Q2 2023 Hub Group Inc Earnings Call
Okay.
Hello, and welcome to the hub group's second quarter 2023 earnings conference call.
So yeager hubs, president and CEO , Brian Alexander hubs, Chief operating officer and.
And Geoff Demartino Hep 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 real lease 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 Phil Yeager you mean.
I'll begin.
Yeah.
Good afternoon. Thank you for joining hub group's second quarter earnings call.
Any week, there, Brian Alexander hub group's Chief operating officer, and Geoff Demartino, our Chief Financial Officer.
I wanted to start by thanking all of our hub group team members across North America for their resiliency during a rapidly evolving environment and their focus on providing excellent service to our customers.
The freight economy has been challenged this year and that trend continued in the second quarter.
Import volumes have been lower driven by elevated inventory and the industry has yet to exit surplus capacity.
This has in turn driven down rates to our customers and decreased spot market activity, putting pressure on our more transactional services.
However, the consumer has remained strong and we believe restraint and growth related capital spending in the transportation industry and an increase in small carrier exits as well as normalized inventories are on the horizon, which will drive increased shipping demand as well as higher spot freight activity.
The timing of this change in market conditions remains unclear, but we werent sure that hub group is in a position to capitalize on that transition as the market improves.
Our second quarter results, while not as robust as last year showed the strength of our portfolio of services and quality of our team.
Ics was challenged with lower intermodal demand and pricing, which led to increased equipment cost is velocity declined and street while increased.
We're taking actions to increase balance and velocity, while better managing our equipment costs.
We offset those challenges with our improved rail agreements strong cost controls and increased interest rates and strength in our dedicated service offering.
We are through the vast majority of bid season, and performed well in maintaining incumbency and growing with new and existing clients in both intermodal and dedicated despite increased levels of competition.
Rail service has remained strong and we anticipate that continuing as demand returns driven by the ongoing investments our rail partners are making in their networks.
We are extremely excited about the growth opportunity, we have unlocked with our partner Union Pacific and the North South corridor between Mexico U S and Canada utilizing the Falcon premium service product.
We believe that expanding our services in the automotive industry and the improved transits, we have will enable us to access growth via near shoring with new and existing clients, while providing excellent service and security to all of our customers across industry segments.
Our focus over the past several years on the development of our logistics segment is paying dividends in this challenging market.
Enabling us to stabilize earnings and cash flow.
Our value added services differentiate us to our customers and is driving a strong pipeline of growth opportunities as clients focus on ways to continue to build resiliency, while reducing cost in their supply chain.
Our teams have performed extremely well and we are in position to grow our logistics segment, as we onboard new wins and see demand from existing clients stabilize.
This success, we've had in executing on our service line diversification and strong free cash flow generation is enabling us to continue to return capital to shareholders as exhibited by our share repurchases during the quarter.
We're also maintaining a strong pipeline of acquisition opportunities that will continue to bolster our end to end non asset logistics segment.
We believe that the market will remain challenged in the near term with improvements in demand through the remainder of the year, but maintain a strong view that we are in a fantastic position to drive growth through our best in class service and team excellent customer relationships and focused investment approach with that I will hand, it over to Brian to discuss our service line performance.
Thank you Phil.
Also wanted to thank our talented team for their efforts in leading and executing through a changing freight environment and delivering continued value to our customers.
I will now discuss our reportable segments, starting with our intermodal transportation solutions.
In the second quarter Ics revenue declined 29% driven by softer intermodal volume declined 17%.
Intermodal volume declined 9% local west declined 19% in the local east declined 17%.
We are very pleased with our dedicated trucking growth and yield expansion in the second quarter, along with a strong pipeline of confirmed wins scheduled to onboard in the third quarter.
Continued soft import volumes and elevated inventories generated softer volume and lower accessorial revenue in the second quarter, which led to a decline in Ips operating income as a percent of revenue of 600 basis points year over year.
We continue to offset price pressure with several cost improvements we've.
We've continued to in source, our drayage from 62% in the second quarter of last year to 79%. This year and we continue to generate improvements in our rail agreements, which we expect to accelerate in the second half of 2023 and beyond.
In addition, we have cost improvements to further benefit our street economics there'll be initiated in the second half of the year.
We continue to defend our incumbency and incremental wins that will set us up for long term success rail service.
<unk> continues to improve and we are confident that it will remain strong as volumes grow.
