Hub Group, Inc.

Hello and welcome to the Hub Group fourth quarter 2021 earnings conference call. Dave Yeager, Hub's CEO, Phil Yeager, Hub's President and Chief Operating Officer, and Jeff DiMartino, 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 they could cause actual results to differ materially from these 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, Dave Yeager. You may now begin.

Good afternoon, and thank you for participating in Hub Group's fourth quarter earnings call. Joining me today are Phil Yeager, Hub's President and Chief Operating Officer, and Jeff DiMartino, Hub's Chief Financial Officer. Fifty years ago, my parents founded Hub Group. On this, the 50th anniversary, we're reporting record revenue and net income for the fourth quarter and for the full year. Strong freight demand coupled with the attractive value proposition of our services has led to a record $4.2 billion in revenue and EPS of $2.48 for the quarter and $5.06 for the full year. We remain focused on providing value-added services by integrating our business with the needs of our customers. We will continue to diversify our non-asset based services while focusing our capital investments on technology and growth in the intermodal business. From a macro perspective, we expect positive economic conditions will continue to benefit our customers. We are very fortunate to work with customers who have been winners in today's economy. The macro outlook remains favorable with 4% GDP, strong retail sales, a declining unemployment rate, and strengthened imports. In addition, retail inventory to sales continues to be at historically low levels, and our customers continue to tell us that their shelves need to be restocked. On the supply side, the outlook for truckload capacity continues to be constrained due to a shortage of drivers. backlog of imports, issues with truck production, rising insurance expenses, and driver regulatory changes. We believe that 2022 will be similar to 2021 in as much as our prices will increase faster than our costs as the economy continues to experience inflationary pressure. With that, I'll turn the call over to Phil to review our business lines.

Thank you, Dave. I wanted to start by thanking all of our team members across North America for all their hard work and commitment to our customers, which resulted in record financial performance and several awards for our service and sustainability efforts this year. I'll now discuss our service line performance for the quarter. Intermodal revenue increased 25% in the quarter, despite a 9% volume decline after 11% growth last year. Transcon volume was flat, while Local Wealth declined 10% and Local Eats declined 14%. Gross margin as a percentage of sales improved 960 basis points year-over-year, driven by improved yield management and network balance, which more than offset rising transportation costs. Network fluidity declined in the quarter, both sequentially and year-over-year, as rail transit and street dwell remain elevated. We are continuing to focus on improving our productivity while collaborating with our customers and rail partners to increase utilization of our latent capacity. Looking ahead, we anticipate a return to stronger service as investments from Hub Group, our rail partners, and customers drive greater throughput in our network. Demand remains strong, and we plan to invest to support our customers by expanding our intermodal fleet by 6,550 units this year while continuing to grow our driver fleet. Dedicated revenue declined 8% in the quarter despite improvement in revenue per truck per day and reduced third-party usage, which led to a 30 basis point improvement in gross margin as a percentage of sales year over year. We have improved our service offering and operational discipline and have a great pipeline of strong return opportunities and onboardings, which we believe will lead to growth this year. Logistics revenue increased 13% year-over-year in the fourth quarter, driven by strength in final mile and consolidation, which was offset by lost accounts from the prior year in our managed transportation offering. Gross margin as a percentage of sales increased 390 basis points year-over-year as new business onboardings and yield management improvements in managed transportation and final mile offset warehousing and transportation cost increases in consolidation. We continue to have extremely strong demand for our services given the dislocations in the global supply chain and anticipate continued growth this year. Brokerage revenue increased 112% year-over-year on 48% higher volume due to the acquisition of Chop Tank as well as organic growth in our full truckload and LTL solutions. Gross margin as a percentage of sales declined 290 basis points year-over-year as we executed higher revenue per unit spot shipments which comprise 51% of our volume in the quarter. The acquisition of Choptank has exceeded our expectations. We are winning with our customers and on track with our integration plan. We're off to another strong start this year and see ample opportunity to leverage our expanded network, strengthen systems, and sales force to drive growth through cross-selling. With that, I will hand it over to Jeff to discuss our financial performance. Thank you, Phil.

