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

Hub Group, Inc. (NASDAQ:HUBG) Q4 2023 Earnings Call Transcript February 1, 2024

Hub Group, Inc. misses on earnings expectations. Reported EPS is $0.4601 EPS, expectations were $0.52. Hub Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Hub Group Fourth Quarter 2023 Earnings Conference Call. Phil Yeager, Hub’s President and CEO, Brian Alexander, Hub’s Chief Operating Officer, and Kevin Beth, Hub’s CFO are joining me on the call. [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, and thank you for joining Hub Group’s fourth quarter earnings call. Joining me today are Brian Alexander, Hub Group’s Chief Operating Officer, and Kevin Beth, our Chief Financial Officer. I’m proud of the way our organization executed to support our customers and one another in 2023 while also delivering the second best financial performance in our company’s history in a challenging year. We faced difficult market conditions with higher inventory levels, excess capacity and slowing import demand. This led to challenging fundamentals that are more transactional service life. However, our execution of our strategy over the last several years of delivering world class service, investing in equipment and technology to drive productivity, diversification of our service offerings to deepen our value to our customers, and maintaining cost discipline enabled us to successfully manage through those challenging conditions and deliver strong results.

We completed several key strategic priorities this past year that will pay dividends for years to come. We improved our rail and taxi agreements, providing us with expanded reach and flexibility while enhancing our cost structure. We achieved a record level of share of our controlled drayage, enabling improved service and costs. We continued our diversification strategy, closing an accretive acquisition that helps us build scale and capabilities in the big and bulky final mile space. And finally, we completed our capital allocation plan, delivering a clear growth and returns-oriented investment strategy. These are just a few of the many strategic initiatives we executed on this past year which we delivered while prioritizing our team and customers, positioning us for long-term success.

We are leveraging the momentum at the end of last year to deliver for our customers and shareholders again in 2024. We believe that the current global supply chain disruption and the normalization of inventory levels will lead to increased shipping demand and wet goods imports, which along with accelerated capacity exits will progressively lead to improved industry fundamentals. In ITS, we have a great deal of momentum in mid-season as we are providing significant savings versus stress while executing an excellent service track. We believe that with our improvements in service and productivity, as well as our enhanced partnership, we will be in a position to deliver strong volume growth this year. Our initial results have shown the quality of our value proposition and we will continue our focus on enhanced balanced velocity and productivity throughout this season.

We’ve also driven incremental growth and dedicated onboarding new wins with existing customers based on our service, quality and scale. We believe these factors will lead to improved performance in our ITS segment as the year progresses. In logistics, we are in the process of integrating our recent Final Mile acquisition and are excited about the initial results. We are taking a best-of approach and finding significant cross-selling cost synergies that will allow us to accelerate growth in the business. In brokerage, after a strong year where we increased total volume count, we are seeing some signs of improvement in the market, which, along with our continued cross-selling, high-quality service and productivity enhancements will lead to improved performance.

Finally, within managed transportation and consolidation, our value proposition of service, technology and savings is resonating with our customers, and we have a solid pipeline of new onboardings that will support growth in 2024. Despite a challenging industry backdrop, we executed on our strategy and are positioned for continued long-term success. We are focused on having a great year in 2024 through delivering best-in-class service, investing in the business through the long term, maintaining our cost discipline and deepening our value to our clients. This focus will position us as a provider of choice for our customers and will accelerate profitable growth as market conditions shift. With that, I will hand the call over to Brian to discuss our segment results.

Brian Alexander: Thank you, Phil. I will now discuss our reportable segments, starting with Intermodal and Transportation Solutions. ITS revenue declined 28% in the fourth quarter, driven by the softer intermodal volumes that declined 11.6%. Transcon volume was close to flat. Local East volume declined 8% and local West declined 17%. While year-over-year volume declined in the fourth quarter, we drove sequential transcon and local East volume growth. This momentum in shorter length of haul is a good early indicator of truckload volume converting back to intermodal. In addition, the sequential improvement is showing the early results of the enhancements that we have made to the local East and our disciplined focus on margin per load day that will continue to drive transcon growth.

We continue to improve our cost structure in ITS that drove a 30 basis point improvement in sequential operating income, excluding acquisition-related fees. We continue to implement several cost controls that will accelerate in 2024 and better position us to compete while maintaining yield disciplines. From a cost perspective, our new rail agreements are moving with the market and improved rail service has helped us better manage our equipment costs. In the West, we’re implementing a new hub control chassis program in the first quarter of 2024 that will improve our cost and service reliability. Our in-sourced trade held steady at 80% throughout Q4 compared to 69% in the previous year. And with improved driver productivity initiatives, we have the capability to further improve our cost per trade as we grow volume in 2024.