We are excited to further expand our cross border rail solutions and have already started to implement new North American wins.
We will continue to invest in our intermodal business for the long term and are confident that these investments along with improved rail service will help support further conversion from over the road to intermodal.
While the near term results are impacted by low volume, we are continuing to take actions to position us to deliver high levels of service for our customers and sustainable profitability for the long term.
Now turning to our logistics segment.
As we continue our diversification strategy to deepen our value to our customers with our integrated approach to supporting an end to end supply chain. We were successful in expanding our logistics operating income as a percent of revenue by 60 basis points over the first quarter.
Despite the challenging freight environment, our brokerage team continues to perform well.
Volume close to flat year over year and grew volume, 3% over the first quarter.
We continue to grow share with existing customers and have been successful in onboarding several new customers each month.
Our overall logistics segment experienced softer revenue was a decline of 17% in the second quarter, but has a strong pipeline of confirmed wins with on boardings in the third and fourth quarter.
In addition, as illustrated in our yield improvement we have been successful in executing on lowering the cost of purchase transportation and integrating our service offerings.
Our past two non asset logistics acquisitions continue to harvest cross selling synergies and the integration has generated a strong internal network of hub volume that we expect to continue to grow.
We continue to be very pleased with our brokerage team as R. Chop think integration is provided non asset low diversification volume leverage and continued cross selling upside, which will further position us for growth.
As mentioned in previous earnings calls, we continue to onboard new multipurpose logistics locations to support our growth.
These locations are strategic to our hub network of freight as they enable the growth of our <unk> consolidation solutions and support inbound and outbound multimodal hub volume to service our customers supply chain needs.
Our logistics deal size continues to grow and our close ratio remained strong.
With these enhancements we are in a great position to continue our trajectory of profitable organic growth and continue to integrate future acquisitions.
With that I'll hand, it over to Jeff to discuss our financial performance.
Thank you Brian .
The second quarter was one of the softest demand environments, we've seen in some time.
The us consumer continues to be in relatively good shape demand from any of our services continued to be impacted by high retail inventory levels low import activity and plentiful transportation capacity.
We fully expect all of these factors to improve in the coming quarters. We have taken several important actions to position hub group for success in both the short and long term time horizon.
We have excellent relationships with our rail partners, who believe in a secular growth story of intermodal and desire to work with scaled high service channel partners like hub group.
We continue to in source, a higher percentage of our drayage offering both cost and service advantages.
We are pleased with the growth of our logistics segment, which accounted for nearly half of second quarter operating income.
We have a strong sales pipeline and several large recent wins, which will drive profitability into 2024.
Our logistics offering provides a more stable earnings stream and improves our positioning as a broad supply chain solutions provider.
We remain very focused on driving efficiencies in our operations and support functions.
Finally, we have an excellent free cash flow profile that enables our ability to invest in the business to position hub group for success over the long term.
Despite softer freight market conditions, we generated revenue of over $1 billion for the quarter and operating income margin of 6%.
Purchase transportation and warehousing cost declined as a percent of revenue as compared to prior year, reflecting our focus on cost containment.
Salaries and benefits costs rose from prior year, as we significantly expanded our driver count and added and warehousing operations through the acquisition of tag logistics.
This increase was offset by lower office employee costs and lower incentive compensation expense.
Our depreciation on claims costs, both increased from the prior year due to investments in fixed assets and the expansion of our drayage operation.
G&A costs decreased from the prior year due to less legal and acquisition related spend.
Our diluted earnings per share for the quarter was $1 44.
We generated $108 million of EBITDA in the quarter and ended with $342 million of cash on hand.
During the quarter, we purchased one 3 million shares of our stock for $100 million.
We are updating our guidance for 2023.
The low end assumes minimal improvement in demand from current levels, while the higher end assumes some tightening in the market place near the end of the year.
For 2023, we expect to generate diluted EPS of between $5 80.
And $6 40 per share.
We expect revenue will range from four three to $4 5 billion.
Our intermodal, we're forecasting high single digit volume declines for the year.
The remainder of the year will be impacted by softer pricing and less accessorial and surcharge revenue, which.
Which will be partially offset by lower purchase transportation costs and improved operating efficiency.
We expect a tax rate of 20 point out to 'twenty, one pointed out per cent for the year with a rate of approximately 27% in Q3 and our rate in the mid teens in Q4 as a result of a change in state apportionment.
