Kevin Beth; Chief Financial Officer, Executive Vice President, Chief Accounting Officer, Treasurer; Hub Group Inc
Welcome to the Hub Group third quarter 2024, earnings conference call. Phil Yeager Hub's President, Chief Executive Officer and Vice Chairman and Kevin Beth, Chief Financial Officer are joining the call. (Operator Instructions) Statements made on this call and in other reference documents on our website that are not historical facts are forward-looking statements.
These forward-looking statements are not guarantees of future performance and involve risk uncertainties and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by this discussion and therefore should be viewed with caution.
Further information on the risks that may affect help groups business is included in the following with the SEC which are on our website. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release and quarterly earnings presentation.
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 joining Hub Group's third quarter earnings call. Joining me today is Kevin Beth Hub Group's Chief Financial Officer.
I wanted to start by welcoming the EASO team to the Hub Group family and thanking all of our team members across North America for their hard work and commitment to supporting our customers and one another. The broader North American transportation market is showing signs of recovery with a pulled forward peak season capacity exits a resilient consumer and inventory replenishment.
Outside factors such as the recent port strike and weather events did not create significant or prolonged tightness. However, we are anticipating a more constructive framework for the market due to continued strength and demand along with small carrier capacity exits and minimal growth in capital expenditures in the industry.
These factors will over time lead to an improved pricing and demand environment. Although the timing and velocity of that recovery remains unclear. We're pleased with how we have operated through challenging market conditions, delivering more resilient results drop to trough and generating strong cash flow which we are utilizing to invest in our core, continue to bring value to our customers and shareholders via strategic transactions and return capital to shareholders through dividends and share repurchases.
We've executed on all three of these capital allocation initiatives this quarter and I will highlight two particular items that stand out to me as examples.
First is our new joint venture with EASO. EASO is the largest intermodal marketing company in Mexico and is growing significantly given their great reputation and service as well as near shoring trends. Just like us. They are a family business with a great track record of long-term success. We have similar cultures and are focused on building the premier service product for intra and cross border Mexico logistics utilizing our combined density scalera fleets network of facilities, financial resources and customer relationships.
Second is that we are executing on our previously announced capital allocation plan returning $91 million to shareholders year-to-date through share repurchases and dividends while maintaining our strong capital structure and a robust acquisition pipeline.
We are in a great position as an organization to drive significant growth in revenue and earnings ahead as we execute on our strategy and are supported by a market recovery.
Prior to reviewing our segment results, I wanted to discuss our adjustments in the quarter. Kevin will give further detail regarding the transaction and restructuring related fees, but I will highlight the network alignment initiative.
In the third quarter, we commenced a consolidation and integration of our final mile cross dock consolidation and fulfillment networks. The focus of this strategy is to create a single high service and efficient Hub Group network of facilities that can better service our customers and position us to compete and win in the market.
This action comprised of integrating 2.6 million square feet of multipurpose space, transferring product and hiring labor while completing systems implementations. These network alignment costs which are $8.4 million in the third quarter will conclude in the fourth quarter and are declining week to week.
We estimate these expenses will be $3.5 million to $4.5 million in the fourth quarter for the transition, which will position us with a fully integrated and highly utilized Hub Group network in 2025.
Despite the unusual costs, we feel this is the right strategy for our logistics business in order to better serve our clients, improve client retention rates and position us for success while expanding operating margins in our logistics segment by an estimated 100 basis points based on this year's full year guided logistics revenue.
I will now discuss our segment operational results for the quarter. ITS earnings increased year-over-year despite a decline in revenue due to improved intermodal and dedicated volumes as well as continued cost management efforts.
Intermodal volumes increased 12% year-over-year in the quarter, as we continue to convert volume from over the road due to our excellent service product and a pulled forward West Coast peak. Revenue per load was down 16% year-over-year which was impacted by mixed fuel and price on a year-over-year basis.
We continued our momentum in the local East with volumes up 39%. Local West increased 6% as we onboarded peak volumes later in the quarter and Transcon was up 1%. Along with these strong results, prior to [EASO] volume, we continued our growth in Mexico with 58% year-over -year volume growth.
We're excited about the momentum we are carrying into bid season as we are utilizing our strong rail service, enhanced driver productivity, increasing percentage of insource drayage improved network balance and better container utilization to drive incremental conversion from over the road.
