Hello, and welcome to the Hub Group Third Quarter 2023 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. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 joining Hub Group's third quarter earnings call. Joining me today are Brian Alexander, Hub Group's Chief Operating Officer, and Geoff DeMartino, our Chief Financial Officer. Over the past few years, we have transformed our earnings, returns, and free cash flow profile through a clear strategy of organic investment into our core business while enhancing capital efficiency through technology deployment and accretive non-asset-based acquisitions. In ITS, we have created a less asset-intensive model that provides industry-leading service and value while becoming more efficient through enhancements to our drayage and dedicated operations. In logistics, we have built a service-leading end-to-end solution for our customers that provides best-in-class scale and technology. This evolution of our business has resulted in Hub Group being a more diversified and resilient company with an improved customer experience as well as significant free cash generation. Our operating model changes have proven effective as we have managed through this challenging freight cycle with a full year forecast that we expect will likely be our second-best year in our Company's 52-year history. With that performance in mind, and with the benefit of extensive feedback from our Board as well as existing and potential shareholders and equity analysts, we have taken the opportunity to reassess our capital deployment strategy. I'm excited to announce the results, which are also highlighted in the investor presentation which is available on our website. First, we are establishing a long-term leverage target of 0.75x to 1.25x net debt-to-EBITDA. We are not in a rush to achieve this target and will do so methodically as we continue to invest in our core business, drive the acquisition, and return capital to shareholders. Second, we have received authorization from our Board for a $250 million share repurchase program while retiring our current authorization, which had $83 million remaining. We believe this new and larger program demonstrates our commitment to returning capital to shareholders and the long-term value we see in Hub Group. Third, our Board has authorized a two-for-one share split that will be effectuated early in 2024 through a share dividend, which we believe will enhance liquidity in our stock and support long-term investment. Last, in the first quarter of next year, we plan to begin paying a quarterly cash dividend equal to $0.50 per share annually on our new share account. The transformation of our business that I described earlier has provided us with the free cash flow and balance sheet profile that allows us to implement these four capital allocation initiatives, which will provide greater consistency regarding the return of capital while allowing ample opportunity to continue to invest in our core business and execute on our acquisition strategy. Now, turning to the quarterly results and outlook. As we discussed on our last call, we felt as though the third quarter would be our most challenging, and that did come to fruition. However, we saw improvement in demand throughout the quarter and increased tightness in the West Coast, indicating a need for some inventory replenishment. However, peak season has been muted, and we do not anticipate a sharp inflection in demand in the fourth quarter. Demand was soft through July and August, leading to volume declines in intermodal. Rail service has remained strong, and we executed improved volumes per business day in September. While onboarding wins in shorter haul markets, we continue to focus on improving operations on the Street, reducing our cost to serve, and maximizing the efficiency of our team. Although we have made significant progress, we still have the opportunity to improve operational fluidity and reduce costs. We believe there is considerable intermodal conversion opportunity in the upcoming bid season, and our commercial organization is focused on returning to growth. Our rail partners have remained committed to providing a great service product, and we believe that the combination of quality service cost benefits versus truck and greenhouse gas emission reductions will lead to share gains from over the road and create improved balance and velocity in our network. Our logistics business performed well once again, illustrating the resiliency of our model. We executed well in brokerage, leading to share gains due to our strong service and value proposition while driving new wins in organic expansion in our warehousing, managed transportation, and final mile services. Our pipeline for logistics and dedicated opportunities is very strong, and we remain focused on excellent execution for our customers. While we are experiencing some improvement in demand, the length of time it will be maintained remains unclear. With bid season approaching, we are focused on returning to growth in intermodal, leveraging our strong service and cost structure to drive conversion from truckload. As bid award realization rates improve, capacity attrition accelerates due to less spot rates and customer demand increases, we will be in a strong position to support those opportunities. Given our excellent team, creative solutions, and available capacity, we will maintain our focus on providing world-class service and efficiently operating our business while executing on our long-term investment plan. With that, I will turn it over to Brian to review our operating results.