Q4 featured all-time record revenue and profitability levels for the quarter and the full year. Revenue grew 32% in the quarter and 21% for the year. Our yield management and cost recovery efforts led to record gross margin of 16.9% for the quarter and 14.2% for the year. Gross margin performance and our focus on operating efficiency led to operating income of $118 million for the quarter, or 9.3% of revenues. For the full year, our operating income was a record $238 million, or 5.6% of revenue. Salaries and benefits increased from last year due to our recent acquisitions, as well as higher incentive compensation expense. G&A declined compared to last year due to $10 million of gain on sale from the transportation equipment offset by higher expenses related to the acquisition. Our diluted earnings per share for the quarter was $2.48, which is nearly four times the prior year, highlighting the substantial operating leverage in our business. We generated $152 million of EBITDA in the quarter and $369 million for the full year. With cash of $160 million and net leverage of 0.3 times EBITDA, we continue to have substantial flexibility to invest in our business through capital expenditures and additional strategic acquisitions. We have a bullish outlook for 2022, with continued demand from our customers driven by strong macro trends, growth in consumer spending, and low inventory levels. We expect supply chain conditions will continue to be constrained and that our yield management and operational efficiencies will lead to further growth in earnings. For 2022, we are expecting EPS of between $5.90 to $6.30. We expect to grow our revenue to approximately $5 billion putting us well on our way to achieve our goal of 5.5 to 6.5 billion of revenue by 2025. We expect intermodal volumes will return to growth in 2022, supported by our container deliveries and improving rail service. We forecast gross margin as a percent of revenue of 13.9 to 14.3 for the year, as rate increases, surcharges, and accessorial revenues offset higher costs for rail transportation, third-party drayage, and driver wages. For the year, we expect costs and expenses of 425 to $445 million. We expect our earnings will be roughly similar for each of the quarters of 2022, as seasonal strength and yields in the back half is offset by rising transportation costs as the year progresses. Our capital expenditure forecast is 240 to $270 million. We have ordered 6,550 containers for 2022, which will result in net growth of 6,000 or 14% after retirements of older units. This comes on top of 8% growth in 2021. We also intend to take delivery of over 750 tractors, the majority of which are replacements for older models that have an attractive ROI with lower maintenance costs and improved fuel efficiency. We will also be finishing up a significant expansion of our headquarters campus in 2022, another example of the investments we are making for our future. In 2021, we introduced our long-term revenue and margin targets. Our recent acquisitions of Choptank, MSD, and KStack, and the significant investments in our fleet are illustrative of the types of strategic investments we will make in our business. Adding scale while also introducing new service offerings with strong cross-sell potential. Dave, back to you for closing remarks.

Thank you, Jeff. Needless to say, 2021 was a strong growth year for Hub. We believe 2022 has the same opportunity as we continue to expand our service offerings while investing in our core business, bringing significant value to our clients. And with that, we'll open up the line for any questions.

Thank you. We'll now begin the question-answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touchtone phone. And our first question comes from Justin Long from Stevens. Your line is open.

Thanks, and congrats on the results. I'm still in a little bit of shock after seeing this. But maybe to kind of start with that point, if I think back to when you gave guidance in October versus these results today that came in roughly a dollar above what you were expecting and the street was expecting, can you just help us bridge the gap into where the upside primarily came from? And I guess more importantly, can you talk about those drivers and what you feel like is sustainable going into 2022 versus anything that is maybe more transient or one time.

Sure. Justin, this is Jeff. Thank you for your comments there. Yeah, Q4 did exceed our expectations. We saw strength in a couple of areas across our business, certainly intermodal, the impact of surcharges around the holidays, the impact of our yield management actions really did lead to higher than we had anticipated when it came to the gross margin generated by Intermodal. In addition, we did bring in Chop Tank in the fourth quarter. Chop Tank's performance did exceed our expectations as well. And our logistics business has done a really good job of bringing up yield. The top line results have not been where we want them to be yet. We do expect that to improve next year, but they've really done a great job of managing the gross margin side of the business there. Below the line, we did outperform our expectations really based on strength and gain on sale. So we were able to sell more units than we had anticipated at significantly higher gains per unit. So that really led to the outperformance in Q4. Going into next year, we do expect conditions will continue to remain like this in terms of freight demand, constrained supply chain conditions, We anticipate we'll be able to build on our price going into next year. We do have cost increases coming significantly on the rail side, on the third-party carriage side. We expect we'll continue to be competitive on the driver wage part of our business. We'll have increasing costs there during 2022. And then below the line, we do expect to have our typical merit increases that'll come into effect here in February. as well as we do expect the used truck market will have some softening at some point in the year, so we're not anticipating quite as strong of a performance next year on gain on sale.

