Hub Group, Inc.

Hello and welcome to the Hub Group fourth quarter 2024 earnings conference call. Phil Yeager, Hub's president, chief executive officer and vice chairman, and Kevin Beth, chief financial officer, are joining the call. At this time, all participants are in 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 the 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 filings 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 welcome to Hub Group's fourth quarter earnings call. Joining me today is Kevin Beth, our Chief Financial Officer. The last year was one that remained challenging with excess capacity and balanced demand. Despite these challenges, I am proud of our execution at Hub Group and how we closed the year with significant momentum. We focused on controlling what we can through effectively managing costs and executing efficiency enhancements across our organization while utilizing our value proposition of service and savings to deliver for our customers and shareholders. We maintained our focus on performance, delivering a year-over-year improvement in adjusted operating margins in the fourth quarter, executed a strong peak season for our customers, leading to intermodal volume and earnings growth, completed our warehouse network alignment, driving improved service and costs, while investing for the future through our joint venture with Ayaso. Along with those actions, we returned nearly $100 million to shareholders through share purchases and dividends. As we look ahead to 2025, we are optimistic about the trends in the broader industry with capacity continuing to exit and the consumer remaining resilient while inventories have become more balanced. These trends and the actions we have taken to improve our cost structure, maintain excellent service levels, and improve growth across all of our offerings, we believe will lead to improved revenue and earnings in 2025. I will now discuss our segment performance for the quarter, beginning with ITS, where we delivered a 50 basis point improvement in year-over-year operating margins due to our focus on network beneficial growth, peak season surcharges, insourcing our drainage network, enhancing driver and container productivity, and providing excellent service. In intermodal, we had strong peak season shipping demand driven by seasonal inventory builds and diversions from the East Coast ports to ensure supply chain fluidity. We and our rail partners delivered record service levels despite the large influx of demand, and this enabled us to capture surcharges while creating the opportunity for conversions from over the road as we enter 2025 bid season. Intermodal volumes increased 14% year-over-year in the fourth quarter, with local east up 25%, local west up 11%, transcom down 2%, and significant growth in Mexico given our organic efforts and investment in the asset. Revenue per load declined 9% year-over-year due to headwinds related to mixed fuel and pricing, but was up 4% sequentially due to peak surcharges and an extended average length of haul. We anticipate year-over-year revenue per load will improve as we move through bid season and have more balanced network growth. We are focused on enhancing our cost structure and efficiency, decreasing our cost per dry at 3% year-over-year through better driver productivity and improving container utilization 6% through our focus on network balance. Empty repositioning costs increased by 3% in the quarter to support peak demand, but we were able to more than offset that with surcharges. I am pleased with the momentum in our intermodal business. Our service, scale, and improved cost structure are putting us in a great position for further growth this year. In dedicated, we closed the year delivering year-over-year earnings growth and meeting the surging demand of our customers. We increased revenue per truck per day by 13% while improving our cost structure and surge capabilities. We have a strong pipeline of opportunities and are focused on driving growth in 2025. In logistics, we delivered a 20 basis point improvement in year-over-year operating margins due to excellent performance in our final mile and e-commerce businesses. This was offset by headwinds in our brokerage due to less spot market demand and seasonal slowness in our managed transportation and consolidation services. In brokerage, load count declined by 6%, with revenue per load down 12%, partially due to mix. We delivered growth in LTL, which helped offset a loose spot market for full truckload services. We focused on ensuring we handled the correct volume, reducing our negative margin shipments 9% on a year-over-year basis. To begin the year, we are seeing improvements in demand due to weather events, an increased emphasis from our customers on shipment security, and small carrier exits. We are utilizing our scale, service, and multimodal expertise to compete and win in bids while positioning us to support our customers as projects and spot opportunities become available. In our managed solutions, we successfully supported our customers through the close of the year. We also completed our warehouse network alignment, which has improved our utilization and service levels. We have a strong pipeline of organic and new customer wins we are onboarding in the first and second quarters across our services, which will support further growth and drive incremental volume to our other service lines. We are excited about the opportunities we have in 2025 and believe we are well positioned given our continued strategic investments, exceptional service levels, strong balance sheet, and productivity. With that, I will hand it over to Kevin to discuss our financial support. Thank you, Phil. As I walk through our financial results, my comments will focus on our go forward results on an adjusted basis. As a reminder, reconciliations between GAAP and non-GAAP financial measures are included in our earnings release issued prior to this call. For the full year, HUB generated revenue of $4 