Q4 2022 Hub Group Inc Earnings Call
Our younger hubs president and CEO .
Ryan Alexander hubs, Chief operating officer, and Geoff Demartino, our CFO are joining me on the call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
In 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 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.
Good afternoon, and thank you for participating in our group's fourth quarter earnings call.
With me today are Brian Alexander of group's Chief operating officer, and Geoff Demartino, Our Chief Financial Officer.
Hi, I'm honored and privileged to be able to serve as hub group's third chief executive and our 52 year history.
I wanted to thank our board of directors for their support but in particular, our executive Chairman, Dave Yeager, who led the company as CEO for 26 years with vision integrity determination and humility.
He has been a phenomenal leader and I look forward to continuing to work with them to deliver on our long term goal for the organization.
I wanted to also thank all of our team members for their continued commitment and focus on supporting our customers in a constantly evolving environment.
Our team delivered a record year in 2022.
To grow all of our service lines in both revenue and profitability, reaching $1 billion in.
Revenue in both logistics and brokerage for the first time as an organization while equipment $3 billion in intermodal revenue.
We continued to execute on our strategy to deliver world class service and invest in our core business and technology, while diversifying our service offerings through organic and acquisition driven growth.
We delivered on that strategy, while maintaining a phenomenal balance sheet generating strong free cash flow and returning capital to shareholders.
As we look ahead to 2023 of the freight economy has changed from this time last year inventories are elevated and we've seen capacity loosen. However, we anticipate another year variations in demand with a stronger second half of 2023 based on continued consumer strength and a need for inventory restocking.
While this backdrop may create short term challenges, we believe that hub group is well positioned to grow in this environment given the many improvements we have made to our business over the past several years.
In intermodal, we anticipate increased conversion to rail from over the road, resulting permanent improved and more consistent service product that along with our rapidly increasing interest rate percentage improved rail agreement and lower outside drayage costs will help our customers reduce costs, while driving efficiency and sustainability and their supply chain.
Our dedicated pipeline is strong and we have improved our profitability and our leadership team, which we believe will help us deliver another year of profitable growth driven by our high service level and engineered solution.
We've also diversified our revenue streams to be more non asset base, which now represents 40% of our annual revenue.
In brokerage, we are offering more diverse capacity alternative that increased scale and have enhanced our technology to drive improved purchasing efficiency and service level, which is enabling continued cross selling wins with our customers.
Our logistics business continues to develop into the premier end to end supply chain solutions provider with our investments in people and technology as well as acquisitions like <unk>.
We are helping our customers save money through our continuous improvement, while providing a world class customer experience that is able to bring to the analytical technological and execution benefits of managed transportation to fruition for our clients.
All of these enhancements to our business model will allow us to continue to grow while maintaining strong profitability and returns. We will continue to invest consistently entered the business through cycles in order to ensure we can support our customers in a variety of environment for both capital investments in technology and capacity as well as acquisitions that help us deliver more value.
While maintaining our strong financial position and utilized in our buyback authorization to reward our shareholders.
Our team is focused on delivering another excellent year in 2023, and with our line strategy as well as focus on execution and efficiency. We feel we are positioned to deliver another strong performance.
With that I will hand, it over to Brian to discuss our service line performance.
Thank you Bill also want to thank our entire team for delivering a record year as they support our vision for growth.
So providing our customers a best in class service experience.
I will now discuss our service line performance starting with intermodal.
In the fourth quarter Ics revenue increased 5% driven by a 19% increase in intermodal revenue per unit as well as continued growth in dedicated trucking.
But the lack of the traditional peak season intermodal volumes declined 12% in the fourth quarter with a 9% decline in local west 9% decline in transcon and decline of 17% in the local east.
Gross margin as a percentage of sales decreased 266 basis points year over year.
We are actively offsetting this decline in margin with an increase an in source drayage.
And year over year fourth quarter from 47% to 65% improved rail agreements lower outside drayage costs and.
Several other operating cost improvements.
In addition, we have already started to experience improvements in efficiency with rail service, which will help drive conversion volume and improve our box turns.
These improvements in intermodal efficiency have us well positioned to grow our volume and maintain operating margin discipline.
Now turning to logistics.
Logistics revenue increased 9% in the quarter as we continue to deepen our value to our customers through our integrated approach to supporting their end to end supply chain needs.
We are well positioned for growth in our consolidation and fulfillment business, taking advantage of the capabilities. The tag has brought us which have already enabled several large transportation and warehousing wins.
Gross margin as a percentage of sales increased 270 basis points as we maintained our focus on operational discipline yield management and customer continuous improvements that drive organic growth.
