Yahoo Finance Hub Group, Inc. (NASDAQ:HUBG) Q1 2024 Earnings Call Transcript
Hub Group, Inc. (NASDAQ:HUBG) Q1 2024 Earnings Call Transcript April 25, 2024
Hub Group, Inc. beats earnings expectations. Reported EPS is $0.44, expectations were $0.39. 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 First Quarter 2024 Earnings Conference Call. Phil Yeager, Hub's President, Chief Executive Officer and Vice Chairman; Brian Alexander, Chief Operating Officer; and Kevin Beth, Chief Financial Officer, are joining 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 believes, 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 joining Hub Group's first quarter earnings call. Joining me today are Brian Alexander, Hub Group's Chief Operating Officer; and Kevin Beth, our Chief Financial Officer. Market conditions have remained soft despite improved demand trends and inventory restocking, largely due to excess truckload capacity that is yet to exit the industry. This trend is counter to many prior cycles, and has led to a prolonged trough in the spot market. This has in turn, driven a competitive start to bid season, as carriers attempt to deploy latent capacity and spot market pricing is pressuring contract rates. We are seeing some positive signs in the market with capacity exits and many customers orienting their purchasing decisions to value of both service and costs.
However, this capacity attrition is not occurring at a pace that is leading to more stability in the broader truckload environment. Despite these market challenges, we continue to execute well on our strategic priorities. Consistent with our focus on diversifying our service offerings to expand value to our customers, the integration of our recent Final Mile acquisition is performing ahead of expectations, and our strong balance sheet and robust pipeline of opportunities positions us to drive growth via strategic acquisitions. We also deployed our capital allocation strategy due to our strong free cash flow generation, issuing our first ever cash dividend, completing our stock split, and opportunistically repurchasing shares in the quarter.
We are executing these initiatives while enhancing our operational discipline, and delivering premier service to our customers. The challenging broader industry fundamentals have more heavily impacted our intermodal and brokerage services. However, we have outperformed expectations in early bid season as we focus on utilizing our improved rail and chassis agreements, enhance street economics, better fleet utilization, healthier network velocity, and extremely strong rail service to convert business from over the road in both short and long haul segments. We remain focused on execution in bid season, and our deliberate approach is helping to drive improved costs through our velocity and balance-oriented growth points. Along with this, our brokerage continues to grow load count as customers recognize the value of our multiple service offerings, scale, and superior service.
The diversification of our services, and focus on cost management has led to enhanced stability in our earnings through this elongated cyclical downturn. We have a high service, integrated, and cost competitive value proposition across all of our contractual solutions. In Final Mile, the expansion of our capabilities and high service levels is helping us deliver improved cross-selling and growth. Our warehousing solutions are flexible, and have a growing national footprint, which brings enhanced value to our clients. Within managed transportation, our continuous improvements, technology, and purchasing power is driving customer retention and organic growth. Last, within dedicated despite short-term headwinds due to start-up cost and increased claims expense, we are utilizing our award-winning service to grow our existing clients.
We have a strong pipeline of opportunities across all of our service offerings, which we believe will drive growth for the remainder of the year, and position us well as the market recovers. We are excited about the progress we have made in our strategic plan while delivering enhanced execution and excellent service for our customers. We believe that there will be a broader market transition in the future, driven by capacity exits and inventory restocking, and we remain focused on positioning Hub Group for long-term success through our consistent investment approach, and relentless focus on delivering for our customers, team members, and shareholders. With that, I will hand the call over to Brian to discuss our service line performance.
Brian Alexander: Thank you, Phil. I will now discuss our reportable segments, starting with intermodal and transportation solutions. ICS revenue declined 22% in the first quarter, driven by softer intermodal volume that declined 10%. Trans-con volume was down 6%. Local East volume declined 2%, and local West declined 16%. While year-over-year volume declined in the first quarter, sequential volume growth was up 3%, with the local East growing 6%, local West up 1%, and trans-con declining 2%. In addition, the first quarter, month-over-month, illustrated growth with January up 5%, February up 9%, and March up 5%. This monthly and quarterly improvement is showing the early results of the enhancements that we have made to our bid strategy.
