Hub Group, Inc.

Hello, and welcome to the Hub Group first quarter 2023 earnings conference call. Phil Yeager, Hub's president and CEO, Brian Alexander, Hub's 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 full 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.

Good afternoon, and thank you for joining Hub Group's first quarter earnings call. With me today are Brian Alexander, Hub Group's Chief Operating Officer, and Jeff DiMartino, our Chief Financial Officer. I wanted to start by thanking all of our team members across Hub Group for their tireless effort to support our customers and one another in this rapidly evolving environment. The market has shifted from this time last year. Capacity is loose, customers are more fluid, rail service is improving, inventories are elevated, import volumes are down, and the employment market has become more balanced. The improvements that we have made to our company over the past several years through our diversification, technology enhancements, yield and cost disciplines, and intermodal operating improvements are supporting our ability to successfully compete in this environment and support our customers with world-class service. In intermodal, rail service has improved, as have customer turn times. However, Given slower import demand and elevated inventories, as well as a more aggressive pricing environment, volumes have underperformed our expectations. Our insourcing of drayage, reduction in third-party spend, improved rail partnerships, as well as our enhanced operational discipline and service levels have enabled us to perform well in bid season. As bid awards are realized, we anticipate improved volumes, velocity, and network balance, which will help offset lower pricing and accessorial fees. We will maintain our focus on providing outstanding service and improving our cost structure to drive long-term growth. I am very pleased with the performance of our other service lines, which are generating strong results in a challenging environment. In brokerage, we are maintaining order count and taking share while enhancing margin percentage through our great sales team, improved systems, enhanced purchasing power, and successful cross-selling. We are growing our dedicated business with improved returns through organic and new customer wins. The acquisition of TAG has been very successful, and we are expanding our warehousing footprint to support demand from our cross-selling and insourcing synergy opportunities. Lastly, we are driving organic and new customer-led growth in our managed transportation and final mile businesses due to our industry-leading service level, scale, and continuous improvements. We have an extremely strong pipeline of new onboardings across all of our offerings, and we are bringing value by integrating these otherwise separate solutions to our customers which provides increased savings and enhanced service. We have an extremely strong balance sheet and are generating significant free cash flow, which will allow us to stay focused on executing our strategy of providing best-in-class service, investing in our asset-based solutions, diversifying our service offerings, and enhancing our technology platform. We will execute on this strategy while maintaining a strong focus on cost controls and efficiency enhancements while returning capital to shareholders. We believe this focus will help us navigate the currently challenging environment successfully and lead to long-term growth. With that, I will hand it over to Brian to discuss our business unit performance.

Thank you, Phil. And I also wanted to thank our experienced team for their efforts in leading and executing through a changing freight environment and delivering continued value to our customers. I will now discuss our reportable segments, starting with our intermodal and transportation solutions. In the first quarter, ITS revenue declined 9%, driven by softer intermodal volumes that declined 12%. Transcon intermodal declined 6%, the Local West declined 12%, and the Local East declined 17%. Intermodal revenue per unit increased 3% in the quarter, and we continue to grow our dedicated trucking operation with a revenue increase of 5% in the first quarter and a strong pipeline for the rest of the year. Softer import volume and elevated customer inventories generated softer volume and lower accessorial revenue, which led to a decline in ITS operating income as a percent of revenue by 400 basis points year over year. We continue to offset price pressure with several cost improvements that include, but certainly are not limited to, lower outside dray costs, improved rail agreements, and an increase in in-source drayage from 58% in the first quarter last year to 74% this year. These cost improvements have more runway through the second half of 2023. In addition, rail transits continue to improve in the first quarter and are much more consistent, leading to improved service and street economics. We are pleased with the wins we have so far through bid season, and we expect them to start to materialize in the second half of the year. We will continue to invest in our intermodal business, even in a down cycle, to deliver a superior service product that helps bring cost savings and sustainability to our customers, which in turn we believe will continue to drive long-term sustainable growth. Now turning to our logistics segment. As we continue to deepen our value to our customers with our integrated approach to supporting an end-to-end supply chain, we were successful in expanding our logistics operating income as a percent of revenue by 70 basis points in the first quarter. and despite the challenging freight environment, our brokerage held volume close to flat and grew market share with several new customers. Our overall logistics segment experienced a revenue decline of 13% in the first quarter, but as illustrated in our yield improvements, we have been successful in executing on lowering the cost of purchased transportation and integrating our service offerings. We have successfully integrated our past to non-asset acquisitions and continue to harvest cross-selling synergies. We continue to be very pleased with our brokerage team as our chop tank integration has provided non-asset mode diversification, buying leverage, and continued cross-selling upside, which will further position us for growth. To support our growth, we onboarded two new multi-purpose logistics locations in the West in the first quarter. And we expect to onboard at least two more in 2023 to take our warehouse logistics square footage to over 10 million by the end of this year. These locations are strategic to our hub network of freight as they support inbound and outbound multimodal hub volume and service our customers' supply chain needs. We have a great logistics pipeline of new onboardings with launch dates in Q2 and Q3. Our logistics deal size continues to grow and our close ratio remains strong. With these enhancements, we are in a great position to continue our trajectory of profitable growth. With that, I'll hand it over to Jeff to discuss our financial performance. Thank you, Brian.

