Hub Group Calls For "Short-Lived" Downturn

On its conference call with analysts, investors and the media, Hub Group, Inc. HUBG signaled that the current soft demand freight environment will likely be "short-lived."

After the close of markets on July 30, 2019, HUBG reported earnings per share (EPS) of $0.87, well ahead of the analysts' expectations of $0.74 and last year's $0.51.

Takeaways from the call

On the call, management provided a good deal of color on current intermodal and truck market fundamentals. They said that while intermodal volumes were off significantly year-over-year in the second quarter, they expect volume declines will begin to flatten out and that the 2019 peak shipping season will be similar to that of 2017. When asked why they have confidence in this call they cited recent conversations with their rail partners and customers as well as recent "tightening" in freight demand at the Los Angeles and Long Beach ports.

Along those lines, HUBG's transcontinental intermodal movements were only off 2 percent in the second quarter compared to local east volumes which were down 9 percent, local west which was down 7 percent and other (which includes Mexico) which was down 11 percent. Additionally, the year-over-year intermodal declines (-2 percent in April, -8 percent in May, -11 percent in June and -4 percent in July) may be reaching an inflection point.

Management said that the shorter length of haul markets (local east and west) were seeing increased competition from truckload (TL) as truck pricing remains depressed. They said that TL pricing is comparable to intermodal pricing levels in the shorter haul markets. They are pointing to the 2019 peak season, which they expect to resemble the 2017 peak, as a point at which truck capacity could tighten. They believe that as the TL capacity overhang is reduced, TL pricing will move higher and the typical gap between TL and intermodal pricing (intermodal rates are typically priced at a meaningful discount to TL rates) will return, thus improving intermodal volumes.

Looking forward, they expect to see sequential intermodal volume improvement in the back-half of 2019, with 2020 volumes likely flat to slightly down year-over-year. Currently, HUBG's intermodal pricing has improved in the low to mid-single digit range with 80 percent of its 2019 bid season (contractual negotiations) complete.

HUBG executives believe that the company can continue to see yield improvement as their strategy takes hold. They said the company is building customer trust as its service improves. The service improvements are being driven by improved fluidity at its railroad partners. Management said that its eastern rail partner, Norfolk Southern NSC, is seeing "record [service] levels" and noted that its main western rail partner, Union Pacific UNP, has seen service improvements of 1,400 basis points. Further, they believe that their operating margin goal of 5 percent is attainable as internal technology improvements will help them continue to improve service and drive headcount costs lower over time. 

Financial results

HUBG reported consolidated revenue of $921 million, a 3 percent year-over-year increase. Operating income improved 60 percent to $41 million as the company's operating margin increased 160 basis points compared to the year ago period at 4.4 percent. Yield improvement and an "intense focus" on cost management were cited as the reasons for the improved results.

HUBG revenue by division

HUBG's largest division, intermodal, reported a 1 percent increase in revenue to $543 million in the second quarter. Improved yield and efficiency were largely offset by a 7 percent decline in intermodal volumes. The volume declines stemmed from a weaker demand environment and increased TL and intermodal competition. Lane cancellations and weather disruptions accounted for a 2 percent volume decline.

Truck brokerage revenue declined 7 percent year-over-year to $107.1 million. The division saw an 18 percent increase in loads moved, but that was more than offset by fuel headwinds, softer pricing and freight mix, which were a 25 percent drag in the period. The less-than-truckload (LTL) brokerage business, CaseStack, was noted as the driver of unfavorable revenue mix.

Logistics revenue increased 15 percent to $194 million given the CaseStack acquisition and HUBG's dedicated revenue grew 5 percent to $78 million year-over-year due to pricing improvements and penetration in new accounts. Management noted that the outlook for the dedicated division was strong as there is potentially $100 million in new business in the pipeline. Additionally, HUBG has been adding new dedicated contracts which are achieving rate increases in the mid-single digit range.

Guidance

The bottom-end of management's 2019 guidance range was raised $0.05 to $3.30 with the top-end of the range left untouched at $3.40. Revenue is forecasted to grow in the mid-single digit range for the full year.

The company's full year capital expenditure range was lowered to $100 million to $110 million from $115 million to $125 million. Management said that the reduction in spending is due to a reduction in planned tractor and trailer spending in 2019. In 2020, capital expenditures will likely be in the $140 to $150 million range as the company will see an increase in equipment replacement and as it completes a second office building.

HUBG previously announced a $55 million budget for a new building at its headquarters in Oak Brook, Illinois, $25 million of which was to be spent in 2019. The second office building will bring total headcount capacity to 1,400 employees at this campus. HUBG reported 5,400 employees, including 3,100 drivers, at the end of 2018.

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