Thank you, Phil. I would like to start by thanking our talented team for their efforts and dedication in leading and executing through a changing freight environment and positioning us for growth with our customers. I will now discuss our reportable segments starting with our intermodal and transportation solutions. As Phil mentioned and we anticipated, our third quarter was challenging with ITS revenue declining 30%, driven by softer intermodal volume that declined 16%. Transcon volume declined 9%, the local west declined 18%, and the local east declined 14%. Continued soft import volume, elevated seasonal inventories, and an oversupply of truckload capacity generated softer volume and lower assessorial revenue in the third quarter, which led to a decline in ITS operating income. Throughout the year, we have improved our cost structure and feel well positioned going into the upcoming bid season. In retrospect, we held the line on price for too long in 2023, which has impacted our volume. We have made the appropriate structural and process changes that are focused on regaining velocity and balance in our network, and feel confident in our timing and disciplined approach for the 2024 bid season. We continue to be pleased with our dedicated trucking growth and yield expansion along with a strong pipeline of confirmed wins scheduled to onboard in the fourth quarter and early in the first quarter of 2024. As I’ve mentioned in our previous calls, we have been improving our intermodal cost structure throughout the year. Our new rail agreements are helping us move with the market to provide compelling volume for our customer base, and rail service improvements have helped us better manage our equipment costs. On the Street, we have continued to improve our dray cost by increasing our in-source dray from 62% last year to 78% and have lowered our cost of third-party purchased dray. We continue to execute and see additional opportunity to improve our Street economics through regional planning improvements and fixed cost reductions. We will continue to defend our incumbency and have incremental wins that will set us up for long-term success. In addition, the recent expansion of our cross-border rail solutions has already generated new wins that will expand in 2024. 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 conversions from over the road to intermodal. While the near-term results are impacted by low volume, we are confident that our actions will position us for growth and deliver high levels of service for our customers with sustainable profitability. Now turning to our logistics segment. As we continue our diversification strategy to deepen our value with our customers, with our integrated approach to supporting an end-to-end supply chain, we are once again successful in expanding our logistics operating income as a percent of revenue by 40 basis points. Despite the challenging freight environment, our brokerage team continues to stand out with growing volume and margin expansion throughout the quarter. Our third quarter brokerage volume was up 5%, led by share gain with existing customers and continued new customer onboardings. Our overall logistics segment experienced a revenue decline of 12% in the third quarter, but has a strong pipeline of confirmed wins with onboardings in the fourth quarter and start of 2024. In addition, we continue to harvest cross-selling synergies with our most recent non-asset logistics acquisitions. While we continue to drive logistics growth, we are also improving our costs as we leverage our ability to establish new multipurpose logistics locations to support our growth and lower our costs. As mentioned in previous earnings calls, these locations are strategic to our hub network of freight as they enable the continued growth of our LTL, final mile, and e-commerce solutions, and support inbound and outbound multimodal hub volume to service our customers' supply chain needs. We saw the benefits of these new locations in the West and Central regions supporting the growth of our LTL solutions in the third quarter, and we expect this success to accelerate heading into 2024. We will also continue to invest in our non-asset-based final mile offering as we continue to onboard new customers and build more density, driving stronger service and enhanced margin performance. Our logistics pipeline remains strong with larger deal sizes and improved close ratios. Our non-asset-based logistics growth strategy is playing out well, and 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 Geoff to discuss our financial performance.

Thank you, Brian. Despite recessionary freight market conditions, we generated revenue of over $1 billion for the quarter and an operating income margin of 4.2%. Our diluted earnings per share for the quarter was $0.97. We generated $88 million of EBITDA and ended with over $400 million of cash on hand. During the quarter, we purchased 208,000 shares of our stock for $17 million. Our purchase, transportation, and warehousing costs declined slightly as a percentage of revenue compared to the prior year, reflecting our focus on cost containment and yield management. Salaries and benefits costs rose from the prior year as we expanded our driver count by 12%, which has enabled a large increase in our in-source drayage percentage. In addition, the inclusion of TAGG Logistics for a full quarter added $4 million of expense compared to the prior year. This increase was offset by lower office employee costs and lower incentive compensation expense as our office headcount declined by 12% compared to the prior year. G&A costs decreased by over $10 million due to lower legal and use tax expenses and the lease impairment charge in the prior year. Depreciation and amortization expense increased compared to the prior year due to growth-oriented investments in equipment and technology as well as the acquisition. The gain on sale was minimal this quarter, whereas the prior year benefited from very strong used truck pricing. Logistics segment revenue of $450 million was down 12% from the prior year but increased 2% from the second quarter. Segment operating income of $29 million was 6.3% of revenue, a 40 basis point improvement from the prior year. While brokerage volume grew 5% and productivity was up by over 40%, revenue per load was down 21% compared to the strong conditions we experienced in 2022, which impacted our profitability in the quarter. This headwind was offset by growth and profitability in our managed transportation, final mile, and consolidation businesses, as well as a full quarter of results from our fulfillment business. The benefits of our long-term acquisition strategy and cross-selling initiatives are showing in our results, with logistics segment operating income accounting for nearly 70% of total. Our logistics offering provides a more stable earnings stream and improves our positioning as a broad supply chain solutions provider. We have a strong sales pipeline and several large recent wins which will drive profitability into 2024. ITS Segment revenue of $595 million was down 30% from the prior year due primarily to lower intermodal volume and a 20% decline in revenue per load. Operating income margin declined to 2.3% as the impact of intermodal price declines and reduction in profitable assessorial charges more than offset improvements in drayage, rail, and equipment costs. While soft demand conditions and abundant capacity weigh on price, the operating team performed well in reducing controllable costs and driving efficiency, and we saw the benefits of our new flexible rail contracts. We are realizing the cost benefits of in-sourcing drayage, with every 100 basis point increase worth approximately $1.5 million annually over the course of the cycle. Profitability within our dedicated service line has significantly improved in 2023, reflecting improved yields and leveraging operating expenses. Our updated guidance for 2023 assumes market conditions decline throughout the remainder of the year, with softness following the Thanksgiving holiday, per more typical seasonality in our intermodal and brokerage services, with stability in our more contractual service lines. For 2023, we expect to generate diluted EPS of between $5.30 and $5.40 per share. We expect revenue will be approximately $4.2 billion for 2023. For intermodal, we're forecasting volume will decline low double digits to mid-teens for the full year. The remainder of the year will reflect the impact of lower prices and less assessorial and surcharge revenue, which will be partially offset by lower purchase transportation costs and improved operating efficiency. We expect a tax rate of approximately 20% for the year. 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 over $250 million in 2023. 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 logistics offering and drive more stability in our earnings. While we compete in a cyclical marketplace, these actions have driven a step change in our trough to trough results, with operating margin growing from 2% in 2017 to 6% today, along with an improvement in free cash flow to over $250 million compared to $60 million in 2017. These strategic changes have positioned Hub Group for success in both the short and long-term time horizon in soft and strong demand environments. With that, I'll turn it over to the operator to open the line to questions.

