Q3 2021 Hub Group Inc Earnings Call
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Hello, and welcome to the hub group third quarter 2021 earnings Conference call.
<unk>, Oh, yeah, well Yeager hubs, President and Chief operating Officer, and Geoff Demartino hub CFO are joining me on the call at this time all participants are in a listen only mode.
A question answer session will follow the formal presentation.
In order for everyone have an opportunity to participate please limit your inquiries to one primary and one follow up question 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.
Statements that are forward looking can be identified by the use of words such as belief.
Fact, anticipate and project and variations of these words he used to be.
The cautionary statements in the release Yeah Justin.
The disclosures in the company's Form 10-K, and other SEC filings regarding factors that could cause actual results to differ materially from these projected.
Projected in these forward looking statements as a reminder.
Is being recorded and now my pleasure to turn the call over to your host Dave Yeager you may now begin.
Good afternoon, and thank you for participating in hub group's third quarter earnings call.
Joining me today is still Jaeger, <unk>, President and Chief operating Officer, and Geoff Demartino, Cox Chief Financial Officer.
We had a solid third quarter as pricing continues to outpace rapidly accelerating cost, thereby creating record quarterly revenue and gross margin.
And to kick off the fourth quarter, we just closed on shark tank, a large truck brokerage operation specializing in refrigerated product. This was an acquisition that <unk> worked on for several years with Chubb tanks owner, Jeff Turner, who share a common vision and culture and we welcomed the chartering team to the <unk> family and look forward to growing our collective.
Business.
Strong demand continues as inventory to sales ratios are at near all time lows, while intense restocking the shelves for sure.
On the second quarter call, we related that we believe that the strong demand and tight capacity market may extend through the second quarter of 2022.
Nothing has really changed since that last report and we believe that this imbalance will continue through most of the first half of 2022 and very likely throughout most of the year.
Today, there are many issues negatively impacting customer supply chains, among the issues or labor shortages and port congestion, resulting in network imbalances.
Our focus continues to be on supply and reliable capacity to our clients in order for them to deliver their products sufficiently.
And with that I'll turn the call over to Phil to discuss the performance of our business lines.
Thank you Dave.
Very pleased with these results from the efforts of our team to support our customers during this dynamic environment.
We delivered strong results in intermodal with a 17% increase in revenue and 530 basis point improvement in gross margin percentage year over year, which was offset by an 8% decline in volume after an 11% increase in the third quarter last year.
For the quarter Transcon volume declined 1% local east was down 7% in local west was down 10%.
Although the intermodal network as more congested and we're seeing slower rail transit extended customer and loading times, the more limited available drayage capacity.
Our team has done a great job of offsetting those challenges with improved on time performance to our faster stronger pricing are better balanced network and improved cost recovery efforts.
Demand continues to be very strong in particular off the west coast and we anticipate receiving all of our Newbuild containers, this year, which will help us capitalize on that opportunity.
We anticipate another strong bid season, and improving network fluidity into 2022, given the strong demand backdrop and the need for shippers to lock in capacity.
Logistics performed well with 17% revenue growth and a 100 basis point improvement in gross margin percentage year over year.
We continued to have strong revenue growth from our consolidation and final mile service client, which was offset by lower revenue, but improved yields in our outsourced transportation management offering.
We've had many strong new wins across all of our solutions, including exceeding our cross selling synergy targets in final mile. We.
We see continued opportunity for growth ahead, as we provide our clients creative solutions to reduce costs and enhanced server.
Brokerage posted strong results again with 28% revenue growth on 3% lower volumes in a flat gross margin percentage year over year.
We continue to see strength in the spot market and are bringing on new clients through our growing sales force, while maintaining strong efficiency.
We also are very excited about the addition of <unk> to our brokerage.
We have shared values and believe that along with our aggressive sales culture that will bring an improved technology platform, a new specialized service offering and a large cross selling opportunity.
The acquisition will put us at over $1 billion in brokerage revenue and we believe enable long term sustainable growth.
