Hello, and welcome to the Hub Group Fourth Quarter 2022 Earnings Conference Call. Phil Yeager, Hub's President and CEO; Brian Alexander, Hub's Chief Operating Officer; and Geoff DeMartino, Hub's CFO, are joining me on the call. Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Phil Yeager. You may now begin.

Good afternoon, and thank you for participating in Hub Group's fourth quarter earnings call. With me today are Brian Alexander, Hub Group's Chief Operating Officer; and Geoff DeMartino, our Chief Financial Officer. I'm honored and privileged to be able to serve as Hub Group's third Chief Executive in our 52-year history. I wanted to thank our Board of Directors for their support, but in particular, our Executive Chairman, Dave Yeager, who was the company's 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 him to deliver on our long-term goals 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. We were able 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 eclipsing $3 billion in intermodal revenue. We continue 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, the freight economy has changed from this time last year. Inventories have elevated, and we have seen capacity loosened. However, we anticipate another year of 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 from improved and more consistent rail service products. That, along with our rapidly increasing intermodal service offerings, improved rail agreements, and lower outside drayage costs, will help our customers reduce costs while driving efficiency and sustainability in their supply chain. Our dedicated pipeline is strong, and we have improved our processes and leadership team, which we believe will help us deliver another year of profitable growth, driven by our high service levels and engineered solutions. We have also made our revenue streams more non-asset-based, which now represents 40% of our annual revenues. In brokerage, we are offering more diverse capacity alternatives that increase scale, and have enhanced our technology to drive improved purchasing, efficiency, and service levels, 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 TAGG Logistics. We are helping our customers save money through our continuous improvement, while providing a world-class customer experience that is able to bring the analytical, technological, and execution benefits of managed transportation to fruition for our clients. All 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 into the business through cycles, in order to ensure we can support our customers in a variety of environments through both capital investments and technology and capacity as well as acquisitions that help us deliver more value while maintaining our strong financial position and utilizing our buyback authorization to reward our shareholders. Our team is focused on delivering another excellent year in 2023. And with our aligned strategy as well as focused on execution and efficiency, we feel we are in a position to deliver another strong performance. With that, I will hand it over to Brian to discuss our service line performance.

Thank you, Phil. I also want to thank our entire team for delivering a record year as they support our vision for growth while also providing our customers a best-in-class service experience. I will now discuss our service line performance, starting with Intermodal. In the fourth quarter, ITS revenue increased 5%, driven by a 19% increase in Intermodal revenue per unit, as well as continued growth in dedicated trucking. With the lack of the traditional peak season, Intermodal volumes declined by 12% in the fourth quarter, with a 9% decline in the Local West, a 9% decline in Transcon, and a decline of 17% in the Local East. Gross margin as a percent of sales decreased 266 basis points year-over-year. We are actively offsetting this decline in margin with an increase in insourced drayage, up 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've 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 capabilities that TAGG has brought us, which have already enabled several large transportation and warehousing wins. Gross margin as a percent of sales increased 217 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 onboardings and have improved our Logistics field size in close ratio as we offer more integrated supply chain solutions. In addition, our Logistics offerings have continued to grow the volume that 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. And now I'll conclude with Brokerage. We are 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 in leading with competitive prices and capacity. This generated an 8% increase in year-over-year fourth quarter volume, and an increase in gross margin as a percent of sales was 61 basis points, but there was a revenue decline of 11% year-over-year. Our acquisition of Choptank helped drive discipline in our purchasing as well as cross-selling growth in our LTL 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 in our capacity types, including reefer, dry, LTL, and drop trailer. With that, I'll hand it over to Geoff 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. ITS grew 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 a gross margin of 16.7% of revenue for the year and 15.9% in Q4, with operating income margin of 8.9% for the full year. We continue to leverage our gross margin against operating expenses, which were equal to 7.8% of revenue for the year, down from 8.5% in 2021. Operating expense dollars in Q4 increased from last year due to incremental expenses from TAGG and fewer gains from the sale of equipment, offset by lower compensation expense. Our diluted earnings per share for the quarter was $2.42. 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 $7.00 and $8.00 per share. We expect revenue will range from $5.2 billion 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 14.5% to 15.0% for the year, driven by softer pricing and less surcharge and accessorial revenue, partially offset by lower purchase transportation costs. For the year, we expect costs and expenses of $420 million to $440 million, increasing from 2022 due to a full year of TAGG and less gain on sale. We will continue to invest in our business in 2023 with capital expenditures of $170 million to $190 million, targeted for containers, trackers, warehouse investments, and 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 in 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 at 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.

