Hub Group, Inc.

Hello, and welcome to the HUB Group second 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 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.

Good afternoon. Thank you for joining Hub Group's second quarter earnings call. Joining 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 Hub Group team members across North America for their resiliency during a rapidly evolving freight environment and their focus on providing excellent service to our customers. The freight economy has been challenged this year, and that trend continued in the second quarter. Import volumes have been lower, driven by elevated inventories, and the industry is yet to exit surplus capacity. This has, in turn, driven down rates to our customers and decreased spot market activity, putting pressure on our more transactional services. However, the consumer has remained strong, and we believe restraint in growth-related capital spending in the transportation industry and an increase in small carrier exits, as well as normalized inventories, are on the horizon, which will drive increased shipping demand, as well as higher spot freight activity. The timing of this change in market conditions remains unclear. but we will ensure that Hub Group is in a position to capitalize on that transition as the market improves. Our second quarter results, while not as robust as last year, showed the strength of our portfolio of services and quality of our team. ITS was challenged with lower intermodal demand and pricing, which led to increased equipment costs as velocity declined and street dwell increased. We are taking actions to increase balance and velocity while better managing our equipment costs. We offset those challenges with our improved rail agreements, strong cost controls, increased in-source drayage, and strength in our dedicated service offering. We are through the vast majority of bid season and performed well in maintaining incumbency and growing with new and existing clients in both intermodal and dedicated, despite increased levels of competition. Rail service has remained strong, and we anticipate that continuing as demand returns driven by the ongoing investments our rail partners are making in their networks. We are extremely excited about the growth opportunity we have unlocked with our partner, Union Pacific, in the north-south corridor between Mexico, the U.S., and Canada, utilizing the Falcon Premium service product. We believe that expanding our services in the automotive industry and the improved transits we have will enable us to access growth via nearshoring with new and existing clients, while providing excellent service and security to all of our customers across industry segments. Our focus over the past several years on the development of our logistics segment is paying dividends in this challenging market, enabling us to stabilize earnings and cash flow. Our value added services differentiate us to our customers and is driving a strong pipeline of growth opportunities as clients focus on ways to continue to build resiliency while reducing costs in their supply chains. Our teams have performed extremely well, and we are in position to grow our logistics segment as we onboard new wins and see demand from existing clients stabilize. This success we have had in executing on our service line diversification and strong free cash flow generation is enabling us to continue to return capital to shareholders as exhibited by our share purchases during the quarter. We're also maintaining a strong pipeline of acquisition opportunities that will continue to bolster our end-to-end non-asset logistics segment. We believe that the market will remain challenged in the near term with improvements in demand through the remainder of the year. but maintain a strong view that we are in a fantastic position to drive growth through our best-in-class service and team, excellent customer relationships, and focused investment approach. With that, I will hand it over to Brian to discuss our service line performance.

Thank you, Phil. And I also wanted to thank our talented 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 transportation solutions. In the second quarter, ITS revenue declined 29%, driven by softer intermodal volume that declined 17%. Transcon intermodal volume declined 9%, the local west declined 19%, and the local east declined 17%. We are very pleased with our dedicated trucking growth and yield expansion in the second quarter, along with a strong pipeline of confirmed winds scheduled to onboard in the third quarter. Continued soft import volume and elevated inventories generated softer volume and lower accessorial revenue in the second quarter, which led to a decline in ITS operating income as a percent of revenue of 600 basis points year over year. We continue to offset price pressure with several cost improvements. We've continued to insource our drayage from 62% in the second quarter of last year to 79% this year, and we continue to generate improvements in our rail agreements, which we expect to accelerate in the second half of 2023 and beyond. In addition, we have cost improvements to further benefit our street economics that will be initiated in the second half of the year. We continue to defend our incumbency and have incremental wins that will set us up for long-term success. Rail service continues to improve and we are confident that it will remain strong as volumes grow. We are excited to further expand our cross-border rail solutions and have already started to implement new North American winds. We will continue to invest in our intermodal business for the long term and are confident that these investments, along with improved rail service, will help support further conversion from over the road to intermodal. While the near-term results are impacted by low volume, We are continuing to take actions to position us to deliver high levels of service for our customers and sustainable profitability for the long term. Now turning to our logistics segment. As we continue our diversification strategy 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 60 basis points over the first quarter. Despite the challenging freight environment, our brokerage team continues to perform well. They held volume close to flat year over year and grew volume 3% over the first quarter. They continue to grow share with existing customers and have been successful in onboarding several new customers each month. Our overall logistics segment experienced softer revenue with a decline of 17% in the second quarter, but has a strong pipeline of confirmed wins with onboardings in the third and fourth quarters. In addition, as illustrated in our yield improvement, we have been successful in executing on lowering the cost of purchase transportation and integrating our service offerings. Our past two non-asset logistics acquisitions continue to harvest cross-selling synergies, and the integration has generated a strong internal network of hub volume that we expect to continue to grow. We continue to be very pleased with our brokerage team, as our chop tank integration has provided non-asset load diversification buying leverage, and continued cross-selling upside, which will further position us for growth. As mentioned in previous earnings calls, we continue to onboard new multi-purpose logistics locations to support our growth. These locations are strategic to our hub network of freight as they enable the growth of our LTL consolidation solutions and support inbound and outbound multimodal hub volume to service our customers' supply chain needs. 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 organic growth and continue to integrate future acquisitions. With that, I'll hand it over to Jeff to discuss our financial performance.