The impact of lower price and a higher tax rate will result in a sequential decline of EPS in the second quarter into Q3.
Our capital expenditure range is unchanged at $140 million to $150 million.
Based on this guidance, we would expect to generate EBITDA less capital expenditures of approximately $300 million in 2023.
This free cash flow profile combined with our zero net debt balance positions us with the financial flexibility to invest in our business through capital expenditures and acquisitions as well as returning capital to shareholders.
With that I'll turn the call 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 is from Bascom majors with Susquehanna Financial Group. Please proceed with your question.
As you look into the third quarter or can you talk a little bit about the puts and takes between feeling a full quarter of the bid season and intermodal pricing from your customers to getting some relief on the purchase transportation side, just trying to understand if the.
The contribution per load in and how that's trending sequentially between those two things and maybe accessorial as well. Thank you.
Sure, Yes sequentially, we do expect EPS will go down from Q2 into Q3.
Biggest driver of that is going to be a full quarter of.
Re prices that happened during Q2, we.
We do have cost offsets with rail transportation costs going down.
Those happen throughout the course of the year. So we don't see a full quarter's impact of that in Q3, but we would expect a pickup in earnings into Q4 as more of that purchase transportation cost.
Benefit comes down both rail as well as continued cost reductions in our <unk>.
<unk> operation.
I would just add I think we are seeing a sequential volume improvement June to July and we're anticipating that that trend will continue. We're also seeing some tightness in a few kind of key.
Corridor for US right now in particular in southern California, as well as the southeast ports, which is a good indication for what we hope will be continued sequential improvement and improvement in overall bid compliance to award as well.
And one other piece to its less of an impact, but our tax rate will be substantially lower in Q4.
And when you talk to the low end of guidance, assuming minimal sequential improvement is that a walk back from what you've seen so far early in the quarter.
To get there or is that basically flatlining, where you are today. Thank you.
Yes, I would say the lower half doesn't assume some improvement modest improvement consistent with the trend we've seen in the quarter to date.
So very low end would assume would assume a retrenchment in volume the higher end of the range generally would assume.
A pickup in demand as well as an exit in some transportation capacity.
Lead to a tightening in the market in that case, we would expect to get to.
To recognize that surcharge revenue in Q4 that would get us to the upper end of the range.
Just highlighted we are seeing more stability in overall spot rate as we talk to our customers inventories are coming down. So we're seeing some of that destocking trend and obviously some capacity attrition not not enough, but I also believe the growth related capex is going to be very limited. So you put all those together.
And it does frame up pretty well.
<unk>. This is Brian I'll chime in with that to our brokerage has seen a big uptick in that as well we consider them a standout in the industry right now and how they face the challenging volume required volume economics, so far but we've seen them in July .
Close to 10% and overall volume and adding anywhere from 100 tool.
Hundred 20, new customers each month, and we think that sets us up really well as that volume increases in.
And we have those seeds planted for growth.
Thank you for the time.
Thank you.
Our next question is from Justin long of Stephens. Please proceed with your question.
Thanks, I wanted to start by following up on that comment you made Phil about June to July and seeing some improvement could you share what your monthly intermodal volumes did throughout <unk> and where you are tracking in July thus far.
Yes. So April was down 17 May was down 19 June was down 16, and then July is down 12.
But up over 2% sequentially from June .
So positive trend we are seeing some of those awards that we've been talking about starting to come online and activate which is which is great but I also.
Good to see some of that tightness in a few key areas for it as well and hope that's an indication of further demand.
Got it and then following up on the earlier question.
Jeff last quarter, you gave an unexpected change in the.
Margin sequentially from <unk>.
<unk> to <unk> I was curious if you can provide any thoughts on kind of <unk> to three <unk> for that metric and you were talking earlier about EPS declining sequentially in the third quarter, but a lot of that seems to be driven by the higher tax rate. So I am curious if you think consolidated operating income.
<unk> declined sequentially as well on the third quarter.
Yes, the tax rate is only a portion of that drive.
From Q2 to Q3 so.
Prices are pretty important contributor to our margin profile. So we would expect to see the Ics margins declined sequentially.
But I also think we are seeing some positive trends and as you know we do like to maintain some conservatism in the estimates that were putting out and so I want to want to continue to stay consistent with that.
Okay.
Add to that to those will be offset a bit logistics as well we continue to see a strong pipeline I mentioned brokerage already with strong volumes and the service offerings out there that they have in play, but also cross selling into our logistics, where we're able to take our customers beyond just the transaction of transportation and given them. The solutions. Our pipeline is strong there are.
