Q3 2022 Hub Group Inc Earnings Call
Okay.
Hello, and welcome to the hub group's third quarter 2022 earnings Conference call, Dave Yeager hubs CEO , Phil 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.
Brief question and answer session will follow the formal presentation.
Order for everyone to 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 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.
Dave Yeager, you may now begin.
Good afternoon, and thank you for participating in hub group's third quarter earnings call.
Joining me today are Phil Yeager hubs, President and Chief operating Officer, and Geoff Demartino, Who's Chief Financial Officer.
We had a strong third quarter, which resulted in doubling our year over year operating income.
The results for the third quarter reflect our strategy of diversification, which allows hub to be more resilient through all economic environments and helps us to mitigate cyclical nature of the transportation worker.
The fourth quarter is generally the peak of the holiday shipping season.
However, judging by the feedback from our clients. This peak will be muted versus historic norms.
Beyond 2022, we do acknowledge the potential for continued softening economy.
But we believe that we are positioned for success as we've taken several important steps to improve our resiliency in a down market.
With our recent acquisitions and organic growth our non asset based businesses represent a growing part of the overall results that will generate significant free cash flow, while deepening our value to our customers.
This diversification into non asset based services, along with enhancements to our intermodal agreements allow us to be more flexible in market base.
We are also aggressively begun to in source, a higher percentage of our drayage, which enhances our competitive positioning in intermodal we.
We expect to continue to benefit from these business model adjustments as well as continuing our relentless focus on operating efficiencies and with that I'll now turn the call over to Phil to review our performance.
Thank you Dave.
Wanted to start by congratulating the entire hub group organization on their strong performance, which continues to be driven by their focus on supporting our customers and team members.
I will now discuss our service line performance.
Ics revenue increased 22% in the quarter driven by a 31% increase in revenue per load in intermodal on 6% lower volume as well as a return to strong growth in dedicated.
Volume was impacted due to the <unk> strike as well as slower turn times and increased competitiveness within shorter haul segments.
Local west volume increased 1%, while transcon declined 1% in local east declined 18%.
We had a sequential deterioration in utilization, but an improvement in rail service, while we dramatically enhanced our on time performance to our customers.
Gross margin as a percentage of sales increased 180 basis points year over year, driven by yield management initiatives in dedicated and intermodal and enhanced purchased transportation cost through increasing our interest rate percentage, which was offset by higher railcar.
We have opportunities to improve our network and capture incremental volume growth through our enhanced service and our compelling intermodal value proposition.
We believe that with our improved street economics, and real partnerships will be in a strong position in this dynamic environment.
Logistics revenue increased 12% as we onboard a new client completed the <unk> acquisition and drove organic growth with our existing customers through our focus on supply chain savings and continuous improvement.
Gross margin as a percentage of sales increased 370 basis points as our continued focus on profitable growth was offset by increased purchase transportation and warehousing costs.
With the addition of tag we are continuing our development of the Premier Third party logistics solution, which we believe will enable long term growth and bring significant value to our customers.
Brokerage revenue increased 63% year over year, driven by 54% increase in volume and 6% increase in revenue per load.
Our growth was due to the addition of Chop, Inc. As well as organic growth in our LTI and driving in the Hopper.
Our service levels continue to improve year over year and will help us differentiate ourselves along with our diversified capacity offering.
Gross margin as a percentage of sales declined 60 basis points year over year as we saw more aggressive competition for a smaller amount of spot market shipments but.
But we believe we will see improvement year over year in the fourth quarter and into next year as our mix shifts from 52% spot to a larger percentage of contractual volumes throughout this season.
We are continuing to focus on growing and Thats important service line and are investing in talent and technology.
Propelling our growth.
With that I will hand, it over to Jack to discuss our financial performance.
Thank you Bill our business continued to perform well in today's environment with strong growth across all lines of business, leading to a 26% increase in total revenue.
Our yield management cost recovery effort and focus on operating efficiency led to a gross margin of 16, 5% of revenue and operating income margin of eight 7%.
We continue to leverage our gross margin performance against our operating expenses with cost and expenses equal to seven 8% of revenue down from nine 1% last year.