We have a great pipeline of new Onboarding and have improved our logistics deal size and close ratio as we offer more integrated supply chain solutions.
In addition, our logistics offering has continued to grow the volume it contributes to our other lines of business to support multimodal capacity.
With these enhancements we are in a great position to continue our trajectory of profitable growth.
Okay.
And then I will conclude with brokerage, we're very proud of our brokerage team as they performed well against challenging market conditions in the fourth quarter.
We remain focused on service to our customers and leading with a competitive price and capacity.
This generated an 8% increase in year over year fourth quarter volume and an increase in gross margin as a percentage of sales or 61 basis points, but a revenue decline of 11% year over year.
Our acquisition of job gains helped drive disciplines, and our purchasing as well as cross selling growth in our LPL and dry offerings.
Transactional moves represented 52% of our volumes throughout the quarter, while our contract business provided consistent volume and margin expansion as we improved purchasing.
We are well positioned to continue our growth through our integrated approach to our customers high service levels and expertise and our capacity types, including reefer dry LCL and drop trailer.
With that I'll hand, it over to Jeff to discuss our financial performance.
Thank you Brian .
Our business had a very strong 2022 with revenue up 26% to over $5 3 billion and $1 3 billion in Q4.
<unk> revenue to over $3 3 billion with brokerage and logistics each at $1 billion.
Our diversification and focus on transportation cost containment yield management and operating efficiency led to gross margin of 16, 7% of revenue for the year and 15, 9% in Q4 with operating income margin of eight 9% for the full year.
We continue to leverage our gross margin against operating expenses, which were equal to seven 8% of revenue for the year down from eight 5% in 2021.
Operating expense dollars in Q4 increased from last year due to incremental expenses from tag and less gains from the sale of equipment offset by lower compensation expense.
Our diluted earnings per share for the quarter was $2 42 status.
We generated $148 million of EBITDA in the quarter and ended with $287 million of cash on hand.
We are introducing guidance for 2023.
Demand conditions softened in the second half of 2022 due to macroeconomic factors and rising retailer inventory levels.
We expect these conditions to persist for the first half of 2023, but are anticipating a slight improvement in demand in the second half.
For the year, we expect to generate diluted EPS of between seven and $8 per share.
We expect revenue will range from five 2% to $5 4 billion.
For intermodal, we're forecasting low single digit volume growth for the year with strength in the second half.
We anticipate gross margin as a percent of revenue of $14 five to 15 point out for the year.
Driven by softer pricing and less surcharge of equatorial revenue, partially offset by lower purchase transportation costs.
For the year, we expect corporate expenses of $420 million to $440 million.
Increasing from 2022 due to a full year of tag and less gain on sale.
We will continue to invest in our business in 2023 with capital expenditures of $170 million to $190 million target for containers trackers warehouse investments in technology.
As we enter into a new year, we thought it would be important to recognize the changing profile of our business.
Over the last five years, we have grown our top line by over 70% both through organic growth in our asset based intermodal business as well as through acquisitions and our non asset businesses that have brought us new capabilities in areas such as fulfillment consolidation final mile and refrigerated transportation, while also adding scale to our business.
We've expanded our operating income margin from 2% to nearly 9% today with a similar large improvement in our return on invested capital.
Despite this we traded a lower valuation than we did several years ago and continue to trade at a large valuation gap relative to our peers.
While we intend to use our pristine balance sheet to invest in the business through capital expenditures and acquisitions.
We also have the flexibility and authorization from our board to take advantage of this inefficiency in the equity market.
With that I'll turn the call over to the operator to open the line to any questions.
As a reminder to ask a question you will need to press star one on your telephone.
Our first question comes from the line of Todd Fowler of Keybanc.
Your question please Todd.
Hi, everybody I'm, assuming it's for Todd Fowler Keybanc, thanks for taking the question.
So maybe just start with the guidance certainly understand that this is volatile.
<unk> environment, but a pretty wide range for 'twenty, three that seven to $8 wider than what you typically guide to I.
I guess, maybe can you talk to what would put you at the high end of the range versus the low end of the range and similar to the <unk>.
Moving pieces is it mostly just where the bids come in how much is dependent on the underlying environment and just some thoughts around.
Kind of the range here to start.
Sure Todd This is Jeff Dimartino.
The range is wider than usual I think just appropriate given the macroeconomic conditions.
We are we are certainly anticipating conditions will Titan and the outlook to improve in the second half of the year, we saw retailers inventory levels really elevate off the bottom in the last few months of 2022, which impacted our performance, we're continuing to see that today, but I think what we're hearing from our from our customers there.