Our first question is from Scott Group of Wolfe Research. Please proceed with your question.

Hey, thanks, afternoon, guys. So I want to try and focus on this, the ITS margin, and we don't have a lot of history to know what it looked like in prior troughs, but it was 10% a year ago in Q3, now it's 2%. It doesn't feel like we're seeing the benefits of different rail contracts or more flexibility like we've talked about, and it looks like the Q4 guide implies margins take another step down from here. So why are we not, I guess, why aren't we seeing the benefits of all the stuff that you've talked about in margin, and where do you think we go on margin from here?

Yes. Sure Scott. This is Phil. I'll start. So I think we have executed well in cost-outs. If you look at the quarter year-over-year, we saw cost per drayage drop 27% year-over-year. Our rail contract did actually help us offset some of the pricing pressure. I think when you're looking at the prior year numbers; those were also somewhat inflated with high assessorial revenue as well as gains on sale, which came out. So if you normalize those, I think you are seeing a more consistent earnings pattern. Obviously, pricing has been somewhat more aggressive than we would have anticipated, and I think Brian did a good job of calling out in his prepared remarks that we didn't necessarily move quickly enough on pricing in the first portion of bid season this time last year, which we wound up losing some share to over the road. We now have an opportunity to garner some of that back, and given some of the spreads that we're seeing, I think we have a significant opportunity to do so. We have a higher asset count today, and when it is not moving, you're going to see degradation in overall margins. And so our goal is to get velocity back into the network through the upcoming bid season, and then I think you'll really start to see the benefits of those rail contracts.

And so as we approach bid season, it sounds like you want to recapture some share. Do you need to – does price need to go lower from here in order to do that? Or do you think there's an opportunity to regain share but also improve price? I would think that's hard to get both, but I'm curious what you guys think.

Sure. So Brian addressed in his prepared remarks. Once again, I think some of the structural changes we made with our pricing group following some of the share losses to truck initially in bid season. And since then we've actually performed quite well and have really seen some nice wins come online, in particular in some shorter-haul markets. So we feel that our current pricing methodology actually is working, and we won't have to go much lower. I think you also look at the spreads that we're seeing right now between OTR and normal contract rates, it's up in the mid-30s at this point. So we think with the combination of really strong service product, higher fuel prices, and some uncertainty around what truckload capacity in the spot market will look like, there is a significant opportunity for intermodal conversion, and we're planning to focus on that and capture that.

Okay. And then just lastly, so maybe, Geoff, are we thinking about this right, that the guidance implies closer to like a 1.5% margin in ITS and Q4? If that's right, how should we think about those segment margins into next year?

No, it wouldn't be that low. I would say it's going to be pretty consistent with where we are today from a margin percent. I think we are going to see some pressure towards the end of the year on the brokerage side. I think we performed well in Q3, and we are starting to see that often. I would say our business model, as you know, within intermodal is very asset-like from an equipment perspective. We do, like most companies have some level of fixed costs on the operations side. So if you think about incremental volume from a contribution margin perspective, those numbers are in the upper teen's area just on a contribution margin, and that's with flat price. Obviously, price is very, very impactful. A 1% price increase on today's financial profile is worth nearly 100 basis points in operating profits. So we are focused on returning fluidity to the network, and then pricing will be incremental upside from there.

Okay. I'll pass it along. Thank you, guys.

Thank you. Our next question is from Jon Chappell of Evercore ISI. Please proceed with your question.

Thank you. Good afternoon. Phil, to your answer before on holding price too long, and Brian's commentary on that as well, you mentioned that you lost share, you think, too, over the road. But as we try to determine how long you'll be bouncing along the bottom with intermodal pricing, can you speak to the competitive landscape among your intermodal competitors? Is that what's driving the race to the bottom, or is it just the overcapacity and truckload, and you feel that once that stabilizes, the whole intermodal industry can get a bit of a floor?