Operating expense dollars increased from last year due to incremental expenses from chop taken tag higher legal and use tax expense and cost for the consolidation of one of our office locations.
Set by gains from the sale of transportation equipment.
Our diluted earnings per share for the quarter was $2 61, which is more than double the prior year.
We generated $157 million of EBITDA in the quarter.
And spent $103 million on the acquisition of tag logistics and $110 million on share repurchases.
We continue to have low levels of net indebtedness, which provides us with flexibility to invest in our business through capital expenditures and strategic acquisitions.
As part of our commitment to returning capital to shareholders. Our board recently authorized the repurchase of $200 million of.
Of our class a common stock.
For 2022, we expect diluted EPS of between $10 40, and $2 60 per share.
We expect to grow revenue to approximately $5 5 billion.
We expect intermodal volumes will decline low single digits for 2022.
We forecast gross margin as a percent of revenue of 16, 5% to $16 seven for the year as our rate increases surcharges in essence oil revenues offset higher cost for rail transportation third party drayage and driver wages.
For the year, we expect costs and expenses of $420 million to $425 million.
Our capital expenditure forecast is unchanged at $240 million to $250 million.
Finally, our entire business is supported by a pristine balance sheet and strong free cash flow generation.
In 2021, we introduced our long term revenue and margin targets are.
Our recent acquisitions and our purchases of intermodal equipment are illustrative of the types of strategic investments, we will make in our business, adding scale, while also introducing new service offerings with strong cross sell potential.
With that I'll turn it over to the operator to open the line to any questions.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone.
Our first question comes from the line of Todd Fowler with Keybanc. Please proceed with your question.
Great. Thanks, and good evening, maybe for my first question just a shorter term question on the guidance for the fourth quarter, the implied guidance for the fourth quarter.
It's still a pretty wide range, and obviously theres a lot of cross currents in the macro but.
I don't know, Dave, Jeff Brookfield, who wants to take it but if we think about kind of the difference between the high end and the low end and just to finish out the year.
What are some of the variables between what gets you to the high end versus what puts you at the low end right now.
Got it.
Jeff.
Pricing.
Primarily at this point so the real swing factors for us would be volume volume growth the volume decline.
Surcharges, which we're expecting to decline sequentially.
Gain on sale would be the third factor.
And Jeff just as far as maybe the volume trend and see how we can see what the third quarter was that you talked about low single digit decline for the full year, but maybe a little bit of color on <unk> and what Youre seeing right now in the <unk>.
Sure in the third quarter, our volume was down 6%.
Around 200 basis points of that we estimate had to do with activity around the.
Threatened rail strike.
Year to date or month today, rather than October we are down about 8% year over year, but it is a sequential improvement from.
From September auto business day basis.
Okay got it and then just for my follow up Dave the comment about getting improved resiliency in the model that the portfolio has changed.
Is there a sensitivity that you can help us think about and I'm not looking for anything, particularly granular but at this point is that that 40% of your business now is much more kind of asset light and viewed as a little bit less cyclical is that the right way to think about it or is there a way we can kind of think about what truly has got cyclical exposure maybe that we've seen in the past.
And then what you have diversified into and then any comments around other levers that you can pull thanks.
Sure.
<unk> for between 40, and 45% of the revenue now is asset light.
We do have a lot of levers some of which we didn't have last time, we got much more flexibility in our rail contracts. They can go up and down and they are more attuned to the market based phenomenon than they had been in the past.
We've also begun to endorse a lot more of our drayage.
In the third quarter in markets, where we have our own capacity, we were up over 60% that's up about 500 basis points year over year, we'll continue that trend that has a service advantage, but also a pretty powerful.
Property advantages as well so we'll look to continue to do that.
We ran our playbook in 2019 and 2020.
<unk> cost savings opportunities.
<unk> begun to <unk>.
Collect that and start to implement that in anticipation of a downturn.
And then one last piece of information just to leave for you. The last time, we did see a decline back in 2019, we had about a 35% reduction in EPS from peak to trough. So that's one other factor to consider this time around.
This is Phil I would just add I think.
With our model now we're going to continue to kick off in the.