Despite softer freight market conditions, we generated revenue of $1.2 billion for the quarter, which is the second highest first quarter revenue in the history of our company. Our continued focus on cost containment and operating efficiency led to operating income margin of 6.8% of revenue. As detailed in our press release, we are updating our income statement presentation as well as disclosing revenue and profitability for our ITS and logistics segments. Purchased transportation and warehousing represents cost paid to third parties for carrier and storage capacity. These costs declined as a percentage of revenue as compared to the prior year, reflecting our focus on cost containment. Salaries and benefits reflect the costs of our office and non-office employee base. These costs rose from the prior year as we significantly expanded our company driver count and added in warehousing operations to the acquisition of TAG Logistics. This increase was offset by lower office employee costs and lower incentive compensation expense. Our depreciation and claims costs both increased from the prior year due to investments in fixed assets and the expansion of our company drainage operations. G&A cost increased as we upgraded our drainage terminal and warehousing network and invested in IT software. Our diluted earnings per share for the quarter was $1.88. Our performance softened as the quarter progressed, particularly within intermodal, as lower volumes, a rapid decline in accessorial revenue, and lower pricing impacted profitability. We generated $124 million of EBITDA in the quarter and ended with $343 million of cash on hand. We are updating our guidance for 2023. Demand conditions began to decline in the second half of 2022 due to macroeconomic factors and rising retailer inventory levels. We expect these conditions to persist for at least the first half of 2023, but are anticipating a slight improvement in demand later in the year. For 2023, we expect to generate validity PS of between $6 and $7 per share. We expect revenue will range from 4.6 to $4.8 billion. For intermodal, we're forecasting mid-single-digit volume declines for the year. We expect to face softer pricing, less accessorial revenue, and a lack of surcharges this year, which will be partially offset by lower purchase transportation costs and improved operating efficiency. We expect Q2 EPS will be the lowest of the year and will decline from Q1 levels at a similar sequential rate as we experienced in Q1. We have also revised our capital expenditure expectations for 2023 to $140 to $150 million, down from our initial estimate of $170 to $190 million, as we reduced our planned container ads for the year. Based on this guidance, we would expect to generate EBITDA-less capital expenditures of over $300 million in 2023. This free cash flow profile, combined with our zero net debt balance, positions us with the financial flexibility to invest in our business through capital expenditures and acquisitions, as well as returning capital to our shareholders. With that, I'll turn it over to the operator to open the line for any questions.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Our first question comes from the line of John Chappell of Evercore. Your question, please, John.

Thank you. Good afternoon. Guys, let me just start with the trends from basically January through where we are today, especially on the intermodal volumes. Overall, kind of the cadence through March and as you have it right now.

Sure. Intermodal volume on a year-over-year basis, January down 8, February down 10, March down 18, and April also down 18 today.