Okay, that's a helpful rundown, and maybe as my follow-up, any way we could get a little bit more color on the intermodal expectations that are getting baked into the 2022 guidance? I know you said volume shouldn't grow, but Could you give us some kind of order of magnitude on the growth you're expecting for intermodal volumes, maybe intermodal price, and the trend in accessorials?

Sure. We are expecting a return to growth next year on the intermodal volume side, low to mid single digits, really driven by the container deliveries, a lot of which we got in in Q4, and then we're starting to take deliveries right away in Q2 here in 2022, so that'll help with our volumes We expect rail service will continue to improve. That will help create some capacity in our network to be able to handle that volume that we think will be there. And on the price side, we're expecting for the full year, we'll realize mid-single-digit price will start off stronger in the first part of the year, and then the year-over-year increases will come down into the low single digits by the time we get towards the end of the year.

Okay, that's helpful. Thanks again.

You're welcome.

And next question comes from Scott Group from Wolf Research. Your line is open.

Hey, thanks. Good afternoon, guys. So you said at the beginning that you think pricing outpaces costs, but when I looked, the guidance is for gross margins to be flattish year over year. Maybe help us understand those two comments and maybe just along those lines if you have thoughts on first half, first, second half gross margins and the guidance.

Sure. So we do expect the margins will be roughly flat. We are going to cover our cost increases with price. But we do expect, you know, the transportation costs you mentioned earlier are going to be increasing year over year. Some of that will be more back half weighted as the year goes on. So, you know, Scott, you typically would see surcharge and seasonal strength in the back half of the year. We do expect that, but we expect that will be kind of offset by some of those transportation costs that rise throughout the course of the year.

So what do you think that roughly means for first half or second half gross margin?

Gross margin percent, I think it's going to be pretty consistent throughout the course of the year.

Okay. And then on the volume guidance low to mid-single digit, I think if we're thinking about this right, the container count's going to be up over 10%, and it sounds like you're assuming some improvement in service and then maybe some reduction in accessorial, so implying improved fluidity. Why isn't the volume better?

Well, the containers come in throughout the course of the year, so on a full-year basis, we're expecting kind of that low to mid-single digit.

And then just last thing, maybe just the latest you're seeing at the ports, if you're seeing any improvement, and then your thoughts on the market share shifts coming to UP this year, next year, and what that means for you guys. Thank you.

Okay. This is Dave. You know, as far as some of the new entrants that are coming on to the Union Pacific, we've been competing with them for many, many years. And so we really don't foresee a significant competitive change. You know, I point out that HUB is the largest intermodal partner on the UP. In fact, we're over twice the size of Schneider Intermodal and five times the size of Knight Intermodal. And we also have 40% more drivers that we have allocated towards Zendermodel than either of our competitors. We have a great relationship with the UP, and I think on a very positive note is that we have a long-term contract that features benefits that come with that kind of scale. I would suggest to you it's also on the positive side that UP is gearing up for the additional business by investing $600 million of capital in 2022, targeting specifically chassis as well as terminals. So bottom line is we view these commercial to be basically a net neutral for hub and not a major competitive change.

Yeah, this is the only other thing I'd highlight is, you know, obviously with, you know, one of the other providers coming on to UT being aligned with the Norfolk Southern, that'll give us maybe a little bit more density than the two other asset-based providers that are aligned with UT and CSX. We think with NS we have a better reach, more density, and we'll have more interline options that will provide a good service. On the port side of your question, I think we aren't seeing a rapid improvement in congestion there. Demand for international remains very strong. We're seeing that in the import of our own containers. So if we even see some improvement over the next few months, in Q2, Q3, you're already back in peak season again. So at this point, we don't see a massive improvement to port congestion this year, and that should continue to provide opportunities for us to grow well into 2023.

Thank you, guys. Appreciate it. Thanks, Kevin.

And the next question comes from Todd Fowler from KeyBank.