Diversification piece of it really comes into play we're going to kick off a significant amount of free cash flow, that's going to allow us to be opportunistic and invest in the business, but also continuing to look for accretive acquisition.
That's going to continue to be.
A focus of ours and I think we have a really good playbook that we've run there and have a great reputation as an acquirer I think if you look at our most recent acquisitions of width.
Tag and chop tank NFC all of those are much more resilient model both from a margin profile as well as the we find the stickiness of the business in particular in warehousing consolidation and timeline on delivery. So feel very good about the adjustments we've made to the <unk>.
Services, because it's also helping to make.
Make our business stickier on the intermodal and brokerage side, which can be much more volatile historically, so I think a lot of good changes that we put into place.
We are seeing them play out which is great.
Yes.
Just to be clear that 35% decline in 2019, but that was also before you had the changes in the rail contracts and then some of that already.
Okay, Okay. Good alright.
Without the continued diversification through the acquisition Thats correct, yes understood. It was just wanted to make sure. We got that framework reference correct. So thanks for the time Tonight.
Yes.
Yes.
Thank you.
And our next question comes from the line of Jon Chapell with Evercore ISI. Please proceed with your question.
Thank you good afternoon.
Jeff you kind of referenced this as it related to the fourth quarter. You said the pricing is effectively fixed at the time of the last call. In July you said you were at through the peak of the bid season as well so as we think about weakness in other segments of transport maybe some of the demand concerns that I think Dave.
Stimulated as the pricing really baked now through the first half of next year.
Or do you start to get some significant renewals in the early part where we could see some step down if other side.
Other factors start to weigh in on intermodal pricing.
About 35% to 40% of our volume will reprice in Q1, the bulk of that is probably in the March timeframe. So we certainly have a tailwind carrying us through the first part of next year, but by the middle of the year, 80% is reprice.
I'd also highlight a lot of our larger customers come in in the third quarter timeframe and so those are pretty well in place I think it's a little early to tell exactly how good season is going to play out, but I think historically intermodal has not moved quite significantly, particularly as truckload.
Our focus is going to be really on maximizing our margin per load day.
That's how we generate the highest return within the intermodal segment.
That's going to continue to be the focus for us.
I think an opportunity we have is to create more balance in the network are empty repositioning costs have increased on a year over year basis, and that's an opportunity. We're looking at as we enter bid season and that will also help with volume at turn times.
But we're really out right now with our customers focusing on the improved service product that we have as well as the savings that we have versus truck to offer.
Folks look at converting freight from truck to intermodal.
I'll just add.
Yes.
Even in today's market intermodal long haul local west and Transcon Youre looking at a 20% to 30%.
Lower rate relative to truckload Phil.
Okay that makes sense.
Something you mentioned there on the balance kind of led me to my follow up question, which is if we look at the last couple of quarters. The variance between west and east has been tremendous and even to salaries I think it was down 14% second quarter down 18% and this is even before really I think the truckload market, especially truck.
Contract.
It's come down when you think about your capital your equipment commitments, you're positioning of resources et cetera, do you have to still have the same amount of investment in maybe that laggard region is that part of the entire network and part of the balance or can you deemphasize, maybe an underperforming part of the network and really prioritize your equipment to work.
Youre getting kind of the best turned in the best returns.
Yes, I think it's a great question and when we run our network model. Once again, we're focusing on maximizing that margin per load. There I think you can see that showing up in our revenue per load.
Which I think tells the story of how we've been trying to maintain pricing discipline and focusing on the right Lane for our network I think when we look at volume there is some some controllable factors and some non controllable ones when I look at the non controllable factors. We mentioned the 200 basis point impact from the Alberta rail strike, we're certainly hoping that's all.
Resolved in the upcoming discussion, but when I look at controllable one.
I think our end markets have slowed down a little bit we are very retail and e-commerce centric inventories.
Inventories have moved up obviously and so we've seen a slowdown in overall demand from those customers. So we're focusing on getting deeper with those clients, but also diversifying our client base and adding to that long tail.
Have deliberately focused over time on growing and long haul segment I think you've seen that perhaps play out probably over the last couple of years, where our transcon local west business has really outgrown our local east mainly because of the stickiness, that's associated with and with it and the gap that it had versus truck we don't see.