Deal size is close to double and our close ratios remained very strong.
I would just add and I think we all highlighted in our prepared remarks.
Performance at the logistics segment has really I think driven.
Driven home the diversification strategy that we've executed on and so kind of emboldened us to continue that path.
Okay, Great and last thing I just wanted to ask about was the buyback are you assuming incremental buybacks in the guidance assume that beyond the $100 million in the second quarter.
Yes, so we have $100 million remaining on our current authorization.
So our guidance assumes about.
No execution of that as well as full execution so because.
Where we are in the year, if we were to execute on the full 100 that we think would add approximately <unk> 12 cents of EPS. So that's within our guidance range.
We do have a strong M&A pipeline, so I want to be very conscious of that as well and I think we will weigh that as we continue to see the obviously good value in our stock, but also wanted to ensure we maintain our very strong capital structure.
And when we are able to execute on that transaction.
Makes sense. Thanks, so much for the time.
Thank you.
Thank you.
Next question comes from the line of <unk> kind of car of Cowen. Please proceed with your question.
This is actually Jason Seidl, My associate dial me in.
Gentlemen wanted to dial into.
One of the comments you made you talked about the sequential growth from June to July of 2%.
How does that compare to prior years.
Yes, typically you actually do not see that behind.
On a business day adjusted basis.
Typically you see that coming out of August coming into August July to August so we're.
Pleased with with that trend.
In the past you see that kind of month and quarter ended pop in June leading into the fourth of July holiday and then some slowdown from there.
I think a big portion of it is bid awards starting to come on.
But there also is some tightness that we're seeing as I mentioned in southern California, some of the southeast Port area.
And we've also been very successful in getting some very strong win had been balanced lanes to support that growth, but also in the local east which is a priority for us to return to growth. There. So pleased with the progress that our commercial team is making but it's still obviously have room to go but we are seeing.
A positive sign.
So positive moving 2% versus normal a little bit of a drop.
Correct.
Okay. My other questions here, one you talked a lot about the wins on the logistics side. So that's good to hear can you talk to us about any startup costs you might see in the second half of the year and then could you help us size those wins on the logistics side on an annualized basis going forward.
Sure, Yes, I think it will set us up nicely within our logistics pipeline is kind of a staggered starts that we've seen so we keep a good cadence of those now coming in in Q3, we've got good line of sight to confirmed wins a few that are onboarding in Q4, but we will see the pipeline that are some of the ones that are close to close at the implementation in Q4.
Sure and then start to set us up well into next year on our logistics wins, we don't see a really a high cost of start startup with those who have got a really good implementation process and team that is well established I would say if we see any startup costs. It would be with some of our new multipurpose buildings that are enabling our growth.
And even with that we've got a really good ramp schedule with how we build those so we're able to take some of the growth that we have already but then we also in sourced very similar to our drayage model, where we're able to in source some of our <unk> space into those new buildings that fill them very fast so we've.
<unk> proven that out so far in the first half of this year with two new buildings in the West two recent additions of buildings in the Midwest and then we're further expanding into the south and into the east yet this year.
Is that I think if you think about our logistics segment. A portion is brokerage, which is obviously more market driven but in the portion of that Brian is talking about what those when youre, probably looking at a double digit to mid teen sort of sequential growth I think we would be anticipating given the wins that we're bringing on at <unk>.
Our margins and as Brian mentioned, those do help feed our other service lines as well as noted the very integrated solution for our customers.
One more point to that Jason as well is it still made me think of two that I mentioned those new buildings that come onboard to help enable a lot of that logistics growth. Those are also helping to enable our LCL consolidation, we've got close to $1 billion of LPL under management on behalf of our customers and a good portion of that is traditional LCL with a traditional provider.
But a larger portion of that runs through our consolidation solutions that help take the cost out and improve the service for our customers. So we see a lot of growth with those in the back half of the year as well.
Oh, that's great and my last one here since you brought up LDL consolidation pending.
Bankruptcy.
Yellow freight how is that going to impact the consolidation business and is this an opportunity for you to get more price.
Yes, we see it as a great opportunity to continue to expand our solutions with our customers we've been derisking our customers for quite some time, and then and making sure that their networks are setup for success.
We will see some of that spillover into we've already seen some of that spill over into our solutions, both transactional as well as through our consolidation network. So.
