Q4 2023 Hub Group Inc Earnings Call
Participants
Phil Yeager; President and CEO; Hub Group, Inc.
Brian Alexander; EVP and COO; Hub Group, Inc.
Kevin Beth; EVP, CFO, and Treasurer; Hub Group, Inc.
Scott Group; Analyst; Wolfe Research
Jon Chappell; Analyst; Evercore ISI
Jason Seidl; Analyst; TD Cowen
Bruce Chan; Analyst; Stifel Nicolaus and Company, LLC
Bascome Majors; Analyst; Susquehanna Financial Group LLP
Brady layers; Analyst; Stephens, Inc.
Thomas Wadewitz; Analyst; UBS Equities
David Zola; Analyst; Barclays
Allison Poliniak; Analyst; Wells Fargo Securities, LLC
Ravi Shanker; Analyst; Morgan Stanley
Brian Ossenbeck; Analyst; JPMorgan
Presentation
Operator
Hello and welcome to the Hub Group Fourth Quarter 2023 earnings conference call. Phil Jaeger, Hub's President and CEO; Brian Alexander, Hub's Chief Operating Officer; and Kevin Beth, 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. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question.
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. 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 fourth quarter earnings call. Joining me today are Brian Alexander, Hub Group's Chief Operating Officer, and Kevin Beth, our Chief Financial Officer. I am proud of the way our organization executed to support our customers and one another in 2023 while also delivering the second best financial performance in our company's history.
In a challenging year, we faced difficult market conditions with higher inventory levels, excess capacity and flowing import demand. Despite the challenging fundamentals that are more transactional service lines. However, our execution of our strategy over the last several years of delivering world-class service, investing in equipment and technology to drive productivity diversification of our service offerings to deepen our value to our customers and maintaining cost discipline enabled us to successfully manage through those challenging conditions and deliver strong results.
We completed several key strategic priorities this past year that will pay dividends for years to come. We improved our rail and chassis agreements, providing us with expanded reach and flexibility while enhancing our cost structure, we treat a record level of share of our controlled rate, enabling improved service and costs. We continued our diversification strategy, closing an accretive acquisition that helps us build scale and capabilities in the big and bulky Final Mile space.
And finally, we completed our capital allocation plan, delivering a clear growth and returns oriented investment strategy. These are just a few of the many strategic initiatives we executed on this past year, which we delivered while prioritizing our team and customers positioning us for long-term success. We are leveraging the momentum at the end of last year to deliver for our customers and shareholders again in 2024. We believe that the current global supply chain disruption and the normalization of inventory levels will lead to increased shipping demand and West Coast import, which along with accelerated capacity exits, will progressively lead to improved industry fundamentals.
In ICS, we have a great deal of momentum in bid season as we are providing significant savings versus truck while executing an excellent service credits. We believe that with our improvements in service and productivity as well as our enhanced partnership, we will be in a position to deliver strong volume growth this year. Our initial results have shown the quality of our value proposition, and we will continue our focus on enhanced balanced velocity and productivity throughout this season. We've also driven incremental growth and dedicated onboarding new wins with existing customers based on our service quality and scale.
We believe these factors will lead to improved performance in our IDS segment as the year progressed in logistics, we are in the process of integrating our recent Final Mile acquisition and are excited about the initial results we are taking effective approach and finding significant cross selling cost synergies that will allow us to accelerate growth in the business in brokerage after a strong year where we increased total volume count. We are seeing some signs of improvement in the market, which, along with our continued cross selling, high-quality service and productivity enhancements, will lead to improved performance.
Finally, within Managed Transportation and consolidation. Our value proposition, trend of service technology and savings is resonating with our customers, and we have a solid pipeline of new onboarding that will support growth in 2024. Despite a challenging industry backdrop, we executed on our strategy and are positioned for continued long-term success. We are focused on having a great year in 2024 from delivering best-in-class service, investing in the business through long term, maintaining our cost discipline and deepening our value to our clients. This focus will position us as a provider of choice for our customers and will accelerate profitable growth as market conditions shift. With that, I'll hand the call over to Brian to discuss our segment results.
Brian Alexander
Thank you, Phil. I will now discuss our reportable segments. Starting with intermodal and transportation solutions. Ips revenue declined 28% in the fourth quarter, driven by softer intermodal volumes that declined 11.6%. Transcon volume was close to flat. Local East volume declined 8% and local West declined 17%. While year-over-year volume declined in the fourth quarter, we drove sequential trans-con in local East volume growth.
This momentum and shorter length of haul is a good early indicator of truckload volume converting back to intermodal. In addition to this, the sequential improvement is showing the early results of the enhancements that we have made with the local lease and our disciplined focus on margin per load day that will continue to drive TransCon growth. We continue to improve our cost structure in IPS that drove a 30 basis point improvement in sequential operating income.
Excluding acquisition related fees, we continue to implement several cost controls that will accelerate in 2024 and better position us to compete while maintaining yield discipline. From a cost perspective, our new rail agreements are moving with the market and improved rail service has helped us better manage our equipment costs in the West. We're implementing a new hub controlled chassis program in the first quarter of 2024 that will improve our cost and service reliability.
Our in-sourced rate held steady at 80% throughout Q4 compared to 69% in the previous year. With improved driver productivity initiatives, we have the capability to further improve our cost per dray as we grow volume in 2024, we're seeing a slow start to the year in weather events that impacted January volume, but we are focused on returning to growth in intermodal this year, which will be driven by truckload conversions back to intermodal, inventory, destocking and normalization, increased West Coast import and transload activity.
