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Operator: 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.

Phillip Yeager: 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’re 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 an improved and more consistent rail service products that along with our rapidly increasing into a straight percentage, improved rail agreement 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 provided our revenue streams to be 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 pay 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.

Brian Alexander: 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 12% in the fourth quarter, with a 9% decline in the Local West, 9% decline in Transcon, and 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 in-source trade, up in 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 offering has 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 a competitive price 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 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 improve purchasing. We are well positioned to continue our growth through our integrated approach to our customers, high service levels and expertise and our capacity types, including reefer, dry, LTL and drop trailer. With that, I’ll hand it over to Geoff to discuss our financial performance.

Geoff DeMartino: 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 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 less 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 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.

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Operator: Our first question comes from the line of Todd Fowler of KeyBanc. Your question please, Todd.

Todd Fowler: 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?

Geoff DeMartino: Sure, Todd. This is Geoff DeMartino. The range is wider than usual. I think just 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 north of 50% I’m not sure we’re going to do that quite that well this year, but we tend to be conservative on our overall guidance initially at the start of the year.

Phillip Yeager: 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 and 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.

Todd Fowler: 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 comment or share any thoughts on maybe the volume decline here in the fourth quarter 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.

Phillip Yeager: Yes, Todd, this is Phil. We watch our share very closely. Our strategy has been to really focus on maximizing our margin per load day, which has guided us towards longer transit and longer haul business, which I think led to some of the volume decline especially when you take into account the longer customers as well. So when we look at it, we actually feel like – and revenue per load is up 19% that we actually gained share on a revenue basis even though volumes were down. Our focus is going to continue to be on maximizing that margin for low days that’s what generates the highest return on capital. As we look at January, volumes were down 8% on a year-over-year basis, but actually up 9% sequentially. So also feel good about the momentum that we have to start the year.

Todd Fowler: Okay, that’s helpful. Thanks a lot. Phil thanks for the time tonight.

Operator: Thank you. Our next question comes from the line of Jon Chappell of Evercore. Your line is open. Jon?

Jon Chappell: 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 to be continued?

Phillip Yeager: 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 improved sequentially and seen 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 derisking 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.

Geoff DeMartino: 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.

Jon Chappell: 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 is 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?

Phillip Yeager: Yes Seth this is Phil. I think it’s a little early for a determination on bid season, but I can give you a little bit of color. Obviously, it’s a different environment than we were in this time last year. But we do feel as though and this has been the historical norm that intermodal will outperform truck by a pretty strong margin. We are continuing to show our customers strong savings towards truck, especially when you take into account fuel and our focus is going to be on that maximization of margin per load day. We have a significant opportunity to better balance our network and take out empty repositioning costs that can create more density and fluidity with our driver base as well. So we’re really focused on – we have a sustainable service products, we have savings.

And you’re able to de-risk your supply chain and all that is coming together I think very well to see a strong bid season for us. And just – in general for over the road conversion to intermodal.

Brian Alexander: Yes, I’ll also add to that to 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 insource 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.

Jon Chappell: All right, that’s super helpful. Thanks, Brian. Thanks, Phil.

Phillip Yeager: Thank you.

Operator: Thank you. Our next question comes from the line of Jason Seidl of Cowen and Company. Your question please, Jason.

Jason Seidl: 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 items seize. 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.

Phillip Yeager: 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 we think perhaps based players. So I think that’s going to continue. I think the last couple of years have shown a lot of the weakness in the non-asset based IMC model particularly around driver availability and capacity availability. So yes, I would agree with that assumption.

Jason Seidl: 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 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?

Phillip Yeager: 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 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.

Jason Seidl: We’ll have our fingers crossed too. Appreciate the time, as always, guys.

Phillip Yeager: Thank you.

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

Brian Ossenbeck: Hey good evening, thanks for the time. So Geoff, you mentioned the big disconnect with the valuation the stock and versus peers. You’re active with the buyback in the third quarter, but it didn’t look like there was any activity on 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?

Geoff DeMartino: Sure. Our priorities for capital deployment have always been invest in the business, first and foremost, through CapEx. We’ve been growing the container fleet 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 M&R 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 put together a really nice offering for the customer and take out some costs there.