Dedicated revenue declined 7% with a 450 basis point decline in gross margin percentage year over year.
This decline was driven by increased insurance cost MLR expense and outside capacity costs.
We're executing our customer renewal onboarding, new more profitable wins and continuing to enhance our systems and processes to help offset these challenges.
Looking ahead, we believe we will see a strong demand environment and the hub group is in a great position to provide solutions to our clients and drive profitable growth.
With that I will hand, it over to Jack to discuss our financial performance.
Phil Q3 featured all time record revenue and profitability levels with total revenue growth of 16%.
Gross margin was $158 million or 14, 7% of revenue.
Which was an improvement of 300 basis points as compared to last year, and 240 basis points higher than Q2.
Gross margin performance and our focus on operating efficiency led to operating income of $60 million or five 6% of revenue.
Salaries and benefits increased primarily due to higher incentive compensation and commission expense as compared to last year.
General and administrative expenses increased compared to last year due to legal settlement and expenses related to the acquisition of <unk>, partially offset by higher gains on the sale of transportation equipment.
Our diluted earnings per share for the quarter was $1 28.
Which is 73% higher than the prior year.
<unk> $92 million of EBITDA in the quarter and had over $230 million of cash on hand at quarter end.
October we invested approximately $130 million cash to purchase <unk>.
We continue to have a conservative capital structure with net leverage of approximately <unk> five times EBITDA.
Which provides us with ample flexibility to continue to invest in the business through capital expenditures and additional strategic acquisitions.
We are raising our 2021 EPS expectation to $3 90 to $4 per share.
From $3 50 to $3 70 that we announced in July.
For 2021, we expect revenue will grow in the high teens percentage range with intermodal volumes approximately flat.
We forecast gross margin as a percent of revenue of $13 three to $13 seven for the year growing as a result of rate increases partially offset by higher costs for rail transportation third party drayage and driver wages.
We continue to see strong consumer demand and low retail inventory levels, which is driving the need for our customers to restock.
For the year, we expect costs and expenses of 365 million to $375 million, which reflects incremental operating cost per chop tick we.
We expect our tax rate to be approximately 24% for the full year.
Our 2021 capital expenditure forecast is 150 to 160 million.
Down somewhat as compared to our prior guidance as 150 of the tractors that we order this year will be delivered in early 2022.
We expect to receive our full order of 3000 containers this year.
Last quarter, we introduced our long term revenue and margin targets.
Acquisition of <unk> is a great step towards achieving these targets and is indicative of the type of strategic investment we will make in the business, adding scale, while also introducing a new service offering with significant cross sell potential.
Dave back to you for closing remarks, great. Thank you Jeff.
Demand continues to be strong in all of our business lines as our customers continue to be cost efficient solutions that offer consistent levels of service.
The fourth quarter is off to a solid start that we believe that the momentum will carry through much of 2022, and what that will open up the call to any questions.
Thank you we will now begin the question and answer session.
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And our first question comes from Jeff Wang from Stephens. Your line is open.
Thanks, Good afternoon, and congrats on the quarter.
Thank you.
So Jeff I wanted to start on the cost and expenses in the third quarter. There was a pretty substantial step up on a sequential basis. It sounds like there were some moving pieces with legal costs and acquisition expenses. So anything that you would consider one time that won't be ongoing.
Then maybe could you help us think through the contribution from chop chop tank, you're assuming in the fourth quarter from both a revenue and Opex.
Perspective, as we think about your guidance.
Sure, Yes in Q3, we.
We did have some kind of one time.
Costs legal settlements not really recurring as well as obviously the acquisition expense.
Those two pretty much a wash with our gain on sale for the quarter. So the real big.
Those kind of two or three items net out.
The real driver of the increase sequentially from Q2 has a lot to do with the compensation expense and commission expense. So as we earned more throughout the year, we've been booking more of those expenses network kind of encompassing our guide throughout the year going forward you can do the math on the guidance, but you can expect the Q4.
