Hub Group, Inc.

Hello, and welcome to the HUB Group Third 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 on a listen-only mode. A brief question and answer session will be followed by 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 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 thank you for joining Hub Group's third quarter earnings call. Joining me today is Kevin Bass, our Chief Financial Officer. and Garrett Holland, our Senior Vice President of Investor Relations. Before we begin our review of the current market and Hub Group's performance, I wanted to thank all of our team members across North America for their constant effort and focus on delivering for our customers and organization in this evolving environment. I'd like to begin by discussing near-term market conditions and our current viewpoint on supply and demand dynamics. International shipping volume was pulled forward in the third quarter, but we did not see that inventory materially begin to impact domestic shipping until following the Labor Day holiday. This has led to a delayed West Coast peak season from what we originally anticipated. Strong West Coast shipping demand in September continued through October, and our customers are indicating that will be maintained into November, which is much closer to typical seasonality. We believe that the recently established regulatory requirements in our industry will be a positive catalyst to balance the supply of capacity, and with active enforcement and demand strength, should lead to improving market conditions over time. These factors, along with our investments in our intermodal business and the prospects of a transcontinental rail merger, are creating a more positive framework for 2026 bid season and beyond. As we referenced in our call last quarter, we are excited about the opportunities that a potential merger between our primary rail partners presents to drive increased intermodal conversion in shorter haul lanes, while growing share gain opportunities due to reduced transit times and improved service performance. These improvements would enhance asset utilization and in aggregate reduce overall costs, leading to significant opportunities for growth. In the current market, rail services remain strong, and we are excited about the new lanes we are offering our customers in conjunction with our rail partners. In particular, the launch of a new integrated service in Louisville has led to conversion of existing volumes running less efficiently over Chicago and new customer lanes in a short time frame. We believe we are well positioned to drive growth in the months ahead as bid season kicks off and over time as the merger process progresses. We have remained focused on our strategic priorities and executed well in the third quarter. We closed on the acquisition of Martin Transport's intermodal division, adding scale to a fast-growing and higher margin segment of our intermodal business. We also closed on the acquisition of SIF LLC, adding additional full service locations and scale in final miles. We completed these while returning capital to shareholders, executing on our cost reduction program, and maintaining excellent service for our customers. In ITS, we delivered strong results with revenue that was slightly up and operating margins that improved 20 basis points year-over-year due to strength in intermodal, which was offset by declines in dedicated. We performed well in intermodal, with slightly improving volumes following double-digit growth in the third quarter last year, as we were providing an excellent value proposition with our rail partners. As mentioned, peak volumes were not recognized in the quarter until September and have continued into the fourth quarter, despite a pull forward of inventory. Transcom volumes declined 1%, Local West declined 2%, Local East declined 12%, while we grew Mexico nearly 300% and our refrigerated business 55% in the quarter. Revenue per load increased 2% due to improved mix, peak season surcharges, and more balanced pricing. We have also reduced costs in our network through lower line haul costs, improving our in-source grade percentage by nearly 700 basis points, and decreasing our maintenance and repair costs through higher in-sourcing levels. These improvements were offset by headwinds and repositioning costs to support peak demand at the end of the quarter and higher insurance costs. Overall, we are pleased with the momentum in our intermodal business and the investments we are making to deliver growth. In dedicated, higher volumes and revenue protractor per day with core customers was not able to offset lost sites, impacting both revenue and profitability. We reduced equipment, maintenance, insurance, and third-party carrier costs while onboarding new business in the quarter, which helped to balance revenue headwinds. We are actively reallocating assets in preparation for growth with new and existing customers and believe that our high-end service capabilities, geographic density, and dynamic model position us well for growth in the current market and as shifts in capacity occur. In the logistics segment, revenue declined 13% year-over-year, but we were able to improve operating margins by 10 basis points as our cost containment initiatives and performance in final mile and managed transportation helped to offset headwinds in brokerage. Last quarter, we announced significant onboardings in our final mile business, totaling $150 million in annual revenue. Those onboardings are taking place now, and we are ramping volumes consistent with our expectations. The timing of the startups was delayed, but we are excited with the growth we are having with our customers, as well as the integration of our most recent acquisition. These onboardings are helping to offset softness in our legacy final mile customers and position us well for strong growth in 2026. In CFS, we are executing on insourcing space in our remaining third-party locations with a focus on maximizing our space utilization, which improved by 1,400 basis points year-over-year while delivering improved site productivity. The integration will be completed by the end of the first quarter of 2026, and along with new onboardings we brought on in September and have scheduled in the fourth quarter, will help drive further improvements in our margins. In brokers, we continue to face headwinds of soft demand and limited spot market activity. We executed on a restructuring of the business during the quarter, which reduced costs and enhanced productivity by 7% year-over-year, while focusing our team on higher profitability areas to serve our clients. Volumes declined 13%, and revenue per load was down 5% in the quarter. However, we believe the actions we are taking to right-size our business and focus on revenue quality will position us for success in the future. Managed transportation has performed exceedingly well, and we have new onboardings we recently signed which will help deliver further growth. Our productivity has improved over 50% year-over-year, enhancing our margins due to our investments in automation and technology. We are excited about the momentum we have in this business due to the savings and visibility enhancements we are delivering to our customers. We are focused on controlling what we can control in this dynamic environment. We are reducing costs while investing in our business to deliver results in the near and long term through our scale and integrated product offering. We are excited about the performance that our team is delivering and believe we are well positioned as an organization to support our customers and deliver for our shareholders. 