<unk> inventory levels to be worked out.
About the year, so we're anticipating some.
Some increase in demand towards the end of the year and Thats, what really will get us to the high end of the range.
You've followed us for many years, we tend to be pretty conservative in our guidance. The last couple of years. We've ended up bidding by north of 50% I'm not sure we're going to do that quite quite that while this year, but.
Well, we tend to be conservative on our own.
Our overall guidance I understand at the start of the year.
Yes.
So I just wanted to add in.
We did want to be conservative on the economic outlook I think so.
Little early to tell exactly if that.
<unk> back end demand will be large or small and we didn't really want to make a call on that given that it's a few quarters out and so we tried to remain relatively conservative in that outlook.
Okay got it yeah. That's helpful. So it sounds like you've got pretty good line of sight into this and the bias would be upwards.
Maybe for my follow up maybe this is for Brian .
When I think about the 12% volume decline on the intermodal side here in the fourth quarter that seems to be maybe a little bit worse than what we've heard from some peers and maybe some of the industry data that's out there.
Don't know if you want to comment or share any thoughts on maybe the volume decline here in the fourth quarter. It seems like local east was down quite a bit.
Maybe just how youre thinking about kind of the environment and share them right. Now. Thanks, Yes. This is Phil we watch our share very closely our strategy has been to really focus on maximizing our margin per load day, which has guided us towards longer transit and longer haul business, which I think led to some of the <unk>.
Volume decline, especially when you take into account the longer customer dwell. So when we look at it we actually feel like and revenue per load was up 19% that we actually gained share on a revenue basis, even though volumes were down our focus is going to continue to be on maximizing that margin per load, Dave that's what generates the highest return on <unk>.
<unk>.
We look at January volumes were down 8% on a year over year basis, but actually up 9% sequentially. So also feel good about the momentum that we have to start the year.
Okay.
Helpful. Thanks, a lot Phil Thanks for the time Tonight.
Thank you.
Our next question comes from the line of Jon Chappell of Evercore. Your line is open John .
Thank you good afternoon.
Hello, I wasn't going to ask about the quarter to date, but since you just brought it up.
The 9% sequential increase was that a function of December being substantially weaker than you.
You anticipated maybe.
Earlier.
Don't know slowing down ahead of the holidays, given some of those inventory situations or do you feel that you have a little bit of a tailwind now.
As it relates to the start of this year and also just to tie that then are you seeing significant service improvements that give you some.
Optimistic views that that type of momentum can be continued.
Yes, John I think Thats, a great question and I would agree with the comments that you made I think December was lighter than we anticipated, but I think January and the improvement that we've seen sequentially has been stronger than we actually anticipated. So we feel very good about the progress that we're seeing with wins that we're having with customers in our <unk>.
Turn to to overall demand, we're actually seeing import volumes improved sequentially and seen ordering patterns normalize. So a lot of good signs in that momentum really carried throughout the entire month of January with each week sequentially, improving and we're seeing that really carry into February as well I think a big piece of that is around rail service.
Improvement is while we do feel as though that's going to be sustainable we're out promoting that very aggressively with our customers around.
Both the service and improvements and sustainability of that but also the cost savings that they can have associated with that as well when you take into account fuel costs I think the last piece that we've highlighted to a lot of our customers is de risking of their supply chain in their capacity as we look into the back half of the year and a normalization of ordering patterns.
<unk> will be tighter and so by locking in intermodal capacity now.
Going to be de risking their overall supply chain. So all those factors are coming into play, but we do feel very strongly we have some good momentum.
Started here I will just add to that too Jonathan we're confident in that rail service has been sustained throughout the year. So we've actually been tightening our transits and looking to promote more of that conversion from over the road to intermodal volume.
That's great and then Brian since I have you on the pricing front. So it sounds like your demand outlook.
<unk> two has a little bit weaker in the first half hopefully some recovery in the second despite January is a pretty good start sequentially at least on.
On the pricing side is it almost flip flopped I mean do you have some kind of legacy pricing momentum from last year. When the market was still kind of incredibly tight and.
How do you kind of think about that is that as we go through the year.
On competing with truck trying to get that modal conversion, but.
But on the other hand, having your shippers locking capacity before where it does get tighter.
Yes. This is Phil I think it's a little early for a determination on bid season, but I can give you a little bit of color. Obviously, it's a different environment than we were in this time last year, but we do feel as though and this has been the historical norm that intermodal will outperform truck by by a pretty strong margin. We are continuing to show our customers.