Our first question comes from Todd Fowler of KeyBanc. Please go ahead, Todd.

Hi, everybody. I'm assuming it's for Todd Fowler at KeyBanc. Thanks for taking the question. So maybe to start with the guidance, I certainly understand that this is a volatile environment, but a pretty wide range for 2023 that $7.00 to $8.00, wider than what you typically guide to. I guess maybe can you talk to what would put you at the high end of the range versus is the low end of the range and some of the 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 Geoff DeMartino. The range is wider than usual. I think it's appropriate given the macroeconomic conditions. We are certainly anticipating conditions will tighten in 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 performance. We're continuing to see that today. But I think what we're hearing from our customers is they're expecting inventory levels to be worked down throughout the year. So we're anticipating some increase in demand towards the end of the year, and that's what really would get us to the high end of the range. You've followed us for many years. We tend to be pretty conservative in our guide. The last couple of years, we've ended up beating by over 50%. I'm not sure we're going to do that quite as well this year, but we tend to be conservative on our overall guidance initially at the start of the year.

Yes and Todd, this is Phil. I just wanted to add in, we did want to be conservative on the economic outlook. I think it's a little early to tell exactly if that snapback in 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. Yes, 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 during 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. I 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 you're thinking about your kind of the environment and share right now? Thanks.

Yes, Todd, this is Phil. We monitor our market share very closely. Our strategy focuses on enhancing our margin per load day, which has steered us towards longer transit and haul business. This approach has contributed to some of the volume decline, particularly with longer-term customers in mind. Consequently, despite a drop in volumes, we believe we have gained share based on revenue, which is up 19%. We will continue to concentrate on maximizing margin per load day, as this yields the highest return on capital. In January, we saw an 8% year-over-year decline in volumes, but a 9% increase sequentially, so I feel optimistic about the momentum we have entering the year.

Okay, that's 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. Jon?

Thank you. Good afternoon. Phil, I also was going to ask about the quarter-to-date, that you just brought it up. The 9% sequential increase was that a function of December being substantially weaker than you anticipated, maybe kind of earlier, I 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 this in, are you seeing significant service improvements that give you some optimistic views that type of momentum can be continued?

Yes, Jon. I think that's 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 and a return to overall demand. We're actually seeing import volumes improve sequentially and seeing ordering patterns normalize. So a lot of good signs, and 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 as well. 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 the de-risking of their supply chain and their capacity as we look into the back half of the year. And a normalization of ordering patterns capacity will be tighter. And so by locking in more capacity now, they're 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 starting here.

I'll just add to that too, Jon. We're confident in that rail service being sustained throughout the year. So we've actually been tightening our transit and looking to promote more of that conversion from over the road to our intermodal volume.

That's great. And then Brian, just to have you on the pricing front, so it sounds like your demand outlook is a tale of two halves: a little bit weaker in the first half, hopefully some recovery in the second despite January being a pretty good start sequentially at least. On the pricing side, is it almost flipped off? 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 as we go through the year on competing with truck trying to get that model conversion? But on the other hand, having your shippers lock in capacity for it does get tighter?

Yes, Seth, this is Phil. I think it's a bit early to make a call on the bid season, but I can provide some insights. Clearly, the environment is different from where we were a year ago. However, we believe, as has been historically the case, that intermodal will significantly outperform truck. We are continuously demonstrating substantial savings for our customers compared to trucking, especially when considering fuel costs. Our primary focus will be on maximizing margin per load day. We have a considerable opportunity to better balance our network and reduce empty repositioning costs, which will enhance density and efficiency within our driver workforce. We are committed to maintaining a sustainable service product, providing savings, and mitigating risks in the supply chain, all of which I believe is paving the way for a successful bid season and encouraging a shift from over-the-road to intermodal transportation.

Yes, I'll also add to that, Jon. I mentioned in some of the prepared remarks too, but we're putting in those cost disciplines and really bending that cost curve down in every possible way. And I mentioned a few of them, but that insourced dray is a big piece for us. We hit 65% in Q4, which was a substantial improvement. But have I set 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 gets much better from a cost perspective as well.