And I think, John, I think we've... haven't seen necessarily the typical seasonality you would see with March being a stronger month in Q1, which is a big part of the revision to the guidance and seeing where April is coming in with pricing resetting at a lower level as well as accessorial fees rolling off.

Yes, that makes sense.

We feel good about the logistics part of our business performing well. Intermodal is just coming off such a high level from last year in such a big part of the business.

That aligns with what we've been hearing otherwise. Kind of bigger picture question, Phil, and maybe for Jeff as well. Last quarter you talked about the acquisition pipeline, hoping to do more than one per year as you've kind of done in the past. Does this environment kind of give you some pause? Does the bank environment give you some pause or does it create more opportunities and How do you think about kind of the timing and the size of acquisitions this year amid this much weaker backdrop versus you have this massive cash flow generation, the stocks really cheap by anyone's metrics, and the buyback program you have outstanding right now?

Well, I think our free cash flow profile and our current balance sheet situation really affords us the opportunity to pursue both. We do have a good pipeline of opportunities. We actually think the current state of the financing market plays well to our strengths. given our ability to fund an acquisition off of our balance sheet, we don't need to rely on capital markets. Obviously, you know, we're pursuing companies that are performing well and, you know, as you would expect. That's the companies that are willing to talk right now are those that are performing. And so, you know, we've mentioned this in the past. I think we talked about this on our last call. If we don't feel like we're in a position to execute on an acquisition, we will more aggressively pursue the return of capital. But we or not at that point right now, but we do have the ability to pursue both.

You know, I would just add, John, I think we've built through the acquisitions we've done in the past a more resilient model and changed that free cash profile. So, as we've said before, we're going to continue to focus on non-asset businesses that help us build, scale, or bring differentiation in our service offering, as well as new technology. As Jeff mentioned, we do have a strong pipeline and are hopeful that we'll be able to close on a transaction this year. But if not, and if things don't come along as we were hoping, we'll certainly be ready to enact the buyback.

Got it. Thanks, Bill. Thanks, Jeff.

Thank you. Our next question. comes from the line of Elliot Alper of Cohen and Company. Please go ahead, Elliot.

Great. Thank you for the question. You talked about a $7 floor on your previous guidance last quarter, kind of how it would take a material change in consumer spending and volumes to change that. I guess, is that what happened this quarter, or are you seeing other factors at play?

No, it's really driven by demand. We just think we're in that lull period still. We know that will correct. It's certainly a question of when and not if. Along with that, I think supply conditions remain pretty loose. We expect those will tighten as well. To get to the upper end of our current guide, we would expect both those conditions would need to be satisfied. If conditions were to stay the same for the full year, that's what gets us to the lower end of

Yeah, I think when we initially issued guidance, we were coming into the year with sequential improvement from December to January. We were anticipating that trend would continue and we would see that March would be much stronger in the quarter. I think as we went through the quarter, we saw we're repricing in a more aggressive environment. We're seeing accessorial fees roll off and we're not getting the bid compliance that we were hoping for on the awarded business. And so with that trend continuing in April, we wanted to make sure we adjusted the guidance. I think as we look ahead, we do feel as though our bid compliance will improve. Our new bid awards are certainly having a higher compliance level than our older ones. And as we reset all those, we'll be in a good position. I think we have performed very well in bid season. We have focused on, you know, really maximizing that margin per load day, increasing the velocity in the network. And so if we see a trend of inventory starting to come down, import volumes increasing, that floor and the spot market really come together, and that will lead to those bid awards materializing. And so that's why we do believe we're going to see some sequential improvement from Q2 to Q3 and Q3 to Q4.

Yeah, no, that's really helpful. Thank you. So I guess maybe on the commentary on kind of a mid-single-digit volume decline for intermodal volumes for the year off of a down 18% in April, I guess, how should we think about that progressing through the year and kind of what gives you confidence on that kind of back-half turnaround?

