock for $17 million. Our purchase, transportation and warehousing costs declined slightly as a percentage of revenue as compared to the prior year, reflecting our focus on cost containment and yield management. Salaries and benefits costs rose from the prior year as we expanded our driver count by 12%, which has enabled a large increase in our in-source drayage percentage.

In addition, the inclusion of TAGG Logistics for a full quarter added $4 million of expense as compared to the prior year. This increase was offset by lower office employee costs and lower incentive compensation expense as our office headcount declined by 12% as compared to the prior year. G&A costs decreased by over $10 million due to lower legal and use tax expenses and the lease impairment charge in the prior year. Depreciation and amortization expense increased as compared to prior year due to growth-oriented investments in equipment and technology as well as the acquisition. Gain on sale was minimal this quarter, whereas the prior year benefited from very strong used truck pricing. Logistics segment revenue of $450 million was down 12% from prior year but increased 2% from the second quarter.

Segment operating income of $29 million was 6.3% of revenue, a 40 basis point improvement from the prior year. While brokerage volume grew 5% and productivity was up by over 40%, revenue per load was down 21% as compared to the strong conditions we experienced in 2022, which impacted our profitability in the quarter. This headwind was offset by growth and profitability in our managed transportation, Final Mile, and consolidation businesses as well as a full quarter of results from our fulfillment business. The benefits of our long-term acquisition strategy and cross-selling initiatives are showing in our results, with logistics segment operating income accounting for nearly 70% of total. Our logistics offering provides a more stable earnings stream and improves our positioning as a broad supply chain solutions provider.

We have a strong sales pipeline and several large recent wins which will drive profitability into 2024. ITS Segment revenue of $595 million was down 30% from prior year due primarily to lower intermodal volume and a 20% decline in revenue per load. Operating income margin declined to 2.3% as the impact of intermodal price declines and reduction in profitable assessorial charges more than offset improvements in drayage, rail and equipment costs. While soft demand conditions and abundant capacity weigh on price, the operating team performed well in reducing controllable costs and driving efficiency and we saw the benefits of our new flexible rail contracts. We are realizing the cost benefits of in-sourcing drayage with every 100 basis point increase worth approximately $1.5 million annually over the course of the cycle.

Profitability within our dedicated service line has significantly improved in 2023, reflecting improved yields and leveraging of operating expenses. Our updated guidance for 2023 assumes market conditions decline throughout the remainder of the year, with softness following the Thanksgiving holiday per more typical seasonality in our intermodal and brokerage services with stability in our more contractual service lines. For 2023, we expect to generate diluted EPS of between $5.30 and $5.40 per share. We expect revenue will be approximately $4.2 billion for 2023. For intermodal, we're forecasting volume will decline low-double-digits to mid-teens for the full year. The remainder of the year will reflect the impact of lower prices and less assessorial and surcharge revenue, which will be partially offset by lower purchase transportation costs and improved operating efficiency.

We expect a tax rate of approximately 20 for the year. Our capital expenditure range is unchanged at $140 million to $150 million. Based on this guidance, we would expect to generate EBITDA less capital expenditures of over $250 million in 2023. Over the past several years, we have made important strategic changes to our business, including our focus on yield management, asset utilization and operating expense efficiency, which has significantly improved profitability and returns. We've also completed several acquisitions to build out our logistics offering and drive more stability in our earnings. While we compete in a cyclical marketplace, these actions have driven a step change in our trough to trough results, with operating margin growing from 2% in 2017 to 6% today, along with an improvement in free cash flow to over $250 million as compared to $60 million in 2017.

These strategic changes have positioned Hub Group for success in both the short and long-term time horizon in soft and strong demand environments. With that, I'll turn it over to the operator to open the line to questions.

Operator: [Operator Instructions] Our first question is from Scott Group of Wolfe Research. Please proceed with your question.

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