<unk> to be.
Basically equal to the Q3 number plus the incremental for job tank, which is about $8 million.
On the Opex line.
For revenue, it's approximately $80 million of incremental revenue for the last two months of the year.
Okay.
That's really helpful and maybe looking at the fourth quarter guidance could you talk about what you're baking in.
For the truck brokerage segment from a revenue and margin perspective sequentially. If you exclude chop tank and then last one from me is just on thoughts around intermodal pricing and the 2022 bid season.
Sure.
<unk>.
Brokerage in Q4 ex <unk> is going to be largely consistent with the Q3 level and then <unk> obviously is the.
Delta.
Yes. This is so we continue to see strong demand on the on the brokerage side, great cross selling opportunities there and we're taking full advantage of the spot market as well. So we're feeling very good about the results there as we look ahead with.
With intermodal pricing, we're feeling very good about the early stages of bid season as we've kind of entered that now some of that pricing was on the lower end given how.
We've seen rates continue to go up throughout 2021, so those renewals will be consistent with what we've seen in the past and those will have effective date early next year.
So early bid season indications are very strong and a continuation of the current trend and we are anticipating a strong bid season shippers need to lock in capacity.
And we've really stepped up I think for a lot of our clients.
And we will be able to take advantage of that next year. So we're feeling very good about our opportunity looking ahead.
Okay, Great I appreciate the time.
And our next question comes from Scott Group of Wolfe Research.
Good afternoon. This is Jake on for Scott, Thanks for taking my questions sure.
Can you break out how much of the pricing growth was driven by higher asps or Lps compared to how much was driven by higher base rate.
Yes. This is Phil.
Kate the question.
Seeing very strong base pricing.
And thats going to continue from an asset Sorial schedule change obviously, our preference is to be moving more volume get more fluidity back into the network.
And so that's really our focus is working with our clients there it is not.
A huge determinant of our margin enhancement obviously.
Beneficial, but not anything that.
Would outweigh the benefit that we see from moving more volume and continuing to get more price.
Got it thanks, and then how much visibility do you have on rail cost inflation next year.
Do you expect more than this year and if the market remains as is do you expect gross margins will continue to increase from here as rates move higher.
Yes, yes.
I'll start with yes, we do have very good visibility to our rail cost increases next year and we do believe that we're going to be able to attain.
Rate increases in excess of our cost inflation.
Got it thanks for taking the time I appreciate it.
And our next question comes from Todd Fowler from Keybanc. Your line is open.
Great Thanks, and good evening.
On the step up in gross margins here, both in the third quarter and for the guidance can you talk a little bit about the driver behind that and then can you also talk about the sustainability of gross margins at these levels, which we really haven't seen for a while as we get into 2022.
Sure absolutely this is Jeff.
The biggest driver of gross margin is going to be a rates and surcharges. We have in place we do have incremental <unk>.
Aspartame costs that are going up sequentially and year over year rail costs, and certainly drayage costs, both internal and third party.
But price is a very big driver of margin for us and that was the that was the driver of the increase.
Yeah, and I would just highlight I think in our logistics segment, we're seeing strong performance there nice improvements in our transportation management margins and a nice sequential improvement in <unk> as well our final mile business is I think see some sequential margin improvement.
We are pleased with what we're doing there.
I think with brokerage chop.
<unk> is an addition, thats going to be a nice driver of incremental gross margins and we're seeing a lot of opportunity on the cross sell as well, but to Jeff's point intermodal is going to continue to obviously be a large driver of that we think that the margins are.
We're going to be sustainable.
And we just need to stay focused on great operational discipline.
Continuing to enhance our pricing.
So Phil you put together the comments that you made to Justin about intermodal contract renewals being positive and think about prices being a big driver for the gross margins that would suggest that going into 2022 as long as you're able to see that positive pricing that you can run somewhat these levels, obviously with some seasonality and some other.
Kind of factors moving through the numbers.