<unk>.
That flipped nearly as much between intermodal providers or.
It really flip back and forth between truck and intermodal around rate and transit sensitivity and then I think lastly, we saw price in the east moved more quickly both in intermodal and in truck.
Then we were moving or have moved and so I think for US we look at it as running a network, where we need to maximize that return maximize margin per load today, and we're going to allocate our equipment and capacity to do that I do think we have latent capacity in the network. We can improve our turn times, but part of that is creating.
Balanced and getting that velocity back as well.
Okay.
Super helpful. Thanks, Bill Thanks, Jeff.
Okay.
Yes.
Thank you and our next question comes from the line of Elliot Alper with Cowen. Please proceed with your questions.
Great. Thanks for the question.
So maybe on the increased guidance can you quantify or speak at a high level.
To any of the rail disruption assumption holding back volumes in the fourth quarter. Some new headlines have come across on a potential rail strike I guess is any part of the guidance range based on whether or not there are significant that back to volumes.
Yes, we've factored in.
The range of potential outcomes on volume within the $2 40 to $2 60.
But we have seen we have seen an improvement on a per day basis sequentially from September into October . So it doesn't seem like there's any impact to that news as of yet.
Okay understood.
And then maybe for the follow up you guys have had some clear success with some recent acquisitions.
Can you talk about recent trends within the M&A market, maybe of what's crossing our das come multiples come down at all or any color there would be helpful. Thank you.
Yes, we actually have seen a slowdown not probably the last six or seven weeks on a new.
Acquisition opportunities that come across our desk. So I think that either a combination of the financing markets or economic conditions are probably into a little bit of a slowdown.
But frankly, we've had much more success on outbound.
Companies that we get to know and spend time with them make sure. They are a good cultural fit and really have been able to have success in doing acquisitions.
Kind of bilateral.
Negotiations with sellers so.
I think there is going to be a slowdown I think private equity probably is going to pull back from their interest in the sector for some period of time, but we don't think thats going to impact our ability to continue to grow through acquisition.
It is good timing for us, though and with our balance sheet, we're going to be out in the market very actively continuing to run the same playbook that we have diversified our service offering getting deeper with our customers and adding really great companies that can benefit from additional investment in cross selling opportunities.
Okay I appreciate it thank you.
Thank you.
And our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks afternoon guys.
So when.
When you talk about less earnings.
<unk> ability is it more about gross revenue less gross margin variability more more opex variability.
Ultimately be the driver.
The less earnings volatility.
Well I think we have we have levers that we're going to Paul we have had those in the past and we have executed on those in prior downturns and we have this time I think the rail the rail contract features are up.
Priced out is a really key factor that we didn't have in the past. That's obviously the biggest cost factor in our biggest line of business and so with the ability to flex up and flex down based on market conditions. We think that is going to lead to less volatility in earnings.
Yeah, and I would just ask I think.
Both from a gross margin perspective, but also below the line I think you've seen in the past with US. We can we are very disciplined on our cost structure and we'll continue to do that.
And then with these with these additional levers as well as adding more contractual and stickier services. We think on a gross margin perspective, we will continue to maintain an.
Hold it at levels that are higher than in the.
In our history.
I mean is there any way to like talk about like what historically was like that.
Range of intermodal gross margin to recycle and what.
Maybe what you think that new range will be with with these rail contracts that now go up and down.
Sure I mean I think.
Obviously, we're in a pretty strong price environment right now you can see in our guidance on where we're going to exit this year, where we've come down off of the Q2 levels.
But certainly much higher than we were back 234 years ago.
We're kind of in the low 12% to 13% gross margin I think it's at least probably 150 or 200 basis points north of that is where we think we're going to be longer term. We're just starting our 2020 through your budget process right. Now so I don't have a more concrete number to give you for next year. It will obviously come back to you with that on our next call, but I think.
It's a good frame of reference to start with.
No I mean, I guess, what I was trying to ask is like meaning historically the margins peak and trough. There is a 400 basis point difference in gross margin and now with the variability of rail contracts, we think it'll be more like 200 basis points something like that that's.