Yes, I think part of it is comparable from last year, but I think the other piece is that compliance level that we're seeing on new awards. We're also seeing really strong performance in our other service lines, which help to feed our intermodal business. We have some nice wins that are going to be coming on. So part of it is comps, but part of it is also we have a good pipeline of onboardings. We just need to see those really materialize.

Yeah, Elliot, this is Brian. I'll add to that as well. I think we're finding new ways to win with our customers, where we certainly participate in bids and win transactionally. We're able to couple together some of our other logistics non-asset offerings that help us win that volume, become more sticky with it, and be less price sensitive. So if customers are looking for transload or consolidation solutions, we're able to supply those for them, as well as giving them access to our logistics square footage throughout our network. So we see that also helping to drive in the back end. Great. Appreciate it. Thank you.

Thank you. Our next question comes from the line of Brian Ostenbeck of JP Morgan. Your question, please, Brian.

Hey, good afternoon. Thanks for taking the question. Just wanted to talk more about competition. Get to you to elaborate on that a little bit. Where are you seeing the most pressure? Obviously volumes are down quite a bit across the board, but also in the local east. Is this more IMC competition? Is it more truck? Can you elaborate a little bit more on that and what do you expect to see throughout the rest of the year? And if you can throw in the spreads where they are right now in the different regions versus truck, that'd be helpful. Thanks.

Sure. So it's certainly been a more competitive bid season. I think in shorter haul segments, we're seeing that be with both truck and intermodal. And then in longer haul segments, more with intermodal. As you know, our growth has mostly been in the trans cons. portion of our network, which has a little bit more resiliency in this sort of environment, but is also very dependent on import volumes, which have been slower. We are seeing wins continue to come online. We're seeing more customers respond positively to our increased service levels, the economics we can bring, and the capacity assurances, I think, as we see things tighten up over time. So it's certainly been more competitive. It's not anything that's surprising to me or any increase competition versus where you would anticipate it would be. For us, we're staying focused on that margin per load day model that helps us generate the maximum returns, creating more balance, creating more fluidity and velocity. I think from a spreads perspective, you know, on contract business, it's really anywhere from mid-teens to high-teens on the longer haul business to a little bit under that, maybe just low double digits in local markets. So the spread is certainly tighter than what we would anticipate. But I think if you see the spot market really start to bottom and some volumes really come online, that'll get wider again.

Yeah, and Brian, this is Brian as well here. I was just going to add to that too. In an effort to drive that competitive price out there, we've been very successful in taking costs out of our network. I mentioned our improvement in in-source dray as well as our improved buying power and outsource dray as well as our rail service agreements. But also we're coming to the end of a rollout of technology in all of our terminals. We've centralized our load planning, and that's helping us become more efficient on the street. So that all together helps us compete.

Okay. And then just to follow up on the guidance, it sounds like accessorials rolled off quicker than you expected. Is that one of the bigger needle movers, I guess, in terms of how the guidance has changed? Is that now all out of the updated numbers? And anything else you're assuming in the guide in terms of either gain on sales or buybacks? Thank you.

Sure. The guide does not assume a buyback. to your point, asset oil revenue did decline pretty rapidly in the quarter. We had been modeling that for the year. It just happened faster than we thought. And so there's a minimal level of that going forward. And then gain on sale, about $4 million in the quarter, minimal going forward as well.

And we didn't build in a very significant peak season or surcharge-related revenues associated with that as well.

So just to clarify, Jeff, is the the SSROs just came out faster than you thought and there really was no net change? Or were there more of that coming out, you know, just all together on a net basis?

We got to the point we thought we'd be at by, you know, the end of the year in the first quarter.

Okay. Yep. Thanks for clarifying. Yep.

Thank you. Our next question. comes from the line of Bascom Majors of Susquehanna. Please go ahead, Bascom.

Looking past 2017, you've fortunately done a lot more raising of guidance than lowering it. I was hoping that you could walk through the lower end of the range today and walk us through some of the levers beyond that $4.6 billion in revenue. How do you get conviction that the first cut is the last cut and you know, granularly, what are the assumptions that get you to $6, and how are you comfortable there? Thank you.

