Hub Group, Inc. (NASDAQ:HUBG) Q4 2022 Earnings Call Transcript

Hub Group, Inc. (NASDAQ:HUBG) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Hello, and welcome to the Hub Group Fourth Quarter 2022 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. 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.

Phillip Yeager: Good afternoon, and thank you for participating in Hub Group’s fourth quarter earnings call. With me today are Brian Alexander, Hub Group’s Chief Operating Officer; and Geoff DeMartino, our Chief Financial Officer. I’m honored and privileged to be able to serve as Hub Group’s third Chief Executive in our 52-year history. I wanted to thank our Board of Directors for their support, but in particular, our Executive Chairman, Dave Yeager, who was the company’s CEO for 26 years with vision, integrity, determination and humility. He has been a phenomenal leader and I look forward to continuing to work with him to deliver on our long-term goals for the organization. I wanted to also thank all of our team members for their continued commitment and focus on supporting our customers in a constantly evolving environment.

Our team delivered a record year in 2022. We’re able to grow all of our service lines in both revenue and profitability, reaching $1 billion in revenue in both logistics and brokerage for the first time as an organization, while eclipsing $3 billion in intermodal revenue. We continue to execute on our strategy to deliver world-class service and invest in our core business and technology, while diversifying our service offerings through organic and acquisition-driven growth. We delivered on that strategy, while maintaining a phenomenal balance sheet, generating strong free cash flow and returning capital to shareholders. As we look ahead to 2023, the freight economy has changed from this time last year. Inventories have elevated and we have seen capacity loosened.

However, we anticipate another year of variations in demand with a stronger second half of 2023 based on continued consumer strength and a need for inventory restocking. While this backdrop may create short-term challenges, we believe that Hub Group is well positioned to grow in this environment given the many improvements we have made to our business over the past several years. In Intermodal, we anticipate increased conversion to rail from over the road resulting from an improved and more consistent rail service products that along with our rapidly increasing into a straight percentage, improved rail agreement and lower outside drayage costs will help our customers reduce costs while driving efficiency and sustainability in their supply chain.

Our dedicated pipeline is strong, and we have improved our processes and leadership team, which we believe will help us deliver another year of profitable growth, driven by our high service levels and engineered solutions. We have also provided our revenue streams to be more non-asset-based, which now represents 40% of our annual revenues. In brokerage, we are offering more diverse capacity alternatives that increase scale and have enhanced our technology to drive improved purchasing, efficiency and service levels, which is enabling continued cross-selling wins with our customers. Our logistics business continues to develop into the premier end-to-end supply chain solutions provider with our investments in people and technology as well as acquisitions like TAGG Logistics.

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We are helping our customers pay money through our continuous improvement, while providing a world-class customer experience that is able to bring the analytical, technological and execution benefits of managed transportation to fruition for our clients. All these enhancements to our business model will allow us to continue to grow while maintaining strong profitability and returns. We will continue to invest consistently into the business through cycles, in order to ensure we can support our customers in a variety of environments through both capital investments and technology and capacity as well as acquisitions that help us deliver more value, while maintaining our strong financial position and utilizing our buyback authorization to reward our shareholders.

Our team is focused on delivering another excellent year in 2023. And with our aligned strategy as well as focused on execution and efficiency, we feel we are in a position to deliver another strong performance. With that, I will hand it over to Brian to discuss our service line performance.

Brian Alexander: Thank you, Phil. I also want to thank our entire team for delivering a record year as they support our vision for growth, while also providing our customers a best-in-class service experience. I will now discuss our service line performance, starting with Intermodal. In the fourth quarter, ITS revenue increased 5%, driven by a 19% increase in Intermodal revenue per unit as well as continued growth in dedicated trucking. With the lack of the traditional peak season, Intermodal volumes declined 12% in the fourth quarter, with a 9% decline in the Local West, 9% decline in Transcon, and decline of 17% in the Local East. Gross margin as a percent of sales decreased 266 basis points year-over-year. We are actively offsetting this decline in margin with an increase in in-source trade, up in year-over-year fourth quarter from 47% to 65%, improved rail agreements, lower outside drayage costs and several other operating cost improvements.

In addition, we’ve already started to experience improvements in efficiency with rail service, which will help drive conversion volume and improve our box turns. These improvements in Intermodal efficiency have us well positioned to grow our volume and maintain operating margin discipline. Now turning to Logistics. Logistics revenue increased 9% in the quarter as we continue to deepen our value to our customers through our integrated approach to supporting their end-to-end supply chain needs. We are well positioned for growth in our consolidation and fulfillment business, taking advantage of capabilities that TAGG has brought us, which have already enabled several large transportation and warehousing wins. Gross margin as a percent of sales increased 217 basis points as we maintained our focus on operational discipline, yield management and customer continuous improvements that drive organic growth.

We have a great pipeline of new onboardings and have improved our Logistics field size in close ratio as we offer more integrated supply chain solutions. In addition, our Logistics offering has continued to grow the volume that contributes to our other lines of business to support multimodal capacity. With these enhancements, we are in a great position to continue our trajectory of profitable growth. And now I’ll conclude with Brokerage. We are very proud of our Brokerage team as they performed well against challenging market conditions in the fourth quarter. We remain focused on service to our customers in leading with a competitive price and capacity. This generated an 8% increase in year-over-year fourth quarter volume and an increase in gross margin as a percent of sales was 61 basis points, but a revenue decline of 11% year-over-year.

Our acquisition of Choptank helped drive discipline in our purchasing as well as cross-selling growth in our LTL and dry offerings. Transactional moves represented 52% of our volumes throughout the quarter, while our contract business provided consistent volume and margin expansion as we improve purchasing. We are well positioned to continue our growth through our integrated approach to our customers, high service levels and expertise and our capacity types, including reefer, dry, LTL and drop trailer. With that, I’ll hand it over to Geoff to discuss our financial performance.

