Although headwinds such as port congestion, labor and equipment shortages, and network imbalances are putting pressure on the current intermodal market, Hub Group is keeping its eye on factors that are poised to support the long-term financial potential for intermodal, executives said during Hub Group’s second-quarter 2021 earnings call on Thursday.
Driver availability is one such factor. Government regulations such as drug and alcohol testing and electronic logs that restrict how many hours a driver can drive per day limit the number of truck drivers that a company can utilize, Hub Group (NASDAQ: HUBG) CEO Dave Yeager said.
In addition, new drivers want to be home daily and want a strong wage, both of which are benefits for intermodal drivers, Yeager said.
Cost issues such as rapidly rising insurance premiums also drive up carriers’ operating costs, while intermodal can serve as a way for companies to reduce their middle-mile spending costs, Yeager said.
Furthermore, customers are seeking ways to develop a more sustainable supply chain, and the freight railroads’ reputation for producing lower emissions compared with the trucking industry can sway those seeking to pursue sustainability goals, Yeager said.
“The freight transportation market has strong demand tailwinds that will carry at least through the first half of 2022. More importantly, we believe the growth story for intermodal will reach far beyond the near-term outlook,” Yeager said.
To capitalize on the opportunities for intermodal, Hub Group has developed several scenarios to gauge whether the company’s capital structure can support an acquisition, executives said. The company also seeks to grow its logistics and brokerage business.
Looking ahead, Hub Group eyes a revenue target of $5.5 billion to $6.5 billion in 2025.
“We expect to achieve this level of revenue primarily through organic growth driven by our superior customer experience, and the technology and equipment investments we will continue to make in our business, as well as through acquisitions of nonasset logistics businesses that expand our solutions offering, add scale to our core operations and deepen our customer relationships,” the company said in a release.
In the near term, capital expenditures for fiscal year 2021 are expected to range between $165 million and $175 million, with investments targeting areas of growth, such as containers, tractors and technology.
Hub Group also plans to add 3,000 containers to its fleet, resulting in a net growth of approximately 2,750 containers as older containers are retired. The company also plans to add approximately 700 tractors to replace older units and support growth in Hub Group’s drayage and dedicated fleets.
In the second quarter of 2021, Hub Group’s net profit more than doubled amid “strong freight market conditions and continued growth with strategic customers,” the company said on Thursday.
Second-quarter 2021 net income was $26.6 million, or 78 cents per diluted share, compared with $13.2 million, or 39 cents per diluted share, for the second quarter of 2020.
A 26% increase in revenue in the second quarter helped boost Hub Group’s profits. Second-quarter revenue was $981 million compared with $779 million year-over-year.
“Unprecedented freight market conditions, combined with our drive to provide a world-class customer experience resulted in 26% revenue growth in the quarter. Our continued focus on yield improvement and operating efficiency led to diluted EPS of $0.78 in the second quarter which is double the prior year,” CEO Dave Yeager said.
All of Hub Group’s business units experienced year-over-year revenue growth in the second quarter.
Intermodal revenue rose 23% to $550 million amid a 7% increase in volume and a 15% increase in revenue per load.
Logistics revenue was up 25% to $222 million amid growth within Hub Group’s retail supplier solutions services and the addition of NonstopDelivery (NSD).
Truck brokerage revenue increased 62% to $140 million on a 55% increase in revenue per load and a 5% increase in volumes. Contractual freight was 51% of total brokerage volume in the second quarter, compared with 64% a year ago.
And dedicated revenue rose 1% to $69 million amid growth from new and existing customers.
Hub Group’s operating income was $37 million in the second quarter, compared with $21 million a year ago. Meanwhile, the company saw its gross margin increase by 12%.
Costs and expenses fell to $84 million amid lower professional fees, a decline in donation expense compared to 2020 and higher gains on the sale of equipment, partially offset by increased costs resulting from the acquisition of NSD and an increase in salaries and benefits expense related to variable compensation, Hub Group said.
Hub Group expects diluted earnings per share for fiscal year 2021 to range between $3.50 and $3.70, with revenue growing in the “high-teens” percentage range for the year. The company also expects gross margin as a percentage of revenue to range from 12.5% to 13%, while costs and expenses are anticipated to range from $355 million to $365 million for 2021.
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