Hub Group, Inc. (NASDAQ:HUBG) Q2 2023 Earnings Call Transcript

Hub Group, Inc. (NASDAQ:HUBG) Q2 2023 Earnings Call Transcript July 27, 2023

Hub Group, Inc. beats earnings expectations. Reported EPS is $3.03, expectations were $1.38.

Operator: 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 Geoff DeMartino, 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 [Operator instructions]. 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.

Phil Yeager: 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 Geoff DeMartino, 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 and 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. It 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, drainage 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 near shoring 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 repurchases during the quarter. We are 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.

Brian Alexander: 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 percent. We are very pleased with our dedicated trucking growth and yield expansion in the second quarter along with a strong pipeline of confirmed wins scheduled to onboard in the third quarter. Continued Software import volume and elevated inventories generated Software volume and lower assessorial 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 have continued to in-source our drainage 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 wins. 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 percentage 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 on-boarding 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 on-boarding in the third and fourth quarter. 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, offering us 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 Choptank integration has provided non asset mode, 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 multipurpose 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 customer’s 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 Geoff to discuss our financial performance.

Geoff DeMartino: Thank you, Brian. The second quarter was one of the softest demand environments we’ve seen in some time. While the U.S. consumer continues to be in relatively good shape, demand for many of our services continued to be impacted by high retail inventory levels, low import activity and plentiful transportation capacity. We fully expect all these factors to improve in the coming quarters and have taken several important actions to position hub group for success in both the short and long term time horizons. We have excellent relationships with our rail partners who believe in the secular growth story of intermodal and desire to work with scaled high service channel partners like Hubgroup. We continue to in-source a higher percentage of our drainage, offering both cost and service advantages.

We are pleased with the growth of our logistics segment, which accounted for nearly half of second quarter operating income. We have a strong sales pipeline and several large recent wins which will drive profitability into 2024. Our logistics offering provides a more stable earnings stream and improves our positioning as a broad supply chain solutions provider. We remain very focused on driving efficiencies in our operations and support functions. Finally, we have an excellent free cash flow profile that enables our ability to invest in the business to position Hub Group for success over the long term. Despite software freight market conditions, we generated revenue of over $1 billion for the quarter and an operating income margin of 6%. Purchase, transportation and warehousing costs declined as a percent of revenue as compared to prior year, reflecting our focus on cost containment, salaries and benefits.

Costs rose from prior year as we significantly expanded our driver count and added in warehousing operations through the acquisition of TAGG Logistics. This increase was offset by lower office employee costs and lower incentive compensation expense. Our depreciation and claims costs both increased from the prior year due to investments in fixed assets and the expansion of our drainage operation. G&A costs decreased from the prior year due to less lead and acquisition related spend. Our diluted earnings per share for the quarter was $1.44. We generated $108 million of EBITDA in the quarter and ended with $342 million of cash on hand during the quarter. We purchased 1.3 million shares of our stock for $100 million. We are updating our guidance for 2023.

The low end assumes minimal improvement in demand from current levels, while the higher end assumes some tightening in the marketplace near the end of the year. For 2023, we expect to generate diluted EPS of between $5.80 and $6.40 per share. We expect revenue will range from $4.3 to $4.5 billion. For intermodal, we’re four forecasting high single digit volume declines for the year. The remainder of the year will be impacted by softer pricing and less assessorial and surcharge revenue, which will be partially offset by lower purchase transportation costs and improved operating efficiency. We expect a tax rate of 20.0 to 21.0% for the year with a rate of approximately 27% in Q3 and a rate in the mid teens in Q4 as a result of a change in state apportionment, the impact of lower price and a higher tax rate will result in a sequential decline of EPS from second quarter into Q3.

Our capital expenditure range is unchanged at $140 to $150 million. Based on this guidance, we would expect to generate EBITDA less capital expenditures of approximately $300 million in 2023. This free cash flow profile, combined with our zero net debt balance, positions us with the financial flexibility to invest in our business through capital expenditures and acquisitions as well as returning capital to shareholders. With that, I’ll turn the call over to the operator to open the line to any questions.

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question is from Bascome Majors of Susquehanna Financial Group. Please proceed with your question.

Bascome Majors: As you look into the third quarter, can you talk a little bit about the puts and takes between feeling a full quarter of the bid season and intermodal pricing from your customers and getting some relief on the purchase transportation side? Just trying to understand if the contribution per load and how that’s trending sequentially between those two things and maybe assessorials as well. Thank you.