Yes. I think it's mostly the overcapacity in the truckload market. We are seeing some really nice wins that we've brought on lately. It was just later in the overall bid season, and as you know, our bid calendar in the first quarter will reprice over 40% of our total business. So that's where we felt as though last year we didn't have a great overall service product, and we tried to hold the line on price, and that's where a lot of that share went to over the road. We believe that there are a lot of questions out there from our customers on how they're going to, as demand returns and they need to replenish inventory, how they're going to move that product. We're displaying a very strong rail service product. We're showing that fuel prices are up and that the spreads between contract rates are expanding. So we think we have a very strong value proposition to bring to our customers and having a lot of great conversations at conversion.

Okay. And then, so if we think about it, now you've transitioned a little bit, so you'd hopefully stem the share loss. I don't recall you giving the monthly breakdown of the intermodal volume, but maybe that will help with as you went through the third quarter, and we're mostly through October now, maybe where you stand there?

Sure. Yes. So July was down 13%, August was down 19%, and September was down 15%. October, thus far, is down 9%. One thing I think that is worth highlighting is when we came out of Q2, June to July, we actually saw a 3% sequential increase in demand. We then, July to August saw an 8% decline, and then August to September, a 9% ramp. What occurred in August, which I think was very impactful in the back half of August and really cost us, we think, 2 to 3 percentage points on total volume for the quarter was Hurricane Hilary, and it obviously was very impactful to the western portion of our network, and so that was something we didn't call out specifically, but I think it's important to reference as we think about the volumes for the quarter.

Okay. I appreciate it. Thank you, Phil.

Thank you. Our next question is from Jason Seidl with Cowen and Company. Please proceed with your question.

Thank you, operator. Hey, Phil. Hey, Geoff. Hey, Brian. I wanted to talk conceptually about next year. You guys announced that you have a pending dividend out here. Most companies don't put out a new dividend announcement if they think the business is going south. So how should we think about the potential for earnings growth with the backdrop of 40% call it of your business coming due in 1Q, improving rail costs on your side, and sort of an increase in your percentage of own internal drag?

Sure. No, I think it's a great question, and I think I'll start and let Geoff and Brian fill in. I think it's a little early to give anything too concrete if we're in our budgeting process, but I'll try to do is kind of frame it up. As we look at the market, I think we're seeing some form of peak season, which is great. We're starting to see capacity exits and a more balanced spot market. Inventories are coming more back in line. I think from intermodal, I referenced fuel prices increasing is normally a good thing for conversion. Our service levels, even with increasing sequential volumes, are holding up very well, and I mentioned that OTR versus intermodal contract spread. I think when you look at Hub, we're far more efficient. Headcount is down 12% year-over-year. I mentioned our cost per drayage. We're going to have far lower capital expenditures going into next year, and I think if you layer in some accretive M&A and the capital allocation plan, barring some sort of consumer recession, we're going to be targeting earnings and revenue growth. I think the only thing that remains unclear is the timing on recovery of demand, but we'll certainly obviously have more specifics for you on the fourth quarter call, but I'll let Brian and Geoff fill in.

Sure. Yes, no, Jason, I think what we see going into next year, and we talked a little bit about it earlier this year too about the inventories, and a lot of that inventory has to burn off more seasonally. So while there was some bloated inventories earlier this year, it just took a full seasonal cycle to burn off, and so as we push through the holiday season and enter into the spring we see that that's going to be reset and in a good position to be replenished. And as we do that, we'll see our intermodal volumes grow. We called out our brokerage, which is a standout in the marketplace. Despite all these market headwinds, they've stood out really well with that 5% growth and really continued growth going into next year as well. And then our logistics services, we continue to see a really strong demand for all of our logistics services with our managed transportation, what we bring to the table, with our consolidation and fulfillment locations that I've mentioned that we're adding and investing with new buildings. We're working kind of left to right, adding two in the West earlier this year, two in the Midwest, and we're going to finish out the year working into the East and going into 2024 as well as our Final Mile. So we continue to win service awards from our customers in our Final Mile offering. We're bringing on new logos and diversifying that customer base. And our non-asset-based model in Final Mile has proven to be really great for flexing and growing with our customers, and so we're going to see continued success there as we invest in that from a growth perspective. But yes, those are the big areas that we'll continue to focus. Phil mentioned a lot of the over-the-road conversions into the previous questions. There's still over $56 million over-the-road truckload volume that's out in the marketplace that is eligible for intermodal conversions, and we're highly focused on delivering that on that growth and converting it in the right cost structure.

I appreciate those comments. How should we think about your rail partners? There's obviously been some talk about improved rail service. I'm happy to see that, but I'm not giving them as much credit because we haven't really seen the improved rail service with improved volume. So how confident are you guys, if we do see volumes come back at some point in 2024, that your rail partners will be able to handle that increase?

Yes. This is Phil. I think you're seeing a good test right now with some sequential volume increase in pretty short order, which I think has been a good test. We're hoping that this is more prolonged and continues to move forward. I agree with you. We have to continue to show our customers that, but at the same time, I think you're seeing the commitment in hiring and resourcing to handle that demand, and so we believe we are going to be in that position. And it's a massive opportunity for us and our rail partners, and I know all of our conversations are related to growth at this point in time.