Our adjustments to our bid approach with a focus on regaining velocity in balance in our network and improved bid realization. We feel confident in our timing and disciplined approach for the 2024 bid season and are already seeing incremental wins. It will ramp in late Q1 and early Q2. Our dedicated trucking team finished the year strong with a great growth story in yield expansion. We are entering 2024 well positioned for further growth with a strong pipeline of organic and new customer opportunities.
While the near term, I guess 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, I wanted to start by welcoming our new Final Mile team to the Hub Group. The integration into our existing Final Mile operation is well underway.
We are now positioned as one of the top final mile providers with a diverse offering that now includes appliance deliveries and a larger network of locations. These locations numbering our hub network to 11 million square feet strategically placed in 75 locations to service our customers' supply chain needs. We have a strong pipeline of cross-selling opportunities that are quickly materializing into wind that will launch in early Q2.
Our brokerage team continues to be an industry stand up as they thrive through a challenging rate year and grew volume while improving team member productivity. We have well-planned IT initiatives set to roll out in 2024 to further enhance our brokerage technology. While we stay true to our values of innovating with a purpose 20, 24 is off to a good start for brokerage, and we are seeing early signs of smart pricing inflation that will support volume and yield expansion for the long tail of hub customers to cross-sell.
We are excited for our brokerage team to continued profitable growth in 2024. While we continue our logistics growth, we're also improving our cost as we leverage our close to 1 billion in LTL under management. This leverage improves our LTL buying power increase density to support consolidations, which helped drive a 16% increase in our fourth quarter LTL volume. We are also continuing to enable our multipurpose logistics locations to support our continued growth of our LTL, final-mile, e-commerce and warehouse solutions. We're also supporting inbound and outbound multimodal hub volume to service our customers' supply chain needs. With that, I'll hand it over to Kevin to discuss our financial performance.
Kevin Beth
Thank you, Brian. Before I start with the results, just a quick reminder that the EPS amounts presented are after the 2-for-1 stock split. Despite a continuing challenging freight market hub generated revenue of $4.2 million for the year and $1 billion for the quarter. Our GAAP operating income margin for the full year was 5.1% and 3% for the quarter. During the quarter, we incurred $5.1 million or $0.08 per share of acquisition related expenses. Without the acquisition related expenses, the quarter operating margin was 3.5%. The acquisition costs were allocated to both segments based on revenue along with our standard corporate expenses without the acquisition related expenses, ICS margin was 2.6% and our logistics segment was 4.4% and our diluted earnings per share presented post-split for the quarter was $0.46 and $2.62 for the year.
Adjusting for the acquisition related expense, EPS of $0.54 for the quarter and $2.68 for the year. In the fourth quarter, purchased transportation and warehousing costs decreased compared to prior year due to lower volumes and cost management efforts. Salaries and benefits decreased from prior year as our non-driver headcount decreased by 15% and we had less incentive compensation expense. Depreciation and amortization expense increased as compared to prior year due to growth oriented investments in equipment and technology as well as acquisitions.
Insurance and claims costs decreased by $7.5 million due to improved claims experiences. G&a costs increased by over $2 million due to the previously-mentioned $5.1 million in acquisition-related expenses. Gain on sale was minimal this quarter, whereas the prior year benefited strong used truck rates. Turning our focus to our balance sheet and capital allocation. Fourth quarter capital expenditures totaled $35 million with full year amount of $140 million. We purchased 21 million of tractors during the quarter, $7 million of containers with the remaining $7 million related to technology projects and warehouse equipment. For 2024, we expect capital expenditures to be between $55 million and $75 million.
As we have no additional container purchases planned and lower tractor replace. We are expecting our typical technology capital spend to be in the $20 million range. We anticipate 2025 CapEx to be in a similar range as the 2024. During the quarter, we continued generating strong operating cash flow while deploying $262 million of cash for the strategic acquisition within our Final Mile business and an additional $26 million on stock buyback at a weighted average price of $76 per share.
For the full year, we purchased 143 million of stock at a weighted average price of $77 a share. At the end of the year, we had cash on hand of approximately 187 million. Our net debt is EUR156 million, which is 0.4 times EBITDA. We are below our stated net debt to EBITDA range of 0.75 to 1.25 times and expect EBITDA less cash expenditures in 2024 to be greater than the $257 million generated in 2023. This shows hub cash resiliency as we expect cash earnings growth in a challenging freight environment. Additionally, we are confident in our ability to execute on our capital allocation plan, which includes paying our first dividend later this quarter, repurchasing more stock and continuing to be active. And Evan, after a second highest annual EPS, we turn our attention to 2024. Our EPS guidance is $2 to $2.50 a share with revenue guidance of 4.6 billion to 5 billion.
A few things to note as we come out of 2023 and into 2024. The middle of the range assumes ICF volume growth of low double digits as OTR conversions occur based on continued strong rail service pricing in the first half of the year is assumed down, but then rebounding to low single digit increases in the second half of the year as truckload capacity exit and the repricing of lower third quarter contractual rates occur. There is upside potential in our guidance at retail inventory decline, leading to restocking demand and more physical shipping pattern, including the traditional intermodal peak season and surcharge revenue during the peak season.