Phil Yeager: Sure. Yeah. Sequentially. We do expect EPS will go down from Q2 into Q3. The biggest driver of that is going to be a full quarter of reprices that happen during Q2. We do have cost offsets with rail transportation costs going down. Those happen throughout the course of the year, so we don’t see a full quarter’s impact of that in Q3. But we would expect a pickup in earnings into Q4 as more of that purchase transportation cost benefit comes down, both rail as well as continued cost reductions in our drainage operation.

Geoff DeMartino: I would just add I think we are seeing a sequential volume improvement June to July, and we’re anticipating that trend will continue. We’re also seeing some tightness in a few kind of key corridors for us right now, in particular in Southern California, as well as the Southeast ports, which is a good indication for what we hope will be continued sequential improvement and improvement in overall bid compliance to award as well.

Bascome Majors: And one other piece, too. It’s less of an impact, but our tax rate will be substantially lower in Q4. And when you talk to the low end of guidance assuming minimal sequential improvement, is that a walkback from what you’ve seen so far early in the quarter to get there, or is that basically flat-lining where you are today? Thank you.

Phil Yeager: Yeah, I’d say the lower half does assume some improvement, modest improvement, consistent with the trend we’ve seen in the quarter to date. The very low end would assume a retrenchment in volume. The higher end of the range generally would assume a pickup in demand as well as an exit in some transportation capacity that would lead to a tightening in the market. In that case, we would expect to get to recognize surcharge revenue in Q4 that would get us to the upper end of the range. I would just highlight we are seeing more stability in overall spot rates as we talk to our customers. Inventories are coming down, so we’re seeing some of that destocking trend and obviously some capacity attrition not enough. But I also believe the growth related capEx is going to be very limited. So you put all those together and it does frame up pretty well.

Geoff DeMartino: Yes. And Bass, this is Brian, I’ll chime in with that, too. Our brokerage is seeing a big uptick in that as well. We consider them a standout in the industry right now and how they face the challenging volume requirement or volume economics so far. But we’ve seen them in July up close to 10% in overall volume and adding anywhere from 100 to 120 new customers each month. And we think that sets us up really well as that volume increases and we have those seeds planted for growth.

Operator: Thank you. Our next question is from Justin Long of Stevens. Please proceed with your question.

Justin Long: Thanks. I wanted to start by following up on the comment you made, Phil, about June to July and seeing some improvement. Could you share what your monthly intermittent volumes did throughout 2Q and where you’re tracking in July thus far?

Phil Yeager:

Yeager:

Justin Long: Got it. And following up on the earlier question, Geoff, last quarter you gave an expected change in the Its margin sequentially from 1Q to 2Q. I was curious if you could provide any thoughts on kind of 2Q to 3Q for that metric. And you were talking earlier about EPS declining sequentially in the third quarter, but a lot of that seems to be driven by the higher tax rate. So I’m curious if you think consolidated operating income will decline sequentially as well in the third quarter?

Geoff DeMartino: Yeah, the tax rate is only a portion of that drive from Q2 to Q3. So price is a pretty important contributor to our margin profile. So we would expect to see the its margins decline sequentially.

Phil Yeager: But I also think we are seeing some positive trends. And as you know, we do like to maintain some conservatism in the estimates that we’re putting out and so want to continue to stay consistent with that.

Geoff DeMartino: Okay, just add to that too. Those will be offset a bit with our logistics as well. We continue to see a strong pipeline. I mentioned brokerage already with strong volumes and the service offerings that they have in play, but also cross selling into our logistics where we’re able to take our customers beyond just the transaction of transportation and giving them the solution. So our pipeline is strong there. Our deal size is close to double and our close ratios remain very strong.

Brian Alexander: Yeah, I’d just add in, I think we all highlighted in our prepared remarks. Performance of the logistics segment has really, I think, driven home the diversification strategy that we’ve executed on and so kind of emboldens us to continue that path.

Justin Long: Okay, great. And last thing I just wanted to ask about was the buyback. Are you assuming incremental buybacks in the guidance, assume that beyond the 100 million in the second quarter?