Okay. Well, one final one, and I'll turn it over to somebody else. And Phil, I think you mentioned accretive M&A. Can you maybe give us an update on the M&A market? Are you still seeing a lot of stuff being put up for sale, and what do the multiples look like, say, compared to a year ago?

Sure. I'll start, and I'll let Geoff go in. We haven't seen as many companies coming up for sale just given some of the challenges in the broader market, and obviously interest rates increasing. And there's been somewhat of a disconnect on overall value, but I think what we've been able to do is continue to go out and find interesting and exciting off-market opportunities, and we have a very strong pipeline right now and are certainly working towards closing something we hope in the near term.

Yes. I'll just add, it's a key part of our strategic growth plan. We highlighted that today in the context of the overall capital allocation plan. I think we have a good pipeline, and we're continuously evaluating. And again, we've had more success on those outreaches that we've generated, and we think we're a good buyer in this market.

Thanks for the time, gentlemen.

Thank you.

Thank you. Our next question is from Brian Ossenbeck of J.P. Morgan. Please proceed with your question.

Good afternoon. Thanks for taking the question. So maybe just to come back to competition on the intermodal side, so can you talk about more what you're going after here? Is this really some of the things you think left the rail network with poor service, and this is really just over the road conversion? Maybe you can give some context in terms of where that spread is versus history. Is service good enough to get this back, or is this really more of a play on price and getting a little bit more of that density that you might have not had as much as you wanted before?

Sure. So I think you could imagine, given the market conditions, that it's obviously a competitive marketplace. But I think what we're seeing are very savvy customers focusing on total cost, including fuel expenses and rates. And so we are seeing some nice conversions outside of bid cycles right now back to intermodal, taking advantage of the improved service product and some of those shorter hauls. When you think about the spread that we're seeing between contract and – both from intermodal and over the road right now, in longer lengths of haul, it's up near 40%. In the shorter lengths of haul, it's getting closer to the high teens and 20 percentile, but in aggregate, really, in the mid 30s and so that's what we're trying to go to our customers both in advance of RFP events and enduring them, and highlight that differential as well as those strong service levels. So we think that the opportunity for conversion is significant both in the short and longer haul, and we're very focused on getting that back.

Yes, Brian. This is Brian. I'll just add in that, too. We'll continue to focus and target the cross-border. We've started that process already. We have some confirmed wins, and we expect those to expand going into next year. We have a superior product on the rail with our partners there on service and transit, and also diversified offerings as well there, too. So that's something that we'll continue to target as we grow into 2024.

Okay. And in terms of capacity boxes, as rail service comes back, there's going to be more boxes effectively out there. What are you doing in terms of your storage? And how do you view CapEx and that investment on the slide deck you've got, more color in terms of the longer-term viewpoint, but how does that investment translate here to the rest of this year and I guess into next year?

Yes, Brian, we have boxes stacked now. I think a lot of the industry does right now. We've started to actually unstack a little bit as we've started to handle and manage through this muted peak. We'll evaluate, as we finish out the year, how we manage that as we enter the year. But certainly, as that volume returns, we'll be bringing down that stack I mentioned about our discipline around targeting balance in our network and getting the most utilization out of that equipment. And as that improves, we'll be able to evaluate what we need as we go into next year. Geoff, maybe you want to talk a little bit about our CapEx plan on that.

Sure. We'd expect for this year, our guidance is 140 to 150. Our preliminary thoughts for next year would be a pretty big reduction in that. I think on the container side, we probably would be looking to add to the fleet next year, and then we do have a smaller replacement cycle on the tractor side, so certainly something south of 100 million next year, which would have a pretty big impact on our free cash flow.

Well, only other thing that I would highlight is we've seen utilization improve about 10% sequentially from Q2 to Q3. So we are getting more out of the existing equipment. We still have a ways to go, but it is good to see progress on that very key metric.

All right, thanks. Just one quick follow-up on balance sheet and the leverage. I know, Phil, you talked about not being in a hurry to get to that new mark, but maybe you can just give some thoughts in terms of how you and the Board are looking at going through that process and if there's anything we should sort of pencil in for buybacks here in the near-term.

Sure. So we're going to be very thoughtful around that. As we mentioned, we have some very interesting acquisition opportunities that we're continuing to look at. I think it'll take likely two to get us to the middle of the leverage target that we laid out, but we are going to be thoughtful on the approach as we did roll out the new repurchase plan, assuming that we would execute on it, I don't think there's anything to build into the model. We certainly did in our forecast, but at the same time, we will be opportunistic with it and utilize the very strong balance sheet that we have effectively. Geoff, you want to add?

Yes. I think, again, the use of the authorization will be tempered by our outlook for both CapEx and acquisitions.

Okay. Makes sense. Thanks, guys.

Thank you. Our next question is from Bascome Majors of Susquehanna Financial Group. Please proceed with your question.