Another market condition that would cause results to the high end of guidance is intermodal volume growth, driven by OTR from Burton baseline continue and sustain further global improvements in our logistics segment, we are assuming growth due to the addition of the appliance final-mile business low to mid double digit growth in Managed Transportation, driven by new customer wins and increased demand as well as mid single digit growth for our consolidation and fulfillment and brokerage businesses. Additional guidance upside would result from the tightening of the truckload market for capacity exiting, resulting in an increase in intermodal and truckload rates.
For the 2024 guidance, we are assuming a normalized annual tax rate of 24% versus the lower 2023 tax rate of 20% in 2023 hub had very minimal incentive compensation expense for 2024 guidance includes a more normalized incentive compensation expense and other assumed headwinds in the guidance is gain on sale. We assumed minimal gains in 2024. Our current average age of our tractor fleet was 2.6 years, which is within the lower range of our optimal replacement cycle. As such, we will be replacing less tractors than previous year.
Additionally, we are not seeing improvement in the used tractor market, thus we expect minimal gains as we replace older tractors. With these assumptions, we expect challenges that we have experienced the last few quarter continuing during the first half of 2024 in the second half of the year. With normal seasonality, we anticipate sequential quarterly earnings growth. We expect earnings in Q1 to be a step down from Q4 2023 due to normal seasonality and continued pressure on intermodal and truckload pricing and the return to a normalized tax rate.
I do want to mention that normalizing our tax rate incentive compensation expense and the gain on sale of equipment would add back approximately $0.49 to our midrange of the 2024 guidance, resulting in flat to slightly growing EPS in 2024. The change in the tax rate will have the largest impact from Q4 to Q1 as we had the low 3.3 tax rate in Q4 2023 and expect the tax rate in Q1 to return to approximately 24%. We expect the incentive compensation effect to grow during the year as our earnings growth.
Finally, looking at our cash flow of cash EPS was $0.3 and $0.34 higher than our GAAP EPS in 2022 and 2023, respectively. We expect that spread to continue to grow in 2024 as generating cash as an important goal of management, we will be noting our cash EPS results going forward. This change is not the basis for guidance, but the highlight of cash earnings power. With that, I'll turn it over to the operator to open the line for any questions.
Question and Answer Session
Operator
(Operator Instructions) Scott Group, Wolfe Research.
Scott Group
Hey, thanks, afternoon, guys. So I just wanted to get a little more color on sort of the near term earnings expectations. And then just thinking about like the cadence throughout the year. So you're saying a step down from Q4, should we adjust for the tax rate and get to something in the low 40s and then take it then apply normal seasonality or not? Any color on just how to think about Q1, I guess and then the sequential build from there?
Phil Yeager
Sure.
Kevin Beth
Thanks, Scott, for the question. Yes, definitely you have a couple of headwinds that will run into here quickly in the first quarter. One is definitely the tax rate going from the 3.3 to normalized 24. Additionally, we're going to have less interest income after spending the 262 million regarding the US acquisition. So those are certainly the two biggest things I think in the first quarter that really aren't that management control. In addition to that, we will have some offsetting we're expecting to start to see margins return and get to at least the pre adjusted or the post adjusted numbers, excuse me. And and then as the year grows, we'll be seeing those price increases as well as volume increases that will sequentially increase EPS during the year.
Phil Yeager
I'd just add, Scott. I think obviously, there's a bit of a tailwind here from the acquisition we just completed in December from a revenue basis. We're anticipating some sequential improvement in intermodal volumes. We saw that show up in January despite some some weather issues. But to Kevin's point, operating margin percentage being relatively consistent with Q4 on the adjusted basis. And then the tax headwind are really kind of the big things to call out.
Scott Group
Okay. And then so we're just right. So you're saying take the adjusted intermodal margin ICS margin of two six and you think hold that fairly steady from Q4 to Q1?
Phil Yeager
Yes.
Yes.
Scott Group
And as you think about your rail contracts and what you're expecting for price is in aggregate for the year? Is intermodal price cost a tailwind or a headwind?
Phil Yeager
Yes, this is Phil. I would say it's a tailwind on our earnings structure and certainly helped us through this more challenging environment with the structure that moves up and down, obviously, with some of the challenges we've seen in the market, it does have a bit of a lagging effect. And I think that's important to call out as we see more stabilized pricing in the broader market as well as an inflection positive. You'll see more flow through for hub. I think Brian mentioned some really good things we're doing on the other side, the cost in implementing our new chassis program in the West. I think in Q4 we saw drayage costs down 25% on a cost per trade basis. So we're doing a really nice job there. And then we're very focused on layering in growth that will help really drive down our cost structure as well.
Scott Group
And just maybe just last question. So you guys used to give us quarterly OpEx guidance. I guess it's a bigger business now, but you want to take a shot at trying to help us think about costs going forward.
Kevin Beth
And I don't we're not prepared to do that for you in the individual segments, but I would say again, we would be looking at increases, you know, first quarter and like I said, similar to the after adjusted amounts and then some going back up to more standard with a little bit of growth into the second half of the year.
Phil Yeager
And I think headcount will stay relatively similar. We're going to have obviously merit-based increases and some some increase in incentive compensation in Q1 and then and again, gain on sale will be a little bit of a headwind Q4 to Q1 as well.
Scott Group
Thank you, guys.
Operator
Jon Chappell, Evercore.
Jon Chappell
Saw on the big big year guidance ranges and the revenue number is substantially higher than Street expectations, so a fair amount of upside there, but the EPS is actually lower. So I'm just curious on the margin cadence for this year. Is this strictly just the pricing weakness at intermodal in the first half of the year before things start to ramp? Or is there more of a structural lower margin for the entire enterprise as you're diversifying your businesses, especially with growth in the logistics market?