So 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 – a 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.

Brian Ossenbeck: 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 guide 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.

Geoff DeMartino: 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 a really – we’ve seen them embrace better economics for us is a way for us to drive growth and convert freight off the road. And so, there is – 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.

Phillip Yeager: 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 cost 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.

Brian Ossenbeck: All right, thanks for the time, appreciate it.

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

Bascome Majors: When we think about the guidance and the cadence, is there a quarter or a period in the year where a couple of negative things line up, be it the roll-off of accessorials and pricing or really anything like – or even the rail increase, where – you’re just going to feel kind of the maximum part of the pain based on things you have some visibility into. I think that would be helpful as we set expectations for how the year plays out? Thank you.

Phillip Yeager: Yes, great question, something we thought about when we were putting guidance together. It’s going to be a little balanced. We’re going to be entering the year with a nice price tailwind coming out of a strong bid season in 2022. About 75% of our volume will reprice in the first half. So, we’re expecting stronger pricing in the first half, stronger accessorials, but the second half, we’ll see a pickup in volume. The accessorials probably roll off as we see more fluidity and price – we’re not anticipating will be quite as strong in 2023. So we probably will start off the year a little bit stronger. I think there is upside, though. We’ve had really two really strong years of peak season surcharges that really kind of went on throughout the year.

That has gone away. And but to the extent the upper end of our case is realized, that would come with a tightened – a tightening in the second half of the year, which we would expect would come with more surcharge.

Bascome Majors: 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.

Geoff DeMartino: Yes, we think with respect to intermodal, if there’s no retailer inventory levels stay low or the recession is severe impact in consumer spending and volumes don’t kind of pick back up, that would certainly impact the second half. We haven’t talked much about it, but we do have our other lines of business that account for 40% of our revenue, that tend to be less cyclical and less price and volume driven and more kind of longer term in nature. That will – that’s one of the things that’s changed if you look back at our history, those non-asset-based businesses are 40% of our revenue today. That’s up from about 30% five years ago. And it does provide more of a cushion.

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

Geoff DeMartino: Yes, it’s around $250 million, so EBITDA and CapEx and a little bit of cash taxes.

Geoff DeMartino: Thank you.

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

Scott Group: Hey thanks afternoon guys. Just following up on the last question it sounds like pricing better first half volume better 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 person of the earnings do you think first half, second half or even quarters or however you think about it?

Geoff DeMartino: 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.

Scott Group: Okay. And then you talked about the margin – the operating margins have gone from 2% to 9%. I think I want to trying 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?

Geoff DeMartino: We don’t kind of bring it down to that level, but I would suggest we’re probably in the same range as them if not higher. Our business tends – price is a pretty strong driver for us, and we certainly saw the benefit of that in 2022.

Phillip Yeager: 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.

Scott Group: And as we insource more and we’ve got new rail contracts, what do you it’s like, 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?

Geoff DeMartino: 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 result 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 insource 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.

Scott Group: 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?

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

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

Geoff DeMartino: We’re targeting 80% insource. 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. Allows us to flex up more quickly to service our customers in high demand environment 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.

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

Phillip Yeager: Thanks Scott.

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

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

Geoff DeMartino: 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 returns of demand and maintain service levels at a better level. So, we want to keep that consistency and we 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.

Christopher Kuhn: All right, great. Thank you.

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

Allison Poliniak: 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 maybe doing more than one just management capacity to handle sort of an increase in M&A, just any thoughts there?

Phillip Yeager: 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 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 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 really nice balance of asset and non-asset based warehousing and we’d like to really replicate that with those types of acquisitions.

Allison Poliniak: No, that’s great. And then just on the tag logistics, what are you seeing in terms of the dispensability that model just given is 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?

Brian Alexander: 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.

Geoff DeMartino: And to your point on – or to your question on CapEx, so the facilities are all leased. We do make some investments in equipment and racking that’s maybe 5%, 6% of our overall CapEx.

Brian Alexander: 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 a 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-com 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.