Correct, Yeah, and we would also believe that we're going to see improved volumes next year fluidity, one we get our containers fully on boarded in two weeks.
We see some improved fluidity, we're starting to see some sequential improvement in <unk> in turn times, we didn't see that from Q2 to Q3, but Q4, we're seeing some of that sequential improvement and if that continues.
And we maintain strong pricing could really create a night.
Benefit for 2022.
And then just for my follow up on the operating expense question, Jeff. It was helpful for the fourth quarter, and we kind of get a sense for the run rate as we move into next year. What are some of the moving pieces I would think incentive comp would be one.
A full run rate for <unk>, but what are the other things we need to think about the expense line for 2022. Thanks.
Sure those are going to be the big drivers. Obviously, we've got the personnel cost is the big chunk of our overall opex.
We are putting together our budget for next year, we're certainly going to be growing I think.
And earnings perspective.
The expansion in our and our profitability is probably going to come more from.
From price than from volume and so that.
Meaning.
Not a lot of incremental head count adds.
But we'll have more to say on that when we announce our Q4 earnings up.
Okay understood. Thanks for the time Tonight. Thanks, Scott.
And your next question comes from Tom <unk> from UBS. Your line is open.
Yes, thanks for the thanks.
Thanks for the questions and for the time and congratulations on the strong results.
Yeah.
What.
You sound pretty optimistic on.
Transition to volume growth and it's interesting you are seeing some recent improvement.
What else.
Do you think that you can do.
Anything can you do mid single digit growth can you do higher than that as you look to next year. It seems like with the container additions you'd be positioned for that I guess, what we're hearing from the railroad seems kind of cautious.
Refer to Norfolk, Southern's comments about they want to hire more people, but they are.
You're just seeing higher attrition, so maybe I guess.
Some more detail on your views on capacity.
And how that.
Mike can screen, what you do next year on volume.
Yes, obviously.
Our rail partners arent able to add that could be a constraint on our capacity I know that there have been adjustments to.
To wages made but I also know there's been a great deal of investment in chassis, which has been one of the larger bottlenecks that we've seen this year and that will really help from a terminal fluidity perspective.
And not having trends really stack up so we think that that's going to be a big benefit hopefully the actions that are being taken will lead to additional staffing I think we've done a nice job of.
Really stemming.
Driver losses on our end and successfully adding third party capacity and so that could be a big upside factor for US next year. If we're able to continue that trend of driver at that will really help us in maintaining fluidity and control the service product.
Our goal is going to be to grow next year, we don't have any hard numbers, yet, but but yes fluidity.
Fluidity in us continuing to add drivers and the investments that are being made.
And in chassis, we think we're going to be in a good position to do that so it has been.
Bit of a challenging year from fluidity, but we're seeing some improvement actually in the start of Q4, which is great and Tom I would add that the macro conditions continue to look very favorable both from the demand side, we see truckload continuing to be constrained, which is a great setup for us coming into next year being able to deliver.
Value and service to our customers.
Sure.
How do you I guess as a follow up question.
How does the I mean, there's obviously tremendous.
Media coverage and increase our heightened focus on the west coast issue and logistics issues in general.
How do you think about the kind of west the west coast issues.
The improvement in fluidity Hao.
I guess, how does that affect your.
Your outlook is that.
I guess is that something that you assume get better or you think that even if there is still challenges at the ports in west West Coast warehousing.
You still can see you transition the nice volume growth.
Hi, Tom This is Dave.
I would suggest to you that the west coast Port situation is not going to be resolved quickly or easily but we're going to continue to see congestion.
At least through the end of the year and Doug.
I would suggest to you beyond.
So there just is not enough warehouse capacity the <unk>.
<unk> seven is really not going to work I mean, you still need skilled labor to be able to load and unload those vessels. So you are.
We're seeing some diversion to some of the east Coast East Coast ports.
And people are trying the port of Portland and.
Other ports on the west, but the congestion is there for a while and it's this.