Scott Group
Sure.
Phil Yeager
So I think what we've shown over this past year is the logistic margins are going to be relatively more stable we think that there is upside within that as we see the brokerage market normalize. But we didn't really want to place a bet on exactly when that's going to occur within IPS. I think we've also stated that is going to have some lower lows, but also some higher highs and a little bit more fluctuation. We're currently in the lower end of that and believe that that's going to sequentially improve throughout the year. So I don't believe that we're at a structurally lower operating margin going forward, but we're certainly navigating through some more challenging market conditions and wanted to be conservative in our approach.
One item that we didn't include in the guidance is any share repurchases. Obviously, we have a $250 million authorization, which could be upside, and we'll be opportunistic within that at around capital points.
Okay.
Kevin Beth
That's helpful.
Phil Yeager
And then for Brian, I think it was last quarter, maybe two quarters ago, but probably last quarter, you said you maybe held the line on price a little bit longer at the expense of volume. And I feel like you've shifted there. You had some positive things to say about incremental wins in bid season. Is it that same policy you're sticking with now and maybe for the first six months of the year to trying to get more volume on the network, doubled efficiency, et cetera, at the expense of price? And when do you kind of maybe expect a better balance of volume and price is that just purely market related?
Jon Chappell
Sure. Yes.
Brian Alexander
No, I appreciate that, John. Were we are getting the early wins in the bid season and what we're seeing is that we're positioned well now to defend our incumbency to capture more share and get the over the road conversions that we needed to do.
As I mentioned in the previous calls, we needed to make some adjustments structurally to target balance and velocity. And I think seeing the bid realization and some of those inventory normalization has helped us plan and demand in that forecast. But we saw transcon, I mentioned that in the prepared remarks, the sequential growth there. And when we look at January over December, we saw a 10% sequential growth in transcon and that's really up focusing on margin per load day and seeing some of that spot inflation start to drive more of those over the road conversions. And it's the same thing in the local east. We saw sequential improvement there in the local east in January.
We saw that consistent and getting more momentum at about 10% over over December. And that's a lot of capture from over the road conversions. So we we think that we've timed it well. We had a 43% of our bids going live in Q1, and we positioned in Q4 to time it right. And then another 18% of those go live in Q2. And so that's going to drive a lot more of that volume and velocity that helps us cover the fixed expenses, but also staying disciplined on margins.
Phil Yeager
Great. That's very helpful. Thank you, Brian.
Thanks, Phil.
Operator
Jason Seidl, Cowen and Company.
Jason Seidl
Thank you, operator, and good morning, gentlemen. A couple of quick questions here for me. You mentioned that there is going to be some cost controls that accelerate as we move through the year. Can you give us some more details and maybe tell us where you expect that to show up in the P&L.
And also on the container side, you said you're going to basically Pauze anymore container purchases. Can you talk to us about where the fleets and what percent of the fleet is actually in use right now versus a big part?
Yes, Bill. So from a container perspective, we have around 20% that's currently stacked. We're in the process of actually unstacking as we've seen some momentum here, Brian mentioned some of the positive signs we're seeing December to January, and that's actually pre some significant startup that we have over the next couple of weeks. So there's some unstacking We think that'll come down kind of sequentially throughout the quarter. But given the amount that we have stacked as well as the improvement in utilization that we can drive, we don't see any need to add.
Any additional containers at this point is obviously going to drive some pretty significant free cash flow generation for the year on the cost side, and I'll let Brian and Kevin jump in here. We've done a really nice job on managing our overhead expenses. Our headcount down 15% on a year-over-year basis, and we'll be thoughtful around hiring and returning to growth there. But I want to make sure that we remain diligent as we've done a very nice job in resetting our cost structure for the current environment. I think we've also done a really nice job as well around reducing cost per dray, improving our purchasing. I mentioned that was down 25% year over year in the fourth quarter.
We'll see that trend continue, not only as we in-source more and get more productivity out of our drivers. But we're also going to continue to be very diligent around third party drayage costs. And then Brian also mentioned our new chassis agreement in the West. That's going to be very helpful from a margin perspective, and we'll start to see that really show up in the second quarter. It will be kind of radically rolled out throughout the first quarter and start to show up there and the last piece I would just highlight is rail costs will likely see some benefits sequentially as we head through Q1 as well as into Q2.
Jon Chappell
Yes.
Brian Alexander
I'll just add one piece on specific the grocery trade. We've seen the volume growth there and it really industries stand out with what they've done. We're really proud of that, but they've also improved their productivity their team productivity. We've got a good roadmap of IT initiatives that are set to roll out throughout the year that will further enhance that productivity within our brokerage and help control that cost.
Phil Yeager
Well, that's good color. If I can go back, Phil, do you know the 20% that you said you had stacked and you said that number should come down with 43% of your bids going live in Q1 and 18% in Q2. What number should we see expect to see by the end of 2Q here on that 20% should be diamond like 15 or could it go below that?
It's a little unclear to me. I don't know exactly at this point. I would say the 15% is probably a good measure, but I think our goal is to get an improved utilization at the same time, right? And so we're really focusing on balance and trying to win the right business that fits our network. And so a little tough for me to say exactly might have some temporary imbalances where we increase repositioning costs.
Will we make a decision to stack Becker to unstack because we think the volume's going to be there longer term. So those are things we're weighing on a more tactical perspective, but it's a little a little difficult to say, but I would say likely you're talking about 15% or maybe a little bit under that.