We’re seeing a slow start to the year and weather events have impacted January volume, but we are focused on returning to growth in intermodal this year, which will be driven by truckload conversions back to intermodal, inventory destocking and normalization, increased West Coast import and transload activity, our adjustment to our bid approach with a focus on regaining velocity and balance in our network and improved bid realization. We feel confident in our timing and disciplined approach for the 2024 bid season and are already seeing incremental wins that will ramp in late Q1 and early Q2. Our dedicated trucking team finished the year strong with a great growth story in yield expansion. We are entering 2024 well-positioned for further growth with a strong pipeline of organic and new customer opportunities.

While the near-term ITS results are impacted by low volume, we are confident that our actions will position us for growth and deliver high levels of service for our customers with sustainable profitability. Now turning to our Logistics Segment. I wanted to start by welcoming our new Final Mile team to the Hub Group. The integration into our existing final mile operations is well underway. We are now positioned as one of the top final mile providers with a diverse offering that now includes appliance deliveries in a larger network of locations. These locations now bring our Hub network to 11 million square feet, strategically placed in 75 locations to service our customers’ supply chain needs. We have a strong pipeline of cross-selling opportunities that are quickly materializing into wins that will launch in early Q2.

Our brokerage team continues to be an industry standup as they thrive through a challenging freight year and grew volume while improving team member productivity. We have well-planned IT initiatives set to roll out in 2024 to further enhance our brokerage technology while we stay true to our Hub values of innovating with a purpose. 2024 is off to a good start for brokerage, and we are seeing early signs of smart pricing inflation that will support volumes and yield expansion. With the long tail of Hub customers to cross-sell, we are excited for our brokerage team to continue profitable growth in 2024. While we continue our logistics growth, we’re also improving our costs as we leverage our close to $1 billion in LTL under management. This leverage improves our LTL buying power and creates density to support consolidations, which helped drive a 16% increase in our fourth quarter LTL volume.

We are also continuing to enable our multipurpose logistics locations to support our continued growth of our LTL, final mile, e-commerce and warehouse solutions while also supporting inbound and outbound multimodal hub volume to service our customers’ supply chain needs. With that, I’ll hand it over to Kevin to discuss our financial performance.

Kevin Beth: Thank you, Brian. Before I start with the results, just a quick reminder that the EPS amounts presented are after the 2-for-1 stock split. Despite a continuing challenging freight market, Hub generated revenue of $4.2 million for the year and $1 billion for the quarter. Our GAAP operating income margin for the full year was 5.1% and 3% for the quarter. During the quarter, we incurred $5.1 million or $0.08 a share of acquisition-related expenses. Without the acquisition-related expenses, the quarter operating margin was 3.5%. The acquisition costs were allocated to both segments based on revenue along with our standard corporate expenses. Without the acquisition-related expenses, ITS margin was 2.6% and the Logistics Segment was 4.4%.

Our diluted earnings per share presented post-split for the quarter was $0.46 and $2.62 for the year. Adjusting for the acquisition-related expense, EPS was $0.54 for the quarter and $2.68 for the year. In the fourth quarter, surface transportation and warehousing costs decreased compared to prior year due to lower volumes and cost management efforts. Salaries and benefits decreased from prior year as our nondriver headcount decreased by 15%, and we had less incentive compensation expense. Depreciation and amortization expense increased as compared to prior year due to growth-oriented investments in equipment and technology as well as acquisitions. Insurance and claims costs decreased by $7.5 million due to improved claims experiences. G&A costs increased by over $2 million due to the previously mentioned $5.1 million in acquisition-related expenses.

Gain on sale was minimal this quarter, whereas the prior year benefited from strong used truck pricing. Turning our focus to our balance sheet and capital allocation. Fourth quarter capital expenditures totaled $35 million with a full year amount of $140 million. We purchased $21 million of tractors during the quarter, $7 million of containers, with the remaining $7 million related to technology projects and warehouse equipment. For 2024, we expect capital expenditures to be between $55 million and $75 million as we have no additional container purchases planned and lower tractor replacements. We are expecting our typical technology capital spend to be in the $20 million range. We anticipate 2025 CapEx to be in a similar range as of 2024. During the quarter, we continued generating strong operating cash flow while deploying $262 million of cash for the strategic acquisitions within our Final Mile business and an additional $26 million on stock buyback at a weighted average price of $76 per share.