Brian Alexander: Yeah. So we have 100 million remaining on our current authorization. So our guidance assumes both no execution of that as well as full execution. So because of where we are in the year, if we were to execute on the full 100, that we think would add approximately twelve cents of EPS. So that’s within our guidance range, we do have a strong M&A pipeline. So I want to be very conscious of that as well. And I think we will weigh that as we continue to see obviously good value in our stock, but also want to ensure we maintain our very strong capital structure if and when we are able to execute on the transaction.

Operator: Thank you. Our next question comes from the line of Uday Kanapakar of Kawan. Please proceed with your question.

Unidentified Analyst: It’s actually Jason Seidel. My associate dialed me in. Gentlemen wanted to dial into one of the comments you made. You talked about the sequential growth from June to July of 2%. How does that compare to prior years?

Brian Alexander: Yeah. Typically you actually do not see that on a business day adjusted basis. Typically you see that coming out of August, coming into August, July to August. So we’re actually pleased with that trend in the past. You see that kind of month end, quarter end pop in June, 4 July holiday and then some slowdown from there. I think a big portion of it is bid awards starting to come on. But there also is some tightness that we’re seeing, as I mentioned, in Southern California and some of the southeast port areas. And we’ve also been very successful in getting some very strong winds and balance lanes to support that growth, but also in the local east, which is a priority for us to return to growth there. So pleased with the progress that our commercial team is making but still obviously have room to go. But we are seeing positive signs.

Unidentified Analyst: So positive movement 2% versus normal, a little bit of a drop?

Brian Alexander: Correct.

Unidentified Analyst: Okay, my other questions here one you talked a lot about are the wins on the logistics side. So that’s good to hear. Can you talk to us about any startup costs we might see in the second half of the year and then could you help us size those wins on the logistics side on an annualized basis going forward?

Geoff DeMartino: Sure, yeah. I think what set us up nicely within our logistics pipeline is kind of the staggered starts that we’ve seen. So we keep a good cadence of those now coming, in Q3, we’ve got good line of sight to confirmed wins, a few that are on-boarding in Q4, but we’ll see the pipeline that are some of the ones that are close to close. Hit the implementation in Q4 and then start to set us up well into next year. On our logistics wins, we don’t see really a high cost of startup with those. We’ve got a really good implementation process and team that’s well established. I would say if we see any startup costs it would be with some of our new multipurpose buildings that are enabling our growth and even with that we’ve got a really good ramp schedule with how we fill those so we’re able to take some of the growth that we have already.

But then we also in source very similar to our drayage model, where we’re able to insource some of our three PL space into those new buildings that fill them very fast. So we’ve proven that out so far in the first half of this year with two new buildings in the west, two recent additions of buildings in the Midwest, and then we’re further expanding into the south and into the east, yet this year.

Phil Yeager: I would just add I think if you think about our logistics segment, a portion is brokerage which is obviously more market driven, but in the portion that Brian is talking about with those wins, you’re probably looking at a double digit to mid team sort of sequential growth. I think we would be anticipating given the wins that we’re bringing on at Strong. And as Brian mentioned, those do help feed our other service lines as well. And so it is a very integrated solution for our customers. And just one more point to that, Jason, as well as this film made me think of too, is that I mentioned those new buildings that come on board to help enable a lot of that logistics growth. Those are also helping to enable our LTL consolidation.

We’ve got close to a billion dollars of LTL under management on behalf of our customers, and a good portion of that is traditional LTL with the traditional providers, but a larger portion of that runs through our consolidation solutions that help take the cost out and improve the service for our customers. So we see a lot of growth with those in the back half of the year as well.

Unidentified Analyst: That’s great. My last one here, since you brought up LTL consolidation, the pending bankruptcy of Yellow Freight, how is that going to impact the consolidation business? And is this an opportunity for you to get more price?

Brian Alexander: Yeah, we see it as a great opportunity to continue to expand our solutions with our customers. We’ve been de-risking our customers for quite some time and making sure that their networks are set up for success. But we will see some of that spill over into we’ve already seen some of that spill over into our solutions both transactionally as well as through our consolidation network. So. That’s well underway.

Phil Yeager: And we have seen an increase in our pipeline for our managed transportation solution. In particular, where we manage over a billion dollars of LTL. We are able to bring some significant cost mitigation opportunities for our customers as they look ahead. And as Brian mentioned, I do think our consolidation network, the pipeline, has continued to grow, and we will be bringing those wins on as well. So that should all be incremental to the logistics segment.

Operator: Thank you. Our next question is from Bruce Chan of Stifel. Please proceed with your question.