All right, that's super helpful. Thanks, Brian. Thanks, Phil.

Thank you.

Thank you. Our next question comes from the line of Jason Seidl of Cowen and 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 IMCs. I mean one, would you agree with that statement and two, why would you think it would occur going forward now? And I have a follow-up about sort of East Coast, West Coast. So long chance of 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 an asset-based carrier with better integration on technology and overall just a better service product compared to non-asset-based players. So I think that's going to continue. I think the last couple of years have shown a lot of the weaknesses in the non-asset-based IMC model, particularly around driver availability and capacity availability. So yes, I would agree with that assumption.

Makes a lot of sense. And thinking about sort of the shift that went on last year as the West Coast ports had a problem, saw a lot of container traffic flow to the East. There's going to be a certain percentage of that, probably a large percentage flow back to the West. Are you guys agnostic to that or would you rather have it on the East Coast or on the West Coast?

Yes, this is Phil. We typically see higher margin per load day off the West Coast because it is typically a Transcon move. We also see higher transload volumes off the West Coast, and so typically for us, West Coast business is going to be better and higher profitability. I agree with you. I think we typically see our shippers switch their ordering patterns from coast-to-coast on kind of an annual basis. And so we believe that with some of the labor issues getting put to rest, that we're seeing a strong year off the West Coast, and that will create a strong peak season, we hope, and we'll see volumes continue to get back to growth on the West Coast. So that's very beneficial to us.

We'll have our fingers crossed too. Appreciate the time, as always, guys.

Thank you.

Thank you. Our next question comes from the line of Brian Ossenbeck of JPMorgan. Please go ahead, Brian.

Hey good evening, thanks for the time. So Geoff, you mentioned the big disconnect with the valuation of the stock versus peers. You're active with the buyback in the third quarter, but it didn't look like there was any activity in 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 still remainder on the recent program authorization?

Sure. Our priorities for capital deployment have always been to invest in the business, first and foremost, through CapEx. We've been growing the container fleet by 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 2.5 years now, and a really nice return on that investment in terms of lower maintenance and repair costs and better fuel economy. So we'll continue to do that. We've had a great experience with acquisitions really with TAGG, the most recent one, improving our offering, expanding our offering, and allowing - with that, and we saw this with CaseStack a few years ago, too. Those companies 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 really putting together a really nice offering for the customer and taking out some costs there. So we're very pleased with that and the ability - and the cross-sell abilities that came with several of our recent acquisitions. So we're looking to do more of that. M&A has been part of our growth path. We've been averaging one deal a year. We'd like to probably accelerate that. We think we have some good pipeline out there now, and we're working on that for 2023. So that's kind of why we didn't pursue - share repurchase 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'll look to deploy that capital in certainly probably all three of those channels in 2023.

Okay, I appreciate that. So just to follow-up on maybe what's also embedded in the guidance. You talked 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 guidance? You can get the full benefit of those. It did seem like maybe these aren't really linear; it will take a little bit of time, obviously, you have different partners. So I just wanted to see how much of a benefit you'd expect to get in 2023? And if there could be even a bit more in '24 if the truck market continues to be as soft as most of us expect.

Sure. We have great rail partners, both of which I think you've seen; you follow them, and you know what they're doing. We've really seen them embrace intermodal over the last few years, deciding to work with channel partners like us, investing in their fleets. I think UP invested $600 million last year in terms of new terminals and equipment. And then I think we've seen them embrace better economics for us as a way for us to drive growth and convert freight off the road. And so, 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 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, insourcing 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 Geoff mentioned earlier, we are conservative in our guidance. And so I think your point that perhaps we're being a little conservative, it's probably right, but we also don't want to build in a significant kind of economic bullwhip that maybe some others have. And so we're trying to just make sure we stay conservative on that economic outlook.

All right, thanks for the time, appreciate it.

Thank you. Our next question comes from the line of Bascome Majors of Susquehanna. Your line is open Bascome.

When considering the guidance and timing, is there a specific quarter or period during the year where multiple negative factors might coincide, such as the decline in accessorials, pricing adjustments, or even the rail rate increase, resulting in the greatest impact based on what you can foresee? I think this insight would be beneficial as we set expectations for the year's performance. Thank you.