If you look at the guidance and results for 3Q and 4Q, you're at $1 or so earnings run rate. You typically do less seasonally in the first half than you do in the second half. So barring some superseasonal outcome in the first half of next year, you've got a lot of catch up to do in the second half. Can you walk us through what has to happen to deliver the earnings growth that you hope for preliminarily next year from the starting place we are today? And just any other thoughts to help us kind of level set expectations for next year now rather than waiting till February? Thank you.

Sure. So I do think we are seeing some peak season we need to perform in the upcoming bids. That is a key priority, I think capacity continuing to exit and the spot market staying relatively balanced. I think the consumer staying resilient, all those pieces are certainly going to support that. We need to successfully onboard a lot of the logistics wins that we have, and we need to get our intermodal fleet moving again. Having a significant portion stacked is not optimal for earnings growth. I think if you layer in us then executing on the capital allocation plan and acquisition strategy that should frame up earnings growth. I do agree with you, it will likely be driven by execution in the latter portion of the year. We would hope to see some increase in demand in the spring to help drive that. And we think if we do see that, we're in an excellent position to go out and execute.

I'll just add one item to that too is we've created a really long tail of customers that we are cross-selling into right now. And as we look at it from a revenue perspective, 80% of our revenue is using two or more services of ours. But as we look at that customer count, 80% of those customer counts is only using one Hub service. So that's a big part of our growth plan is continuing to cross-sell that's been underway and is going to accelerate as we go into next year.

Thank you for that. Can you update us on where bid compliance is and I apologize if I missed that earlier and just maybe anecdotally how are these conversations going with your customers? It seems that the economic case for intermodal from your earlier discussion is very attractive, but the reality is it's just not converting. What is holding that back and what has to happen to change that in your view? Thank you.

Sure. In regards – this is Brian. In regards to the bid compliance, we started the year at about 70%. We finished last year at 81%. We did see that compliance improve throughout the year, finishing out Q3 at around 78% compliance. And we think a lot of that was the shipper starting to realize where their balance was at, where their demand was going to be. A lot of those conversations with them is about the seasonality of their inventory, and as that starts to rebuild, they know that over-the-road capacity is going to be exiting and needs to come back into the rail, and they want to have that assurance that the service is going to be there that we've talked about. And as Phil mentioned, we've seen the continued investments from our rail partners to ensure that that service is going to be there and from a – to be a little bit more tactful in that too. We've been confident in that service, so we've improved our transit times that we submit in those bids and have a lot more confidence in those competing very well against over the road.

Thank you both.

Yes and just one piece on that before we go into the next question too. I think in regards to those customers too. We saw capacity exit with the departure of Yellow, and we've been really successful one in protecting our customers with that, but then also providing solutions for them to consolidate that LTL through our network, our logistics network, and convert that into intermodal as well. We see that piece growing for us and for our customers going into next year as well.

Thank you. Our next question is from Justin Long of Stephens. Please proceed with your question.

Thanks. And maybe I'll start with one for Geoff, on the guidance, last quarter, you talked about the tax rate for the fourth quarter being in the mid-teens. It looks like, based on the guidance you gave today, it could be a little bit lower than that. So I was just wondering if you could provide an update there. And just given the decline in the tax rate, it also seems to imply that operating income will probably take a step down from 3Q to 4Q. So I was wondering if you could comment on what's driving that. It sounds like logistics margins may be down a bit, but I wanted to make sure I wasn't missing anything else.

Sure. Yes. Your math is correct. On the tax rate, we think in Q4 will be around 10%. That's driven by a change in state apportionment project we've been working on all year. So Q4 will be low as we file the 2022 final tax returns. To your point, on the operational side of the earnings, we're expecting seasonal strength in October is going to fall off, as it usually does in the latter half of Q4. We are expecting some more softness on the brokerage side. And of course, brokerage is in our logistics segment. So it's really the transactional parts of our business between intermodal volume, brokerage volume, and some tailing off and profitability into Q4. The rest of our logistics segment we think will continue to perform based on recent wins that are being onboarded, but not enough to overcome the performance of the other two pieces we talked about.

Yes, we certainly wanted to be conservative in the approach on what we think volumes will be, just given that it does remain somewhat unclear, right. And there's certainly upside to that if we see the demand continue right up to and through the Thanksgiving holiday, that is certainly upside, but felt as though with the guidance, we should be conserving.

Got it. Thanks. And maybe as a follow-up for Brian, you talked about some onboardings and logistics in the fourth quarter and early next year. Is there a way to think about the collective impact that these onboardings could have to the top line? I just wanted to get a sense for how you're set up for potential growth in that segment as we move into next year.