That's well underway and we have seen an increase in our pipeline for our managed transportation solution in particular, where we managed over $1 billion of Lps, we are able to bring significant cost mitigation opportunities for our customers as they look ahead and as Brian mentioned that you think are consolidation network. The pipeline has continued to.
Grow and we will be bringing those winds on as well so that should all be incremental to the logistics sector.
Okay.
Appreciate the time as always gentlemen.
Thank you.
Yes.
Thank you.
Next question is from Bruce Chan of Stifel. Please proceed with your question.
Yes, thanks for the time in the afternoon guys.
You talked a little bit about some of the incremental sites that you are bringing online and on the logistics side just wanted to get a sense of where you stand now in terms of utilization how much spare capacity do you have and if your win rate were to accelerate in subsequent quarters, how quickly or what's the time lag involved in bringing.
Further sites online.
Yes, no that's a great question Bruce.
It's an important one as well so we consider ourselves never sold out of space and it's because of the model that we've enabled and our further investments into so we've got our asset buildings that we operate and run.
And we've done that through acquisitions and these are multi purpose locations that can do trans loading cross docking ecommerce enabled then we also have a complementary fleet of square footage that really flows into our third party space that third party space is able to flex up and down and so as those growth opportunities come on.
We leveraged that third party space and then we start to in source that so thats really what has us building out that strategy to enable the growth, but also improve the yield as we as we put on those new buildings.
Okay, Great. That's really helpful color and then just maybe one follow up we've been pretty successful with the drayage in sourcing.
Thank you said, 79% now do you have a sense for how high that could go or what the target percentage might be and then.
And as we see a migration back to the West coast and Port volumes pick up do you think that you can keep that in source percentage up at these levels.
We intend to continue to keep them up at these levels I think we could see them press into the mid eighties, potentially where our driver count is up 20%, but in addition to that.
Our driver productivity continues to remain very strong so the efficiency on the street as a part of our economic plan to continue to take cost out and we will continue to invest in that drayage fleet to drive that in sourcing up there is a balance we want to continue to strike. We are the largest purchaser of third party drayage in the industry and we think that is beneficial.
To us to be able to react to fluctuations in demand as our customers need a surge, but we will stay very consistent and the investment to maintain that 80%. There are several markets, where we're over that therapy, where we need to continue to hire to bring more share in house I would tell you we've done a really great job in recruiting and in many markets have a backlog.
A candidate that we can be bringing on so I don't have a concern necessarily around as volume returns, thus, losing a lot of ground on that 80% share.
I think the team's done a great job positions positioned as well, but we need to continue to focus on that productivity and balance for our drivers as well, that's an opportunity where we're zeroed in on but.
Very pleased with how we've done it in managing that share thus far.
Okay, great. Thanks for the kind of jets.
Thank you.
Our next question.
Is from Scott Group of Wolfe Research. Please proceed with your question.
Hey, Thanks, good afternoon.
Any way you can give us some color on intermodal Rev per load or just totally intermodal revenue just to help with the.
Transparency in the model and then I just want to understand a bit.
The offset or the help from purchase transportation that we're supposed to get in intermodal I thought it was more of a <unk>.
Third quarter that now it sounds like it's more of a fourth quarter event.
Why maybe maybe I'm not getting that right but.
If that's right why a bit of a delay and then ultimately do we see the full benefit by Q4 or is there incremental benefit into the first half of 'twenty four from rail PT.
Sure. So no change in how it works it is a quarterly reset on a portion of the business.
So by the by the time Q4 starts we will.
A run rate basis that will be fully implemented I think the biggest.
Changed from the last time, we talked is prices a little bit worse than we had initially anticipated. So we do have a full quarters worth of that hitting now which is not fully offset yet by the rail cost.
Release, and I think it's price realization without the improved volumes that we were anticipating in June . So we're just trying to be cognizant of that we will see some further adjustments near the end of Q3 as well as in the latter portion of Q4, which would carry.
Over to your point in Q.
Into Q1 of 2024, so we are not fully baked on PT release, but we do feel as though we are fully realizing price at this point in time.
And to your question on intermodal so within that segment, obviously is intermodal and dedicated dedicated is around $275 million annual revenue business for the rest obviously would be would be intermodal.
And then from a revenue per load.
Basis, the decline in Q2 was about 17% year over year that does include a couple of hundred basis points impact.