Probably half of the variability we've seen.
Seen in the past.
Being cut in half through that through that through that feature.
Okay, and then just last thing if we do have a year of sort of.
Down earnings next year.
How do we think about that.
<unk> comp.
Potential offset.
Sure that's probably the biggest single driver of on the operating expense line.
That's about it could be as much as a $40 million swing year to year.
Our goal would be do not have that happen.
Sure. Okay. Thank you guys appreciate it Scott.
Thank you and our next question comes from the line of Brian <unk> with JP Morgan. Please proceed with your question.
Hey, good afternoon, Thanks for taking my question.
Wanted to see if you could go into little more detail.
<unk> acquisition.
It's only been a couple months now I guess since you had that in house and maybe.
Maybe elaborate on the strategic strategic goals and how those are progressing fits in the portfolio.
The initial feedback cross selling all of those things would be helpful to kind of get a sense as to what you see here and how it's progressing so far.
Sure. Yes, there were really two main factors that led us to do that acquisition, which we have been looking in that space for some time.
The acquisition of tag really gives us an ecommerce fulfillment capability that we didn't have in the past we've been in the consolidation warehousing business. Since we made our acquisition of <unk> back in 2018, and <unk> got a great model, serving small and mid sized consumer goods companies, but they didn't really have an ecommerce fulfillment capability and so we were.
Not able to pursue business, we were able to only obtain part of our customers' share of wallet and.
We wanted to add that capability and so we've got a lift of both our existing customers, who we can now offer that to but also we have our list of customers who had we're looking for that type of service that we can now go back to and win new business based on that.
That gives us a parcel footprint that we didn't have in the past as well and the other factor was.
With the App with the acquisition of case back in that footprint. We had we had about 5 million square feet of non asset base warehousing space that we spoke for tag add $4 million of asset base space. So around 9 million square feet now with close to a 50 50 mix between asset and non asset that gives us the ability to scale up more quickly for new opportunity.
These.
It also gives us some leverage when we're negotiating rates with our.
Our non asset based partners, where we have a better understanding of the cost that it cost to serve in a given market.
And I would just add I think we're seeing that play out now.
Acquisition and receptivity from our customer base has been phenomenal and we are far exceeding anything that I thought we would do from a cross selling perspective, it's been much quicker, but with our balanced asset non asset model, we're actually able to not only take on that demand, but also optimize it from a margin perspective.
By in sourcing the right customers and growing with our third party partners.
In the right business for that.
<unk> has really been exceeding my expectations and it's a great team they have a great reputation and it's so it's worked very well and I think the other piece that we're bringing to them that.
The tag team didn't have before with the expertise that we have in transportation and by tying that together core legacy tap customers.
We're seeing them want to get deeper in with tag give us more business and outsource their entire supply chain to us versus just a component.
I think has really been just a phenomenal acquisition, thus far and excited to see.
What we can continue to do.
The actual fulfillment side is that.
Done by third party contractors as well.
No we.
Got about 18 warehouses across the country and those are primarily company employees, we do use contractors for seasonal spikes, but primarily by employed.
Okay, and then just a quick follow up on <unk>.
Drayage and sourcing what was that percentage when you look at sequentially versus the second quarter, where do you expect to be exiting this year and sort of rough goal for next year, given some of the constraints that we see on drivers and equipment.
And to the extent you have or want to offer any sort of sensitivity.
Margin in terms of what percent point increase would mean for the bottom line would be helpful.
Sure so markets in which we had our own drivers we were at 52% in source in the quarter. That's up about 200 basis points sequentially, it's up about 500 basis points year over year.
We recognized about $1 million or half of incremental profitability for every 100 basis points.
Our long term goal is to get to 80%.
I think we're working through our budget I think we're going to probably be targeting around 70% for the end of next year.
That will require some capital for four.
For new trackers, but the bulk of that is actually coming through productivity. So running more drivers per truck through slip seating and running each driver is going to run more loads per day, we'd come become more efficient in how we plan.
Drivers days and where we're at.
Seeing the benefits of that from an efficiency perspective.