<unk> strong savings towards trough, especially when you take into account fuel and our focus is going to be on that maximization of margin per load that we have a significant opportunity to better balance our network and take out empty repositioning cost that can create more density and fluidity with our driver base as well. So we're really focused on we have a sustainable serve.
This product, we are saving and youre able to Derisk your supply chain and all of that is coming together I think very well.
To see a strong bid season for us and just for in general for over the road conversion to intermodal.
I'll just add to that too general I mentioned in some of the prepared remarks, too, but we're putting in those cost disciplines and really bending the cost curve down in every possible way and I mentioned, a few of them, but that in source drayage is a big piece for us.
65% in Q4, which was a substantial improvement, but however, I said on 70% as we go into 2023 as well as our third party dray, taking that cost out and then as that service improves the fluidity of our overall network.
It gets much better from a cost perspective as well.
Alright, that's super helpful. Thanks, Brian Thanks Bill.
Thank you.
Thank you.
Our next question.
Comes from the line of Jason Seidl of Cowen <unk> Company. Your question. Please Jason.
Thank you operator, Hey, gentlemen, how are you.
Two quick things.
One I was talking to another large IMC and they mentioned that they think now and going forward, there's going to be a lot of market share taken from the smaller and mid sized items fees. I mean, one would you agree with that statement and two why would you think that would occur going forward now and I have a follow up about sort of.
East Coast West Coast. So let me answer the first one and I'll get to the second one.
Yes. This is.
Phil I feel very strongly we feel strongly that asset based players are going to continue to take share from the non asset based IMC both around an overall access to capacity, but also drayage economics and our rail partners are building their network and their service product around a asset based carrier.
With better integration on technology, and overall, just a better service product, we think grasp based players. So I think thats going to continue.
The last couple of years have shown a lot of the weakness in the non asset based IFC model, particularly around driver availability and capacity availability. So yes, I would agree with with that assumption.
It makes a lot of sense.
And thinking about sort of the shift that went on last year as the west coast ports at a problem solve a lot of container traffic slowed to the east.
There is going to be a certain percentage of that probably a large percentage of flow back to the west are you guys agnostic to that or would you rather have it on the east coast on the West Coast.
Yes. This is so we typically see a higher margin per load day off the west coast because it is typically a transcon move we also see higher trans load volumes off the west coast and so.
Typically for US West coast business is going to be better on a higher profitability.
I agree with you I think we typically see our shippers.
Switch their ordering patterns from coast to coast on kind of annual basis and so.
We believe that with some of the labor issues getting put to ramp that we'll see in a strong year off the west coast and that will create a strong peak season, we hope and.
And we will see volumes continue to get back to growth on the west coast. So that's very beneficial to us.
We will have our fingers crossed I appreciate the time as always guys.
Okay.
Thank you. Our next question comes from the line of Brian Austin back of Jpmorgan. Please go ahead Brian .
Hey, good evening, thanks for the time.
So Jeff you mentioned the big disconnect with evaluation.
<unk> and versus peers, you are active with the buyback in the third quarter, but it didnt look like there.
Any activity on the fourth quarter. So maybe you can give us some thoughts on how you expect to deploy some of the extra capital going forward throughout the rest of the year with the with the remainder on the.
On the recent program authorization.
Sure our priorities for capital deployment have always been invest in the business first and foremost through capex.
Growing our container fleet, 5% to 10% a year, we've had a really nice benefit from our tractor cycle upgrades. We've taken the average age from four years down to about two and a half years now in a really nice return on that investment in terms of lower MLR that are better fuel economy.
So we'll continue to do that we've had a great experience with that with acquisitions.
With tag the most recent one.
Improving our offering expanding our offering.
And along with that and we saw this with case back a few years ago too.
These are really good at what they do which is operating inside the warehouse and then we marry that up with what we do which is managing transportation and let me put together really.
Our next offering for the customer and take out some costs. There so very pleased with that and the ability and the cross sell abilities that came with up with several of our recent acquisition. So we're looking to do more of that.
M&A has been part of our growth path, we have been averaging.
One deal a year, we'd like to probably accelerate that we think we have some good a good pipeline out there now and we're working on that for 2023.
So thats kind of why we didn't pursue share repurchases in the fourth quarter as we wanted to kind of run out some of the M&A opportunities in the pipeline as well as invest in capex, but given the really strong financial performance for the last two years, we've got a balance sheet that is pretty much net debt zero and so we will look to deploy that capital and certainly.
Probably all three of those channels in 2023.
Okay I appreciate that.
Just to follow up on maybe what's also embedded in the guidance talks a lot about how this time is a little bit different in terms of flexibility with the rail contracts.