The lower price of fuel.
Okay very helpful. And then can you just share within the guidance what youre, assuming for the logistics margins in the back half.
Sure. So you saw logistics margins improve around 60 basis points from Q1 into Q2, we do expect that will continue.
Throughout the course of the year.
And is that cost driven or more sort of hopefully market getting better.
It's a little bit of both I mean, some of it some of it is also a mix we are bringing on.
Some higher margin new customers as well.
Some significant freight under management wins that we've been able to capture that have a high operating margin contribution.
Also really as Brian had mentioned billing warehouses that we've been bringing online so that will help from a overall warehousing cost and really bring up the margins in that consolidation of fulfillment portion of the business.
Okay, and just last one real quick if again, if you answered this already to say you answered and I'll read the transcript did you give any comments about.
Peak and what your customers are saying and inventory destocking and when that flips to restocking or anything any color sure happy to hit on it again for sure I think we are seeing some tightness, we're seeing spot market rates really kind of bottomed out here and as we talk to our customers and it varies by segment.
There are further along in their destocking than others, but that is certainly the conversation and I think there is a focus on the intermodal service product is going to be maintained at where it is and we're going to see really the truckload capacity start to trip in growth Capex really be limited that intermodal is a great option.
And a lot of discussion around conversion back. So we are seeing some tightness already.
It's early stages. So we certainly don't want to call. It a trend, but we are seeing some tightness in some of our larger port areas like Southern California, and so we're hoping at that point to a sign of peak season, we arent anticipating in our guidance a robust peak.
At the high end it would have to be somewhat muted peak would likely get us to that high end.
That would be kind of framing the guidance at that occur.
Thank you.
Thank you. Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from Thomas Wildwood.
Of UBS. Please proceed with your question.
Okay.
Yes, great. Thank you.
Okay.
When you think about the <unk> versus <unk> and I were just talking about kind of peak and you're expecting some peak.
Is the increase in earnings I think it's like tax rate lower and then operating income sequentially. You think is up for both intermodal and for logistics. When we think about <unk> versus <unk>. How are you thinking about the two segments kind of <unk> versus <unk>.
Yes. The answer is yes to both so on the logistics side, we'll benefit from some of the newer business coming on line as well as the.
Incremental flow through profit as we as we load up more of our warehousing space that becomes more or.
Towards the higher end of the capacity that obviously that contribution margin is pretty high. So that is that is going to drive logistics profitability towards the end of the year and then also we do expect an improvement sequentially.
And operating profit at Ats.
Largely driven by.
By the rail cost relief, we have it for a full quarter in Q4 as.
As well as if we're achieving the upper end of our guidance that would be it would be partially the result of more volume which has a benefit.
As we are able to get more efficiency out of our assets, but also surcharges in Q4.
Yes.
So how are you and I apologize if I missed this at the beginning or but.
How are you thinking about volume progression you said.
I think July is showing some improvement.
The I guess the normal sequential is down a little bit and you set up to in July I believe.
Is that right.
Yes up to up to four sequentially for the month of June .
And whats the normal sequential.
Flat.
Wouldn't anticipate.
Pick up at this point flat to down if you come off of.
Month and quarter ending June kind of in front of the fourth of July holiday and then typical a typical seasonality would point to August gets a little better than September .
You would be in a peak and that would that would really flow through October .
So that was a solid typical seasonality.
Right. Okay. I know, it's hard to you have had some questions around the volume improvement I know, it's hard to kind of parse it out but.
How do you think about what's driving this and whether you think it might continue I mean, obviously its constructed to see a little bit of.
Better than normal seasonality in July do you think that's just that's primarily inventory reduction is getting over or do you think.
You think there are other factors that could could improve a bit further.
Or do you maybe you think the shape of the kind of intermodal peak in imports is a little different that maybe some of the imports are coming a little earlier that it's tough to decipher, but we think is driving that and whether that sequential improvement continues or not.
Yes, the discussions we're having with our customers I think inventories are coming back into line and that there is going to be a need to get back to more normalized shipping level I think at the same time, you're starting to see a realisation for many of our customers that the low spot market rates that have been out there for quite some time are going to come under pressure.
Sure.
We're seeing that already in southern California, as pricing has really solidified have gone up somewhat in the spot market, you're seeing that in the southeast ports as well.
And so I think there is a focus on if I can make sure that I'm de risking my supply chain that locking in capacity rail service is very strong.