We are significantly improving our recruiting we have been able to get more slip seating in our fleet. We went from about a 1.5 drivers of tractor ratio a couple of years ago, we're not where we want to be but we're near $1 four now and we still have opportunity to become more efficient.
We're adding drivers at a really nice clip, it's a very important market for us and in sourcing that higher share and continue to see progress as we've enhanced our recruiting capability. So.
I think we've got a great offering to drivers where they can be home every night to get paid at the high end of the market and be in the newest invest equipment. The average age of our fleet is nearing two three years.
It's a just a great.
Asset to be able to go to drivers and show them that value. So I think we're a destination at this point for drivers and we're seeing that show up in our turnover numbers as well.
Alright, great. Thanks for the detail.
Thank you and our next question comes from the line of Tom <unk> with UBS. Please proceed with your question.
Yes. Good afternoon wanted to ask you a bit about how you think about the competitive dynamic in intermodal in 2023.
I mean, it seems like Theres a lot of interest in growing from the different players.
I guess I don't know where youre at in terms of volume growth focused but.
You've got some new better flexibility on rail pricing.
Transportation, which you pay.
So you could you could be more aggressive if you want I am just wondering how you think about the competitive dynamic do you think it's going to be stable or do you think there is some risk there is.
Kind of increase in.
Competition in the market because people want to grow volume.
Yes. This is Dave.
I would suggest to you that at this point in time.
The market is very stable.
Table as I've seen it, particularly as we're beginning to see a little bit of a softening in more competitive competition from.
Over the road I.
I do think we are all focused on growth but.
At this point in time, just speaking for hub.
We're also very focused on margin, we're very focused on.
Pulling some of the levers that Phil and Jeff have been talking about that are within our control to control our costs and in fact reduce our costs.
No I don't believe that its going to be.
Impossible to.
Not only grow the overall volumes, but also continue to maintain reasonable margins that will allow us to continue to invest in intermodal.
Do you think your focus is going to persist just in terms of more focus maybe on <unk>.
Price and profitability and a bit less on volume is that youre going to stay the course with that or do you think that may change.
I think again, we will do both I think that we will be focusing on growing volume in particular lanes.
We feel as though we have a competitive advantage.
And at the same time, we will be focused on continuing to deliver solid financial results for our shareholders.
Tom.
Really goes to the strategy that we've executed on over the last several years continuing to grow those long haul sticky segment that that really day in intermodal as long as you are providing a really good service.
But also creating more balance in the network to drive more volume and velocity. So it has to be both.
And I think we have the opportunity to do both.
Right. Okay that makes sense, just one more quick one you've talked a bit about flexibility.
On the rail cost, what's the timing on that and how do we think about what drives the adjustment is that like.
Kind of a one quarter lag or is it longer and is it driven by the pricing you realize or is it some type of a market metric for I don't know truckload contract rates are intermodal contract rates.
Yes, Tom this is Dave.
We really don't talk about our contracts and so.
That's something we just cant delve into.
Okay Alright.
Fair enough.
Thanks for the time.
Yes.
Thank you and our next question comes from the line of Baskin majors with Susquehanna. Please proceed with your question.
Thanks for taking my questions just high level to kind of follow up on the last question. If we were to feel.
Peak pricing pressure in intermodal sometime call. It in the third quarter of next year as the cycle reverses and accounts peak, how long would it take just is it a quarter or a few months to get that reaction and the rail pricing that youre getting on the PT side.
Yes, so I think.
It would.
It would be moving.
In some ways as the market shifts, but not at a linear rate.
We would see it over a period of a year, probably fully manifest itself would be my.
Just kind of assertion.
I don't I don't want to delve too far into the detail, but I would tell you.
It works itself out relatively evenly over call it a year period.
Okay.
And both our east and west contracts, which differ on mechanics.
So if intermodal contract pricing were to trough in sometime in the second half of next year or your rail pte would probably trough.
The second half.
Next year in the first half of 'twenty four.
Hi, that's probably it.
Yes.
And to your hypothetical comments earlier about.
There are some differences in the business and we don't expect to call. It one third EPS decline in the next downturn here and that gets you to call it $7 in earnings power.
That 35% that you don't expect to hit in the downturn can you talk any about what the free cash flow profile of the business might look like in a downturn just would that fall more or less any thoughts on the cash generation power and its resiliency in a downturn. Thank you.