Can you talk about.
How much of that is reflected in the guide you can get the full benefit of those it did seem like it.
These arent really linear would take a little bit of time, obviously you have different partners.
Wanted to see how much of a benefit you would expect to get in 2023, and if there could be even a bit more than 24, if the truck market continues to be as soft as most of us expect.
Sure we have great partners, both of which I think you've seen you follow them and you know what theyre doing we've really seen them embraced intermodal over the last few years.
Deciding to work with channel partners like us investing in their fleets I think <unk> invested $600 million last year in terms of new terminals and equipment and then I think we've seen a really we've seen them embraced.
Better economics for us as a way for us to drive growth and convert freight off the road.
And so there is to your point there is more flexibility than we've had in the past there is a little bit of a lag that's built into the way those contracts reset so that will carry that will carry through beyond 2023.
And I think I'd just add there are opportunities I think as well for us to be more efficient in our network, creating more balance also as Brian mentioned in sourcing more drayage, reducing our third party costs.
So by getting back to more of a high velocity network. We think we can reduce costs there as well.
I think Jeff mentioned earlier, we are conservative in our guidance and so I think.
You point to that.
Perhaps we're being a little conservative, it's probably right, but but we also don't want to build in a significant kind of economic Bull whip that maybe some others haven't so we're trying to just make sure we stay conservative on that economic outlook.
Alright, thanks for the time I appreciate it.
Thank you. Our next question comes from the line of Bascom majors Susquehanna Yeah.
Your line is open bascom.
When we think about the guidance and the cadence is there a quarter or a period in the year, where a couple of negative things lineup the roll off of <unk>.
Pricing or really anything like <unk> or even the rail increase where its just youre just going to feel kind of the maximum part of their pain based on things you have some visibility into I think that would be helpful. As we set expectations for how the year plays out. Thank you.
Yes, great question, something we thought about when we're putting guidance together.
It's going to be a little balanced we're going to be entering the year with a nice price tailwind coming out of a strong bid season in 2020 to about 75% of our volume will reprice in the first half.
So we're expecting stronger pricing in the first half stronger accessorial, but.
But the second half.
We'll see a pickup in volume.
The accessorial is probably roll off as we see more fluidity.
And price, we're not anticipating will be quite quite as strong in 2023.
So we probably will start off the year, a little bit stronger I think there is upside though.
We've had.
Two really strong years of peak season surcharges that really kind of went on throughout the year.
That has gone away, but to the extent the.
The upper end of our case is realized.
Would come with a tightened.
A tightening in the second half of the year, which we would expect would come with with more surcharge.
And.
To follow up on an earlier question, you've kind of pushed us towards the higher end and.
<unk> talked about conservatism.
Whats scenario has to play out to get you to $7 or below just want to understand.
How dire dire cases in your mind. Thank you.
Yes, we think with respect to intermodal if theres no if retail inventory levels stay low or a recession is severe impact on consumer spending and volumes don't kind of pick back up that would certainly impact.
The second half.
We haven't talked much about it but we do have our other lines of business that account for 40% of our revenue.
Tend to be less cyclical and less less price and volume driven and more kind of longer longer term in nature.
That will that's one of the things Thats changed if you look back at our history.
Those non asset based businesses are 40% of our revenue today, that's up from about 30% five years ago that it does provide more of a cushion.
As a housekeeping item, what sort of free cash flow outlook does the midpoint of your range get too. Thank you.
Yes, it's around $250 million, so EBITDA and Capex.
A little bit of cash taxes.
Thank you.
Thank you.
Our next question.
It comes from the line of Scott Group of.
Research Your question please Scott.
Hey, Thanks afternoon guys.
Just following up on the last question it sounds like pricing better first half volumes better second half what does that mean from like the earnings cadence and sometimes in the past you've given us some sort of directional color what percent of the earnings you think first half second half or even quarters.
You think about it.
Yes, I'd say at this point, it's probably pretty balanced.
With those two offsetting one another it may be a little bit stronger than the first half.
But we'll have more to say, obviously as we get further into the year and what the rest of the year looks like but at this point, that's our best guess.
And then you talked about the March the operating margins have gone from 2% to 9% I think I want to try and understand the sustainability of these margins at this level.
When we look at intermodal I know you don't report intermodal margin, but where is that relative to the other big guys that are <unk>.
Low double digit margins right now.
We don't kind of bring it down to that level, but I would I would suggest we're probably in the same range as that if not higher or business.
Prices are pretty strong driver for us and we certainly saw the benefit of that.