Sounds you appreciate the time.
Jon Chappell
Thank you.
Operator
Bruce Chan, Stifel.
Bruce Chan
Thanks, operator, and good afternoon, everyone. And maybe just a follow-up here on the revenue growth side. I'm not sure if I missed some of it, but it sounds like you're off to a pretty healthy start for the year on the volume side. How should I think about kind of the cadence of low growth versus pricing growth in intermodal as we move through the year?
Phil Yeager
Is the idea kind of that we're higher on the volume side and maybe that subsides a little bit in the back half of the year and pricing accelerates there. So maybe just some commentary on how you'd have revenue growth proceeds through the year.
Yes, Kevin, mentioned, I think when you look at as volume is likely going to be down again year over year in Q. one be up in Q2 and then accelerate as we have both new wins coming on, but also lower comparable in Q3 and Q4. I think around that as well. We would certainly hope that in that kind of 31% that's coming out to bid in Q three and we're getting positive price, which would be incremental. And then certainly, we hope if there's any normal seasonality in Q3 and Q4, we'd see some sort of surcharge revenue that's coming in there as well. That would certainly be upside to our to our revenue projection.
And the other piece that is built-in, there's onboarding and within our Logistics segment that we have good visibility to as well as the final mile acquisition is adding some significant revenue as well. So those components together really are leading to the revenue guidance, Kevin, are running at anything yet.
Kevin Beth
Yes, I agree with Phil. And I think one thing to point out cruises are definitely have some high comparable. You know, where we're looking at this year sort of the exact flip of last year where we started off with really high revenue amounts in IPS. And this year, you know, we're going to fill back up to those as opposed to starting with the and I have as the bid come about that later in the year, we'll start to see that price increase year over year as those bids that went into the second half were priced at a lower amount to begin with.
Phil Yeager
Okay.
Brian Alexander
That's really helpful.
Phil Yeager
And maybe just as a quick follow-up here, of any comments around what you're seeing in terms of competitiveness in the marketplace? And I know you've got some boxes to unstack. Some of your peers have some boxes to In-Stat So maybe just what assumptions are built in from a pricing competitive standpoint in your assumptions for pricing this year?
Jon Chappell
Sure.
Phil Yeager
I'd say it's a competitive market, but we're very focused on our network needs and really driving that velocity and productivity and converting business from over the road. That's actually what we are seeing the majority of our wins in the shorter length of haul, which might be a negative mix impact to our revenue per load as the year progresses. But I think at the same time is a positive for velocity and the balance. So while it's competitive, we're not going to unstack containers unless we're getting a return on that. And we still have a long way to go to get our fleet to running optimally and that the utilization levels that they should be. So there's capacity available even on the street today. But we also want to make sure we have ample capacity to support new onboarding, make sure that those are seamless and that we're serving our customers appropriately as well.
Scott Group
But trade protection is done.
Operator
(Operator Instructions) Brian Ossenbeck, JPMorgan.
Jon Chappell
All right.
Phil Yeager
Thanks, guys. Appreciate taking the question. I just wanted to go back, make sure I understood the the cadence again, like where are you seeing contract renewals now to your point, you are holding the line a little bit too hard on on price or is pricing no down at this point? It sounds like maybe you're hoping for that to recover and turn positive market recovery and maybe comps at the same time. So I mean, if you can just start there and kind of walk me through that again, pure and focusing on our incumbency, we are seeing slightly down renewals, I would say. And then what we're really trying to do is ensure that we're getting growth that is consistent with our network needs that help drive that balance, help reduce costs and really spread our fixed costs a little bit more effectively.
Kevin Beth
And when you look at the last latter part of the year in a Brian, that's already mentioned that we held price a little too long and it's those contracts that are going to come due here in the second half, and we'll be able to price better and it happens are winning more volume at that time.
Brian Alexander
Right.
Phil Yeager
So then I guess I'm just have a hard time with these gas prices. So too long in the back half of last year coming up this year when it flipped the other way and you do some on lose more on pricing.
Good morning, volume. Obviously, a lot can happen between now and then, but just wanted to make sure I understood what you were, what you were assuming in the outlook from focused on the midpoint?
Yes, we are taking a slightly down price in the current bid process, which is that 41% and 18% that are here in the first half, right? So that's what we assumed on those renewals. And then we assume slightly up on the Q3, Q4. And as we bring that on, we would hope we would be hopeful that we are growing volumes during all of those bids. And that is what we are seeing currently right now, if you talk about the 41% that it's currently in bid.
We are seeing we're locking in our incumbency at that slightly down level, but then we're adding incremental volume, which, as you know, has a significant flow through for us and that's been the approach thus far. Obviously, we want the market to assist us. We want to see as there is some stabilization in the spot market. We haven't seen that necessarily translate into contract rates yet, but we're certainly hopeful we see the market really solidified start to move upwards. And as you know, plate prices have large flow through for us and we'll certainly be as the market enables us to be going after rate as well.
Kevin Beth
I think one thing we didn't mention this is Kevin, is on the upside of the guidance, the potential for some surcharges, and that has sort of coming back that was really muted that in fact, there was no surcharge revenue that we experienced in 2023 so we can get back to it with standard environments. We think we'll be able to get some surcharge revenue in the second half of the year as well.
Phil Yeager
And I would just highlight. I think we based that on discussions with a lot of our customers too, are having some concerns around the East Coast labor challenges that may be seen as we enter what is typically retail peak shipping season. And so I do think you'll see a little bit more diverse Asia back to West Coast ports.