There is no light switch to turn it off and on.
Are you tightly coupled to that or is that something that you know kind of domestic can flow well, even if the international intermodal is not.
It actually for domestic intermodal actually closed quite well.
Theres only a limited amount of capacity both.
Gray container as well as our rail ramp capacity. So actually this almost metering in AV product actually is probably beneficial and allows us to supply more capacity to our clients because it's kind of stretched out.
I would just add I think that tightness.
From the international box capacity is going to continue to drive more trans loading into domestic.
And I don't see that trend really changing anytime soon I think that's going to continue to be a driver of more growth for domestic intermodal.
West Coast.
There is going to continue to be a high level of demand for imports there, but even as we look at other locations. We still think there's a lot of growth opportunity for US you look at port of Savannah.
That's been a big growth opportunity for us this year and I think that will continue as well.
Yes, certainly it seems like there must be a lot of pent up demand out there. Thanks for the time thanks.
Hey, Scott.
And our next question comes from Bruce Chan from Stifel. Your line is open.
Hey, Thanks, and good evening gents.
You mentioned, the shipper need to lock in capacity a couple of times and just thinking about that in the context of dedicated obviously higher cost there issues with driver availability is there more business to exit in subsequent quarters and at what point do we expect net growth there, especially if you start to convert that new business pipeline.
Yes, I think it's a great question, yes, and I would start with I'm very pleased that we are generating an improved return in the dedicated business and that's been our primary focus.
I would highlight I think dedicated is that we were not fast enough to get wage increases and with our customers to be able to go out and recruit and seat trucks and that led to some of the revenue loss that we saw with <unk>.
Exited the majority of the business that we think is in non compensatory contract and we're trying to make sure that with our clients, we're adjusting language, where it might not fit with a standard dedicated contract with fixed and variable.
Charges. So I think we've done a nice job with that we are through the vast majority of those changes we're still always going to be trying to make sure that we're working with our clients to set up a mutually beneficial agreement.
But we certainly see opportunity and demand out there for us it's about making sure we're going after the right contracts with the right customers.
And the right set of charges, so feeling good about our disciplines, there and ability to maintain a better returns going forward as we as we bring on new business.
Okay, Great. That's Super helpful. And then just for my follow up.
<unk> talked about strong residual demand for E Commerce, and I'm wondering how that translates for last mile and some of these big ticket goods.
Maybe some of the stimulus dollars start to wane.
Yes.
With.
Big and bulky kind of final mile home delivery, we have seen significant growth. This year I think even if there is a slowdown with some of those clients. We have been able to diversify the customer base quite a bit with our more traditional retail and e-commerce customers. So we're.
We're feeling very good about the growth opportunity ahead, regardless of if theres, a little bit of a slowdown in demand we actually have some.
Little bit of a backlog in onboarding.
Going in that will move into Q1 of next year that will really be a nice ramp for us as we look ahead.
2022.
Okay, great. Thank you for the time.
And our next question comes from Charlie Your Covid.
Evercore ISI your line is open.
Thank you for taking my question and congrats on the quarter guys focusing on truck brokerage when we think about the changes in volume and revenue per load. This quarter, how does this breakout between contractual and spot.
Sure. So this quarter we were.
Right around 49, just under 50%.
Or just over 50% contractual.
So it did move.
Down from about 61% last year Q3.
Okay, I guess I was more focused on how contractual volumes grew this quarter. If there is any sort of color that you could give on that.
Sure I would say spot continues to be.
News to be strong we are doing our best to convert.
Where there's opportunities to convert spot into contract.
That's kind of where we played historically closer to 70% we think we'll get back there.
Over time.
Okay, Great and then I guess as my follow up could you tell me what the split is between contractual and spot for chocolate.
Sure Chop tank is around and this market is around 65% to 70% transactional historically they've been closer to 50 50.
Okay, great. Thanks, a lot for the time.
And as a reminder, if you have a question. Please press Star then one on your Touchtone phone to enter the queue.