Absolutely, yes, we.
We'd expect to have really strong free cash flow, we do have the ability to scale up or scale down our capex. This year at our range of $2 $45 or $2 40 to $2 50 is a pretty heavy year, we're growing the fleet the container fleet by 13% overtime, we would expect more around a 10% on average so.
Again, we're going through our 2020 budgeting right now but.
Our assumption at this point it will kind of be in that.
Mid to high single digit percent range for container growth, which would probably put our capex to the end of the $1 50 to 175 range.
So we do have the ability to scale that we do this year does include about $25 million on the.
A headquarters building, which is as you know is complete.
Thank you.
Thank you and our next.
Next question comes from the line of Bruce Chan with Stifel. Please proceed with your question.
Everyone. Thanks for the question.
Just maybe you want to start here with a big picture question, you talked a lot about half the portfolio is now.
Non asset.
At this point or almost half the portfolio.
Even if that's not getting reflected the evaluation.
When you think about M&A and when you think about the growth profile of each of the various businesses, where do you see the mix being in say the next three to five years.
Yes, I think our mix will continue to shift in the direction that we've seen it over the past several years, where our non asset segments.
Come near to you if not the majority of our overall revenues, which we think will allow us to continue to invest in the asset side, while continuing to focus on accretive acquisitions and growth in our non asset segment. So.
I would anticipate it's not because.
Our asset based businesses are shrinking, but because we are continuing to grow the non asset side at a faster clip because of the components of organic.
Organic growth.
Okay, Great. That's helpful. And then just a follow up here on the brokerage side. I think you mentioned that you were still 52% spot, which seems like it might be a little bit of a challenge in this market and assuming that's not just an artifact of mode mix what does the rate ratio look like for you.
Part of the cycle and then how fast do you think you can move there.
Yes.
I'd highlight that when we purchased chop tank.
That shifted our mix to about 50 50 split to close to $60 40 spot to contract. So we're actually seeing that come back to a more normalized level. I think this is where the benefit of hub in shops coming together are really.
<unk> going to show because traditionally with the chop tank model, we would have seen.
A more difficult time because of the focus on spot, we're bringing a lot more contractual and bid business opportunities that that team is winning in the pricing expertise to support that while they are in fact salesforce is really helping us continue to drive momentum on transactional wins and develop a better.
Tactical relationship with a lot of our customers. So I think there's this mutual benefit here, that's going to help us have a much more balanced model over the long term and I think youll see us continue to toggle back and forth between call. It a 45% to 55 sort of spot to contract ratio and that'll be the appropriate mix over time, but now.
With that we are in bid season and that starting to kick off I think youll see that mix shift even even more broadly.
Okay, Great I appreciate the color.
Thank you.
As a reminder, if you have a question. Please press star one one on your telephone once again, if you have a question press star one one.
Our next question comes from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, I wanted to start with a question on rail service. It sounds like utilization was under pressure in the third quarter, but I was wondering if you could put some numbers around that and then how you've seen utilization recover here recently and where you think we might normalize.
Yes, so utilization did deteriorate on a sequential and year over year basis, but I think the good news is that we actually saw rail transit sequentially improve.
On a year over year basis as well.
We are continuing to see a elongation in transit.
Really on our customer dwell, we need to continue to work with our customers to draw that down I think as inventories are high.
In many ways, our containers are being used as a storage unit in some ways and we're working very closely with our customers on.
Changing that I think is inventories are drawn down you'll see that normalize that's going to help us get more velocity back in the network as well which is.
Part of the longer street, while that we're seeing and I think as we balance out the network a little bit more we will see improvement in that as well I would also just highlight rail service has improved both in the east and west.
But not only has it gotten better on just a percentage basis, but we've seen it more of a stabilization.
In that overall service product and that's what really what we're going to our customers and presenting at <unk>.
<unk>.
But but also a stabilization which allows us to a point better allows us to get better visibility to our customers use our drivers more effectively and really just given overall better customer experience. So.
Been very pleased with that and I think a good example of that is that we have reduced in a number of lanes. The transit estimates by up to three days. So we are definitely seeing some.