Automotive was a great option right now I think at the same point the spread between intermodal and truck is growing and really in that 20% to 25% range now I would have told you.
Not too long ago that that was in the low to mid teens and so I think that spreads come in further apart and that service product as well as what that need for capacity in the reliance on spot market really coming to an end I think likely we'll drive a stronger demand environment looking ahead.
So that would be kind of the data points that we're watching right now are looking positive. It's a little early to say that that's exactly what's going to happen, but we're feeling as though given the data on our internal numbers as well as these external factors at the positive framework.
Yes.
Oh.
We feel like we performed well during bid season and once there is a resumption in.
Customers.
Awarded.
Tendering based on the awards that we're ready to.
A substantially there in volume.
No.
Got it.
Just so I understand that.
Comment on spread is that are you looking at spot rates are you seeing intermodal contract versus truckload contract.
Okay.
Contract versus contract Okay, great. Thank you for the time, but I think you are seeing.
Solidified spot market with several market increasing.
The week.
As an example in southern California, which is obviously, a very large and important.
<unk> of our network and I think.
If we see continued stability at the West Coast ports I think your I know all of our customers want to ship through the West Coast Port Vegas, one of these stability and so I think that's another positive catalyst that may be out there and bid compliance. Let me just mentioned the tender into the volume that they bid we've seen bid compliance go up to 80% so far in the end of Q2.
<unk> start here in Q3, and we think thats another good indicator.
Great. That's very helpful. Thank you.
Thank you.
Thank you. Our next question is from Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, Thanks for taking the question so.
So maybe just to follow up on the the spreads can you go through those by each of the major regions and maybe how they've trended and once everything gets.
Implemented how do you expect them to move forward from here. If you expect any major differences at this point.
Sure. So during during Q2, the spread in transcon contractor contract, which was about 20% that's moved up to 26.
As of today.
In the east it was about 10% in Q2, and that's we got to <unk> and then.
Local west was <unk> 15 in the quarter, that's moved up to 'twenty. Two so I would say transcon is getting back into a more of a normal range typically we would've seen yet north of 30%. So we're approaching that.
And I think we'll get there.
Are you experiencing from now as you know service levels are at multiyear highs and so we're able to take our transit times down and offer more value that way as well.
Okay, and then just on the maybe.
Maybe competitive front.
With with other rails.
Many boxes are you storing right now and do you feel like the industry is going to be pretty disciplined.
On that front obviously.
There's a long lag in supply chain in terms of ordering boxes.
They all kind of showed up at the there are a lot of them showed up at the wrong time.
So how do you manage through that where you store your boxes and do you see any.
<unk> <unk> of incremental competition on the fringe on a rail to rail basis.
Yes, so we have.
Mid high teen percentage that is currently stacked.
Given some of the tightness that we're seeing we're holding off or slowing down the level of staffing that we were doing.
There's obviously a cost related to Unstack restocking as you enter Q1, if we see normal seasonality play out.
I would anticipate most players are going to try to focus on improved utilization at the current size of their fleet, which is what we're going to focus on.
I believe we have a lot of runway there we are getting to very improved utilization levels last week was actually the best.
Turn times we've had.
This year, thus far and we anticipate that going lower throughout the quarter, which is obviously a very positive thing for our cost structure.
I would tell you our view is let's remain focused on supporting our clients with what is on stack.
And if we need to obviously will accept that but it would need to make economic sense.
Understood and then just one other quick follow up could.
Can you just comment on the West Coast ports, obviously the contracts for application there is disruption in Canada, So all right.
Moving back for this peak season have already moved back.
Where do you feel is kind of to be expected from from that front.
I think this peak season likely the.
Ordering patterns that have already been set.
Although there may be some opportunities to deviate depending on the lead times that some of our customers have.
I think there is going to be a lag in import activity. So if there is that stability that the deviation could be much stronger with the customers that I have been interacting with as of late as I mentioned, there is a desire to get back to pushing the majority of their freight through.
The West Coast ports, just based on speed and cost effectiveness and so I think that stability is maintained.
Leading in Q2 next year, there is an even bigger opportunity.
Okay I appreciate it thanks for your time.
Thank you.
I would now like to turn the conference back to Phil Yeager for closing remarks.
Great well. Thank you so much for joining our call. This afternoon, and as always Brian Jeff and I are available for any questions.
This concludes today's conference call. Thank you for participating you may now disconnect.
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