Dedicated performed well in the quarter, posting revenue growth on a year-over-year basis as we improved our operations and increased revenue per tractor per day by 12%. We continue to enhance our earnings potential through improved asset and driver utilization and are pursuing growth with new and existing customers as we deliver excellent service.
In logistics revenue and adjusted earnings increase sequentially due to new business onboardings and strong cost management. Within the logistics segment. Managed transportation continues to perform well supporting our customers with continuous improvements and bringing on new onboardings in the fourth quarter.
In final mile, we had lower volumes in our legacy business due to a large customer consolidating facilities as well as temporarily inflated costs, as we completed the integration of our support teams and facilities. We have since reorganized the team reduced costs and completed several high value onboardings which is positioning us well for the end of year surge in demand. In brokerage, we delivered flat volumes on a year-over-year basis, but continued to face headwinds and revenue per load due to a higher mix of LTL which grew 21% in the quarter and lower spot market activity.
We continued our yield management efforts and also supported our customers in recovering from the hurricanes impacting the Southeast while maintaining our focus on productivity. In CFS, we are focused on completing our network transition, improving our service levels and minimizing costs.
We have actions in place to address all these items and we drove a 15% point improvement in utilization quarter-to-quarter and are enhancing our productivity, which we believe will lead to longer term growth and improved client retention rates.
As I previously mentioned, we believe we are in a great position as an organization with a solid financial profile, strong cost controls, committed and passionate team best in class service scale across our services and integrated portfolio of solutions. These factors are leading to wins across our service lines, and we are carrying that momentum into the close of the year and into 2025.
With that, I will hand it over to Kevin to discuss our financial performance.
Kevin Beth
Thank you, Phil. Before I start my prepared remarks, I'd like to discuss the $10.4 million of adjustments in the quarter. The network alignment initiative expenses associated with the EASO transaction and $1.1 million of other expenses.
These adjustments are cash items and impacted both segments with $1.5 million of expenses in ITS and $8.9 million in the logistics segment. As the majority of the network alignment efforts including warehouse transfer and incremental labor costs impacted the final mile and consolidation and fulfillment lines of business as well as our crop dock services.
We anticipate that the network alignment initiative will improve service to our customers and operational efficiency and allow us to better compete for new business. Transaction related expenses of $900,000 in the quarter included due diligence, legal and insurance fees for the EASO joint venture which closed on October 23.
Banker fees and final professional fees of approximately $2 million will be reported in Q4 to align with the deal closure date. In addition, we expect $3.5 million to $4.5 million of network alignment expenses to be included in our fourth quarter results.
As I walk through our financial results, my comments will focus on our go forward operating performance on a non-GAAP or adjusted basis. As a reminder, reconciliations between GAAP and non-GAAP financial measures are included in our earnings release or investor presentation issued prior to this call.
For the third quarter, [Hub] reported revenue of $987 million. Revenue declined 3.7% compared to last year and was comparable to the second quarter revenue of $986 million. ITS revenue was $560 million which is down 5.9% from prior year. As intermodal volume growth up 12% and stronger dedicated revenue was not enough to offset lower intermodal revenue per load at the soil and fuel revenue in the quarter. Lower fuel revenue of approximately $15 million contributed to the decrease.
Logistics revenue was $461 million compared to $460 million in the prior year. As the contribution of the final mile business offset lower revenue in our brokerage business. Moving down the P&L adjusted purchase, transportation and warehousing costs were $732 million, a decrease of $40.5 million from the prior year due to lower accessorial costs, lower third party expenses and lower rail costs.
This results in a 120 basis points improvement on a percent of revenue basis when compared to Q3 of 2023. Adjusted salaries and benefits were $4.1 million higher than the prior year due to the final mile acquisition as we continue to manage overall head count. Total legacy head count which excludes acquisition employees, drivers and warehouse employees declined by 5%. Depreciation and amortization decreased $3.7 million on both an adjusted and GAAP basis.
Results include a change to our useful life estimates for transportation mequipment as our containers and trailers were lasting well beyond the previous assumption. We also discovered that we were more conservative than industry practice.
Insurance and claims decreased by $1.5 million due to lower claim costs in the quarter. Adjusted G&A increased by $3.3 million driven by operating costs associated with the final mile acquisition, which were partially offset by cost management efforts.