Bruce Chan: You talked a little bit about some of the incremental sites that you’re bringing online and on the Logistics side. Just want to get a sense of where you stand now in terms of utilization, how much spare capacity do you have. And if your win rate were to accelerate in subsequent quarters, how quickly or what’s the time lag involved in bringing further sites online?

Phil Yeager: Yes. That’s a great question, Bruce. And I think it’s an important one as well. So we consider ourselves never sold out of space. And it’s because of the model that we’ve enabled and our further investments into. So, we’ve got our asset buildings that we operate and run, and we’ve done that through acquisitions. And these are multipurpose locations that can do transloading, cross-docking, e-commerce enabled. Then we also have a complementary fleet of square footage that really flows into our third-party space. That third-party space is able to flex up and down. And so, as those growth opportunities come on, we leverage that third-party space, and then we start to in-source that. So that’s really what has us building out that strategy to enable the growth but also improve the yield as we put on those new buildings.

Bruce Chan: Okay, great. That’s a really helpful color. And then, just maybe 1 follow-up. You’ve been pretty successful with the drayage in-sourcing. I think you said 79% now. Do you have a sense for how high that could go or what the target percentage might be? And then, if and as we see a migration back to the West Coast and import volumes pick up, do you think that you can keep that in-source percentage up at these levels?

Phil Yeager: Yes. We intend to continue to keep them up at these levels. I think we could see them press into the mid-80’s. Potentially, our driver count is up 20%. But in addition to that, our driver productivity continues to remain very strong. So, efficiency on the Street is a part of our economic plan to continue to take cost out. And we’ll continue to invest in that drayage fleet to drive that in-sourcing up. There is a balance we want to continue to strike. We are the largest purchaser of third-party drayage in the industry. And we think that is beneficial to us to be able to react to fluctuations in demand as our customers need to surge. But we will stay very consistent in the investment to maintain that 80%. There are several markets where we’re over that.

There are a few where we need to continue to hire to bring more share in-house. I would tell you we’ve done a really great job in recruiting and in many markets have a backlog of candidates that we could be bringing on, so I don’t have a concern necessarily around as volume returns us losing a lot of ground on that 80% share. So, I think the team has done a great job and positioned us well. But we need to continue to focus on that productivity and balance for our drivers as well. So that’s an opportunity we’re zeroed in on. But very pleased with how we’ve done in managing that share thus far.

Operator: Our next question is from Scott Group of Wolfe Research.

Scott Group: Anyway you can give us some color on intermodal rev per load or just total intermodal revenue just to help with the transparency in the model? And then, I just want to understand a bit the offset or the help from purchase transportation that we’re supposed to get in intermodal. I thought it was more of a third quarter event. Now it sounds like it’s more of a fourth quarter event. So, why — maybe I’m not getting that right. But if that’s right, why a bit of a delay. And then ultimately do we see the full benefit by Q4 or is there incremental benefit into the first half of ’24 from rail PT?

Phil Yeager: Sure. So no change in how it works. It is a quarterly reset on a portion of the business. So, by the time Q4 starts, we will — on a run rate basis, that will be fully implemented. I think the biggest probably change from the last time we talked is price is a little bit worse than we had initially anticipated. So we do have a full quarter’s worth of that hitting now, which is not fully offset yet by the rail cost release.

Geoffrey DeMartino: And I think it’s price realization without the improved volumes that we were anticipating in June. So, we’re just trying to be cognizant of that. We will see some further adjustments near the end of Q3 as well as in the latter portion of Q4, which would carry over to your point into Q1 of 2024. So we are not fully baked on PT release, but we do feel as though we are fully realizing price at this point in time.

Phil Yeager: And to your question on intermodal, so within that segment obviously is intermodal and dedicated to run a $275 million annual revenue business. So, the rest obviously would be intermodal. And then, from a revenue per load basis, the decline in Q2 was about 17% year-over-year. That does include a couple hundred basis points impact of a lower price of fuel.

Scott Group: Okay. Very helpful. And then, can you just share within the guidance what you’re assuming for the logistics margins in the back half?

Phil Yeager: Sure. So you saw logistics margins improve around 60 basis points in Q1 into Q2. We do expect that will continue throughout the course of the year.

Scott Group: And is that cost driven or more sort of hopefully market getting better?

