Hub Group, Inc.

Hello, and welcome to the HUB Group Second Quarter 2025 Earnings Conference Call. Phil Yeager, HUB's President, Chief Executive Officer, and Vice Chairman, and Kevin Beth, Chief Financial Officer and Treasurer, 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 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 follows of 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 second quarter earnings call. Joining me today are Kevin Bass, Hub Group's Chief Financial Officer, and Garrett Holland, our Senior Vice President of Investor Relations. I wanted to start by once again thanking our thousands of team members across North America for their diligence and focus on delivering for our customers and shareholders through this rapidly evolving environment. The second quarter was challenged versus typical seasonality due to tariff-driven adjustments to shipping patterns. Our more transactional service lines were impacted less than we anticipated, but we did experience a decline in demand due to slower import volumes near the end of the quarter. Offsetting those headwinds, our contractual services performed well and maintained resiliency. This consistent performance is helping us maintain our strong balance sheet and pre-cash flow profile, giving us the ability to invest in our business through cycles to deliver long-term value to our customers and shareholders. Through this dynamic environment, we are focused on executing our strategy of delivering best-in-class service at scale, continuously improving our productivity while investing in high-return initiatives and returning capital to shareholders. We are executing on this strategy as illustrated by the acquisition of Martin Transports refrigerated intermodal fleet and our success in our cost reduction program. The acquisition allows us to enhance our scale and capacity in one of the highest growth segments of our intermodal network and expand our customer base while generating strong returns due to our ability to capture synergies within our platform. We have a robust pipeline of additional acquisitions and plan to continue deploying capital toward long-term growth opportunities. We are also controlling what we can control by implementing our cost reduction program. And thus far, we've completed the vast majority of our initial $40 million goal while identifying additional opportunities for savings and efficiency gains. This success is allowing us to raise our target to $50 million of total cost reduction. As we look ahead, near-term demand trends off the West Coast are strong, and we are seeing indications of an early West Coast peak season, which coupled with several sizable startups in our logistics services, should lead to improving revenue through the remainder of the year. It remains unclear how long elevated import demand will persist as we are seeing variances in forecasts by customer, but we believe we are in an excellent position to support our customers with our best-in-class team, service, capacity, and solutions while executing on our strategic priorities. I will now discuss our business segment performance, beginning with ITS. ITS revenue declined 6% due to lost dedicated sites and lower intermodal revenue per load, while we increased operating income by 6% year-over-year. Intermodal volume increased 2% year-over-year, despite a decline in import activity at the end of the quarter, with local East down 1%, local West down 2%, Transcom down 6%, Mexico up over 300%, and our refrigerated business growing 18%. Revenue per load declined 9% year-over-year in a quarter due to lower fuel and accessorial revenue, as well as a shorter length of haul. Dedicated revenue also declined due to small lost sites and equipment count reductions in existing operations. Despite these revenue challenges, we improved operating margins through increasing our percentage of in-source trayage by 700 basis points to our stated 80% goal. We also maintained network fluidity and reduced empty repositioning costs by 43% year-over-year in the quarter, along with lower rail, trayage, and insurance expenses. Our service with our rail partners is excellent, and we are seeing customers convert volume to intermodal to take advantage of the cost, capacity, and performance benefits. It has completed the majority of bid season and performed well on our goals of network balance and velocity while maintaining yield despite the competitive environment. As we look ahead, we anticipate an early West Coast peak season due to inventory pull forward in advance of potential tariff implementation and seasonal sales, as well as improved bid realization rates, which along with new dedicated startups should lead to higher revenue from current levels. In logistics, revenue declined 12%, while operating income declined 13% year-over-year in the quarter. The decline was driven primarily by our brokerage operations, where load counts declined 5% and revenue per load declined 9% year-over-year due to a soft drive-in market, which we offset partially with strength in LCL and flatbed, as well as better relative performance in our contractual services. An area of strength for Hub Group has been our final mile division due to our excellent