The first quarter represents about 40% of our annual bid activity, and we have recognized early wins that started late in the first quarter and will continue throughout the year. We are being successful in taking share in converting from over the road, while also creating balance and velocity in our network. In addition, we are seeing strong volume growth with cross-border activity as we continue to invest in a superior solution to support our customers' north and southbound volumes. Our improved cost structure is helping to support more competitive pricing while maintaining yield discipline. From a cost perspective, our rail agreements are moving with the market and improved rail service has helped us better manage our equipment costs. In the West, we completed the implementation of a new Hub-controlled chassis program that is improving our cost and service reliability.
Our in-sourced rate was 77% throughout the first quarter, compared to 74% in the previous year, and improved driver productivity initiatives are further enhancing our cost per train, which will expand as we grow volume in 2024. Finally, our new bid awards are creating network balance that is reducing our repositioning costs. We are pleased with the start of the second quarter, with Apri, showing volume growth over March and year-over-year. Our bid strategy and improved cost structure are expected to have continued incremental wins throughout 2024. While our dedicated trucking team finished 2023 strong, they entered the year with some headwinds related to start-up costs. We have already seen yield improvements in the second quarter that we expect to continue throughout the rest of the year.
Now turning to our logistics segment. The successful integration of our Final Mile acquisition, our strong pipeline, and continued brokerage volume growth, improved our logistics revenue by 2% year-over-year and 10% over the fourth quarter. Our acquisition synergies and leverage purchasing strength help improve our operating income 60 basis points when compared to the fourth quarter adjusted operating income. The integration of our Final Mile acquisition is ahead of schedule with several new customer inorganic implementations in the first quarter and confirmed wins to implement in the second quarter. We have also started to leverage the combined non-asset based operating model to improve our cost structure. Despite market headwinds, our brokerage team continues to build momentum with its fifth straight quarter of sequential volume growth.
The team continues to improve productivity that will expand as we further implement our brokerage IT initiatives throughout 2024. While we continue our logistics growth, our leverage spend of LTL has generated several transactional and contract wins in the first quarter, with volume up 16% and confirmed wins that will onboard in the second quarter. We are also continuing to expand our multi-purpose logistics locations with the addition of our largest facility in the Northeast that will open this summer, and be close to 100% utilized at opening. The integration and diversification of our logistics solutions are playing out well, and we expect continued growth in 2024. With that, I'll hand it over to Kevin to discuss our financial performance.
Kevin Beth: Thank you, Brian. I will now walk through our financial results before commenting on our outlook. Our reported revenue for the first quarter of $1 billion. Revenue declined 13% compared to $1.2 billion last year, but was in line with fourth quarter revenue. ICS revenue was $552 million, which is down 22% from prior year as expected, due to the challenging market conditions. Lower fuel revenue of approximately $32 million contributed to the decrease, as did lower revenue and lower intermodal volumes of approximately 10%. Logistics revenue increased to $480 million, an increase of 2.4% year over year, as the contribution of the new Final Mile mileage business more than offset revenue per load declines in our brokerage business.
In addition, the January storm hindered overall performance with an estimated 1.5 day of volume loss in the quarter. Moving down the P&L, purchase transportation and warehousing costs decreased compared to the prior year due to lower volumes, partially offset by cost management efforts. Purchase transportation costs decreased as a percentage of revenue, partially due to decreases in our ICS segment as equipment, rail, and repositioning costs were all lower than last year. As anticipated, salaries and benefits increased year over year due to the final mile acquisition and increased merit and incentive compensation expense, partially offset by a 9% decrease of our legacy headcount. Depreciation and amortization expense increase as compared to prior year due to the acquisition.
Insurance and claims costs were in line with last year as we continue to make safety a top priority. G&A costs increased by approximately $1.7 million, due to an additional $2.7 million of costs related to the acquired Final Mile business versus last year. Gain on sale was minimal in the quarter, whereas the prior year benefited from strong used truck pricing. This changed trading an earnings headwind of $3.5 million. As a result, our operating income margin was 3.7% for the quarter, which was an increase over adjusted Q4 of 20 basis points. ICS operating margin was 2.4%, down slightly from Q4's adjusted OI percent of 2.6% due to the impact of the January storms, dedicated startup costs, and a larger than expected auto claims settlement in our dedicated business.