Gain on sale was $400,000 in the quarter. As a result, our adjusted operating income margin was 4.3% for the quarter, an increase of 10 basis points over the prior year and a 30 basis points sequential improvement over the second quarter.
ITS adjusted operating margin was 2.7%, a 40 basis points improvement over prior year and a 30 basis points improvement over Q2s OI percentage of 2.4%, as we benefited from strong intermodal volume growth, dedicated revenue growth, lower depreciation and amortization expenses and cost management efforts in the quarter.
Logistics adjusted operating margin is 6%, a 40 basis points improvement from the Q2 OI percentage of 5.6% due to strong results from final mile and consolidation and fulfillment services offsetting a lower brokerage margin.
Our brokerage business continues to contribute positive operating income in the quarter and year-to-date despite being challenged by the overcapacity in the market. Interest expense and other income totaled $1.4 million as interest income was lower in the quarter.
Our tax rate was 23.2% slightly higher than our Q2 rate of 22.8% as anticipated. For the full year, we expect an average tax rate of approximately 23% down from the previous assumption as we have managed tax related expenses better than originally anticipated. Overall. Hub earned adjusted EPS of $0.52 per diluted share for the third quarter.
Generating cash is an important goal of management. We are pleased with our adjusted cash ETS of $0.62 in the third quarter. Cash flows from operations for the first nine months of 2024, were $194 million.
Pre-cash flow of $31 million in the third quarter was impacted by our annual insurance renewal fees, tax payments and expenses related to the network alignment efforts and the EASO transaction. We also purchased $35 million of stock in the quarter.
In total, we returned $43 million to our shareholders in the third quarter with $8 million in dividends and the $35 million of stock repurchases, and we ended the quarter with cash on hand of $186 million. Third quarter, capital expenditures totaled $12 million and was down 13% for the second quarter.
CapEx spend included replacement for tractors that have reached their end of life, warehouse equipment purchases and technology projects. At the end of the third quarter, our year-to-date CapEx was $43.2 million.
We expect full year end spend to be between $45 million and $65 million. With Q4 spend closer to the lower Q2 and Q3 levels. Including expenditures related to the EASO JV, which will be consolidated in our Q4 financial statements.
Net debt was $102 million, and our leverage was 0.3 times below our stated net debt to EBITDA range of 0.75 times to 1.25 times.
The EASO transaction is expected to slightly increase our leverage in Q4. We continue to expect adjusted EBITDA less CapEx for the full year 2024, to be greater than the $257 million generated in 2023. Demonstrating Hub's cash resiliency as we expect cash earnings growth in this challenging freight environment.
Additionally, we remain confident in our ability to execute on our capital allocation plan which includes paying quarterly dividends, stock repurchases and strategic acquisitions. Year-to-date, we've returned $91 million to shareholders through stock repurchases of $68 million and dividend payments of $23 million.
Hub Group continues to perform well with intermodal volume growth of 12% in the third quarter. Well above [ITS] reported volumes as customers pull forward demand in preparation for the east coast port strike. We've also seen some tightening of capacity. We remain optimistic that these factors will lead to improved rates and demand in the future.
We expect full year adjusted EPS in the range of $1.85 to $1.95 a diluted share and revenue to be approximately $4 billion. In our ITS segment for the fourth quarter, we expect the intermodal volume growth in the low double digits.
For dedicated, we now expect revenue for the full year to be comparable to last year. For the total logistics segment, we expect revenue to grow low single digits in the fourth quarter as brokerage revenue continues to be negatively impacted by price.
When excluding brokerage, we continue to expect low-to-mid double digit revenue growth. In brokerage, we expect volume up low single digits in the fourth quarter and for pricing to remain challenged given overcapacity in the market. Further, the expected network alignment initiative tailwind is expected to begin in earnest in 2025.
As mentioned at the beginning of the year, we are facing some headwinds versus last year including higher interest costs, the normalization of incentive compensation, our annual tax rate being closer to 23% and minimal gain on sale.
As we exit the third quarter, we are pleased with our performance to date with volume growth in intermodal, strong cost savings initiatives, disciplined financial management, free cash flow generation and a strong balance sheet.
Over the past several years, we have made important strategic changes to our business including our focus on yield management asset utilization and operating expense efficiency which has significantly improved profitability and returns.