Okay. I appreciate that. And just to follow-up on the current market conditions, it sounds like things are actually pretty strong relatively speaking from December into January. I think come Brian mentioned there's some signs of spot market spot market strengthen, clearly not as strong as you'd like, and you just mentioned.
Jon Chappell
So.
Phil Yeager
But what are you seeing now that sort of gives you confidence and looking out for that so that back half recovery, is it too early to say we've turned the corner? Maybe specifically, since you're talking about truckload conversion just on rail service, are shippers really willing to but meaningful volume to that? Or is it just kind of wait-and-see?
Brian Alexander
Yes, sure, Brian. I'll start with the quality of the bids that we're getting. And Phil mentioned some of the dialogues we're having with our shippers. They have a much better view what the normalized inventories, what their demands are going to be in each of the lanes and some of that seasonality that comes with it. That helps us align with what to execute to what price to how to balance our network. And so the quality of the bids are coming out really well. And so we mentioned some of the early wins in the bid season that have already started to materialize here.
We've seen the early signs of that in January. You had mentioned some of the sequential growth that we've seen, not just in intermodal, but also when we look at our brokerage sequential January over December was up 9% and up 4% year over year. And we think those are good indicators. And within that brokerage piece and over the road that we did see some spot price inflation, we'd like to see some more of that continued through the quarter. And we think it will as we start to see some of that spring restocking. And as we go through March and into April. So I think that's a big part of it.
As far as the rail services, Brian, go, we go throughout 2023. We saw continuous quarter-over-quarter service improvements from both rail or both of our rail partners on. They're at a very good, good place. They're continuing that improvement that's compounding over the fourth quarter into this year. I'd say in addition to the consistency that we've seen in their rail service. We're also seeing them be more nimble and quicker to respond to disruptions, whether it be weather and they recover very quick so shippers are noticing that as well and becoming more confident in that.
Phil Yeager
And then those conversions and I think we're using the most recent winter weather disruption of the rebound in service very quick as proof point for a lot of our customers. And I think a lot of many of our customers are thinking about how they want to lock in capacity right now as well and that there likely will be an inflection at some point this year. I don't think anybody is calling a change in the market, and that's not really built into our guidance. But and we're certainly hopeful that we're seeing the positive trends that will lead to that.
Kevin Beth
Okay. I appreciate all that.
Phil Yeager
Thanks for the time.
Operator
Bascome Majors, Susquehanna.
Bascome Majors
Yes, it sounds like the intermodal outlook for the second half, you're expecting slightly positive pricing, slightly favorable calls for nice price cost spread. I'm curious if the pricing comes in more neutral with cost for a kind of breakeven spread there, do you still think the low end of your guidance could hold if that's what the second half gives us?
Jason Seidl
Thank you.
Phil Yeager
Yes, absolutely. I don't we did not build that guidance with a large market improvement in mind as I mentioned, there's some upside factors as well in there around share repurchases. And certainly, if we see the market stabilize, we have levers we can pull to continue to improve our overall cost structure.
Kevin Beth
So absolutely, yes, I think the cost of both the dynamic rail contract that we have will help allow for that. That's Bascome, as well as some of our in 14 of the dredge and and the new chassis agreement also help a deal to allow for for hitting that low end of the guidance.
Phil Yeager
And in your prepared remarks, you talked about in recent years, cash EPS being, call it $0.35 higher than reported EPS. Clearly that goes up with the acquisition this year.
Yes, you have a preliminary purchase price allocation sense of what that gap will be in 2024?
Kevin Beth
Yes, we think preliminary in a low 10s, is that part of the additional amortization from now terminated. That's not not done yet and probably won't be done for the end of the quarter. But yes, that's our preliminary.
Phil Yeager
I'm sorry, low 10s. Do you mean like 10 to $0.15 or 10% or $0.35?
Kevin Beth
Yes, are not as big in actual dollars.
Jon Chappell
Yes.
Kevin Beth
About that.
Well, $15 million of amortization at this higher amortization expense acquisitions is that what you're looking for.
Phil Yeager
I'm sorry to thank you for the time.
Jason Seidl
Thank you.
Operator
[Brady layers] of Stephens.
Brady layers
Okay, great. Thanks. This is Brady on for Justin.
Brian Alexander
I wanted to ask if you could share what your guidance is assuming for margins and logistics.
Phil Yeager
And maybe if you could just share any color on the cadence of margins in that segment in 1Q and then kind of as we as we move through the year?
Kevin Beth
Sure, Brady, I think actually similar to what we've been talking about with ICS, it's going to start off a little lower than we would certainly like it just due to lower transactional volume. But, you know, the spot market and the brokerage pricing right now is a tough headwind to battle, but we expected that to increase as our contractual rates on the truck market improve and also as the final mile, the integration that happens, but we have a lot of upside there as well to help with the BOI. of the Logistics segment.
Phil Yeager
Yes, I would think about it as adjusted operating margin percent for Q4. It's probably relatively flattish yet to Q1, and we would anticipate sequentially improving.
Okay, great. Thanks.
Kevin Beth
Very helpful.
Brian Alexander
And maybe you could just talk about the growth that you're assuming on an organic basis and logistics?
Phil Yeager
And maybe any updated thoughts on kind of what you view as a normalized margin for the segment, including the recent acquisition?
Sure.
Jon Chappell
Yes.