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 third quarter was $934 million. Revenue decreased by 5% compared to last year, but increased 3% sequentially. ITS revenue was $561 million, which is slightly greater than prior year's revenue of $560 million, as steady intermodal volume and 2% growth in revenue per load was partially offset by lower dedicated revenue in the quarter. Additionally, Lower fuel revenue of approximately $8 million negatively impacted the top line. The logistics segment revenue was $402 million compared to $461 million in the prior year due to lower volume and revenue per load in our brokerage business. Exiting of unprofitable business and select customer attrition in CFS and sub-seasonal demand in managed transportation and final mile businesses. Lower fuel revenue of $6 million in the quarter also contributed to the decrease. Moving down to P&L. For the quarter, purchase transportation and warehousing costs were $684 million, a decrease of $56 million from prior year due to strong cost controls as well as lower rail and warehouse expenses. This resulted in 180 basis point improvement on a percent of revenue basis when compared to Q3 of 2024. Salaries and benefit expenses of $143 million were stable compared to the prior year, as the impact from the EOSA transaction offset expense initiatives. Total legacy headcount, which excludes acquisition employees, drivers, and warehouse employees, declined 5% from the prior year as we continued to manage headcounts across the organization. Appreciation and amortization decreased $1 million over Q3 2024 due to our updated useful life assumptions. Insurance and claims expense are largely unchanged from prior year as we continue to realize benefits from our safety focus and training programs. Our general and administration expenses declined by $3 million or 9% year over year. Altogether, our adjusted operating income decreased 4% year over year But our adjusted operating income margin was 4.4% for the quarter and increased 10 basis points over the prior year. The IPS quarterly adjusted operating margin was 2.9%, a 20 basis point improvement over prior year. The third quarter logistics adjusted operating margin increased 10 basis points year over year at 6.1%, despite the challenging brokerage environment and demand headwinds. Adjusted EBITDA was $88 million in the third quarter. Overall, Hub earned adjusted EPS of 49 cents in the third quarter, down from adjusted EPS of 52 cents in Q3 2024. Now, turning to our cash flow. Cash flow from operations for the first nine months of 2025 was $160 million. Third quarter capital expenditures totaled $9 million, with spending weighted toward technology and warehouse equipment investments. Our balance sheet and financial position remain strong. Through the third quarter, we returned $36 million to shareholders through dividends and stock repurchases. We also closed on the acquisitions of Martin Intermodal Assets and West Coast Final Mile provider, SIS LLC, during the quarter. Net debt was $136 million, which is 0.4 times adjusted EBITDA, Below are stated net debt to EBITDA range of 0.75 times to 1.25 times and includes the Martin transaction. Adjusted EBITDA less capex was $79 million in the third quarter. We are pleased with our adjusted cash EPS of 60 cents. The spread between adjusted EPS and adjusted cash EPS was 11 cents for the quarter and the end of the quarter with $147 million of cash and restricted cash. Turning to our 2025 guidance, we expect full year EPS in the range of $1.80 to $1.90 and revenue of $3.6 billion to $3.7 billion for the full year. We project an effective tax rate for the year of approximately 24.5%. We also expect capital expenditures to be less than $50 million for the year. Recall, the upper end of our prior revenue and ETS guidance ranges reflected benefits from a healthy peak season and related surcharges, along with the onboarding of sizable final mile business awards. Outside of quarter end activity, peak season has been muted to date rather than a stronger return to seasonality. Execution for the final mile awards has also been solid, but start dates for some markets have shifted into the fourth and first quarters. The team continues to realize targeted cost savings, but benefits have been offset to a degree by revenue pressure. Given needed demands and continued low visibility, we tempered expectations for the fourth quarter and narrowed our outlook accordingly. This outlook implies sequentially lower adjusted ETS during the fourth quarter at the midpoint. Realizing the upper end of our revenue and ETS guidance range would reflect a strong finish to peak season. The path to the lower end of the current guidance range would reflect further weakness in freight market activity. For the ICS segment, the intermodal business continues to cycle, challenging volume growth comparisons from a year ago. But, revenue per load trend should continue to slowly improve in the stabilizing pricing environment. Lost sites and customer activity in the competitive one-way market are expected to continue to weigh on dedicated performance. For logistics, Excluding our brokerage business, during the fourth quarter we expect further progress onboarding new final mile awards, sustained stronger profitability at manned transportation, and stable CSS results sequentially. For brokerage, we expect volume pressure continues in the near term and weighs on logistics segment profitability. Market optimism to start the third quarter around the stabilizing tariff backdrop and potentially stronger peak season gave way to sustained software demand across end markets. Nevertheless, the team was able to deliver improving margin performance year over year and sequentially for both the ICS and logistics segments. Publix is not assuming market conditions quickly change and remains focused on execution. We remain confident in achieving the targeted $50 million of cost savings on a run rate basis by the end of the year, and work to continuously improve profitability across business lines. Margin improvement and solid free cash flow through this challenging freight recession underscores the resilience of our operating model. The acquisition of Martin and Immodal also reflects our disciplined approach to capital deployment. Focus grows. Cost controls and capital deployment should continue to support performance until the freight market conditions improve. We continue to manage the business for long-term growth, higher returns on capital, and resilient free cash flow generation. With that, I'll turn it over to the operator to open the line to any questions.

Thank you. I would also like to remind participants that this call is being recorded and the replay will be available on the HUB Group website for 30 days. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question is from Scott Group of Wolf Research. Your question, please.