Great. Thanks, and good evening. So I wanted to ask kind of your views on rail service, and I guess in the context of how important I understand from the volume guidance and kind of the expectations that you're embedding improvement in rail service. But when I look at the fourth quarter and I think about kind of the results that you're able to put up, Is the message that if rail service doesn't improve materially, you can still kind of get to a similar answer and it's just a movement between volume and price? And I guess how important do you view rail service in the context of your guidance? I understand it's important from a service perspective, but just from an outlook standpoint, how are you thinking about that?

Yeah, you're absolutely right, Todd. We do want to see improved service. Long term, that's the right thing. That's going to allow us to convert more business from over the road. I think as our customers get their inventories in better order, they're going to look to expedite fewer shipments, want to convert more to intermodal. So having capacity and a better service product and a more consistent one available is really going to help. We have seen, at least at this point, a slight deterioration from Q4 to Q1. I think that's winter weather driven, as well as we just haven't seen the investments really take hold. We're hoping as weather really starts to subside that the that we can see that improvement. I think the other piece for us is we've actually seen an improvement year over year in our end service product to our customers. So we're really excited about that. So even in disruptive times, we're able to improve our service product. So really pleased with that. I think with the question around margins and does that deteriorate if service improves, I don't see that at this time given the demand that is out there, given the constraints in the driver market. And, you know, really with accessorial revenue potentially subsiding, at this point, we'd much rather be moving that volume. The opportunity cost is much higher. And so, you know, we think that'll be a good formula for us going forward.

Yeah, no, Phil, that makes a lot of sense. And really it was more in the context of, you know, it seems like the business, the guidance isn't so much dependent on the improvement in rail service. And we certainly understand that the service component of it, so that's helpful. I guess just for my follow-up, how do we think about the 2020 guidance in the context of the 2025 guidance? And I know that 2025 wasn't supposed to be a straight shot, but when I look at the high end of your revenue guidance for 22 and the low end of your guidance for 25, I mean, you're pretty close. Would your expectation be that things level off post-22, or is it something that you feel more confident in achieving the 25 targets maybe on the earlier side? Thanks.

No, I mean, we did give a range, so I think, you know, the guide is going to get us a big chunk of the way there. I mean, part of the way we're getting there is both organic but also through the benefits of the acquisition of Chop Tank, which I think, you know, we're going to continue to do. So if we can continue to make acquisitions like that, we would anticipate being towards the higher end of the range by 2025.

Okay. Thanks for the time. You're welcome.

And our next question comes from Elliot Alper from Cowan. Your line is open.

Great, thank you. So on the brokerage side of the business, last quarter you discussed some of the cross-selling opportunities for Chop Tank. Can you discuss some of those wins in the quarter and kind of whether most of that low-hanging fruit has materialized and kind of how we should think about the brokerage margins in 2022?

Sure, yeah, this is Phil. We are really excited about the Chop Tank acquisition. It's been a great cultural fit thus far. They have a great team. We move with a lot of speed with that group in particular, and so that's been phenomenal. We've actually seen three record months from the Chop Tank organization right out of the gate, which is phenomenal. and we want to continue to see that. We're ahead of schedule on our cross-sell targets, but to me, we've only really scratched the surface of that. I think the only other interesting thing I'd share with you is that sometimes during an acquisition, you get a little nervous around shared customers and how that will play. We've actually... seen a real positive come out of that, where we have a joint relationship with those customers. We're actually able to create even more value, not actually deteriorate the existing relationship. And so I'd say, all in all, we're really excited about the progress we're making and think there's a huge opportunity that we're really just getting started on. So it's been exciting. I think the only other piece I'd share is the refrigerated market continues to have a significant amount of demand. And we're actually going to be investing in 550 incremental refrigerated containers this year to help support our selling into that market. So supporting existing ShopTank customers, but also our existing hub customers building that real refrigerated product offering. So feeling very good about that as well.

Okay. And should we think about that margin structure of the brokerage business staying relatively the same this year?

I think you'll see Choptank typically has had a lower gross margin percentage, mainly because of moving higher revenue per unit spot shipments, but have that lower gross margin percentage. So you might see that come down, I think, but we will be consistently focused on getting that higher throughout the year. I think our existing brokerage between LTL and truckload, you'll see that remain relatively similar, you know, depending on what the stock market does throughout the year. But our forecast is, you know, at least coming out of the gate, we'll continue to see a similar sort of trajectory.