Sure. We tend to be pretty conservative in our guidance, so it was a big deal for us to come in with a reduction, but we did want to provide a balanced view of what we're seeing. You know, the conditions, again, softened throughout the first quarter and have not really firmed up since then. If conditions were to stay the same, and volume were to be basically flat sequentially the rest of the year, that's what gets us to the lower end of our range. The higher end of the range would come with a stronger improvement in volume sequentially for the year. So, you know, at the midpoint, we're down mid-single digits on volume. You know, to get to the higher end of the range would be closer to flat for the full year, which obviously would imply a sequential improvement in the back half. If the conditions exist that drive that type of volume, we would expect to see surcharge revenue coming into play in late Q3 or Q4. That would also get us to the higher end of the range as well.

I'll just call out Bascom as well. This is Brian. The resilience of our brokerage operations amongst the headwinds in the market. So even with those market headwinds, they've been able to hold their volume close to flat and continue to add new customer logos and gain market share. And as the demand increases, that's really going to accelerate their performance while they also are able to keep their costs contained. So that team moves very fast. They move ahead of the market, and they protect the service, the market share, and their overall yields. And that helps bring a diversified offering.

Thank you both for that. And just one more piece. I believe you said you thought you could do about $250 million in free cash flow. at the initial guide. You've cut CapEx. Maybe there's some working capital release here. Any update on what free cash flow looks like, at least within a range at the new income level? Thank you.

Sure. I had said it in my prepared remarks, but on an EBITDA less CapEx basis with this guide, we'd be north of $300 million. Thank you.

Thank you. Our next question. Comes from the line of Scott Groop of Wolf Research. Please go ahead, Scott.

Hey, thanks. Afternoon, guys. So I was wondering if you could help maybe give us a little bit more history of this ITS margin. It fell from 11% to 7%. But where was this margin at? You know, prior to the pandemic, what's been the historical peak to trough range? Any sort of color history there I think could be helpful.

Sure. So, in the press release, in the appendix, we did put in 2022 by quarter. So, 2022 full year ITS operating income margin was 10 and a half. You know, we didn't go back and recap all of the history, but, you know, the company as a whole back in the, you know, 2017, 2018 timeframe was, you know, around that kind of 2.5% to 4% range. And back then, intermodal was a much bigger part of the overall puzzle. So that, you know, that would have certainly been a part of a big driver of that, you know, 2.5% to 4% would have been intermodal. So kind of call it, you know, the 4% to 5%. Since then, you know, we've done a lot to improve the business. We've taken a lot of costs out. We have better yield management disciplines. Certainly, insourcing, our drayage is a big driver of value as well as offers a service benefit as well. But taking that up from, you know, historically mid-50s up to, you know, we're in the mid-70s today and looking to go higher, that's another driver as well. along with the technology and operating efficiencies below the transportation line.

Yeah, Scott, I'd just highlight I think we're a far better recruiter of drivers now, so we feel that we can sustain the 74% that we're at and get to that 80%. We actually have a backlog of candidates that are coming on, and we've increased our driver count 33% year over year. So, you know, those are markets where we're oversubscribed. We have a few that we need to make up the gap to get to 80%. We're aggressively pursuing drivers in those markets, but those economics will certainly help us quite a bit and are proving to be very helpful in this sort of environment. I would also just highlight the improved rail agreements that we have that are certainly supporting our ability to go out and win as well.

Yeah, just one piece to add to that as well is we've integrated our drivers so that we've really found a lot of optimization in how we share drivers amongst our dedicated and our intermodal drayage within that ITS.

And maybe, do you have, what's in the guidance for Q2 and full-year ITS margin? You know, I just want to, like, in the last quarter or last few quarters, we talked about why there would be less. sort of cyclicality in the margin going forward, and 400 base points is a big drop in one quarter. So I just want to understand, you know, is the variability of the rail contracts, is that still in play, but it just happens on a lag? I want to understand the cyclicality of these margins a little bit better.