Yes, that's a great question and something we considered while developing our guidance. It's going to be somewhat balanced. We are starting the year with a favorable pricing environment following a strong bidding season in 2022. Approximately 75% of our volume will be repriced in the first half, so we expect to see stronger pricing and accessorials during that time. In the second half, however, we anticipate an increase in volume, but accessorials may decrease as things become more fluid, and we don't expect pricing to be as robust in 2023. We likely will begin the year on a stronger note, but I see potential for upside. We've experienced two consecutive years of significant peak season surcharges that persisted throughout the year, which has now subsided. If the upper end of our projections is realized, we would expect a tightening in the second half of the year, which should be accompanied by more surcharges.

And to follow-up on an earlier question, you've kind of pushed us towards the higher end and talked about conservatism. What scenario has to play out to get you to $7 or below? Just want to understand how dire the dire case is in your mind? Thank you.

Yes, we believe that if retailer inventory levels remain low or if a severe recession affects consumer spending and volumes do not recover, this would certainly affect the second half of the year. We haven't discussed it much, but we do have other lines of business that represent 40% of our revenue, which tend to be less cyclical and are driven more by long-term factors rather than price and volume. This is a change from our history; non-asset-based businesses now make up 40% of our revenue, up from about 30% five years ago, and they provide us with more stability.

As a housekeeping item, what sort of free cash flow outlook does the midpoint of your range get to? Thank you.

Yes, it's around $250 million, so EBITDA and CapEx and a little bit of cash taxes. Thank you.

Thank you. Our next question comes from the line of Scott Group of Wolfe Research. Your question please, Scott.

Hey thanks. Good afternoon guys. Just following up on the last question, it sounds like pricing is better in the first half, volume better in the second half. What does that mean from like the earnings cadence? Sometimes in the past you've given us some sort of directional color. What percentage of the earnings do you think first half, second half, or even quarters or however you think about it?

Yes, I'd say at this point, it's probably pretty balanced with those two offsetting one another, maybe a little bit stronger in 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.

Okay. And then you talked about the margin - the operating margins have gone from 2% to 9%. I think I want to try to 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 low double-digit margins right now?

We don't quantify it at that level, but I would speculate that we are likely in the same range as them, if not higher. Pricing is a significant factor for our business, and we definitely experienced advantages from that in 2022.

And I think what Geoff was trying to stress in his prepared remarks is also that it's a far less capital-intensive model as well. So, we have 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 insource more and we've got new rail contracts, what do you think? 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 if we're doing some more of our drainage, 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 the business; when capacity is tightened and demand is strong, you're going to get results like 2021 and 2022. But we think we've reset at a higher base than where we have been in the past. One of the really nice things about our drayage insourcing is we've been able to really increase the amount of insourcing without adding a lot of capital to-date and that's through better efficiency where we've improved our driver-to-truck ratio and improved our loads per driver per day and really been able to see a nice pickup without a lot of capital.

If I can just squeeze one more, just to that point, is there any way to quantify what like every 10 points of insourcing means for operating margin earnings, however you think about it?

Yes, so 100 basis points over the cycle is about $1.5 million of pretax.

100 basis points movement, but your goal is to go from like 60% to 90% or something. Is that right or?

We're targeting 80% insourced. We're still the largest purchaser of third-party drayage. We think that's important and it's a good lever actually to have through cycles. It allows us to flex up more quickly to service our customers in high demand environments and create a more variable cost structure as we see demand dwindle. So we want to remain in that position as for that 20%. We think it's kind of optimal. And we'll maintain a focus on that. We're running to start the year in kind of the 70% range, which is great. Obviously, it's on lower volumes. 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 70 number for a full year is really a good target that we have set, which would be some pretty strong growth on a year-over-year basis.

Okay. Thanks for the back and forth. Appreciate it. Thank you, guys.

Thanks, Scott.

Thank you. Our next question comes from the line of Christopher Kuhn of Benchmark. Your question please, Christopher.

Yes, hi good afternoon guys. Can you just talk about maybe your plans for container adds? Some IMCs that have reported talked about holding off on container additions this year; just wondering what your thoughts are on that? Thank you.