In 2022, and I think what Jeff was trying to stress in his prepared remarks is also that it's a far less capital intensive model.
It'll as well so we had very strong margins without the capital intensity and we're generating a lot of free cash flow that we can put back into the business.
And as we in source more and we've got new rail contracts. What do you like is the range of intermodal margin.
Ultimately going to be a lot narrower like maybe those guys look like maybe a little bit more capital intensive.
During some more of our drayage, but a tighter band of margin how do we think about that.
Yes, I think it's certainly an improvement from where we've been historically.
There is obviously some level of cyclicality in that business when when capacity is tight and demand is strong you're going to get good results like last like 2021 and 2022.
But we think we've reset at a higher base.
Where we had been in the past one of the really nice things about our drayage and sourcing as well.
Been able to really increase the amount of in source without adding a lot of capital to date and that's through better efficiency. We have improved our driver to truck ratio and we've improved our loads per driver per day, and really been able to see a nice pick up without a lot of capital.
If I can just squeeze in one more just to that point is there any way to quantify what Mike every 10 points of in sourcing means for operating margin earnings. However, you think about it.
Yes, so 100 basis points over the cycle is about $1 five of pre tax.
100 basis points movement in Europe , but your goal is to go from like 60% to 90 or something is that right or were taught.
Getting to 80% in source, we're still the largest purchaser of third party drayage, we think thats a coordinated it's a good lever actually to have through cycle allows us to flex up more quickly to service, our customers and high demand environment and create a more variable cost structure as we seek to manage windows. So we want to remain.
And that position them for that 20%.
We think as kind of optimal.
And we will maintain our focus on that we're running to start the year and kind of the 70% range, which is great. Obviously, it's on a lower volume. So we need to continue to hire as we see volumes pick up to maintain that share, but I would tell you I think that 65 to <unk>.
70 number for a full year is really a good target that we've set which would be some pretty strong growth on a year over year basis.
Okay. Thanks for all the back and forth I appreciate it. Thank you guys. Thanks Scott.
Thank you.
Our next question comes from the line of Chris Cohen.
Mark Your question please Chris.
Yes, Hi, good afternoon, guys can you just talk about maybe your plans for container add some <unk> that have reported talked about holding off on container additions. This year I'm just wondering what your what your thoughts are on that thank you.
Yes. Thank you I think it's a really good question.
Our preliminary Capex planning, we have planned a call it 5% to 6% sort of net increase in our fleet.
We think that is very important to maintain consistency in capital expenditures and investment into the fleet that allows us to support our customers as we see returns of demand and maintain service levels at a better level. So so we wanted to keep that consistency I think we said that in our prepared remarks, and so you will see its net add some.
This year it would be less than the 11% that we did this year, but but.
But we will have a net add.
Our container fleet.
Alright, great. Thank you.
Thank you.
Our next question comes from the line of Allison <unk> of Wells Fargo. Your question. Please Allison.
Hi, good evening, and just want to turn to M&A I know you talked about the pipeline being active which could you maybe give us a little color on what that pipeline is looking like in terms of our multiple becoming more reasonable out. There you did talk at maybe doing more than one just management capacity to handle sort of an increase in <unk>.
Just any thoughts there.
Sure we've been pretty active the last several years ever kind of averaging around one year and so we feel like we've got a really good playbook developed and we've got the disciplines in place to be able to handle more than one.
For us, we've kind of targeted anywhere from $100 million to $300 million in deal size historically.
I think with the success, we've had we'd like to actually go a little bit larger if it made sense.
We're a conservative company.
We're cognizant of maintaining appropriate levels of leverage so.
So it could be Q2 smaller ones or maybe one larger one.
As part of our M&A strategy.
I think multiples are probably going to come in to some degree in 2023 I think.
The last two years saw pretty strong bid from private equity buyers in it.
Seems like the financing markets.
Sort of dried up for those types of transactions that we would expect a little bit of a more reasonable level of evaluation.
But we're encouraged by the success, we've had with cross selling the <unk> acquisition was a good one for US It gave us an ecommerce fulfillment capability. It also improved our our nationwide footprint of warehousing space and gave US a really nice balance of asset and non asset based warehousing and we'd like to really replicate that with <unk>.
Those types of acquisitions.
No that's great and then just on the logistics.
What are you seeing in terms of the defensibility of that model just given it is exposed to ecommerce and then in terms of organic capex into that business or is that part of that this year or is it sort of a wait and see.
No. It absolutely is Allison this is Brian and we're off to a great start with tag the ecommerce is fit really nicely into our retail and CPG verticals.