Okay, great. Thank you.

And your next question comes from Biskami Majors for Susquehanna Financial.

Thanks for taking my questions. You know, Into what were strong fundamental years before, you certainly saw some conservatism in the initial outlook. I guess that argument could be made on the back of what you just did for 4Q and the idea that not a lot of market conditions are changing near term. Can you talk about the puts and takes? Where might there be some conservatism? Where might people risk getting ahead of themselves when we think about projecting out the next you know, four quarters for your business. Thanks.

Sure. Yeah, happy to do that. You know, our forecast, and we, you know, we did give a range, you know, it was meant to encompass kind of the current market conditions with some input cost inflation. You know, additional strength areas could come in areas like, you know, stronger surcharge revenue in the back half of the year. We certainly are aiming to grow intermodal volumes at a higher rate than mid-single digit. If there's continued tightness in the truckload market, that's going to obviously benefit our pricing. Rail service is another area of potential upside, which would facilitate more truck to intermodal conversions. And then there could be additional strength in the used truck market, which would result in more gains on sale for us. And then, of course, we're on the lookout for additional strategic acquisitions. That could be another source of upside. On the downside would be any weakness in consumer spending. If consumers shift their spending back to services, there is a pretty big backlog of inventory that needs to be rebuilt. So that, we think, will be a tailwind for a while. But if there's a sustained shift back to services, that could be a negative. If there's a return of oversupply in the truckload market that would have a way on price, and then just additional driver turnover if we can't bring that down into 2022, that could go the other way. Those would be the big pluses and minuses to those guidance.

Thank you for that. Do you expect anything fairly abnormal for seasonality this year?

You know, coming out of the gate to start the year, we're seeing very strong demand. You know, we don't foresee, you know, a change at this point from conversations with our customers and what we're seeing in the data. So, you know, feeling like market conditions will continue and, you know, which gives us, you know, confidence in the guidance. Thank you.

And our next question comes from Tom Wadowitz from UBS.

Yeah, good afternoon and congratulations on the really strong results. I wanted to see if you could offer some thoughts on just the M&A backdrop. I mean, obviously you've got a lot of momentum and firepower with the ability to go and do more deals. Should we expect you to do something in 2022? Do you think that's likely? And then also just, you bought a really high-quality brokerage company, a lot of momentum there. Where is the next place to look in terms of what might be a place you want to add in terms of businesses?

Sure. Yeah, we definitely expect to be active on the M&A front. We've got a very solid pipeline. We've got engagement from a lot of our business unit leaders. We've had really good success when we are out just knocking on the doors of companies that we think fit our profile, and we spend a lot of time up front getting to know the management team and the ownership and I think that's what really has led to the successes we've had recently with Chop Tank and with NFD. The commercial synergies that we're penciling out in diligence, we're finding those are coming to fruition. We've got a great customer base with our existing business and they're willing to give us opportunities to sell new services to them. That will really inform our strategy going forward. Choptank was a great example of both adding scale to an existing business as well as adding a new capability. So we scaled up in brokerage and we now have a very, very solid refrigerated transportation platform to build off of. Areas for targeting for future acquisition, really going to be non-asset based logistics We have a great footprint with nonstop in the final mile space while you're on the big and bulky as an example. But what we don't really have today is the ability to do appliance delivery installations. That would be an area of interest to us. Things like e-commerce fulfillment, with our customer base being retail and CPG, we think there's a lot of opportunity there. That's another example of an area that we'll target for growth.

Okay, yeah, great. I wanted to ask you one on the volume side as well. I guess, can you give a little more perspective on the timing of the container ads? And then maybe just, you know, what should we really pay attention to in terms of the constraints that, you know, if they get better, you can do upside on the volumes and are kind of, you know, important inputs? Is it, you know, your own dredge capacity? Is it rail terminal operation? What are kind of some of the key factors that feed into the intermodal volume output?