billion, a 6% decrease over prior year. For the fourth quarter, HUB recorded revenue of $1 billion, a decline of 1% over last year's quarterly revenue. ICS revenue was $570 million, which is down 1% from prior year. There's an intermodal volume growth of 14% and surcharge revenue of $5 million, partially offset lower intermodal revenue per load and slightly lower dedicated revenue in the quarter. Additionally, lower fuel revenue of approximately $22 million negatively impacted the top line. Full year ITS revenue was $2.2 billion. Logistics revenue was $429 million compared to $438 million in the prior year. as the contribution of the final mile business was not enough to offset lower revenue in our brokerage, CFS, and managed transportation businesses, and lower fuel revenue of $22 million in the quarter. Full year logistics revenue increased to $1.8 billion. Moving down to P&L. For the quarter, purchase transportation and warehousing costs were $719 million, a decrease of $24 million from the prior year due to strong cost controls, as well as lower rail and warehouse expenses. This results in 150 basis point improvement on a percent of revenue basis when compared to Q4 of 2023. Salaries and benefits of $148 million were $13 million higher than the prior year due to the final mile and the active transaction, which was offset by lower headcount across the rest of the organization. Depreciation and amortization and insurance and claims expense both decreased $4 million, which was slightly offset by higher G&A expenses from recent transactions. As a result, our adjusted operating income margin was 3.9% for the quarter, an increase of 40 basis points over the prior year. For the full year, our adjusted operating margin was 4%. ICS quarterly adjusted operating margins was 3.1% of 50 basis point improvement over prior year and a 40 basis point improvement over Q3's OI percentage of 2.7%. ICS adjusted operating margins was 2.6% for the full year. Fourth quarter logistics operating margin was 4.6%, a 20 basis point improvement over last year. Logistics adjusted operating margin was 5.3% for the full year. Interest and other income was a $2 million expense and our tax rate was 18% below our Q3 rate of 23%. For the full year, our tax rate was 22%. Overall, HUD earns adjusted EPS of 48 cents in the fourth quarter and adjusted EPS of $1.91 for the full year. We are pleased with our adjusted cash EPS of 59 cents in the fourth quarter and $2.34 for the full year. The spread between EPS and cash EPS was 43 cents for the full year, a 26% increase over the 34 cents spread in 2023. In total, we returned nearly $100 million to our shareholders in dividends and stock repurchases in 2024 and we ended the year with cash of $127 million. Our full year of cash back was $51 million in line with our estimate of $45 to $65 million. EBITDA less capped at was $298 million for the full year, an increase of 16% over the $257 million generated in 2023, demonstrating HUB's cash resiliency even with lower revenue for the year. Net debt was $167 million. Our leverage was 0.5 times post the ASU transaction, the lower stated net debt to EBITDA range of 0.75 to 1.25 times. Turning to our 2025 guidance, we expect ETS in the range of $1.90 to $2.40 and revenue to be between $4 billion to $4.3 billion for the full year. We project an effective tax rate of approximately 25%. We also expect capital expenditures in the range of $50 and $70 million as we integrate Viatu into our financials and continue to focus on replacements for tractors that have reached their end of life and technology projects. We do not plan to purchase containers in 2025. For our ICS segment, we expect high single-digit intermodal volume growth and low single-digit price increase for the full year. Pricing in the first half of the year is expected to be comparable to Q4 rates, with increases materializing in the second half of the year as we reprice contracts as part of the annual bid cycle. We expect dedicated revenues to be comparable to 2024 as new customer wins are possibly offset by lost customers late in 2024. For logistics, excluding our brokerage business, we expect low to mid single-digit revenue growth due to new business wins and organic growth. For brokerage, we expect mid-single-digit volume growth with potential upsides if we see continued momentum in the truckload environment. Other factors to consider in our 2025 guidance is the forecasted margin improvement in our logistics segments from our network alignment efforts, the normalization of incentive compensation expense, and a higher tax rate. We expect earnings to step down slightly from Q4 to Q1 due to lower peak season demand, followed by an increase in profitability as the year progresses. As we exit 2024, we are pleased with the progress the team has made with Q4 operating income growth in both segments. ICS with a 17% or 50 basis points and logistics with 3% or 20 basis points of growth. resulting in a 9% increase in consolidated operating income, or 40 basis points of growth, on a percent-to-revenue basis. We also reported Q4 intermodal volume growth of 14%, the completion of the network alignment initiatives, execution of the OPSA joint venture, disciplined financial management, 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 the operating margin growing from 2% in 2017 compared with the 4% reported for the full year. Adjusted EBITDA less capped X improvement of 16% over last year, despite a lighter top line, showcases the impact of our portfolio changes in recent years. These strategic changes have positioned HUD Group for success in both the short and long-term 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.

As a reminder, to ask a question, you will need to press star 11 on your telephone. Thank you. I would also like to remind participants that this call is being recorded and a replay will be available on the group website for 30 days. Our first question. Comes from the line of Scott Group of Wolf Research. Your question, please, Scott.