For the full year, we purchased $143 million of stock at a weighted average price of $77 a share. At the end of the year, we had cash on hand of approximately $187 million. Our net debt is $156 million, which is 0.4x EBITDA. We are below our stated net debt-to-EBITDA range of 0.75 to 1.25x and expect EBITDA less cash expenditures in 2024 to be greater than the $257 million generated in 2023. This shows Hub’s cash resiliency as we expect cash earnings growth in a challenging trade environment. Additionally, we are confident in our ability to execute on our capital allocation plan, which includes paying our first dividend later this quarter, repurchasing more stock and continuing to be active in M&A. After Hub’s second highest annual EPS, we turn our attention to 2024.

Our EPS guidance is $2 to $2.50 a share with revenue guidance of $4.6 billion to $5 billion. A few things to note as we come out of 2023 and into 2024. The middle of the range assumes ITS volume growth of low double digits as OTR conversions occur based on continued strong rail curve. Pricing in the first half of the year is a zoom down but then rebounding to low single-digit increases in the second half of the year as truckload capacity exits and the repricing of lower third quarter contractual rates occur. There is upside potential in our guidance if retail inventory decline, leading to restocking demand and more typical shipping patterns, including the traditional intermodal peak season and surcharge revenue during the peak season. Another market condition that would push results to the high end of guidance is intermodal volume growth driven by OTR conversions based on continued and sustained service level improvements.

In our Logistics Segment, we are assuming growth due to the addition of the appliance Final Mile business, low to mid-double-digit growth in managed transportation driven by new customer wins and increased demand, as well as mid-single-digit growth for our consolidation and fulfillment and brokerage businesses. Additional guidance upside would result from the tightening of the truckload market with capacity exiting resulting in an increase in intermodal and truckload rates. For the 2024 guidance, we are assuming a normalized annual tax rate of 24% versus the lower 2023 tax rate of 20%. In 2023, Hub had very minimal incentive compensation expense. The 2024 guidance includes a more normalized incentive compensation expense. Another assumed headwind in the guidance is gain on sale.

We assumed minimal gains in 2024. Our current average age of our tractor fleet is 2.6 years, which is within the lower range of our optimal replacement cycle. As such, we will be replacing less tractors than previous years. Additionally, we are not seeing improvement in the used tractor market. Thus, we expect minimal gains as we replace older tractors. With these assumptions, we expect challenges that we have experienced the last few quarters continuing during the first half of 2024. In the second half of the year, with normal seasonality, we anticipate sequential quarterly earnings growth. We expect earnings in Q1 to be a step down from Q4 2023 due to normal seasonality and continued pressure on intermodal and truckload pricing and the return to a normalized tax rate.

I do want to mention that normalizing our tax rate, incentive compensation expense and the gain on sale of equipment would add back approximately $0.49 to our midrange of the 2024 guidance, resulting in flat but slightly growing EPS in 2024. The change in the tax rate will have the largest impact from Q4 to Q1 as we had the low 3.3 tax rate in Q4 2023 and expect the tax rate in Q1 to return to approximately 24%. We expect the incentive compensation effect to grow during the year as our earnings grow. Finally, looking at our cash flow. Hub’s cash EPS was $0.30 and $0.34 higher than our GAAP EPS in 2022 and 2023 respectively. We expect this spread to continue to grow in 2024. As generating cash is an important goal of management, we will be noting our cash EPS results going forward.

This change is not the basis for guidance but to highlight Hub’s cash earnings power. With that, I’ll turn it over to the operator to open the line to any questions.

Operator: [Operator Instructions] Our first question comes from the line of Scott Group of Wolfe Research. Please go ahead.

See also 15 Highest Quality Creatine Supplements of 2024 and 20 Highest Quality Fabrics in the World.

Q&A Session

Scott Group: Hi thanks. Afternoon guys. So, I just want to get a little more color on sort of the near-term earnings expectations, I mean just think about like the cadence throughout the year. So you’re saying a step down from Q4, should we adjust for the tax rate and get to something in the 40s and then take it, then apply normal seasonality or not? Any color on just how to think about Q1, I guess, and then the sequential build from there.

Kevin Beth: Sure. Thanks, Scott, for the question. Yes, definitely, you have a couple of headwinds that we’ll run into here quickly in the first quarter. One is definitely the tax rate going from the 3.3 to a normalized 24%. Additionally, we’re going to have less interest income after spending the $262 million regarding the acquisition. So those are certainly the two biggest things, I think, in the first quarter that really aren’t management control. In addition to that, we will have some offsetting. We’re expecting to start to see margins return and get to at least the pre-adjusted or the post-adjusted numbers, excuse me. And then, as the year grows, we’ll be seeing those price increases as well as volume increases that will sequentially increase EPS during the year.