Sure. I think the cyclicality of the margins overall is going to benefit from our logistics segment. where the margin did improve year-over-year, and we expect that will continue to ramp. The reality, though, is ITS, and Intermodal in particular, is sensitive to rate, and it's the biggest single part of our business, so that does drive some variability in the business. We expect in a cyclical market such as Intermodal, there's going to be periods of price strength and periods of price weakness. Last year was obviously a period of price strength. this year we expect is going to be one of the troughs and the price weakness side. And so while there will be variability within intermodal, we do have the levers around rail flexibility with our rail contracts and the ability to insource more of the drayage. And then the other key factor is just the growing part of our overall business coming from logistics.

But, Scott, there is a lag on those rail agreements. And I would also just highlight I think we're coming off of historic highs in gains on sale on accessorial fees, on surcharges that have normalized more quickly and drastically than I think we would have anticipated. So we feel a higher floor on earnings that we can now grow off of. And I also believe that it's higher than our 2021 earnings per share, which I think is very strong. And that's the second best year we've ever had in the company. I think lastly, we feel we've built a more resilient model with that insourcing dredge with continuing to improve those rail contracts and with the diversification that we've done, which is leading to a really high free cash flow generating model in a difficult environment.

Yeah, those are all good points. Do you mind just sharing, though, what's in the guidance for Q2 and full year ITS margin?

It'll be a step down from where we were in Q1. you know, somewhere in the, you know, probably another 100, 150 basis points down for the full year.

All right. Thank you, guys. Appreciate the time.

Thank you.

Thank you. Our next question comes from the line of Tom Wadowitz of UBS. Please go ahead, Tom.

Yeah, good afternoon. I wanted to ask you a little bit about the competitive dynamic out there. I think there's some sense or has been a sense maybe that intermodal prices won't go down quite as much as truckload contract rates. So maybe broker rates down the most and then truck asset base not as bad and intermodal not as bad. I wanted to get your thoughts and see if that's right. I guess that's excluding the impact of storage fees going away. But on that, and do you think that there's some kind of, I guess, stability, or is it, you know, the pressure keeps building and, you know, might get a bit worse, you know, as you go through 2Q? So really just around a competitive dynamic. Thanks.

Yeah, sure. So I think that your assertion around rates by group of brokers having the lowest rate you know, full truckload carriers having the next most intermodal outperforming is accurate. You know, in Q1, our year-over-year revenue per load was about 3%, which, you know, I think is strong. Obviously, we're renewing those rates through this cycle at a lower rate. So, you know, I agree with, you know, what he says there. Brian, you want to?

Yeah, I think on the brokerage side too, what we saw in Q1 of last year was we were about 60% spot, 40% contracted. What we did is work really hard to get those customers moved out of spot into contracts so that we could retain them in a much more stable environment in our contract side. And we've seen that help protect our volume as illustrated in our brokerage results. And we think that's going to help us as the market starts to move up as well to drive more volume in that brokerage side.

And just to round it off, Tom, I don't anticipate that we're going to see rates go much lower from what we're renewing right now. That would, to me, be surprising and would really be driven, I think, by a consumer-driven recession. I think we're through 43% of our bids with renewals that are effective. We're repricing another 40% right now that'll be effective in Q2, and there's just not that much left after that, obviously, in the third quarter and fourth quarter to reprice, even if there was additional downside. I think we have seen a few customers pull bids forward. That hasn't been a dramatic change, but you can tell that there is a thought out there from our customers that the market might shift a little bit here in the back half, and they want to try to get the best rates during this kind of Q2 pricing season. So that would be our read on go forward.

Just one last piece to that as well is we still are hearing from our customers that they have volume that's moving over the road that they want to convert to intermodal. And that service stability that we've been seeing from the rails has really played out nicely in Q1. We've gained confidence in the stability of that and the consistency of it. So we've trimmed our transits to those customers to better compete, not just on price, but on overall service with over the road.

Okay. And then I have one that's a little more granular, I suppose. When you talk about the guidance of the kind of decline in 2Q EPS, similar to the decline 1Q versus 4Q, are you talking about a percent change or an absolute earnings per share change? It makes a little bit of a difference the way you look at it.