Brian Alexander
This is Brian. I'll talk a little bit about that. I think what we've seen obviously is in our logistics segment is our brokerage standing out and continuing to grow volume. We expect that volume to grow into the double digits, low double digits as we go into this year. Like I said, we've already seen that in January starting to materialize. I think also within our brokerage of what we're seeing is their ability to cross-sell across all of Hub Group and they're adding new logos. And then those logos are cross-selling throughout logistics and within our Final Mile.
We've added those appliance capabilities, but we've also seen that cross-sell pipeline open very quickly with materializing wins ready to onboard in Q2. So that will be another good piece of that revenue stream. And then as we think about our network, which I've mentioned is 11 million square feet that helps enable our cross-selling and our growth with strong pipelines for that network as well as our managed trends. And I've also indicated to as we've done this, we do see a higher retention rate of our customers. How we see them being less price sensitive and a higher rate of return with those solutions that we deliver across our logistics offerings.
Phil Yeager
Yes. Obviously, the higher growth rate would be in Final Mile just given the incremental revenues there?
I would say following that would be managed trend because we have some locked-in wins that are starting up actually in February. So we're excited about that brokerage, we didn't assume a massive amount of growth just given we don't know exactly how the market's going to look. And then with the consolidation, we said things would be a little bit more muted, but maybe just some organic growth in overall volume and velocity. So not anything massive, but actually up year over year.
Kevin Beth
Okay, great.
Phil Yeager
Thanks, guys. I'll leave it there.
Thank you, sir.
Operator
Thomas Wadewitz, UBS.
Thomas Wadewitz
Yes, good afternoon. I wanted to ask a little bit about what's behind the optimism on volume growth in intermodal and just think about where is this, you know, shippers are really kind of interested in the conversion and a better backup on rail service gives you that momentum. Is it the share gain or the improved volume performance? Is that really at the expense of truck? Or are you thinking about maybe competing better against some of the other intermodal player system or perspective about the improvement in intermodal volume is looking at 24?
Phil Yeager
Yes, this is still we are very focused on unless again finding the right business is going to fit our network. But yes, we are very focused on returning to growth. As we mentioned, we don't think Q1 is going to be a positive year over year volume growth, but that it will improve on growth rates as soon as we go through the year. One is low comparable in the back half so that's certainly an aspect of it. But at the same time, it our discussions with our clients around incremental wins that we're actually receiving and then their forecasts for the year as well.
And with the service levels we're providing, we're winning a lot of awards and positioned ourselves to really take advantage of the market upswing here. And so it's a mix of comparable that I confirmed wins and discussions with our customers around how they see their supply chains adapting throughout the year.
Brian Alexander
Do you think it's more share gain from truck or competing better versus some of the other intermodal players.
Phil Yeager
And we're targeting track. I mean, we're winning a lot of short-haul business right now, and sometimes it's more challenging to tell exactly where it comes from. But but I think our main targeted strength, right, right.
Jon Chappell
Okay.
Kevin Beth
That makes sense.
Brian Alexander
One more on you've built a nice portfolio of services. You can offer you talked a little bit about cross-selling. What do you think is the kind of the best hook with the customer when you go in something they really want and is helpful for cross selling and perhaps an area that you might want to build out additional capability?
Phil Yeager
Yes, we're able to really open the door with any customer base and our intermodal capabilities and our service reputation. I think that's certainly our way in. And once we're there, it's about finding the right solution for what their supply chain requires. That could be anything from something as simple as transactional brokerage to a consolidation program to a full outsource or just managing their LTL.
We find that our managed transportation capabilities we can come in with a especially given the inflation that has been taken place in the LTL market with what we can do with consolidation and managing their LTL spend to date very sticky and strong service offering but when we combine that with our warehousing capabilities, that becomes even stickier, as Brian mentioned. So it really does depend on the customer and their specific supply chain. But when I think about where we're at now, I think we have the right set of capabilities. It's about building specializations and scale within them and finding the right cultural fit that will help us continue to drive that growth.
So I think you'll see us continue to be active in non-asset logistics, M&A, but also be very thoughtful around our approach in adding to those core capabilities that we've developed. Okay, great. Thanks for your time.
Jason Seidl
And thank you.
Operator
Ravi Shanker, Morgan Stanley.
Scott Group
Ravi, I think this is Christine McGarvey on for Ravi Shanker. I'm just going to take a step back a little bit. You guys issued some long-term targets a couple of years ago now and it seems we're quickly approaching 2025. So maybe you can talk about kind of confidence and path to some of those long-term targets. And if I can maybe your thoughts as we approach them, how you guys are thinking about kind of the mix and benchmarks that you guys are looking to to benchmark against?
Phil Yeager
Yes, we're not ready to publish any new targets?
Certainly, we're very focused on the 2025 targets with that. We have some work to do on the revenue side, but I think our guidance shows that where we think will be is relatively consistent and what the opportunity to achieve that target we operated this year and the prior year within and above the range on operating margin but I think our guidance is also within the range, obviously. And we think that with a positive inflection in the market will be well within that. So certainly our focus is on achieving both of them and we think both very doable.
Scott Group
Great, thanks. And if I could squeeze in one more, and there's been talk about a bit on the call, but maybe to ask it a slightly different way in your customer conversations thus far in bid season over the road conversions, it seems it was quite the way the market is sometimes in have been harder to prove out that maybe hope for it sounds like there's some inflection here in this conversation. You alluded to kind of rail service confidence coming back, but is there anything else in terms of customer priorities or what they're telling you that because the over-the-road conversion a little more attractive here?