Sure. So we've really received all of our 2021 orders at this point. We only had less than 5% kind of bleed into the first part of the year. We'll have the remainder of the 2022 order really coming in throughout the year leading up and into peak season by the last deliveries coming around November. But it'll be a pretty even sort of trajectory and cadence throughout the year. I think that obviously is going to be a nice tailwind, assuming we don't see any drops in service or turn times or any new COVID variants or anything like that that create staffing shortages. So we would anticipate throughout the year you're going to see a better percentage growth. We did start with January down 6%, but we were up 3% on our volume sequentially. So we think that's a nice trajectory if we see that continue as we start to overlap the shutdown Union Pacific had during February of last year. We could see momentum start to carry out of the first quarter for growth and into the remainder of the year.

So on a monthly basis, maybe March easy comp, you could actually potentially be up in March, something like that?

Yeah, I agree.

Yes.

And then, you know, if service continues to improve like we think it will, as, you know, Norfolk Southern and UC start to get staffing up and more chassis online and our customers become more fluid, and we do as well, we think we're going to see, you know, upside to that. So that growth trajectory, that volume percentage growth trajectory should be moving, you know, progressively upwards throughout the year.

Great. Okay. Thank you. Appreciate it. Thanks, Tom.

The next question comes from Allison Polniak from Wells Fargo.

Hi. Good evening. I just want to ask about Choptank. It sounds like it's growing better than you anticipated. Is there a way within the context of your revenue guidance in terms of what the contribution from core versus the acquisitive growth would be for 22? Any color there?

Sure. I can speak to that. So at the midpoint, we're looking at about 19% growth in total. We would be at about 10% organically.

Got it. And then just going back to the question on M&A, it sounds like a pretty active pipeline. Could you maybe talk your comfort level with leverage? It certainly seems like you have a lot of capacity today, but kind of where your comfort level would be within that leverage range, just given the active pipeline?

Sure, yeah. So we're at about 0.3 times net leverage on an EBITDA basis today, which we think gives us a lot of flexibility to pursue investments both in capital expenditures, in the containers and trackers, but also to give us the capacity to do acquisitions. We're comfortable going up kind of north of two times, maybe two and a half times EBITDA for the right deal, but we'd like to maintain our leverage closer to one times EBITDA over time.

Great. Thank you.

You're welcome.

And our next question, Constance John Chappell from Evercore ISI.

Thank you. Good afternoon. Phil, there's been a lot of focus in the industry on logistics, and the growth across the entire industry has been pretty remarkable in the last couple quarters. Your revenue is maybe a little bit lower than expectations, but your gross margin on the logistics side up 390 basis points was pretty huge. Are you trying to be a bit more disciplined with the onboarding of customers onto your platform to focus a little bit more margin as opposed to just going to the top line as fast as you can?

No, that's exactly right. I think when we look at our logistics segment, we have scale in the LTL and truckload space, so we get to be selective due to our purchasing power that exists today, and we want to find customers that fit our profile. that want to be with us for the long term. And then we can generate a strong return for the investment that we're making as well. So yes, we've been much more disciplined in our approach and I think that has allowed us to bring on the right business that we hope will be much stickier longer term. Sometimes you see with some of those really high revenue, low profit sorts of engagements, those can be somewhat volatile, and so we have been much more selective there, and I think it's proven out to be beneficial for us.

Okay, great. And then just for my follow-up, I don't want to just keep harping on the short term here, but You know, you're one of the last to report this quarter, and, you know, we've heard about, you know, stickouts by employees and shippers as well, labor shortages, terrible weather. You know, the volume has obviously been showing up in the rail data, and yet I think it was pretty interesting that Jeff said, like, the gross margin and the EPS would be pretty ratable on a quarterly basis throughout the year. Should we just think about, as a big needle mover, you know, intermodal pricing will continue to kind of be what it was like in the second half of the year, those huge kind of 26% to 37% increases. And that kind of offsets a lot of these macro headwinds that you're facing in the early part. In the back half of the year, it's kind of really a more, quote, unquote, normalized operational backdrop.

Sure. Yeah, I think that's right. Yeah, we are seeing a strong start to bid season. And just to give you a cadence around it, 44% of our business in intermodal is going to be repricing Q1, 34% in Q2, and then 19% in Q3. So Q2 is actually a little heavier. than is typical in years past. And so given where pricing is currently, and we forecast it's going to continue to be in the second quarter, that could be a little bit of upside for us. But there's a benefit to customers in that they want to lock in capacity right now, right? And us making these investments is going to allow us really, to do that. So I would anticipate you'd see a little bit more of a normalized peak season next year, but, you know, we also thought that that was going to occur this year. So if these issues and challenges and supply chain issues persist, you know, you could continue to see these conditions, you know, well throughout the year. Okay. That's great. Thank you, Phil.

