Hub Group’s volume declines accelerate in April

On its first quarter 2020 earnings call, intermodal marketing company Hub Group’s (NASDAQ: HUBG) management team said that they expect second quarter volumes to deteriorate further. April revenue is down 15% to 18% year-over-year company-wide, accelerating from the 10% decline reported during the first quarter.

The company’s intermodal and brokerage segments are expected to see the largest negative impact from the COVID-19-related demand degradation. Intermodal volumes were down 16% year-over-year during April.

The company reported $0.40 in earnings per share, significantly lower than the consensus estimate of $0.60 per share according to Yahoo Finance. The quarter included $2.5 million ($0.07 per share) in severance, consulting and donation expenses as well as $3.4 million of non-cash amortization expense and $0.6 million of compensation expense mostly related to the CaseStack acquisition.

Management said that they are roughly one-third of the way through their contractual bid season and expect intermodal pricing to be down in the low single digit range for 2020, categorizing the current pricing environment as “very aggressive.”

First Quarter 2020

The company’s intermodal revenue declined 8% year-over-year to $495 million as volumes moved 7% lower on a “soft demand environment” reflective of increased truckload (TL) competition in the intermodal space. Intermodal gross margin moved lower due to declines in demand, pricing, higher insurance and claims expense and an increase in rail costs.

Key Performance Indicators – Hub Group

Intermodal volumes have been under pressure for several quarters as excess truck capacity weighs on TL rates and depressed diesel fuel prices have lowered the total cost to ship via truck. Both catalysts have narrowed the cost savings between the two modes, resulting in a diminished desire to ship freight on the rails.

U.S. container volumes on the Class I railroads were 7% lower year-over-year in the first quarter. The company’s primary rail partners are Norfolk Southern (NYSE: NSC), which saw container volumes decline 9.9%, and Union Pacific (NYSE: UNP), which reported a 12.4% drop in container traffic during the quarter.

Truck brokerage revenue was off 17% year-over-year as loads fell 10% and fuel surcharge revenue, pricing and mix were down 7%. The company reported that contractual truckloads increased 500 basis points to 90% of total truckload volumes. Surprisingly, the truck brokerage gross margin improved 150 basis points on “the transformation of our operating model, an enhanced technology platform and a deeper engagement with our carrier network.” 

Most brokerage platforms with high contractual exposure saw gross margins squeezed in the quarter as volumes surged briefly forcing providers to pay up for truck capacity to fulfill contractual agreements.

Logistics revenue moved 10% lower year-over-year to $183 million, with gross margin improving 70 basis points. Dedicated revenue was off 18% at $62 million with a decline in gross margin. The decline in margin was attributed to exiting a contract, which resulted in idle equipment costs. Also, startup costs in new dedicated contracts and maintenance costs were listed as culprits for dedicated margin erosion.

Hub Group’s consolidated gross margin was down 110 basis points to 12.5%, mostly due to headwinds in the intermodal division. Operating margin declined 140 basis points year-over-year to 2.4%.

On March 31, Hub Group withdrew its full-year earnings guidance of $3.39 to $3.60 per share.

“We continue to execute on our profit improvement initiatives, and we remain on track to realize $40 million of annualized savings in 2020,” said Hub Group Chairman and CEO Dave Yeager. Those initiatives primarily include utilization and optimization enhancements to its drayage and dedicated trucking operations. Further, the company has lowered its headcount by 4% since the end of 2019 and reduced “discretionary” expenses. 

The $5 million in equipment donations to COVID-19 emergency responders, severance costs incurred in the quarter and a full quarter’s impact of the headcount reductions will provide cost tailwinds for the remainder of the year when compared to the first quarter.

The company ended the quarter with $277 million of cash and equivalents and $219 million of unused capacity on its revolver, after previously taking a $100 million draw on the line.

Hub Group expects capital expenditures (capex) to be $50 million to $80 million for the rest of the year, after investing $25 million in capex during the first quarter. The company previously announced that it has suspended construction of a new office building on its Oak Brook campus. Hub Group’s original capex guidance of $115 million to $120 million included a $35 million capital allocation for the completion of the building.

CFO Retires

On April 23, Hub Group announced that Executive Vice President, Chief Financial Officer and Treasurer Terri Pizzuto will retire effective June 30, overseeing the transition of her duties through June 2021. Vice President of Corporate Development and Strategy Geoff DeMartino will succeed Pizzuto in the executive vice president and CFO roles and Controller and Assistant Treasurer Kevin Beth will also succeed her in the executive vice president position and as the company’s chief accounting officer.

Pizzuto began her career with Hub Group in 2002, assuming her current position in 2007.

DeMartino joined Hub Group in his current capacity in 2016 and Beth joined as controller in 2003.