Hub Group, Inc.

Hello, and welcome to the HUB Group Third Quarter 2024 Earnings Conference Call. Phil Yeager, HUB's President, Chief Executive Officer, and Vice Chairman, and Kevin Best, Chief Financial Officer, are joining the call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the prepared remarks. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Statements made on this call and in other reference documents on our website that are not historical facts are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risk, uncertainties, and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by this discussion and, therefore, should be viewed with caution. Further information on the risks that may affect Hub Group's business is included in the followings with the SEC, which are on our website. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release and quarterly earnings presentation. 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 third quarter earnings call. Joining me today is Kevin Bass, Hub Group's Chief Financial Officer. I wanted to start by welcoming the team to the Hub Group family and thanking all of our team members across North America for their hard work and commitment to supporting our customers and one another. The broader North American transportation market is showing signs of recovery with a pulled forward peak season, capacity exits, a resilient consumer, and inventory replenishment. Outside factors such as the recent port strike and weather events did not create significant or prolonged tightness. However, We are anticipating a more constructive framework for the market due to continued strength in demand, along with small carrier capacity exits and minimal growth in capital expenditures in the industry. These factors will, over time, lead to an improved pricing and demand environment, although the timing and velocity of that recovery remains unclear. We are pleased with how we have operated through challenging market conditions, delivering more resilient results trough to trough, generating strong cash flow which we are utilizing to invest in our core continue to bring value to our customers and shareholders via strategic transactions and return capital to shareholders through dividends and share repurchases we've executed on all three of these capital allocation initiatives this quarter and i will highlight two particular items that stand out to me as examples first is our new joint venture with ayaso EASO is the largest intermodal marketing company in Mexico and is growing significantly, given their great reputation and service, as well as nearshoring trends. Just like us, they are a family business with a great track record of long-term success. We have similar cultures and are focused on building the premier service product for intra- and cross-border Mexico logistics, utilizing our combined density, scale of drainage fleets, network of facilities, financial resources, and customer relationships. Second, is that we are executing on our previously announced capital allocation plan, returning $91 million to shareholders year-to-date through shareware purchases and dividends, while maintaining our strong capital structure and a robust acquisition pipeline. We are in a great position as an organization to drive significant growth in revenue and earnings ahead, as we execute on our strategy and are supported by a market recovery. Prior to reviewing our segment results, I wanted to discuss our adjustments in the quarter. Kevin will give further detail regarding the transaction and restructuring related fees, but I will highlight the network alignment initiative. In the third quarter, we commenced the consolidation and integration of our final mile, cross dock consolidation and fulfillment networks. The focus of this strategy is to create a single high service and efficient hub group network of facilities that can better service our customers and position us to compete and win in the market. This action comprised of integrating 2.6 million square feet of multipurpose space, transferring product and hiring labor, while completing systems implementations. These network alignment costs, which are $8.4 million in the third quarter, will conclude in the fourth quarter and are declining week to week. We estimate these expenses will be $3.5 to $4.5 million in the fourth quarter for the transition, which will position us with a fully integrated and highly utilized hub group network in 2025. Despite the unusual costs, we feel this is the right strategy for our logistics business in order to better serve our clients, improve client retention rates, and position us for success while expanding operating margins in our logistics segment by an estimated 100 basis points based on this year's full year guided logistics revenue. I will now discuss our segment operational results for the quarter. ITS earnings increased year over year, despite a decline in revenue due to improved intermodal and dedicated volumes, as well as continued cost management efforts. Intermodal volumes increased 12% year-over-year in the quarter, as we continued to convert volume from over the road due to our excellent service product and a pulled-forward West Coast peak. Revenue per load was down 16% year-over-year, which was impacted by mixed fuel and price on a year-over-year basis. We continued our momentum in the Local East with volumes up 39%. Local West increased 6% as we onboarded peak volumes later in the quarter, and Transcon was up 1%. Along with these strong results, prior to any ASSO volume, we continued our growth in Mexico with 58% year-over-year volume growth. We are excited about the momentum we are carrying into bid season as we are utilizing our strong rail service, enhanced driver