Phil Yeager: Yes, as I said, Scott, I think obviously there’s a bit of a tailwind here from the acquisition we just completed in December from a revenue basis. We’re anticipating some sequential improvement in intermodal volumes. We saw that show up in January despite some weather issues. But to Kevin’s point, operating margin percentage being relatively consistent with Q4 on the adjusted basis and then the tax headwind, are really kind of the big things to call on.

Scott Group: Okay. And then, so just so you’re saying take the adjusted intermodal ITS margin of 2.6 and you think hold that fairly steady from Q4 to Q1?

Phil Yeager: Yes, yes, right.

Scott Group: Okay. And as you think about your rail contracts and what you’re expecting for price, is an aggregate for the year, is intermodal price cost a tailwind or a headwind?

Phil Yeager: Yes, this is Phil. I would say it’s a tailwind. Our new structure has certainly helped us through this more challenging environment, with the structure that moves up and down, obviously with some of the challenges we’ve seen in the market. It does have a bit of a lagging effect and I think that’s important to call out. So as we see more stabilized pricing in the broader market, as well as an inflection positive, you’ll see more flow through for Hub. I think Brian mentioned some really good things we’re doing on the other side of the cost in implementing our new chassis program in the West. I think in Q4 we saw drayage costs down 25% on a cost per drayage basis. So we’re doing a really nice job there and then we’re very focused on layering in growth that will help really drive down our cost structure as well.

Scott Group: And maybe just last question. So you guys used to give us quarterly OpEx guidance. I guess it’s a bigger business now, but you want to take a shot at trying to help us think about quarterly OpEx going forward?

Kevin Beth: I don’t, we’re not prepared to do that using the individual segments, but I would say again, we would be looking at increases, first quarter, like I said, similar to the after adjusted amounts and then going back up to more standard with a little bit of growth into the second half of the year.

Phil Yeager: Yes, and I think headcount will stay relatively similar. We’re going to have obviously merit-based increases, some increase in incentive compensation in Q1 and then, gain on sale will be a little bit of a headwind Q4 to Q1 as well.

Scott Group: All right, thank you guys.

Operator: Thank you. Our next question comes from the line of Jon Chappell of Evercore. Your question please, Jon.

Jon Chappell: Thank you. Phil, on the big year guidance ranges, the revenue number is substantially higher than street expectations. So a fair amount of upside there, but the EPS is actually lower. So, I’m just curious on the margin cadence, for this year. Is this strictly just the pricing weakness at intermodal in the first half of the year, before things start to ramp, or is there more of a structural lower margin, for the entire enterprise as you’re diversifying your businesses, especially with growth in the logistics markets?

Phil Yeager: Sure. So I think what we’ve shown over this past year, is the logistics margins are going to be relatively more stable. We think that there is upside within that as we see the brokerage market normalize, but we didn’t really want to place a bet, on exactly when that’s going to occur. With an IPS, I think, we’ve also stated that it’s going to have some lower lows, but also some higher highs and a little bit more fluctuation. We’re currently in the lower end of that. I believe that that’s going to sequentially improve throughout the year. So, I don’t believe that we’re at a structurally lower operating margin going forward, but we’re certainly navigating through some more challenging market conditions, and wanted to be conservative in our approach. One item that we didn’t include in the guidance, is any share of purchases. Obviously, we have a $250 million authorization, which could be upside and will be opportunistic within that around capital deployment.

Jon Chappell: Okay. That’s helpful. And then probably for Brian, I think it was last quarter, maybe two quarters ago, but probably last quarter, you said you’d maybe held the line on price a little bit longer at the expense of volume. And I feel like you’ve shifted there. You had some positive things to say about incremental wins in bid season. Is it that same policy you’re sticking with now and maybe, for the first six months of the year to try to get more volume on the network, to help with efficiency, et cetera, at the expense of price? And would you kind of maybe expect a better balance of volume and price? Is that just purely market-related?

Brian Alexander: Sure. Yes, no, I appreciate that, Jon. We are getting the early wins in the bid season, and what we’re seeing is that we’re positioned well now to defend our incumbency, to capture more share, and get the over-the-road conversions that we needed to do. As I mentioned in the previous calls, we needed to make some adjustments structurally to target balance and velocity. And I think seeing the bid realization and some of those inventory normalizations has helped us plan that demand and that forecast. But we saw Transcon, I mentioned that in the prepared remarks, sequential growth there, and when we look at January over December, we saw a 10% sequential growth in Transcon, and that’s really us focusing on margin per load day and seeing some of that spot inflation start, to drive more of those over-the-road conversions.