And our next question comes from Brian Ostendek from J.P. Morgan.

Yeah, thanks. Good evening. Appreciate taking the question. Maybe just to follow up on the pricing commentary, it sounds like shippers are obviously pulling forward some of the contracts a little bit, trying to lock in capacity. Is there anything else that you would say is sort of different this time? Obviously, quite a few things are different, but at least from a contractual perspective, longer-term agreements, different forms of pricing, how do you think that this whole experience over the last couple of years will change or has changed? how some of these transactions get done, especially on the intermodal side.

No, I think that's exactly right. We're seeing a lot of customers be very interested in moving to more of a multi-year framework with floors and ceilings related to publicly available data, and those are contracts that we're comfortable with, with the right customers, and we will continue to pursue those, especially with business that we define as baseload or that's network beneficial, and so it might not be that we'll lock in an entire network with a customer, but we might say, okay, half the business is really good business for us that we feel comfortable with locking in these prices for a multi-year period. So we are taking that approach, and And for a lot of customers, they're very interested in it as well. The other thing that we're seeing right now is a consolidation of providers, whether it's in brokerage or intermodal. And so for the providers, we think like ourselves with our strategic customers that we've really stepped up for, we're going to see some benefits coming out of that and opportunities to continue to grow with our strategic accounts through that process.

Okay, great. Maybe just one quick follow-up on that second one. Is ESG part of the conversation at this point, at least in a more material way than it's been in the past?

Certainly. I think every supply chain team at a large Fortune 500 company like which is our customer base is thinking about how can they contribute to the sustainability efforts of their company. And we provide them with a lot of data around carbon emission savings and what business could potentially convert to intermodal and that is going to continue to be, we think, a story for several years to come. We need to continue to get our service to the right level to fully take advantage of that. The other piece that is going to continue to play into conversion to intermodal is fuel prices as well. So if you see that continue to move upward, that could be another good tailwind that comes into conversion to intermodal as well. So all those factors we think are going to continue to drive a nice conversion opportunity for the next year and we think beyond.

And then can you just talk briefly about the IT spend? It's within the $40 million total, including the headquarters. What are you focused on there? Is it still transitioning over to Oracle? Anything integration-wise on Chop Tank? Maybe some of the bigger projects you're working on would be helpful.

Yeah, so for us, and, you know, as we've really gone to a buy commodity but build for differentiation approach, differentiating for our customers, for our vendors, for our team members, we've really been focused on utilizing the our satellite tracking to provide end-to-end visibility. We've done a great job of automating workflow, giving better intelligence to our teams and our drivers so they can be optimal in their workflow. I think one great initiative that I've seen really benefit us over the last year was within our brokerage, we built a customized workflow management tool And we've seen an 18% improvement in productivity on a volume basis within that team over the past year. So a really impressive result, you know, we think. And we're going to continue to make investments like that, and we're doing that across the organization. And so I think you're going to continue to see us become more and more efficient and more effective and responsive to our customers. On top of that, to your point, we've got to do a great job in integrating our acquisitions. I think we have done a phenomenal job. So getting... you know, chop tank onto our ERP and integrate it in with our human capital management. All of that is going to be part of the work. And as we do more acquisitions, we're going to stay really on top of that and make sure that we integrate timely but also very well. So those would be a lot of the big initiatives that we're focused on. But I'd also just highlight within truck technology, we continue to assess our investment in electric trucks. I think that's a great opportunity. We're doing autonomous vehicle tests, you know, a lot of really interesting things are out there from that perspective as well that are exciting and even just beyond, you know, the workflow management tools we have here at Houzz as well.

Okay, great. Appreciate it, Phil. Thank you.

And our next question comes from Fadi Chamon from BMO. Your line is open. Fadi, if your line is on mute, could you unmute your phone?

Yes, hi, good afternoon. Congrats on the results, first of all, and thanks for the question. Can you remind us about the boxed turns that you have currently in the intermodal network, and what would that look like in more normal times?