Geoffrey DeMartino: It’s a little bit of both. I mean, some of it’s also mixed. We are bringing on some higher margin new customers as well. There’s some significant freight under management wins that we’ve been able to capture that have a high operating margin contribution. We’re also really, as Brian had mentioned, filling warehouses that we’ve been bringing online. And so that will help from a overall warehousing cost and really bring up the margins in that consolidation and fulfillment portion of the business.

Scott Group: Okay. And just last one real quick again. And if you answered this already, just say answer and I’ll read the transcript. Did you give any comments about peak and what your customers are saying in inventory destocking and when that flips to restocking or anything, any color?

Phil Yeager: Sure. Happy to hit on it.Again, for sure. I think we are seeing some tightness. We’re seeing spot market rates really kind of bottomed out here. And as we talk to our customers, it varies by segment. Some are further along in their destocking than others. But that is certainly the conversation. I think there is a focus on — if the intermodal service product is going to be maintained at where it is, and we’re going to see really the truckload capacity start to encrypt and growth capEx really being limited, that intermodal is a great option and a lot of discussion around conversion back. So we are seeing some tightness already in its early stages. So we certainly don’t want to call it a trend. But we are seeing some tightness in some of our larger port areas like Southern California.

And so, we’re hoping that that points to a sign of a peak season. We aren’t anticipating in our guidance a robust peak at the high end. It would be a somewhat muted peak would likely get us to that high end.

Scott Group: So that would be kind of framing the guidance, if that makes sense.

Operator: [Operator Instructions] Our next question comes from Thomas Wadewitz of UBS.

Thomas Wadewitz: When you think about the 4Q versus 3Q, and we were just talking about kind of peak and you were expecting some peak, is the increase in earnings, I think, it’s like tax rates lower, and then operating income sequentially you think is up for both Intermodal and for Logistics when we think about 4Q versus 3Q? Or how are you thinking about the two segments kind of 4Q versus 3Q?

Phil Yeager: Yes. The answer is yes to both. So, on the Logistics side, we’ll benefit from some of the newer things coming online, as well as the incremental flow through profit as we load up more of our warehousing space that becomes more towards the higher end of the capacity. Obviously, that contribution margin is pretty high. So that is going to drive logistics profitability towards the end of the year. And then, also we do expect an improvement sequentially in operating profit at ITS, largely driven by the rail cost relief we have for a full quarter in Q4. As well as if we’re achieving the upper end of our guidance, it would be partially the result of more volume, which has a benefit as we are able to get more efficiency out of our assets, but also surcharges in Q4.

Thomas Wadewitz: So how are you — I apologize if I missed this at the beginning, but how are you thinking about volume progression? You said I think July is showing some improvement. I guess, the normal sequential is down a little bit and you said up 2 in July, I believe. Is that right?

Phil Yeager: Yes, up 2.4 sequentially from the month of June.

Thomas Wadewitz: And what’s the normal sequential?

Phil Yeager: Flat. We wouldn’t anticipate normally to see a pickup at this point in the year.

Geoffrey DeMartino: Yeah. Flat to down if you come off of the month-end quarter-end in June, kind of in front of the 4th of July holiday. And then, typical seasonality would point to August gets a little better and then September is, you would be in a peak and that would really flow through October. So that would follow typical seasonality.

Thomas Wadewitz: Right. Okay. I know it’s hard to — you’ve had some questions around the volume improvement. I know it’s hard to kind of parse it out, but how do you think about what’s driving this and whether you think it might continue? I mean, obviously it’s constructed to see a little bit of kind of better than normal seasonality in July. Do you think that’s just, that’s primarily inventory reduction is getting over or do you think there are other factors that could improve a bit further? Or do you maybe think the shape of the kind of intermodal peak and imports is a little different that, maybe some of the imports are coming a little earlier? I know it’s tough to decipher, but what do you think is driving that and whether that sequential improvement continues or not?

Geoffrey DeMartino: In discussions around with our customers, I think inventories are coming back into line and that there is going to be a need to get back to more normalized shipping levels. I think, at the same time, you’re starting to see a realization for many of our customers that the low spot market rates that have been out there for quite some time are going to come under pressure. We’re seeing that already in Southern California as pricing has really solidified and gone up somewhat in the spot market. You’re seeing that in the Southeast ports as well. And so, I think there’s a focus on if I can make sure that I’m de-risking my supply chain, that I’m locking in capacity, rail service is very strong, intermodal is a great option right now.