Yes, thank you. I think it's a really good question. In our preliminary CapEx planning, we have planned a call it, 5% to 6% sort of net increase in our fleet. We think that it is very important to maintain consistency in capital expenditures and investment into the fleet that allows us to support our customers as we see a return of demand and maintain service levels at a better level. So, we want to keep that consistency and we've said that in our prepared remarks. And so, you will see us net add some this year. It would be less than the 11% that we did this year, but we will have a net add to our container fleet.

All right, great. Thank you.

Thank you. Our next question comes from the line of Allison Poliniak of Wells Fargo. Your question please, Allison.

Hi, good evening. Just want to turn to M&A. I know you talked about the pipeline being active, but could you maybe give us a little color on what that pipeline is looking like in terms of our multiples becoming more reasonable out there? You did talk about maybe doing more than one just management capacity to handle sort of an increase in M&A, just any thoughts there?

Sure, yes, we've been pretty active the last several years, kind of averaging around one a 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 makes sense. We're a conservative company, and we're cognizant of maintaining appropriate levels of leverage. So we could do two 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. And in 2023, I think the last two years saw a pretty strong bid from private equity buyers, and it seems like the financing markets have sort of dried up for those types of transactions. So 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 TAGG acquisition was a good win for us. It gave us an e-commerce fulfillment capability. It also improved 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 those types of acquisitions.

No, that's great. And then just on the TAGG Logistics, what are you seeing in terms of the expandability of that model just given it's exposed to e-commerce? And then in terms of organic CapEx into that business, 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 TAGG. The e-commerce has fit really nicely into our retail and CPG verticals, and really since bringing them on in late August, we've already achieved $30 million in wins in cross-sells that are onboard throughout 2023. We've 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 to digest some of that growth, but then it's also to help us optimize deployment of our space with our 3PL partners. And very similar to our drayage model, we balance and feel it's important to run and operate our own assets, but then have that 3PL partner there as well to flex when we need to. So, off to a great start with more to come.

In response to your question about capital expenditures, all of our facilities are leased. We invest a small portion, around 5% to 6%, in equipment and racking as part of our overall capital expenditures.

And I would just add, I think one of the great things about the e-commerce portion is when with our CaseStack acquisition, a lot of those customers had an e-commerce program that we couldn't effectively serve. So we're cross-selling very well into our existing CaseStack customer base. And I think the other piece that's been very exciting is we are building multipurpose warehousing space. So we can use it for cross-stacking, for storage, for e-commerce fulfillment, for consolidation. And I think that's going to be a very effective strategy as we look ahead. We're going 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 comes from the line of Bruce Chan of Stifel. Your line is open, Bruce.

Hi, good afternoon and congrats to you Phil on the new role. I just maybe want to stick with the fulfillment business here. You mentioned some cost inflation in the release. I'm wondering if we're starting to see that roll off at this point. And also maybe whether you've got any contract mechanisms there claw 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 something else?

This is Phil. We haven't seen any significant changes with our large customers. We generally experience some churn in our consolidation programs when customers are acquired or grow large enough to manage their own warehousing. However, nothing substantial has occurred in that regard. I believe we have effectively established a long-term warehousing space plan with both our 3PL partners and some real estate partners. We do not anticipate any significant increases in overall costs. While industrial capacity is still quite tight from a warehousing standpoint, it is improving from previous low levels. As we explore new spaces and renewals, we will consider this situation, but we also aim to maintain a long-term perspective and continue investing in our expansion. We are confident in our team's efforts, pleased with the progress so far, and optimistic about our growth potential. As Brian mentioned, our cross-selling efforts have been outstanding, and we have already surpassed our expectations.

And Bruce, I'll just add to that as well. With that, it's helped us retain our customers. So we're adding, and Phil mentioned this, our existing contract new service offerings, and that has helped us with customer retention and contract renewals. But it's also really in that strong pipeline. I mentioned it before just to elaborate to it as well, is that it helped us improve our deal size, and we've seen that deal size really increase. Our close ratios are improving. And while shippers are still focused very much on price, they're less sensitive to it when we have diverse service offerings that we can offer to them. So we'll continue to see growth there.

Okay, great. And just to follow-up real quick, what sort of renewal rates do you typically see in that business if you can comment on that?

Yes, we're seeing mid-90s for that renewable. And there's some of those factors, and some of the items that I think Phil mentioned as well that there may be some acquisition components that are more uncontrollable, but we're typically in that mid-90s.