We've also completed several acquisitions to build out our offering and drive more stability in our earnings. While we compete in a cyclical marketplace, these actions have accelerated trough to trough results with operating margin growing from 2% in 2017, compared with a 4.3% reported this quarter. Along with an improvement in free cash flow to over $150 million year-to-date versus a $60 million in 2017.
These strategic changes have positioned Hub Group for success in both the short- and long-term time horizons as well as in soft and strong demand environments.
With that. I'll turn it over to the operator to open the line to any questions.
Operator
(Operator Instructions) Bruce Chan, Stifel.
Bruce Chan
Yeah, thanks and good afternoon, everyone. So Kevin, maybe you could just walk us through the pricing backdrop in intermodal during the quarter. I know that you talked about fuel and assure being under some pressure.
But any color on the underlying pricing backdrop would be helpful. Where you're seeing pockets of pressure is that, more continued drive from spot or are you seeing any competitive pressure from other IMC providers?
Phillip Yeager
Sure. Yeah, this is Phil. We're in the early part of bid season and I think, demand has been very strong through the third quarter and into the fourth quarter. It's great to see a peak season really take hold as we kick off bids for 2025. I think it's great to come in with the peak season and the strong service that we have, it's still a competitive environment, but we're not seeing anything that's irrational. It's been, obviously competitive because everybody wants to get their assets moving. But I think everybody wants to gear price upwards.
So we're not anticipating as we go into bid season, the prices will be down. I think it's unknown how much they'll be up. We're very focused on retaining our network friendly business and then being prescriptive with our customers around areas where they can help us in enhancing asset productivity, enhancing driver productivity. We are going to carry forward through Q1 and Q2, some of the pricing that we have obviously earlier from this year.
So we'll reprice about 70% of our business in the first and second quarter, but we're feeling very good about our positioning opportunities to convert volume. And then obviously, we have the EASO tail wind with our cross border and intra Mexico volume. So overall feeling confident in our ability to have another successful bid season.
Bruce Chan
Okay, great, super helpful. And then just a quick follow up on the final mile side, you talked about some integration initiatives. Any thoughts there on -- what the timeline for those might be and what sorts of adjustments you'll be making?
Phillip Yeager
Yes. We've really executed on those. We feel as though we're in a really good position. We were, -- we lost a little bit of business from a customer consolidating some facilities into larger facilities. So they were smaller facilities we lost. But in tandem with that, we're actually going through a rationalization of the organization and then bringing on some highly marginal creative business.
So those startups are now in line. We've reorganized the business and feel as though we're in a really good position to capture upside as we go through the fourth quarter here. We're anticipating from all of our customers. A nice surge in seasonal demand and we're in a great position to service that and we have new onboardings that will continue to take hold as we enter the first quarter. So excited about where the final mile business is at and the trajectory ahead.
Kevin Beth
Excellent. Thank you.
Operator
Daniel Imbro, Stephens.
Hey afternoon guys, this is Brady on for Daniel. I wanted to ask about the four Q volume guidance and ITS, it seems to imply full year volume growth below your previous guide. Could you just talk a little bit about what's driving the change there?
Kevin Beth
Yeah, hello. This is Kevin. Yes, you're correct. Fourth quarter volumes that we're guiding to is low double digits with price down mid to single digits. We did believe that it looked like there was some pull forward in third quarter and we're still hearing from our customers and October was strong, we had 12% increase of volume in October.
So we're feeling that that's really good. But with the rest of the quarter, it, we're a little, we think the pull forward has eaten into some of those original expectations of the volume.
Phillip Yeager
Yeah. And I think that original guide, I think, we have seen a little bit of pull forward, a little bit of East Coast diversion. I think some upside might be in there potentially. If we continue to see things trend in the right direction through November, we do think peak is going to continue through at least the first few weeks. We don't know exactly how far beyond thanksgiving it could potentially go. I think the other interesting part of this is international intermodal demand has been very strong.
We've seen some service disruptions there that could push more into transloading and into domestic and potentially extend the overall peak. So it's a variable out there. I think I also add some incremental to what we just gave you on the low double digits. I think that could push it into the teens.
But we didn't include that in the guidance. So all in all, though, we're feeling good about our volume performance. I think, you know, continuing to perform in the local East and convert volume there. But we have opportunities to continue to grow.