Percent.

percent right okay great thank you for the time thank you our next question comes from the line of justin long of stevens your question justin thanks and good afternoon i guess phil it was helpful to get some color on the cadence of bid season but would love to kind of hear how contract pricing is trending so far when you look at that kind of first 80% of bids and maybe your level of visibility at this point?

Sure. So certainly lower on a year-over-year basis. I think for us, there's a mixed component where we're really trying to target balance. We're focused on retention of incumbent kind of long-haul and headhaul business while getting that backhaul balance. And I think that from a revenue per unit perspective might be lower than that kind of mid-single, but by retaining the headhaul, we're really doing far better than that. And I think you can see that in the revenue per unit being uh, up 3%, you know, on a year over year basis, despite, you know, renewing the majority of that business or that 42% of the business during the quarter. So our view is still, you know, we're going to do better than, than truck, um, that it will be in the, you know, kind of single digits on, uh, on renewals, um, from, from a decline. And, and, uh, you know, we're really managing, uh, I think very well through this season winning, you know, really picking our spots and, and, uh, and trying to get the velocity and balance back into the network.

Got it. And, you know, if rates are down single digits, I know mix is going to play a role as well, and accessorials. Is there a way you can help us think about the trend of all-in yields going forward and what's baked into the guidance on a year-over-year basis?

Sure. We are assuming – you know, would be down, could be flat to down low single. Okay.

Okay. And last thing I wanted to ask, I wanted to try the question on segment margins maybe a bit differently. Given the resegmentation, how are you thinking about targeted operating margins in both ITS and logistics? Is there a a range you can give us in terms of where you think both of those businesses kind of trend through the cycle?

Sure. I mean, on the ITS side, I mean, I think last year demonstrates the power of our business in a strong pricing environment. You know, this year is probably going to be the opposite. And so in Q1, we were at 7.0%. You know, if you think on a full year basis, we're down another 100 basis points. I mean, that's That's kind of the range of strength and softness. Maybe the midpoint is a good long-term average. On the logistics side, we keep doing better and better, raising yields and operating more efficiently. I'm not sure we're ready to come out with a long-term number, but where we are today, we think there's definitely upside. And as that becomes a bigger part of the business, it'll mix up the overall margin.

Yeah, and part of that will be driven by how much acquisition revenue we drive into the logistics segment. I think we haven't had that be as high, so you're not being as burdened with some of those costs that come through post-acquisition. But just to kind of tie it together, I think when we came out quite a while back with a 2025 operating margin target of 4% to 5.5%, I would anticipate we'll continue to outperform that in totality and on the high end. And you'll see, as Jeff mentioned, in a strong environment, ITS really be the driver of that outperformance. And in an environment like this, which is part of the balance of the portfolio that we have, logistics really be the driver of the outperformance.

Got it. That's helpful. Thanks for the time.

Thank you. Once again, to ask a question, please press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Our next question comes from the line of Robbie Schenker of Morgan Stanley. Your question, Robbie.

Thank you. Good evening, everyone. Just a couple of follow-ups here. I think there's been a fair bit of discussion on this call about floor EPS and kind of where that lies relative to your prior expectations. But if I can just kind of follow up on that and ask you, if your view of normalized mid-cycle EPS and that long-term guidance has changed at all, kind of given where the sort of almost the new floor is and how kind of bad the cycle has been relative to your expectations, is that just The pendulum swings a lot more, or do you think that you probably also have recalibrated what normalized EPS is?

Well, I think Phil addressed some of that on the prior question. I think our prior long-term guide was 4.0 to 5.5 on operating income margin, and we expect the normalized kind of through the cycle operating income margin will be well north of that 5.5. I think last year is a pretty good indication of the strength, and then this year, obviously, is going to be the opposite. So longer term, we're going to be in the middle of those two guideposts.