I think on the same point, the spread between intermodal and trucks is growing and really in that 20% to 25% range now, I would have told you not too long ago that that was in the low to mid-teens. And so, I think that spread coming further apart and the service product as well as that need for capacity and the reliance on spot market really coming to an end, I think likely will drive a stronger demand environment looking ahead. So that would be kind of the data points that we’re watching and right now are looking positive. It’s a little early to say that that’s exactly what’s going to happen, but we’re feeling as though given the data on our internal numbers as well as these external factors, it’s a positive framework.

Phil Yeager: I would just add, we feel like we perform well during mid-season and once there’s a resumption in customers’ tendering based on their awards that we’re ready to move up a substantial volume. More of a question of when that is.

Thomas Wadewitz: Just so I understand the comment on spread, are you looking at spot rates or are you saying intermodal contract versus truckload contract?

Phil Yeager: Contract.

Thomas Wadewitz: Contract versus contract?

Phil Yeager: Yes. But I think you are seeing a solidified spot market with several markets increasing week to week. As an example, Southern California, which is obviously a very large and important portion of our network. And I think if we see continued stability in the West Coast ports, I think — I know all of our customers want to shift through the West Coast ports. They just want to see stability. So I think that’s another positive catalyst that may be out there.

Brian Alexander: Yes. Then bid compliance, we just mentioned the tendering to the volume that they bid. We’ve seen bid compliance go up to 80% so far in the end of Q2 and start year of Q3, and we think that’s another good indicator.

Operator: Our next question is from Brian Ossenbeck with JPMorgan.

Brian Ossenbeck: So, maybe just to follow-up on the spreads, can you go through those by each of the major regions and maybe how they’ve trended and once everything gets implemented, how you expect them to move forward from here, if you expect any major differences at this point?

Phil Yeager: Sure. So during Q2, the spread in Transcon contract to contract was about 20%. That’s moved up to 26% as of today. In the East, it was about 10% in Q2, and that’s moved up to 16%, and then Local West was 15% in the quarter, and that’s moved up to 22%. So, I would say, Transcon is getting back into more of a normal range. Typically, we would have seen north of 30%, so we’re approaching that. And I think not just price, but stable from now. As you know, service levels are at multi-year highs, and so we’re able to take our transit times down and offer more value that way as well.

Brian Ossenbeck: Okay. And then just on the maybe competitive front with other rails, how many boxes are you storing right now? And do you feel like the industry is going to be pretty disciplined on that front? Obviously, there’s a long lag in supply chain in terms of ordering boxes and kind of showed up at the — a lot of them showed up at the wrong time. So how do you manage through that? Where are you storing your boxes? And do you see any signs of incremental competition on the fringe on a rail-to-rail basis?

Phil Yeager: Yes. So we have a mid-high teen sort of percentage that is currently stacked. Given some of the tightness that we’re seeing, we’re holding off or slowing down the level of stacking that we were doing. There’s obviously a cost related to unstacking and restacking as you enter Q1 if we see normal seasonality play out. And so, I would anticipate most players are going to try to focus on improved utilization of the current size of their fleet, which is what we’re going to focus on. And I believe we have a lot of runway there. We are getting to very improved utilization levels. Last week was actually the best turn times we’ve had this year thus far, and we anticipate that going lower throughout the quarter, which is obviously a very positive thing for our cost structure.

So, I would tell you, our view is, let’s remain focused on supporting our clients with what is unstacked. And if we need to, obviously we’ll access that, but it would need to make economic sense.

Brian Ossenbeck: Understood. And then, just 1 other quick follow-up. Could you just comment on the West Coast ports? Obviously the contracts are out for ratification. There’s disruption in Canada. So, are shippers moving back for this peak season? Have they already moved back? What do you feel is currently expected from that front?

Phil Yeager: I think this peak season, likely the ordering patterns have already been set, although there may be some opportunities to deviate depending on the lead times that some of our customers have set. I think there is going to be a lag in import activity. So, if there is that stability, that the deviation could be much stronger. With the customers that I’ve been interacting with as of late, as I mentioned, there is a desire to get back to pushing the majority of their freight through the West Coast ports just based on speed and cost effectiveness. And so, I think if that stability is maintained leading into next year, there’s an even bigger opportunity.

Operator: Thank you. I would now like to turn the conference back to Phil Yeager for closing remarks.

Phil Yeager: Great. Well, thank you so much for joining our call this afternoon. And as always, Brian, Geoff and I are available for any questions.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.