Okay, great. Thanks for the color there. Maybe just a quick follow up. I think on the last call you mentioned, you expected 4Q ITS margins to step up from 3Q levels. Is that still the case, given just the step up and adjusted margins here in 3Q, just any color around expectations that would be helpful? Thanks.
Kevin Beth
Yeah, I -- you're correct that was the original thought again, that stuff up and pull forward. Really help that stuff up here in third quarter. And I think we're going to fall back a little bit. When we look at fourth quarter, again, the fourth quarter, we're going back to sort of some normal seasonality.
And when you see the second half of fourth quarter, you have a lot of fixed costs that, that hurt the, the overall margin for the quarter. So, we actually saw some of that savings a little quicker and they came forward here in third quarter and that helped this quarter. So we will think it's coming down a little bit looking forward.
Phillip Yeager
Yes, I think if you look at the guide, it's a slight sequential decline Q3, Q4. I think ITS with the anticipated slowdown in volumes near Thanksgiving or a little bit after is the driver of the decline. We're actually thinking logistics will have some upside quarter-to-quarter with final mile having some seasonal uplift as well as the network alignment initiative that we've undertaken starting to show some progress. Although we'll really see that in full in 2025.
Okay, great. Thanks for all the color there, guys. I'll pass along.
Kevin Beth
Thank you.
Operator
(Operator Instructions) Elliot Alper, Cowen.
Elliot Alper
Great. Thank you. This is Elliott on for Jason. You talk about the maybe the earnings contribution if you're a new joint venture, maybe how that fits into the guide that seems small, but just want to make sure. And then maybe if you could talk about some of the over the medium longer term, some of the crossline opportunities that, that joint venture will give you in Mexico?
Phillip Yeager
Yeah, sure. This is the, so the transaction is going to be immediately accretive to earnings, although slightly, it's not a huge transaction but one that we think is very strategic, as it ties just perfectly in with our intermodal business. To me the biggest opportunity is cross selling, and we've timed this really well where bid season is really kicking off right now.
So we're able to have very strategic discussions with our customers around opportunities for growth. I think the other areas, energy capture and opportunities on the [dra] side, on both sides of the border, having that DRA fleet is a strategic value. It's something we haven't had in the past in Mexico and they are experts within that area.
So if you take the local knowledge that the EASO team has and the great brand and reputation and I think the resources and capital that we can bring to help scale the business and really take on that incremental demand as the business is already growing 30% year-over-year on its own.
And then along with the near shoring trends and strong macro, we just think, there's a lot of opportunity for growth and synergy capture. So we're excited about all the opportunities we have ahead.
Kevin Beth
And just for a reminder, this is Kevin, so that transaction closed in October 23. So we don't, -- we're seeing a little less than a full quarter. And so we really expect to see that decretion coming in '25.
Elliot Alper
Okay, great. Thank you. And then when the joint venture was announced, you guys talked about, the pivotal catalyst that the US MCA had with trade volumes, I guess as you think about the potential regulatory environment evolving over the next couple of years, I guess, how are you seeing some of your customers act? Are they, sitting on the sidelines right now? And if you could see the floodgates open up, if there there's some clarity on that or any other commentary on that front would be helpful? Thanks.
Phillip Yeager
Sure. Yeah. Again, customer conversations, everybody is still very committed to growing in that market. I think if you just look at the trends, I mean, it continues to be the fastest growing trade partner of the United States. I think it's been a beneficial agreement for both sides, but we do anticipate further investment. I think all the customer conversations that we've had that the trends are for more near shoring the labor cost differential is significant and the [ease] of doing business is improving.
So, our customers and their vendors are continuing to invest there, which creates more opportunity for us. And I would tell you just the dialogue that we've been having with our customers thus far has been very encouraging and, we're seeing a lot of opportunities for growth and it's once again, very good timing with this season.
Elliot Alper
Thank you guys.
Operator
I would now like to turn the conference back to Phil Yeager for closing remarks.
Phillip Yeager
Great. Well, thank you very much for your time this evening. Obviously, if there's any follow up questions, feel free to reach out to Kevin or I, and thank you very much. Hope you have a great evening.
Operator
Ladies and gentlemen, this concludes today's conference call with Hub Group. Thank you for joining. You may now disconnect.