With this, its operating margin of 5% increased 60 basis points from the Q4 adjusted OI percentage of 4.4% due to strong results from Final Mile offsetting a lower brokerage margin. Interest expense and other income totaled $2.7 million, an increase of $1.1 million from last year. Although our debt balance is comparable year over year, interest expense increased due to an increase in our average interest rate. Our tax rate was 21.5%, slightly below our estimate of 24% due to tax expense related to our restricted stock program. Overall, this translates into earnings of $0.44 per diluted share for the first quarter. Now turning to our cash flow, cash flow from operations for the first three months of 2024 was $80.5 million. First quarter capital expenditures totaled $18 million, with the majority of spending related to $11 million of trackers.
The remainder is technology projects and warehouse equipment. We are lowering our full year outlook for CapEx, and now expect it to be between $45 million and $65 million as we have no additional container purchases planned, and lower tracker replacements than last year. Our balance sheet and financial position remain strong. In the first three months of 2024, we purchased $26 million of stock at a weighted average price just shy of $44 a share. We also issued our first quarterly dividend of $0.125 per share. Through the first quarter, we have returned $33 million to shareholders through dividends and stock repurchases. And we ended the quarter with cash on hand of over $195 million. Net debt is $142 million, which is 0.4 times EBITDA, below our stated net debt to EBITDA range of 0.75 times to 1.25 times.
We continue to expect EBITDA less CapEx for full year 2024 to be greater than the $257 million generated in 2023, demonstrating Hub's cash resiliency as we expect cash earnings growth in a challenging freight environment. Additionally, we remain confident in our ability to execute on our capital allocation plan, which includes paying quarterly dividends, stock repurchases, and strategic acquisitions. Next, I will conclude my remarks with a few comments on our 2024 guidance. The macro environment remains challenging, and while Hub performed well in the first quarter, we anticipate a prolonged competitive pricing environment impacting our intermodal and brokerage line of businesses. We now believe that the market inflection point has shifted further out from our Q4 assumption, we expect full year EPS in the range of $1.80 to $2.25 a share and revenue of $4.3 billion to $4.7 billion.
In our ICS segment, for the full year, we continue to expect intermodal volume growth in the high single digits, but price to be down mid single digits for the full year, due to our updated fuel revenue and market recovery assumptions. For logistics, we continue to expect low to mid double digit growth, driven by the addition of the acquired Final Mile business, which is offsetting or suppressed brokerage revenue. Our managed transportation consolidation and fulfillment lines of businesses are expected to show growth driven by new customer wins. There continues to be upside potential in our guidance. If retail inventory levels decline, leading to a restocking demand, and more typical shipping patterns, including a traditional intermodal peak season and surcharge revenue during the peak season.
Another market condition that would push results to the high end of the guidance is truck conversion to intermodal, helping to increase intermodal volume growth, and increase margin. When there is a tightening of the truckload market with capacity exiting, we are well positioned to capitalize in increasing intermodal and truckload rates. As mentioned at the beginning of the year, we are facing some headwinds on guidance, including higher interest costs, the normalization of incentive compensation, our tax rate being closer to 24% and minimal gain on sale. This quarter, we updated assumptions to assume that the challenges that we have experienced the last few quarters will continue into the fall. We do expect earnings growth in Q2 compared to Q1 due to seasonal improvements, resulting in stronger intermodal volume and continued momentum in the Final Mile business, helping grow operating income.
Generating cash is an important goal of management, and we are pleased with our cash EPS of $0.55, and our free cash flow of $63 million in the first quarter of 2024. While forecasting the market recovery has been difficult I'd like to point out that we expect our 2024 OI to be more than double our performance from the last downturn cycle in 2017, when the company's OI was $67 million, or 2.1% of revenue. We believe this trough to trough growth is a good example of how Hub is positioning itself for more stable financial performance in the long term. With that, I'll turn it over to the operator to open the line to any calls.
Operator: [Operator Instructions]. Our first question comes from Scott Group of Wolfe Research.
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