Really since bringing them on in late August we've already achieved $30 million in wins and cross sells that'll onboard throughout 2023, and we got two new buildings opening in the west that have already opened this year and then adding two more in the Midwest in the second quarter and really as we fill those buildings is to digest some of that growth but.
And it's also to help us optimize the deployment of our space with our three PL partners and very similar to our drayage model, we balance and feel it's important to run or run and operate our own assets, but then have that three PL partner, there as well to flex when we need to so off.
Off to a great start with with more to come.
To your point or to your question.
Capex so that the facilities are all leased we do make.
Some investments in equipment and racking, that's maybe five 6% of our overall capex.
And I would just add I think one of the great things about the ecommerce portion as well with our case back acquisition a lot of those customers had a E. Commerce program that we couldnt effectively serve so we're cross selling very well into our existing case that customer base and I think the other piece that's been very exciting as we are building multi purpose warehousing space. So we can.
Use it for cross docking for storage for E comm fulfillment for consolidation and I think thats going to be a very effective strategy as we look ahead.
To be at probably 12 million square feet of warehousing space with a lot of room to grow this year, so very excited about it.
Great. Thanks for the color.
Thank you.
Our next question.
Hey, good afternoon, and congrats to you Phil on the on the new role.
Just maybe you want to stick with the fulfillment business here you mentioned some cost inflation in the release.
During if we're starting to see that roll off at this point and also maybe whether you've got any contract mechanisms there to call some of those back.
And then you also talked a little bit about exited business. There. So maybe just some color on that was that just.
Residual attrition I guess post acquisition or was that was that something else.
This is Phil.
We haven't had any any large customer changes, we typically do have some churn within our consolidation programs that customers are acquired or they get large enough to in source their own warehousing footprint, but nothing really material. There I think we we've done a really nice job of setting a long.
Term warehousing space plan with our partners both on the <unk> side as well.
Some of our real estate partners, we don't really foresee any out of market sort of increases in overall costs.
Industrial capacity remains very tight from a warehousing perspective, not at historic levels, but coming off of those we're going to as we look at new space and renewals try to take that into account, but we also want to take a long term view and continuing to grow and invest in expanding that footprint. So.
We feel like we have a great team that works on that very pleased with that.
The <unk>.
Process, thus far and feel very good about our ability to keep growing there as Brian noted the cross selling has been phenomenal to start and we've exceeded our expectations already and Bruce I'll, just add to that as well with that has helped us retain our customers. So we're adding and Phil mentioned that our existing contracts new service offerings and Thats helped us.
With customer retention and contract renewals, but it's also really and that strong pipeline I mentioned it before just to elaborate to it as well is that it has helped us improve our deal size and we've seen that deal size really increase our closed close ratios are improving and while shippers are still priced very focused on price. They are less sensitive to it when we have a diverse.
Service offerings that we can offer to them. So we'll continue to see growth there.
Okay, Great and just a follow up real quick what sort of renewal rates do you typically see in that business. If you can if you can comment on that.
Yes, we're seeing mid nineties for that renewable and Theres. Some of those of that factors in some of the items that I think Phil mentioned as well.
And then maybe some acquisition components that are more uncontrollable, but we're typically in that mid nineties.
Alright, very good thank you.
Thank you.
Our next question comes from the line.
Thomas <unk> of UBS. Your line is open Thomas.
Hi, great. Thanks, good afternoon.
I'm not sure if I missed this but you talked a little bit about December volumes, but I didn't hear I kind of buy.
By months.
Can you give us what the intermodal volumes were year over year by month in the quarter.
Sure Yeah October down nine.
November down 14 in December down 13.
Okay Alright.
When I think about the I guess, the 12% down for the full quarter.
It's obviously, it's a weak market.
But I'm wondering how do you think about pricing your approach to pricing against that backdrop is it something where you say, okay. We can kind of.
<unk> reasonably disciplined downturn down 12, but if we ended up going.
Down 20, and someone else pushing harder on price.
Then we got to kind of push back more I'm just trying to think about.
What happens with the intermodal competitive environment and just how we think about the.
The pricing dynamic in the contract season for 'twenty three.
Yes, and Thats, where we utilize that margin per load day model, we really focus on how can we maximize that based on what's going on in the broader market. I think you saw that our revenue per load was up 19% in intermodal. So we feel like we are staying very disciplined.
And really trying to pick our spots to create better balance and velocity in the network.
We're seeing a pretty disciplined start to overall bid season, obviously more competitive than what we've seen before but not anything different than what you would expect in this environment.
And so we're really focusing on winning volume in the places where it benefits our network benefits our drivers.