And our next question comes from David Zyla.
Barclays. Your line is open.
Hey, Thanks for taking my question.
Hey.
Yes.
David for whoever wants to take it you talked on the last call with <unk> about the good cultural fit.
That it made with your existing businesses I guess I was curious did you look at any kind of measurable metrics or how did you measure that.
Beyond kind of a personality fit on how the business would fit in.
Yes, I would say.
We always.
Really focus on culture and alignment and you can see through.
The tenure of their team.
The commitment that they have for that business into the community that they are in.
And how long they've been assets right. They didn't just start up a few years ago they've been at this for 20 years and growing this business methodically and have a strategy.
In a way that they interact with their customers the most of their customers stick with them for the long term right.
And that is different than a lot of brokerages theres typically a high level of customer turnover a high level of team member turnover, that's something that hub group really values as our folks and our clients and.
From that sort of long term relationship with both stakeholders we thought.
With all the qualitative aspects of the diligence process.
That was really indicative of a great alignment with with our organization.
Thanks Aman following up I mean, obviously, you havent been integrating for a long time.
I know you mentioned the cross sell opportunity, but do you feel like you've made any progress since the announcement as far as.
Moving to product onto existing customers and then you roll yes.
We're very excited I know their sales team is very excited our customers have been very excited we've already got wins on the board actually.
We're seeing tremendous.
A opportunity to us.
Cross sell so yes, very excited about even the progress through through a week so great.
Okay. Thanks very much.
Yes.
And your next question comes from Brian <unk> from Jpmorgan.
Hey, this is Kevin Corey on for Brian.
But both transcon and local west volume was was down so so number one just what's been the sequential trend into the fourth quarter and then.
What's your expectations for the utilization level for the upcoming containers given that congestion is.
I still expect it to last into the into the new year.
Rail service still needs to improve.
Yes.
Quarter to date first relate to the month of October we are down around 9% year over year.
Last year Q4 was a very strong quarter for US. We are encouraged that we've seen sequential improvement as the month has gone on we had our highest volume week this past week.
All year and really going back to January. So we're encouraged by that we do have new containers coming in we expect will receive all of them by the end of the calendar year.
And we are forecasting an improvement in our container turn times sequentially from Q3 into Q4.
Okay. Thanks, and then just last question sort of follow up in terms of the vaccine mandate.
Based on your reading and understanding of the mandate does it apply to you.
It's not.
Will you be impacted by the mandate.
Indirect way that could impact operations in any way.
This is Dave.
Certainly.
The government contractors.
Don't believe that that's going to have a direct impact for US right. Now we are not a government contractor if they do if osha does come out with a mandate.
And horses truck drivers it'll have.
In fact, we're still working through it.
But it will have an impact on the entire economy in my view.
Because there will be a certain number of truck drivers that just feels strongly from a personal perspective that they don't want to take it I am not an anti Baxter on vaccinated I encourage people to but.
If you try to mitigate that.
<unk> would.
What could be a very independent group.
<unk>.
At least I hope that common sense prevails.
It is understood that.
Realistically the truck drivers throughout.
This.
Pandemic has.
It's been out there and getting getting product to store shelves and I hope that that's taken into account and they do get it because we get an exemption.
Okay.
Got it thanks Scott.
Okay.
And your next question comes from David Zulauf Barclays. Your line is open.
Sorry, if I missed it if somebody asked it earlier, but did you guys put out the employees year over year change.
We didnt, but we can do that so we ended the year ended the quarter at.
Just under 2000.
We had.
Around 30 or 40 more last year adjusted for <unk>. So we are we are.
<unk> slightly year over year.
Awesome, Thanks very much appreciate it.
And that concludes the question and answer session I'll turn the call back over to Dave Yeager for final remarks.
Again, thank you for joining us this evening.
As always Jeff and Phil and I are available if in fact, you come up with the different questions or additional questions. So thank you again for joining us.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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