Thank you. Our next question comes from the line of Thomas Wadewitz of UBS. Your line is open, Thomas.

Yes. 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 kind of by month. Can you give us what the Intermodal volumes were year-over-year by month in the quarter?

Sure. Yes, October down 9%, November down 14%, and December down 13%.

When I consider the 12% decline for the entire quarter, it’s clear that the market is weak. I'm curious about your pricing strategy in this context. Do you believe you can maintain some discipline, perhaps allowing for a decrease of 10% to 12%? However, if we see a drop of 20% and competitors lower their prices more aggressively, would you then feel the need to respond similarly? I'm trying to understand the Intermodal competitive landscape and how we should approach pricing as we enter the contract season for 2023.

Yes. And that's where we utilize that margin per load day model. We really focused 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%, so we feel like we're 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 the overall bid season, obviously, more competitive than what we've seen before, but not anything different than what you'd 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 events, which we think will benefit us as well.

So I guess when you put that together and you say the guide is $7 to $8, do you assume like a 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 modeled it.

I think the market outlook indicates that truckload rates are down by high single digits. So perhaps we can expect a decline in the mid-single digits or possibly even better than truckload rates.

Yes, better than truck.

Okay. All right. Great. Thank you for the time.

Our next question comes from Ravi Shanker of Morgan Stanley. Please go ahead, Ravi.

Thank you. Good evening, everyone. Sorry to revisit the whole midyear inflection topic again, but if I were to ask that question in a different way, what are your customers telling you is going to happen kind of in the back half of the year once we do have that mid-year inflection? Is it a case of we 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 remain reasonably the same, do they expect an actual restock and a real upcycle in the back half of the year going into '24?

Yes, Ravi, this is Phil. I think that's the unknown with our customer base is how fast do inventories bleed down? And what does that require from an ordering for peak seasons. 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 inventories, and that leads to more snap ordering and rush ordering, which typically leads to more West Coast transloading and really supports intermodal growth. And so we didn't build that into our guidance, but I think that that might delay the increase in ordering, but it also might exacerbate the extreme of the capacity tightness, if that makes sense.

Got it. That’s helpful. I agree that it seems to be the biggest unknown right now. As a follow-up, you mentioned expecting an increase in over-the-road conversion, which makes sense with the improvement in rail service. However, based on your conversations over the last few years, has the rail service you've experienced led to any customers permanently shifting towards trucks? Additionally, in previous upcycles, shippers tend to prioritize service and speed, favoring trucks over rail when they look to restock. Are you confident that this won't be the case in the next upcycle, which we hope will happen later this year?

Sure. Maybe I'll start with truck capacity where I think that 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 limited. And I think you're also starting to see with spot market rates at these levels, small and mid-sized carriers really starting to exit the market. And so it's our estimation that truckload capacity is going to continue to tighten, which will make intermodal a more conducive sort of path to be able to move freight. And I think with improved rail service, which we're very confident that's going to be maintained, a lot of folks are going to be looking at transloading solutions to be able to get into big-box and really move that freight inland through the West Coast ports. So that would be our view. We're out really promoting right now, as Brian mentioned, tighter transits and a mid-90s sort of on-time performance. We obviously need to prove that as volumes continue to pick up, but we feel very good about the investments we're making as well as our rail partners to sustain that service.

Very helpful. Thanks guys.

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're expecting to start the year in the first quarter versus finish the year in the fourth quarter? And I know you talked about Intermodal price earlier, but anything you can share on the pressure you're anticipating in accessorial.

Sure. Those two factors will be closely related. From a margin percentage perspective, we expect to start the year strong, likely in a similar position to where we ended 2022. However, we anticipate that margins will decrease as a percentage in the second half due to softer pricing and lower accessorial revenue, although we plan to counterbalance this with increased volume to drive revenue. Does that make sense?

Got it. That makes sense. And then are buybacks 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 growth basis? And then, I guess, on a net basis, you're assuming something less than that, but still positive. Just wanted to clarify.

That's correct. Yes, it's 5% to 6% on a net basis. We have some containers that have reached the end of their life that we've been holding off on retiring, but we plan to address that this year.

And then your other question, the guide does not assume any share buybacks or acquisitions.

Okay. Helpful. Thank you.

I would now like to turn the conference back to Phillip 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, Geoff, or I, and hope you have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.