productivity, increasing percentage of in-source drayage, improved network balance, and better container utilization to drive incremental conversion from over the road. Dedicated to perform well in the quarter, posting revenue growth on a year-over-year basis as we improved our operations and increased revenue per tractor per day by 12%. We continue to enhance our earnings potential through improved asset and driver utilization and are pursuing growth with new and existing customers as we deliver excellent service. In logistics, revenue and adjusted earnings increased sequentially due to new business onboardings and strong cost management. Within the logistics segment, managed transportation continues to perform well, supporting our customers with continuous improvements and bringing on new onboardings in the fourth quarter. In final mile, we had lower volumes in our legacy business due to a large customer consolidating facilities, as well as temporarily inflated costs as we completed the integration of our support teams and facilities. We have since reorganized the team, reduced costs, and completed several high-value onboardings, which is positioning us well for the end-of-year surge in demand. In brokerage, we delivered flat volumes on a year-over-year basis but continued to face headwinds in revenue per load due to a higher mix of LTL, which grew 21% in the quarter, and lower spot market activity. We continued our yield management efforts and also supported our customers in recovering from the hurricanes impacting the Southeast while maintaining our focus on productivity. In CFS, we are focused on completing our network transition, improving our service levels, and minimizing costs. We have actions in place to address all these items, and we drove a 15 percentage point improvement in utilization quarter to quarter, and are enhancing our productivity, which we believe will lead to longer term growth and improved client retention rates. As I previously mentioned, we believe we are in a great position as an organization with a solid financial profile, strong cost controls, committed and passionate team, best in class service, scale across our services, and an integrated portfolio of solutions. These factors are leading to wins across our service lines, and we are carrying that momentum into the close of the year and into 2025. With that, I will hand it over to Kevin to discuss our financial performance.

Thank you, Phil. Before I start my prepared remarks, I'd like to discuss the $10.4 million of adjustments in the quarter for the Network Alignment Initiative, expenses associated with the IASU transaction, and $1.1 million of other expenses. These adjustments are cash items and impacted both segments, with $1.5 million of expenses in ITS and $8.9 million in the logistics segment, as the majority of the network alignment efforts, including warehouse transfer and incremental labor costs, impacted the final mile and consolidation and fulfillment lines of business, as well as our crosstalk services. We anticipate that the network alignment initiative will improve service to our customers and operational efficiency and allow us to better compete for new business. Transaction related expenses of $900,000 in the quarter included due diligence, legal, and insurance fees for the EOSU joint venture, which closed on October 23. Banker fees and final professional fees of approximately $2 million will be reported in Q4 to align with the deal closure date. In addition, we expect $3.5 to $4.5 million of network alignment expenses to be included in our fourth quarter results. As I walk through our financial results, my comments will focus on our go-forward operating performance on a non-GAAP or adjusted basis. As a reminder, reconciliations between GAAP and non-GAAP financial measures are included in our earnings release or investor presentation issued prior to this call. For the third quarter, Hub reported revenue of $987 million. Revenue declined 3.7% compared to last year and was comparable to second quarter revenue of $986 million. ITS revenue was $560 million, which is down 5.9% from prior year as intermodal volume growth of 12% and stronger dedicated revenue was not enough to offset lower intermodal revenue per load, accessorial, and fuel revenue in the quarter. Lower fuel revenue of approximately $15 million contributed to the decrease. Logistics revenue was $461 million compared to $460 million in the prior year as the contribution of the final mile business offset lower revenue in our brokerage business. Moving down the P&L, adjusted purchase transportation and warehousing costs were $732 million, a decrease of $40.5 million from the prior year due to lower accessorial costs lower third-party expenses, and lower rail costs. This results in 120 basis point improvements on a percent of revenue basis when compared to Q3 of 2023. Adjusted salaries and benefits were $4.1 million higher than the prior year due to the final mile acquisition as we continue to manage overall headcount. Total legacy headcount, which excludes acquisition employees, drivers, and warehouse employees, declined by 5%. Depreciation and amortization decreased $3.7 million on both an adjusted and GAAP basis. Results include a change to our useful life estimates for transportation equipment as our containers and trailers were lasting well beyond the previous assumption. We also discovered that we were more conservative than industry practice. Insurance and claims decreased by $1.5 million due to lower claim costs in the quarter. Adjusted G&A increased by $3.3 million driven by operating costs associated with the final mile acquisition, which were partially offset by cost management efforts. Gain on sale was $400,000 in the quarter. As a result, our