The sequential improvement.
Okay. That's helpful and secondly, I wanted to ask about intermodal volumes I heard the update on October but do you have the monthly intermodal volumes for for the third quarter and then any thoughts on intermodal volumes in 2023.
Sure in Q3 July was down nine.
Which we talked about on our last call August was up about one five.
In September down about 10, obviously was impacted by the.
Rail strike.
But as we look at 'twenty three I think our goal is going to be growth.
And <unk>.
<unk> in that margin below David growth through enhanced balance, which will improve overall yield and margin.
Okay. So youre planning on growth even in a mild recession scenario.
Correct.
Got it thanks for the time.
Yes.
Thank you and our next question comes from the line of David Zulu with Barclays. Please proceed with your question.
Okay.
Real quick you had mentioned that you'd seen some acceleration in dedicated is that something you plan to lean into it.
In the event that there is some softening of demand next year is that something where you think you can grow.
<unk> 2023.
Yes, David This is Phil we've put a lot of work into improving our dedicated business.
Moving our contracts and customer mix.
And we feel as though it is an area that we can grow we want to grow with the right customers in the right regions, where we have density.
And I think Thats really been our focus so I think for US we're going to stay disciplined but we do like these long term contracts with set price escalators that give our drivers are good view to their their wage as well and so.
It's good business for US we plan to continue to do it and grow in that service line, so, but it's great to see a return to growth, but also margin improvement.
And then just a quick cleanup do you have the employee count Jeff.
I do.
Bear with me one moment.
So the end of the quarter, we were at about 2150.
And that includes so we now have obviously drivers who has always had and we now have warehouse employees. So that number is an office head count number.
Okay. Thanks, I appreciate the time.
Yes.
Thank you and our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks for the follow up just a couple of last quick things.
You talked about a little maybe a little less M&A activity you just reauthorized buyback how are you thinking about buybacks going forward.
Yes, we are going to be opportunistic.
Bought back stock in the quarter.
At a double digit free cash flow yield so that's a pretty attractive investment for us. We continue to train at these kind of ridiculously low valuation levels, we're going to take advantage of that.
So we don't have any set timeframe on the $200 million, but we.
We'll make a financial decision.
Our net investment in <unk>.
Again, where we were last quarter as well with our performance lately. This year, our balance sheet is very under Levered, where Joe 0.2 times debt to EBITDA. So as you know our priority for capital investment or Capex and acquisitions.
In the current environment, we think we certainly have the financial flexibility to also do a return of capital to shareholders.
Okay.
You've had some healthy gains on sales this year, how do we is that.
Tractors.
Containers, how do we think about that in a downturn and earnings risks. This cycle that maybe we haven't had in the past.
Yes, we've been obviously benefiting from pretty strong market conditions for used equipment, it's all been on tractors.
We're nearing the end of that I think number one just the number of pieces of equipment. We have left to sell but also I think the market is going to certainly we're not planning on this level of.
These types of market conditions continuing this.
We've never had these types of gains in the past too. So it's there's no real frame of reference for and what that looks like going forward. Other than we think it is going to come through that I think for the.
At least for the near term, though we are continuing to see strong gains.
And it is attributable to improving the age of the fleet, which helps us on our MSR expenses.
But also better utilization I pointed to the attractive tractor ratio before and by getting that flip CD. It allows us to take advantage of that and we'll reach a threshold, where we're really optimize probably over the next six months and so are the amount of equipment. We would sell would then come down even if the.
Market conditions.
Deteriorated or staying the same so I would anticipate it's a headwind.
But.
At the same time should help us in our expenses.
Okay, and then last thing so the rails have new labor contracts I'm sure they.
They would like to pass some of those costs through to their customers does that impact you in your.
Rail costs.
No we have contractual agreements and we do not anticipate or.
Anything like that.
Okay Alright.
Alright, Thank you guys.
Thank you I will.
Now I'd like to turn the conference back to Dave Yeager for closing remarks.
Great well again, thank you for joining us this afternoon as always if there's any questions Phil.
Phil Jeff and I, certainly would be available.
Thank you for joining us and have a good evening.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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