Jon Chappell
Yes.
Phil Yeager
Yes, I think our customers are looking for service. They're looking for consistency. They're obviously looking for cost savings and they're looking to ensure that they have available capacity when the market does inflect. And I think intermodal is a great solution for all of that. And as Brian mentioned earlier, when inventory stabilized, there's more of an opportunity to extend those transit, which also opens up more intermodal opportunities. So all of that leads to some of that shorter length of haul, which we're seeing right now start to flip over.
Great.
Jon Chappell
Thanks.
Scott Group
I'll leave it there.
Phil Yeager
Appreciate.
Thank you.
Operator
[David Zola], Barclays.
David Zola
Hey, good evening and thanks for taking my question. Just real quick, are you able to share the realized yields you were able to get in intermodal for the quarter?
Phil Yeager
Yes, it was down 21%. A couple of things to reference. There was we had a fuel headwind as well as overlapping assets, Oriel and over 5 million of surcharge revenue growth from last year. So I think along with that, I had mentioned earlier, you're going to continue to see a little bit of a mix impact as we bring on more shorter length of haul business. And that obviously impacted us in the fourth quarter as well.
Scott Group
Thanks, very helpful. But I don't want to pick too much of a stab that Brian had had gone after, but just a little bit of understanding for us on on the way down our perception was you held the line on price, maybe a little too loud and it cost you on the volume side. Have you changed at all how you're thinking about pricing or anything you're looking at for pricing or algorithms or anything that will help you. Can you maybe be more could you prevent you from being not aggressive enough? I guess on the upside and not taking advantage of rapidly moving pricing?
Phil Yeager
Yes. Yes, we have absolutely we've changed our entire pricing organization and philosophy to be able to adjust for that. We have a new Chief Marketing Officer, did an excellent job in making sure that we are winning in the market and able to go out and price to win. And that's what we've been doing thus far. So yes, we've made some significant changes within the organization and the end to our approach and feel as though it's working.
Brian Alexander
And then just to add to that as well on price too, is also targeting what we go after to make sure that we're building the balance across our network as well as the velocity in the areas where we need it, and that aligns with the cost takeout that we've also been able to do within our intermodal operation.
Phil Yeager
Last point I'd just add this is Phil. I think right now is the time frame where we lost that volume last year, right? So we are in the process of recapturing that, which is why we laid out in the guide that we are going to be down in Q1, but then start to see year-over-year growth.
Scott Group
Thanks, super helpful. Matt, on the brokerage side, can you get your thoughts on spot versus contract, how you're trying to set yourself up to be able to take advantage of a potentially positive lead inflecting market there and how you plan on handling customer relationships?
Phil Yeager
Sure.
Brian Alexander
Tim, this is Brian. I'll touch on that at when we finish out the year, we were 53% of our brokerage volume being contracted 47 on the spot side, I think what we've been able to do is take a lot of that volume that's coming in and that we're buying low on the spot and move that into contracted. So that we're able to secure that pricing as pressure starts to come in through the through the later parts of this year so that we maintain that lower cost of purchased transportation and then we translate that back into the price that we give to our customers, which then creates more of that volume. So we're structured really well with a good balance and a good strategy for that.
Scott Group
If I have if I just had a last cleanup, can I get the non-driver employee count?
Kevin Beth
Yes, our non-driver without new Final Mile is 1900 versus the 22 at the end of last year or 15% decrease.
Scott Group
Thanks so much.
Operator
Allison Poliniak, Wells Fargo.
Allison Poliniak
Hi, good evening.
Ravi Shanker
And could you maybe talk to on IDS margins in Azure, you're looking towards growth in the second half, any impact in terms of area if you can quantify the how unstacking the boxes would impact that margin in the second half? Is there a cost there and just any holding costs there near term to be mindful?
Phil Yeager
Yes, Allison, I think very good question, but we're unstacking and we're very much looking at it from a returns perspective. So we want to make sure that the business we're bringing on is going to be helpful to margin. So it shouldn't be a large impact in one quarter or another. Anything likely worth calling out where we might give you a little bit more? Is it repositioning costs are increasing? I think that would be a larger driver than unstacking costs.
Kevin Beth
Yes, I think one of the things we do pretty well as we staff close to the markets that we anticipate are going to have the data. So no to allow us to react quickly. And there isn't a lot of costs to get those boxes revenue producing as quickly as possible.
Scott Group
Got it. And then just in terms of M&A, it maybe a little color on kind of where your pipeline stands and you just did the Forward Air the process that just management capacity to handle future and M&A, just given your ability to that to be done on the financials, Mike?
Phil Yeager
Yes, in a facility yes, we do have a strong pipeline. We're very focused on kind of the core non-asset logistics areas, adding scale and specialization that bring a higher margin profile. And yet we're continuing to look for opportunities, we want to be thoughtful. Obviously, priority one is being successful in getting back to growth in intermodal as well as a successful integration of final mile acquisition. So those are the top two, but then certainly out looking for more and as you mentioned, we have a significant capacity.
Jon Chappell
Great.
Phil Yeager
Thank you.
Kevin Beth
Thank you.
Jason Seidl
Thank you. I would now like to turn the conference back to Phil Jaeger for closing remarks.
Brian Ossenbeck
Sir.
Great will thank you for joining our call this evening. As always, if you have any questions, Kevin, Brian, and I are available, and we hope you have a great evening. Thank you.
Jason Seidl
This concludes today's conference call and thank you for participating, and you may now disconnect.