Yeah, so for the full year in the fourth quarter, we were up about 10% year over year. We actually saw a decline sequentially from the third quarter to the fourth quarter of 3%. The year-over-year deterioration mostly was driven by rail service. There's a mixed component in there. I think you can see that our TransCon volumes continue to outperform the remainder of our network. That elongates your transit a little bit, but that's not really a massive impact. It might be a percentage point or two. On the sequential decline, that was mostly driven by customer pools. you know, and unloading times at customers as I think, you know, that makes sense that demand was up and staffing levels were coming down, right? And so we saw some longer dwell in our customer pool. So I think if you look at normalized levels, there's a lot of upside here, you know, and could be, you know, as much as 15% on our turn times as we get back to more normalized service levels. You know, it could be even higher than that. So we're So, you know, excited to see that take place and think that as the year progresses, we'll see that improvement take hold.

Okay. And the second question, going back to the volume guide on the intermodal side, I mean, if I look back, you know, a few years now, five, six years, it feels like we've gone through multiple cycles where fuel prices were up or down and truck market was loose and tight and throughout that volume and intermodal have really struggled to grow and here we are today with kind of record saving for intermodal versus truckload and yet the volume picture looks kind of not all that impressive. What does need to happen on the intermodal service product side to really start to see the that structural growth opportunity in intermodal play out?

Yeah, I think from a capacity commitment perspective, the intermodal industries, there are tender acceptance rates versus the truckload industry, which have been in the high 70s, low 80s. Typically, intermodal, we're in the low to mid 90s. So the commitment to capacity, I think, is there. What is not there, particularly in shorter haul lanes right now, is a consistent service product. I don't think our customers are looking for necessarily the fastest transit. They're okay with two days extra to capture those savings, but it needs to be two days. It can't be seven days longer one time and two days faster the next. It has to be consistently two days slower than truck. I think that on a consistent basis, is what we need, and I know we're all, along with our partners, very focused on delivering that. That's why I think you continue to see our TransCon business perform better than our local business as well, is that is where you can more consistently capture that service and those savings versus those shorter lengths of haul where you have maybe less of a room for error.

Okay. Thank you. I appreciate that.

And just as a reminder to enter the queue, please press star then 1 on your touch-tone phone. Again, that's star 1, enter the queue. And our next question comes from David Salula from Barclays. Your line is open.

Hey, congrats on the quarter, and thanks for taking the question. I just wanted to ask, and you alluded a little bit to it in one of the previous answers about your use of rail-owned equipment. I think you talked about it in the East, but maybe can you discuss a little bit more your use of rail-owned equipment during the quarter, if any challenges that presented and what challenges and opportunities you might have for that in the coming year?

Yeah, so that would be a part of the volume decline that you're seeing for us. Last year, we used probably... We were about 93% of our business was done in our own fleet. This year that's closer to 99, mainly because we can better manage our own fleet. It's much less expensive when you have higher street dwell. And so we have really, you know, removed a lot of the rail network to under 1% of our volume is in rail-owned boxes. So that has been a concerted effort. And it's part of why you're seeing, you know, some of that volume decline on a year-over-year basis.

Great. And then as a follow-up, I don't know if you have handy the sequential headcount number for 4Q, but related to that, I guess you didn't note labor as being a constraint to volume kind of anywhere throughout any of the businesses. So maybe touch a little bit about what you're doing in human capital to kind of keep the labor count up in kind of challenging labor times.

Sure, so at the end of the year our non-driver headcount was 2,300. Last year we were just under 2,000, so up by 300, but we did add around 400 employees through the acquisition of Chop Tank.

And then just from a human capital perspective, I think we really value our culture. We have a great human resources team, we have great managers, and we've really worked hard, one, to provide a really great environment for our team so we can keep turnover at a minimum, but also make sure that we're giving them better and better tools so they can be more effective at their job and give people progression opportunities within their career. That's going to continue to be our focus. I don't think we would say that we're perfect, and we always have opportunities to improve, and so we've experienced somewhat higher turnover, but not anything that has impacted us and I think our whole organization has really rallied around the opportunity to service our customers and continue to grow.

Thanks. And we have no further questions. I'll turn the call back over to Dave Yeager for final remarks.

Okay. Well, thank you for joining us for the fourth quarter earnings call. As always, if you do have any additional questions, Jeff and Phil and I would be available. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.