Sure. Yes. No, Justin. Yes, I appreciate that question, and we love our logistics wins for a lot of reasons. One, it's great to continue to get out there and win, but a lot of what we see within our logistics wins is that it helps feed the other lines of business and creates that overall Hub network of freight. So as we win in the final mile, we're able to leverage our assets for the middle mile management of that. As we onboard these new buildings that I've mentioned, we're again leveraging our assets to manage the inbound and the outbound across all modes of transportation. And then it also just continues to add to that long tail of customers that we cross-sell into and provide more solutions for. As we do that and we get deeper with our customers, they become less price sensitive, they become more sticky, and our retention continues to go up. We've seen our deal sizes continue to grow in logistics and I'll also mention on the dedicated from a contract win perspective, our dedicated project continues to stand out against some of the headwinds but strong pipeline, continued demand. Our win ratios are the highest we've seen them. Our largest dedicated win of the year will onboard right before the turn of the calendar and set us up really well going into next year.

Thank you. Our next question is from Bruce Chan of Stifel. Please proceed with your question.

Hey, thanks operator and good afternoon everyone. I just want to look at the brokerage side of things for a minute here. It seems like the market's going to be grinding lower for a bit longer and just assuming that's the case, want to see if you have any more opportunities for cost rightsizing there, whether it's headcount-related or technology-related or maybe something else.

Sure. Yes, no Bruce, appreciate the question. And one of my favorite guiding principles that we say here at Hub is that we innovate with a purpose, right. And that we direct our IT investments in a meaningful way that focuses on our customers, our carriers and our team members that drives profitable growth. And that's exactly what we've seen in our brokerage. And Geoff called out some of those productivity gains that we saw. While we did see volume grow, we saw that grow on top of a lower cost base and drive more efficiency in our overall operations. So we do sense some more headwinds coming in the fourth quarter. We feel well positioned to handle those, but with some of the softer volume, we’ll make sure that we’re scaled appropriately and that, again, our investments are appropriated towards driving that profitable growth.

Okay. Great. And maybe just one...

Go ahead, Bruce.

Go ahead.

The one thing around our program is that our commission model really incentivizes volume growth around. But we obviously pay out gross profit dollars, but we also incentivize volume growth and handling additional volumes. And that has really allowed us with the growth that we’ve seen to remain very lean in our operation and not have to add additional headcounts and actually become more and more efficient. And I believe we saw about a 20% in aggregate productivity improvement year-over-year in our brokerage. And so really significant improvement there and we still have a long way to go and need to return to growth but that will come as the market does, but we’ll keep focusing on taking share as well.

Okay. That’s great color. And I was just going to ask, with that 5% volume growth, was that related to some of those incentive programs or is it fair to say that was tied more to disruption from Yellow in the LTL market?

A little bit of both. Like I said, we saw a lot of growth in our customers from that Yellow exit and we protected our customers from that. We did pick up volume there but we also get new logo wins. Our brokerage team is adding anywhere from 80 to 100 new customers a month and so as we do that, then we cross-sell into those. And our brokerage also offers a diversified subset of modes as well. So outside of just dry van, our Choptank acquisition really built out a nice temperature-controlled offering as well as our LTL rates that we bring to the table, flatbed and other sub modes that become very meaningful to our customers. So it’s a good overall balance of growth.

Great. And just a final follow-up before I turn it over. We had a fairly high-profile competitor exit in that space last week. Just want to get your take on that and whether you anticipate any major changes in the market as a result.

Sure. I wouldn’t reference any major changes. I think it’s just an indication of how challenging the market can be and having brokerage as a key capability that you can bring to customers as part of a full suite of services I think is very important and something that we’ve tried to utilize. We think our model works and we’re continuing to invest in the brokerage products. So feel good about our positioning for the long term there.

That’s great. Thanks for the time.

Thank you. Our next question is from Thomas Wadewitz of UBS. Please proceed with your question.

Yes. Good afternoon. Wanted to ask you about the ITS operating margin and just how we should think about the potential levers for improvement? I know you’ve talked about volume and being a bit more aggressive with some of the bids and winning volume. Is that kind of a key lever to see improvement off the level in third quarter? Or is it more appropriate to think about pricing being the lever and you kind of wait for potential improvement in rates in the bid season next year and second half? Just wanted to get a little more perspective on what really kind of drives potential improvement in the timing as well.

Sure. I think we have a good feel for the market at this point and have positioned ourselves well. We’ve seen some nice wins, as I mentioned in the latter portion of bid season and even some out-of-market opportunities. So I don’t think it’s taking rates lower, and we’re currently have that pricing fully baked. What I think we see as the opportunity is this time frame last year, which I referenced, about 43% of our freight is pricing effective in Q1. That is a significant opportunity where we lost shares over the road. And given some of the question marks around the spot market as well as customers taking a deeper look at fuel prices and aggregate costs, I think presents an opportunity to leverage the strong service we’ve had and that disparity in contract rates to garner some of that volume back.

So you think that if you get the volume back in 1Q, 2Q, that can be a meaningful margin lever or you think it's further off than that.

Yes. We’re getting the container fleet unstacked and driving more velocity in the network will reduce the fixed costs and help us really – with the efficiencies we’ve gained in headcount drive a better flow-through to the bottom line.

Thank you. Our next question is from Ravi Shanker of Morgan Stanley. Please proceed with your question.