And ensuring that we maintain incumbency as well so we're really making sure that we lock in that incumbency in advance of RFP event, which we think will benefit us as well.
So I guess when you put that together and you say the guide is seven to $8 do you assume like kind of a mid single digit decline in intermodal pricing do you assume low single digit what's the kind of ballpark without being overly precise.
Yes, I would say not as strong as 2022 and better than truckload is kind of how we model that.
Right do you think okay. So I think the market view as kind of truckload down high single digits. So maybe something in mid single digits or it is something better than truck.
Yes, but better than truck.
Okay, Alright, great. Thank you for your time.
Thanks Scott.
Thank you as a reminder to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone SaaS question.
Our next question comes from the line of Ravi Shanker of Morgan Stanley . Your question. Please Rob.
Thank you and good evening everyone.
Sorry to revisit the whole midyear inflection.
Again, but if I were to ask that question a different way.
What are your customers telling you.
Is it going to happen kind of in the back half of the ones that you do have that inflection is it okay.
Get inventories back down to normal and then we sort of bounce along the bottom here waiting for macro to improve or if the macro conditions that we see right now remains reasonably the same.
Do they expect an actual restock and a real up cycle in the back half of the year going into 'twenty four.
Yes, Ravi this is so I think thats the unknown with our with our customer base is how fast do inventories bleed down and what does that require from a ordering for peak season.
I've heard a myriad of different thoughts on that I think what we've seen historically is.
A bleed down probably too far in overall inventory then that leads to more snap.
Sort of ordering and rush ordering which typically leads to more west coast Trans loading and really supports.
Intermodal growth and so.
We didn't build that into our guidance, but.
I think that that might delay the the.
The increase in ordering but it also might exacerbate the extreme of the capacity tightness if that makes sense.
Got it no. That's helpful. And then I agree you kind of that that's probably the biggest unknown out there.
Maybe as a follow up obviously, you said that you expect.
Over the road conversion, which is understandable as rail service improves, but again youre conversations over the last few years.
Has.
The kind of the rail service you've seen how has that kind of a permanent you shifted any customers towards truck and also in the last couple of up cycles.
When we had many shippers are looking to restock, they look for service and speed and so they tend to kind of a bias towards truck versus rail are you confident that will not happen.
The next up cycle hopefully that's in the back half of this year.
Sure So maybe I'll start with truck capacity, where.
<unk>.
Capex has been limited at replacement levels.
Really for the past couple of years, so the ability to really net add to the overall truckload capacity has been eliminated I think youre also starting to see with spot market rates at these levels small and mid sized carriers really starting to exit the market and so.
Our estimation that truckload capacity is going to continue to tighten which will make intermodal a.
Or more.
Conducive sort of path too.
To be able to move freight and I think with improved rail service with we're very confident that's going to be maintained a lot of folks are going to be looking at trans loading solutions to be able to get into big box and and really move that freight inland through the west coast Port So that would be our view were out really promoting right now as Brian mentioned tighter transits and.
Mid 90 sort of on time performance, we obviously need to prove that as volumes continue to pick up but we feel very good about the.
The investments, we're making as well as our rail partners to sustain that service.
Very helpful. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Justin long of Stephens.
Your question please Justin.
Thanks, I wanted to ask about the guidance for gross margin percentage is there any additional color you can provide on the quarterly cadence of that metric just curious where you are expecting to start the year in the first quarter versus finished the year in the fourth quarter and I know you talk.
About intermodal price earlier, but anything you can share on the pressure youre anticipating in accessorial.
Sure in two weeks.
Kind of go hand in hand, I think from a margin percent perspective will start the year stronger probably in a similar spot to where we finished 2022.
We would anticipate that those margins would decline as a percent in the second half.
With softer pricing and with less accessorial revenue.
But then offset that with increased volume to drive the dollars that makes sense.
Got it that makes sense and then our buyback factored into the guidance for 2023 and I just wanted to clarify the comment earlier around container adds that you made Phil it sounded like you're modeling a 5% to 6% increase this year was that on a gross basis and then I guess.
On a net basis, youre, assuming something less than that but still positive just wanted to clarify.
That's correct yes.
5% to 6% on a net basis, we didn't we got some containers that have reached end of life that we've held off on retiring but.
We are going to pursue that this year and then.
Your other question the guide does not assume any share buybacks or acquisition or acquisition.
Okay helpful. Thank you.
Yes.
Thank you I would now like to turn the conference back to Phil Yeager for closing remarks.
Great well, thank you for joining us on our call. This afternoon and as always if there are any questions. Please feel free to reach out to Brian Jeff and hope you have a great evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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