service, competitive cost, and flexible operating model. This performance is leading to significant growth for the business as we will be onboarding $150 million of net new annualized revenue in the third and fourth quarter with both new and existing customers. This growth will lead to short-term startup costs. We are excited to onboard this new business into our network and deliver for our customers. These final mile wins will be executed in conjunction with new onboardings and consolidation and brokerage that we believe will lead to improvements in revenues as the year progresses. We remain focused on driving profitable growth, but are also remaining vigilant on our cost, service, and productivity. Our recent warehouse network alignment initiative has helped improve earnings resiliency through a 1600 basis point improvement in warehouse utilization while enhancing service levels. Due to the prior success of those alignment actions, we will be completing the transition from the vast majority of our remaining third party warehouses beginning in the third quarter, which will lead to additional margin and service level enhancements. We also focus on delivering improved results in our brokerage operations. reducing negative margin shipments, which were down 160 basis points year-over-year in the quarter, while maximizing our purchasing power and enhancing our organizational structure to improve efficiency, yields, and maintain our excellent service. We believe these growth and efficiency actions, along with our continuous improvement process, will enable profitable growth over the near and long term across the segment. We are pleased with our performance through the first half of the year in an extremely dynamic environment. We remain focused on delivering best-in-class service through all of our capabilities, enhancing our efficiency, and investing in our business to deliver long-term growth. With that, I will hand it over to Kevin to discuss our financial performance. Thank you, Phil. I will walk through our financial results before commenting on our outlook. Our reported revenue for the second quarter was $906 million. Revenue decreased by 8% compared to last year and declined 1% sequentially. ICS revenue was $528 million, which is down 6% from prior year's revenue of $561 million. Intermodal volume growth of 2% was offset by lower intermodal revenue per load and lower dedicated revenue in the quarter. Additionally, lower fuel revenue of approximately $18 million negatively impacted the top line. The logistics segment revenue was $404 million compared to $459 million in the prior year due to lower volume and revenue per load in our brokerage business, exiting of unprofitable business and CFS, and sub-seasonal demand in managed transportation and final mile businesses. Lower fuel revenue of $9 million in the quarter also contributed to the decrease. Moving down the P&L. For the quarter, purchase transportation and warehousing costs were $656 million, a decrease of $71 million from the prior year due to strong cost controls as well as lower rail and warehouse expenses. This resulted in 130 basis point improvement on a percent of revenue basis when compared to Q2 of 2024. Salaries and benefits of $143 million, or $1 million higher than the prior year, due to additional employee drivers and warehouse team members and the IASU transaction. Total legacy headcount, which excludes acquisition employees, drivers, and warehouse employees, declined 3% from prior year as we continued to manage headcount across the organization. Depreciation and amortization decreased $5 million over Q2 2024 due to our updated useful life assumptions. Insurance and claims expense decreased by $2 million as we continue to realize benefits from our safety focus and training programs. When adjusting for the vendor settlement expenses in the quarter, our general and administration expenses declined by $2 million, or 5% year over year, as our cost takeout started to make an impact. Altogether, our adjusted operating income decreased 7% year-over-year, but our adjusted operating income margin was 4.1% for the quarter and increased 10 basis points over the prior year. The ICS quarterly operating margin was 2.7%, a 30 basis point improvement over prior year. The second quarter of logistics adjusted operating margin was stable year-over-year at 5.6%, even with a more difficult brokerage environment. Adjusted EBITDA was $85 million in the second quarter. Overall, Hub earned adjusted ETS of 45 cents in the second quarter, down from 47 cents in Q2 2024. Now, turning to our cash flow. Cash flow from operations for the first six months of 2025 was $132 million. Second quarter capital expenditures totaled $11 million. with spending evenly balanced across tractor replacement and technology. Our balance sheet and financial position remains strong. Through the second quarter, we returned $29 million to shareholders through dividends and stock repurchases. Net debt was $96 million, which is 0.3 times adjusted EBITDA, below our stated net debt to EBITDA range of 0.75 times to 1.25 times.

Adjusted EBITDA plus CapEx was $74 million in the second quarter. We are pleased with our adjusted cash EPS of 55 cents.