Thanks. This is Christyne McGarvey on for Ravi. I wanted to circle back to the capital allocation announcements specifically calling out on the acquisition front. Doesn’t feel like that’s super new for you guys. So just wondering if you’re trying to signal anything different going forward in terms of pace of transaction or type of transaction that you guys are looking for going forward.

I think the announcement today is really just formalizing things we’ve been working on. So M&A has always been an element of our growth strategy, particularly in the non-asset parts of our business, expanding that logistics offering. We’ve always had the strategy to invest in our intermodal fleet containers and trackers. We’ll continue to do that. I think you’ve seen us be more opportunistic on the return of capital with share repurchases, and we are today announcing or signaling a more rigorous framework around that. So really no change in the pieces, I think just more of a framework to measure a return of capital performance by. I think we all feel good about our acquisition pipeline and we’re optimistic to get an acquisition completed in the short term here.

Got it. That’s really helpful. And if I could squeeze one more in, switching gears a little bit on the drayage in-sourcing and some of the other kind of costs or process initiatives. Can you just frame up for us at all sort of the cost benefits that you guys are seeing and maybe how to think about incremental margins in that business going forward in the next upcycle when it comes, if you think it can be structurally improved on the back of these?

Yes. So we have a pretty strong focus on operating efficiency within our headcount within our kind of below the transportation part of our P&L. Within transportation I think having those in-source numbers around 80% may drift down in a stronger market, but we feel like that’s the right balance of fixed costs. Right now, third-party costs are pretty low. It’s a very different story last year in a stronger market. We like to have that flex but also the ability to insource on our own fleet. As we do more volume, we are able to leverage our fixed costs as we improve that productivity on our tractors and on our drivers. I referenced earlier a contribution margin just on today’s cost structure. An incremental load with no change in price is going to deliver north of 15% incremental flow through operating margin.

Great. Appreciate it. Thank you.

Thank you. Our next question is from David Zazula of Barclays. Please proceed with your question.

Hey, thanks for squeezing me in. Sorry to beat the dead horse on brokerage volumes. But I just want to understand a little bit. You guys said you’re seeing peak and you gained 5% in volumes this quarter, but it sounds like you’re talking about potentially some pressure in the fourth quarter? I mean, is that a factor of customers going away from brokerage on a temporary basis? Or can you talk about what is driving the volume outlook for brokerage in the fourth quarter?

Some of that’s just – this is Brian, David. Some of that’s really just the decline after Thanksgiving of what we’ll see just in a softer tail off of the year from what we’re expecting in overall volumes. But I think we’re continuing to driving the cross-sell and where we’re growing with our brokerage internally as well. So, yes, we still think that we’ll continue to stand out in the marketplace in the fourth quarter, but are just anticipating some of that softness as we wrap up the year.

Great. Thanks for the help. And then if I can just get one follow-up. You mentioned some dedicated wins. I know you’ve had some competitors that have lost existing customers. Can you talk to your dedicated retention rate and how it compares to history?

Yes, no, we’ve – I would knock on wood. We have done very well with our retention. We have retained our customers. I think our model for doing so, as I mentioned before, is that we see a higher retention when we’re offering them multiple lines of service. So while our dedicated service and assets and management and efficiencies are all really important to our customers, we find that if we can have them cross-sold into multiple lines of service, it helps drive that overall operating efficiency, but it also helps with that retention. But we focus on being a very strong operator and making sure that we pass those efficiencies along to our customers and that we position to retain. But it’s also helped us in the bid cycle. And so we’ve seen a higher rate of our wins on these because they are highly competitive and our deal sizes are growing. I mentioned one of our largest ones will be onboarding later in this quarter and setting us up really well for next year. And those are organic as well as new logo customers that we’re winning with.

Thanks very much. Appreciate it.

Thank you. Our next question is from Brian Ossenbeck of JPMorgan. Please proceed with your question.

Yes. Thanks for taking the follow-up. Just a real quick one. I think you mentioned assessorials were down. Just wanted to see if that was a sequential comment or year-over-year? I think there’s been some providers who have seen a little bit more come out than they initially thought, and you guys took a pretty big hit earlier in the year. So where do you stand on assessorials right now? And kind of at a run rate you expect to carry into next year?

Yes, sequentially on the revenue side is flat. The big step down is year-over-year. We do have assessorial costs as well, which we have been reducing sequentially, but not enough to offset the revenue piece.

And do those costs come out with more volume, with more fluidity, I guess, better service?

Yes, we would expect them to, yes.

All right. Thanks for the follow-up.

Yes.

Thank you. I would now like to turn the conference back to Phil Yeager for closing remarks.

Great. Well, thank you for joining our call this evening. And just to wrap up, despite headwinds in the broader logistics market, we believe Hub Group is extremely well positioned to drive long-term growth and returns through our focus on providing best-in-class service, continuing to operate efficiently, and investing in our business through accretive acquisitions and long-term organic growth. We believe this investment approach, along with our focus on consistently returning capital to shareholders, is going to create long-term value. So I want to thank you again for joining our call this evening. And as always, Brian, Geoff, and I are available for any questions.

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