Hub Group, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Welcomed the EASO team to the Hub Group family and thanked team members for their hard work. The broader North American transportation market shows signs of recovery with a pulled forward peak season, capacity exits, and inventory replenishment. Executed capital allocation initiatives: new joint venture with EASO (largest intermodal marketing company in Mexico) and returned $91 million to shareholders year-to-date via share repurchases and dividends. Commenced network alignment initiative in Q3, with $8.4 million in expenses, expecting $3.5 million to $4.5 million in Q4 expenses. ITS performed resiliently with intermodal and dedicated volumes, while Logistics segments had varied performance with managed transportation strong, Final Mile reorganized, Brokerage facing headwinds, and CFS improving utilization.

Segment Performance

• ITS (Intermodal Transportation Services): Revenue was $560 million, down 5.9% year-over-year. Intermodal volume increased 12% year-over-year, but lower Intermodal revenue per load, accessorial, and fuel revenue offset stronger dedicated revenue. Fuel revenue decreased by approximately $15 million.
• Logistics: Revenue was $461 million, comparable to the prior year. The Final Mile business contributed positively, offsetting lower revenue in brokerage. In Final Mile, legacy business volumes were lower due to a customer consolidating facilities, but the team was reorganized and high-value onboardings occurred. Brokerage had flat volumes year-over-year but faced headwinds from a higher mix of LTL (which grew 21% in the quarter) and lower spot market activity. CFS focused on network transition, achieving a 15 percentage point improvement in utilization quarter-to-quarter.

Guidance

• Full year adjusted EPS expected in the range of $1.85 to $1.95 per diluted share, and revenue approximately $4 billion.
• ITS: Q4 intermodal volume guidance is low double-digits, with price down mid- to single-digits. Dedicated revenue for full year expected to be comparable to last year.
• Logistics: Q4 revenue expected to grow low single digits, with brokerage revenue negatively impacted by price; excluding brokerage, low-to-mid double-digit revenue growth is expected. Brokerage Q4 volume expected to be low single digits with pricing challenged. Network alignment tailwind expected to begin in earnest in 2025.

Risks

• Market cyclicality affecting pricing and demand.
• External factors like port strikes and weather events causing temporary tightness.
• Overcapacity in the brokerage segment impacting revenue per load.
• Regulatory changes in Mexico potentially affecting trade volumes and nearshoring trends.

Question and Answer

Q: Bruce Chan of Stifel asked about the pricing backdrop in Intermodal during the quarter and integration timeline for Final Mile.

A: Phil Yeager responded that demand was strong into Q4, bid season was ongoing with competitive but not irrational pricing, and Final Mile had reorganized, was in a good position to capture seasonal demand, and had new onboardings.

Q: Brady on behalf of Daniel Imbro asked about 4Q volume guidance in ITS and 4Q margin expectations.

A: Kevin Beth stated 4Q ITS volume was low double-digits with price down mid- to single-digits due to pull forward in Q3, and Phil Yeager mentioned 4Q margin would fall back due to normal seasonality and fixed costs in the latter part of Q4.

Q: Elliot Alper of Cowen asked about the EASO joint venture's earnings contribution and Mexico trade regulations.

A: Phil Yeager said the joint venture is immediately accretive to earnings, with cross-selling and synergy capture opportunities in Mexico, and Kevin Beth noted the transaction closed on October 23. Phil Yeager also mentioned customers are committed to growing in Mexico due to nearshoring trends and beneficial USMCA agreement.