Allison Poliniak: Great thanks for the color.

Operator: Thank you. Our next question comes from the line of Bruce Chan of Stifel. Your line is open, Bruce.

Bruce Chan: 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?

Phillip Yeager: This is Phil. We haven’t had any large customer changes. We typically do have some churn within our consolidation programs as customers are acquired or they get large enough to insource their own warehousing footprint, but nothing really material there. I think we’ve done a really nice job of setting a long-term warehousing space plan with our partners both on the 3PL side as well as some of our real estate partners. We don’t really foresee any out of market sort of increases in overall costs. Obviously, industrial capacity remains very tight from a warehousing perspective, not at historic levels, but coming off of those. We’re going to – as we look at new space and renewals, try to take that into account, but we also want to take a long-term view and continue to grow and invest in expanding that footprint.

So we feel like we have a great team that works on that, very pleased with the process thus far and feel very good about our ability to keep growing there. As Brian noted, the cross selling has been phenomenal to start and we’ve exceeded our expectations already.

Brian Alexander: 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 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 priced, very focused 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.

Bruce Chan: 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?

Brian Alexander: 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.

Bruce Chan: All right. Very good. Thank you.

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

Thomas Wadewitz: 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?

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

Thomas Wadewitz: Okay. All right. When I think about the, I guess, the 12% down for the full quarter, it’s — obviously, it’s a weak market. But I’m wondering, how do you think about pricing — your approach to pricing against that backdrop? Is it something where you say, okay, we can kind of stay reasonably disciplined pre down 10%, down 12%. But if we end up going down 20% and someone else pushes harder on price, then we got to kind of push back more. I’m just trying to think about what happens with the Intermodal competitive environment and just how we think about the pricing dynamic in the contract season for ’23.

Phillip Yeager: 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% in Intermodal. 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 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.

Thomas Wadewitz: 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?

Geoff DeMartino: Yes, I would say not as strong as 2022 and better than truckload is kind of how we modeled it.

Thomas Wadewitz: Right. Do you think — okay. So I think that market view as kind of truckload down high single digits. So maybe something in mid-single digits or what something better than truck?

Geoff DeMartino: Yes, better than truck. Yes.

Thomas Wadewitz: Okay. All right. Great. Thank you for the time.

Operator: Our next question comes from the line of Ravi Shanker of Morgan Stanley. Your question please, Ravi.

Ravi Shanker: 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 like the macro conditions that we see right now remain reasonably the same, do they expect an actual restock and a real up cycle in the back half of the year going into ’24?

Phillip Yeager: 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 season. 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 snack sort of 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.

Ravi Shanker: Got it. No, that is helpful. And I agree kind of that. That’s probably the biggest unknown out there. And maybe as a follow-up, kind of obviously, you said that you expect over-the-road conversion which is understandable as rail service improves. But again, your conversations kind of over the last few years, how has the kind of the rail service you’ve seen kind of has that kind of permanently shifted any customers towards truck? And also in the last couple of up cycles, when shippers are looking to restock, they look for service and speed and so they tend to kind of bias towards truck versus rail. Are you confident that will not happen in the next up cycle, hopefully, that’s in the back of this year?

Phillip Yeager: 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 midsized 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.

Ravi Shanker: Very helpful. Thanks guys.

Operator: Thank you. Our next question comes from the line of Justin Long of Stephens. Your question please, Justin.

Justin Long: 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.

Phillip Yeager: Sure. And those two would kind of go hand in hand. I think we — from a margin percent perspective, we’ll start the year stronger probably in a similar spot to where we finished 2022. And we would anticipate that those — that margins would decline as a percent in the second half with softer pricing and with less accessorial revenue, but then offset that with increased volume to drive the dollars. Does that makes sense?

Justin Long: 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 ads 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.

Geoff DeMartino: That’s correct. Yes. It’s 5% to 6% on a net basis. We didn’t — we’ve got some containers that have reached end of life that we’ve held off on retiring, but we are going to pursue that this year.

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

Justin Long: Okay. Helpful. Thank you.

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

Phillip Yeager: 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, Jeff or I, and hope you have a great evening.

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