Despite potential headwinds, investments in freight rail and improvements in rail service could boost transportation management provider Hub Group’s intermodal offering in the medium term, executives said during the company’s second-quarter 2022 earnings call.
Hub Group (NASDAQ: HUBG) could also benefit from smaller carriers exiting the market as well as higher fuel prices, which draw potential customers away from long-haul trucking and toward rail to take advantage of cost savings, said Phil Yeager, Hub Group president and chief operating officer.
“It’s a good backdrop in the medium term for demand for intermodal. … I think all that is a pretty good formula, and so that’s why we can say we’re continuing to invest and add containers,” Yeager told investors on the late Wednesday call.
Customers have told Hub Group that they anticipate a strong peak season, even amid a potential softening of the economy, and company executives said they expect improving rail service will help create a more fluid rail network. Hub Group’s efforts to diversify through its non-asset-based logistics business and its acquisition of Choptank will also help see the company through macroeconomic uncertainty.
“The diversification allows Hub to be more resilient during economic downturns and helps to mitigate the cyclical nature of the transportation market,” CEO Dave Yeager told investors on the call. Nearly half of Hub Group’s revenue is now provided by its non-intermodal businesses, he said.
Although intermodal experienced some service issues in the second quarter, Hub Group is starting to see incremental improvements, which have enabled the company to offer lower transit estimates to customers.
Hub Group also kept up with efforts to hire drivers throughout the quarter, which resulted in improving the company’s percentage of in-house drayage while enhancing street dwell times and service to customers, according to Phil Yeager.
Looking ahead, Hub Group executives reiterated plans to invest in intermodal assets and containers.
“Our recent acquisitions and our purchases of intermodal equipment are illustrative of the types of strategic investments we will make in our business, adding scale while also introducing new service offerings with strong cross-sell potential,” CFO Geoff DeMartino said in prepared remarks during the earnings call.
Q2 financial results
Record quarterly revenue of $1.4 billion drove Hub Group’s second-quarter net income higher, from $26.6 million, or 78 cents per diluted share, in the second quarter of 2021 to $102.8 million, or $3.03 per diluted share in the second quarter of 2022.
Quarterly revenue rose 43% year over year, while gross margin was a quarterly record of $247 million, or 17.6% of revenue, amid favorable pricing and yield management. Operating income jumped to $138 million, or 9.8% of revenue, compared with $37 million, or 3.8% of revenue, for the second quarter of 2021.
Breaking down by segment, intermodal and transportation solutions revenue grew 41% to $873 million. Gross margins for the segment rose on favorable pricing and cost recovery.
Truck brokerage revenue rose 90% to $266 million due to the acquisition of Choptank Transport as well as revenue growth from truckload and LTL.
Logistics revenue increased 18% to $263 million amid growth in managed transportation, final mile and consolidation services.
Costs and expenses rose nearly 31% to $109 million amid incremental operating costs from Choptank, higher legal and outside services spend, and higher compensation expense, Hub Group said.
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