adjusted operating income margin was 4.3% for the quarter. an increase of 10 basis points over the prior year, and a 30 basis points sequential improvement over the second quarter. ICS adjusted operating margin was 2.7%, a 40 basis point improvement over prior year, and a 30 basis point improvement over Q2's OI percentage of 2.4%, as we benefited from strong intermodal volume growth, dedicated revenue growth, lower depreciation and amortization expenses, and cost management efforts in the quarter. Logistics adjusted operating margin is 6%, a 40 basis point improvement from the Q2OI percentage of 5.6% due to strong results from final mile and consolidation and fulfillment services offsetting a lower brokerage margin. Our brokerage business continues to contribute positive operating income in the quarter and year to date. despite being challenged by the overcapacity in the market. Interest expense and other income totaled $1.4 million, as interest income was lower in the quarter. Our tax rate was 23.2%, slightly higher than our Q2 rate of 22.8%, as anticipated. For the full year, we expect an average tax rate of approximately 23%, down from the previous assumption as we have managed tax-related expenses better than originally anticipated. Overall, Hub earned adjusted ETS of $0.52 per diluted share for the third quarter. Generating cash is an important goal of management. We are pleased with our adjusted cash ETS of $0.62 in the third quarter. Cash flows from operations for the first nine months of 2024 were $194 million. Free cash flow of $31 million in the third quarter was impacted by our annual insurance renewal fees, tax payments, and expenses related to the network alignment efforts and the IASU transaction. We also purchased $35 million of stock in the quarter. In total, we returned $43 million to our shareholders in the third quarter with $8 million in dividends and the $35 million of stock repurchases. And we ended the quarter with cash on hand of $186 million. Third quarter capital expenditures totaled $12 million and was down 13% to the second quarter. CapEx spends included replacement for tractors that have reached their end of life, warehouse equipment purchases, and technology projects. At the end of the third quarter, our year-to-date CapEx was $43.2 million. We expect full year-end spend to be between $45 and $65 million, with Q4 spend closer to the lower Q2 and Q3 levels, including expenditures related to the IASU JV, which will be consolidated in our Q4 financial statements. Net debt was $102 million, and our leverage was 0.3 times. below our stated net debt to EBITDA range of 0.75 to 1.25 times. The IASU transaction is expected to slightly increase our leverage in Q4. We continue to expect adjusted EBITDA less capex for the full year 2024 to be greater than the $257 million generated in 2023, demonstrating HUB's cash resiliency as we expect cash earnings growth in this challenging freight environment. Additionally, we remain confident in our ability to execute on our capital allocation plan, which includes paying quarterly dividends, stock repurchases, and strategic acquisitions. Year to date, we've returned $91 million to shareholders through stock repurchases of $68 million and dividend payments of $23 million. HubGroup continues to perform well with intermodal volume growth of 12% in the third quarter. well above IANA's reported volumes as customers pull forward demand in preparation for the East Coast port strike. We've also seen some tightening of capacity. We remain optimistic that these factors will lead to improved rates and demand in the future. We expect full-year adjusted EPS in the range of $1.85 to $1.95 a diluted share and revenue to be approximately $4 billion. In our ITF segment for the fourth quarter, we expect the intermodal volume growth in the low double digits. For dedicated, we now expect revenue for the full year to be comparable to last year. For the total logistics segment, we expect revenue to grow low single digits in the fourth quarter as brokerage revenue continues to be negatively impacted by price. When excluding brokerage, we continue to expect low to mid double digit revenue growth. In brokerage, we expect volume up low single digits in the fourth quarter and for pricing to remain challenged given overcapacity in the market. Further, the expected network alignment initiative tailwind is expected to begin in earnest in 2025. As mentioned, at the beginning of the year, we are facing some headwinds versus last year, including higher interest costs, the normalization of incentive compensation, our annual tax rate being closer to 23%, and minimal gain on sale. As we exit the third quarter, we are pleased with our performance to date, with volume growth in intermodal, strong cost savings initiatives, disciplined financial management, free cash flow generation, and a strong balance sheet. Over the past several years, we have made important strategic changes to our business, including our focus on yield management, asset utilization, and operating expense efficiency, which has significantly improved profitability and returns. We've also completed several acquisitions to build out our offering and drive more stability in our earnings. While we compete in a cyclical marketplace, these actions have accelerated trough-to-trough results with operating margin growing from 2% in 2017 compared with a 4.3% reported this quarter, along with an improvement in free cash flow to over $150 million year-to-date versus $60 million in 2017. These strategic changes have positioned Hub Group for success in both the short and long-term time horizons, as well as in soft and strong demand environments. With that, I'll turn it over to the operator to open the line to any questions.