Geoff DeMartino: Thank you, Brian. Our business had a very strong 2022 with revenue up 26% to over $5.3 billion and $1.3 billion in Q4. ITS grew revenue to over $3.3 billion with Brokerage and Logistics each at $1 billion. Our diversification and focus on transportation cost containment, yield management and operating efficiency, led to gross margin of 16.7% of revenue for the year and 15.9% in Q4 with operating income margin of 8.9% for the full year. We continue to leverage our gross margin against operating expenses, which were equal to 7.8% of revenue for the year, down from 8.5% in 2021. Operating expense dollars in Q4 increased from last year due to incremental expenses from TAGG and less gains from the sale of equipment, offset by lower compensation expense.

Our diluted earnings per share for the quarter was $2.42. We generated $148 million of EBITDA in the quarter and ended with $287 million of cash on hand. We are introducing guidance for 2023. Demand conditions softened in the second half of 2022 due to macroeconomic factors and rising retailer inventory levels. We expect these conditions to persist for the first half of 2023, but are anticipating a slight improvement in demand in the second half. For the year, we expect to generate diluted EPS of between $7.00 and $8.00 per share. We expect revenue will range from $5.2 billion to $5.4 billion. For Intermodal, we’re forecasting low single-digit volume growth for the year, with strength in the second half. We anticipate gross margin as a percent of revenue of 14.5% to 15.0% for the year, driven by softer pricing and less surcharge and accessorial revenue, partially offset by lower purchase transportation costs.

For the year, we expect costs and expenses of $420 million to $440 million, increasing from 2022 due to a full year of TAGG and less gain on sale. We will continue to invest in our business in 2023 with capital expenditures of $170 million to $190 million, targeted for containers, trackers, warehouse investments and technology. As we enter into a new year, we thought it would be important to recognize the changing profile of our business. Over the last five years, we have grown our top line by over 70%, both through organic growth in our asset-based Intermodal business as well as through acquisitions in our non-asset businesses that have brought us new capabilities in areas such as fulfillment, consolidation, final mile and refrigerated transportation, while also adding scale to our business.

We’ve expanded our operating income margin from 2% to nearly 9% today with a similar large improvement in our return on invested capital. Despite this, we traded a lower valuation than we did several years ago and continue to trade at a large valuation gap relative to our peers. While we intend to use our pristine balance sheet to invest in the business through capital expenditures and acquisitions, we also have the flexibility and authorization from our Board to take advantage of this inefficiency in the equity market. With that, I’ll turn the call over to the operator to open the line to any questions.

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Q&A Session

Operator: Our first question comes from the line of Todd Fowler of KeyBanc. Your question please, Todd.

Todd Fowler: Hi, everybody. I’m assuming it’s for Todd Fowler at KeyBanc. Thanks for taking the question. So maybe to start with the guidance, I certainly understand that this is a volatile environment, but a pretty wide range for 2023 that $7.00 to $8.00 wider than what you typically guide to. I guess maybe can you talk to what would put you at the high end of the range versus is the low end of the range and some of the moving pieces is it mostly just where the bids come in, how much is dependent on the underlying environment and just some thoughts around kind of the range here to start?

Geoff DeMartino: Sure, Todd. This is Geoff DeMartino. The range is wider than usual. I think just appropriate given the macroeconomic conditions. We are certainly anticipating conditions will tighten in the outlook to improve in the second half of the year. We saw retailers’ inventory levels really elevate off the bottom in the last few months of 2022, which impacted performance. We’re continuing to see that today. But I think what we’re hearing – from our customers is they’re expecting inventory levels to be worked down throughout the year. So we’re anticipating some increase in demand towards the end of the year and that’s what really would get us to the high end of the range. You’ve followed us for many years. We tend to be pretty conservative in our guide.

The last couple of years, we’ve ended up beating by north of 50% I’m not sure we’re going to do that quite that well this year, but we tend to be conservative on our overall guidance initially at the start of the year.

Phillip Yeager: Yes and Todd, this is Phil. I just wanted to add in, we did want to be conservative on the economic outlook. I think it’s a little early to tell exactly if that snapback and demand will be large or small and we didn’t really want to make a call on that given that it’s a few quarters out. And so, we tried to remain relatively conservative in that outlook.

Todd Fowler: Okay, got it. Yes, that’s helpful. So it sounds like you’ve got pretty good line of sight into this and the bias would be upwards. Maybe for my follow-up, maybe this is for Brian. When I think about the 12% volume decline on the Intermodal side during the fourth quarter, that seems to be maybe a little bit worse than what we’ve heard from some peers and maybe some of the industry data that’s out there. I don’t know if you want comment or share any thoughts on maybe the volume decline here in the fourth quarter seems like local East was down quite a bit. Maybe just how you’re thinking about your kind of the environment and share right now? Thanks.

Phillip Yeager: Yes, Todd, this is Phil. We watch our share very closely. Our strategy has been to really focus on maximizing our margin per load day, which has guided us towards longer transit and longer haul business, which I think led to some of the volume decline especially when you take into account the longer customers as well. So when we look at it, we actually feel like – and revenue per load is up 19% that we actually gained share on a revenue basis even though volumes were down. Our focus is going to continue to be on maximizing that margin for low days that’s what generates the highest return on capital. As we look at January, volumes were down 8% on a year-over-year basis, but actually up 9% sequentially. So also feel good about the momentum that we have to start the year.

Todd Fowler: Okay, that’s helpful. Thanks a lot. Phil thanks for the time tonight.