Got it. That's helpful. And maybe kind of as a follow-up to the competition question, I mean, obviously, the truck market right now is very loose, but it feels like the real intramural markets also kind of fundamentally changing competitively with the combination of CPK, CS and kind of new offerings and such. And basically all the IMCs and players in the space are kind of jockeying to kind of be positioned for that. What does that mean for kind of Hub Group as a whole? Kind of, you know, what are the opportunities? What are the risks for you guys kind of maybe looking out in that same three to five year period from these changes that have taken place at the end of the last 12 months?

Yeah, so we're really excited about the Falcon Premium service that just got launched by our Western partner, Union Pacific. It's really going to help us, I think, take advantage of the nearshoring opportunity, both in the near term as well as longer term. It's two to three days better than the next best service. And so we hope it can be a catalyst for growth, and certainly it's going to be a focus area. I think for us, we're also anticipating, you know, with West Coast port labor challenges getting behind us, we'll see an import volume getting back to a more normalized level. That'll be a good driver of growth. And then with improved service and sustainable service, which our rail partners and us are making the investments to really maintain that in an up cycle, we really want to see us get back to growth in the shorter haul local east markets. And we're certainly working very closely with our partner in the East to make that happen. Very good. Thank you.

Thank you. Our next question comes from the line of Brandon Oglenski of Barclays. Your question, Brandon.

Hey, this is David Zizula on for Brandon. If I could just ask on brokerage, I think there was a competitor that had mentioned kind of 4Q or 1Q as kind of the trough levels in net revenue per load. I know that's not something you disclosed, but I guess are those the trends you're seeing in the market, or are you seeing something else trending in terms of what you'd realize on a unit basis?

Yeah, sure. Yeah, thanks, David. This is Brian. Yeah, I think Q1 would probably be in that trough. We've We've seen April perform just about the same as March, but we have good, as I mentioned before, the market share that we've gained really over the last two quarters with our combination of our acquisition of Choptank and how we face that market, we see our volumes holding quite strong and we've expanded our gross margin as a percent of revenue. And so we feel very well positioned to see a good Q2 and even stronger back half of the year. with our brokerage. I'll mention, too, that our brokerage is integrated into our full logistics offering. And so we have, as we diversify our service offerings with our customers and we bring more than just capacity to them on the transportation side, we're bringing them warehouse capabilities, cross-stock and consolidation capabilities, as well as transloading, that we've seen that business be stickier and less price competitive, and we provide a stronger service offering.

The only thing I'd add on that, Phil, is that our customer count is at record levels in brokerage, and that's a testament to our sales team and the cross-selling efforts that we have. But we think that positions us very well as the spot market does begin to tighten up to be there for those customers and make sure that we're absorbing maybe some of the tender rejections they're going to see from asset-based carriers. Mm-hmm.

Thanks. That's very helpful. I guess the other segment I wanted to talk about, or not segment anymore, but area I wanted to talk about was dedicated. I guess you've been dedicated as a place that you can lean into, maybe that customers are looking for more capacity this year.

Yes, yes, you're right, David. We have seen customers look for more stable and consistent capacity in taking out a lot of that volatility that they've experienced the last two years in their supply chain. So our pipeline is very strong. We have good line of sight to our onboardings in Q2 and in Q3. We've also taken a lot of cost out of that model as well and ran it more efficiently as we've integrated it within our intermodal dredge operation. So, yeah, we feel very good about our dedicated growth.

And then just as a cleanup, Jeff, I don't know if you have handy the non-driver employees. I mean, I don't know if you're now breaking them up by segment, but if you have them by segment, I would definitely take that.

So our total office headcount was just over 2,100 at the end of the quarter. Thanks.

Much appreciated. Have a great one.

Thank you. I would now like to turn the conference back to Phil Yeager for closing remarks.

Great. Well, thank you for joining our call this evening. Hub Group is continuing to position for long-term success. I'm confident in our strategy and team and believe we will successfully navigate this more challenging environment. And I think that's evidenced by Hub being on track for our second best year in our company's 50-plus year history. As always, Brian, Jeff, and I are available for any questions. Thank you again, and I hope you have a great evening.

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