Hello, and welcome to the Hub Group Q4 2021 Earnings Conference Call. Dave Yeager, Hub's CEO, Phil Yeager, Hub's President and 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. In order for everyone to have an opportunity to participate, please limit your inquiry to one primary and one follow-up question. 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 these 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, Dave Yeager. You may now begin.
Good afternoon, and thank you for participating in Hub Group's Q4 Earnings Call. Joining me today are Phil Yeager, Hub's President and Chief Operating Officer, and Geoff DeMartino, Hub's Chief Financial Officer. 50 years ago, my parents founded Hub Group. On this, the 50th anniversary, we're reporting record revenue and net income for Q4 and for the full year. Strong freight demand, coupled with the attractive value proposition of our services, has led to a record $4.2 billion in revenue and EPS of $2.48 for the quarter and 5.06 for the full year. We remain focused on providing value-added services by integrating our business with the needs of our customers. We will continue to diversify our non-asset-based services while focusing our capital investments on technology and growth in the intermodal business.
From a macro perspective, we expect positive economic conditions will continue to benefit our customers. We are very fortunate to work with customers who have been winners in today's economy. The macro outlook remains favorable, with 4% GDP, strong retail sales, a declining unemployment rate, and strength in imports. In addition, retail inventory to sales continues to be at historically low levels, and our customers continue to tell us that their shelves need to be restocked. On the supply side, the outlook for truckload capacity continues to be constrained due to a shortage of drivers, backlog of imports, issues with truck production, rising insurance expenses, and driver regulatory changes. We believe that 2022 will be similar to 2021 in as much as our prices will increase faster than our costs as the economy continues to experience inflationary pressure.
With that, I'll turn the call over to Phil to review our business lines.
Thank you, Dave. I wanted to start by thanking all of our team members across North America for all their hard work and commitment to our customers, which resulted in record financial performance and several awards for our service and sustainability efforts this year. I'll now discuss our service line performance for the quarter. Intermodal revenue increased 25% in the quarter despite a 9% volume decline after 11% growth last year. Transcon volume was flat while local west declined 10% and local east declined 14%. Gross margin as a percentage of sales improved 960 basis points year-over-year, driven by improved yield management and network balance, which more than offset rising transportation costs. Network fluidity declined in the quarter, both sequentially and year-over-year, as rail transit and street dwell remain elevated.
We are continuing to focus on improving our productivity while collaborating with our customers and rail partners to increase utilization of our latent capacity. Looking ahead, we anticipate a return to stronger service as investments from Hub Group, our rail partners, and customers drive greater throughput in our network. Demand remains strong, and we plan to invest to support our customers by expanding our intermodal fleet by 6,500 units this year while continuing to grow our driver fleet. Dedicated revenue declined 8% in the quarter despite improvement in revenue per truck per day and reduced third-party usage, which led to a 30 basis point improvement in gross margin as a percentage of sales year-over-year.
We have improved our service offering and operational discipline and have a great pipeline of strong return opportunities and onboardings, which we believe will lead to growth this year. Logistics revenue increased 13% year-over-year in Q4 , driven by strength in final mile and consolidation, which was offset by lost accounts from the prior year in our managed transportation offering. Gross margin as a percentage of sales increased 390 basis points year-over-year as new business onboardings and yield management improvements in managed transportation and final mile offset warehousing and transportation cost increases in consolidation. We continue to have extremely strong demand for our services given the dislocations in the global supply chain and anticipate continued growth this year.
Brokerage revenue increased 112% year-over-year and 48% higher volume due to the acquisition of Choptank as well as organic growth in our full truckload and LTL solutions. Gross margin as a percentage of sales declined 290 basis points year-over-year as we executed higher revenue per unit spot shipments, which comprised 51% of our volume in the quarter. The acquisition of Choptank has exceeded our expectations. We are winning with our customers and on track with our integration plan. We're off to another strong start this year and see ample opportunity to leverage our expanded network, strength in systems, and sales force to drive growth through cross-selling. With that, I will hand it over to Geoff to discuss our financial performance.
Thank you, Phil. Q4 featured all-time record revenue and profitability levels throughout the quarter and the full year. Revenue grew 32% in the quarter and 21% for the year. Our yield management and cost recovery efforts led to record gross margin of 16.9% for the quarter and 14.2% for the year. Gross margin performance and our focus on operating efficiency led to operating income of $118 million for the quarter, or 9.3% of revenue. For the full year, our operating income was a record $238 million or 5.6% of revenue. Salaries and benefits increased from last year due to our recent acquisitions as well as higher incentive compensation expense.
G&A declined compared to last year due to $10 million of gain on sale from the transportation equipment, offset by higher expenses related to the acquisition. Our diluted earnings per share for the quarter was $2.48, which is nearly 4x the prior year, highlighting the substantial operating leverage in our business. We generated $152 million of EBITDA in the quarter and 359 million for the full year. With cash of $160 million and net leverage of 0.3x EBITDA, we continue to have substantial flexibility to invest in our business through capital expenditures and additional strategic acquisitions. We have a bullish outlook for 2022, with continued demand from our customers driven by strong macro trends, growth in consumer spending, and low inventory levels.
We expect supply chain conditions will continue to be constrained and that our yield management and operational efficiencies will lead to further growth in earnings. For 2022, we are expecting EPS of between $5.90-6.30. We expect to grow revenue to approximately $5 billion, putting us well on our way to achieve our goal of $5.5-6.5 billion of revenue by 2025. We expect intermodal volumes will return to growth in 2022, supported by our container deliveries and improving rail service. We forecast gross margin as a percent of revenue of 13.9%-14.3% for the year as rate increases, surcharges, and accessorial revenues offset higher costs for rail transportation, third-party drayage, and driver wages.
For the year, we expect costs and expenses of $425- 445 million. We expect our earnings will be roughly similar for each of the quarters of 2022 as seasonal strength in yields in the back half is offset by rising transportation costs as the year progresses. Our capital expenditure forecast is $240- 270 million. We have ordered 6,550 containers for 2022, which will result in net growth of 6,000 or 14% after retirements of older units. This comes on top of 8% growth in 2021. We also intend to take delivery of over 750 tractors, the majority of which are replacements for older models that have an attractive ROI with lower maintenance costs and improved fuel efficiency.
We will also be finishing up a significant expansion of our headquarters campus in 2022, another example of the investments we are making for our future. In 2021, we introduced our long-term revenue and margin targets. Our recent acquisitions of Choptank, NSD, and CaseStack, and the significant investments in our fleet 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. Dave, back to you for closing remarks.
Thank you, Geoff. Needless to say, 2021 was a strong growth year for Hub. We believe 2022 has the same opportunity as we continue to expand our service offerings while investing in our core business, bringing significant value to our clients. With that, we'll open up the line for any questions.
Thank you. We'll now begin the question answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Justin Long from Stephens. Your line is open.
Thanks and congrats on the results. I'm still in a little bit of shock after seeing this. Maybe to kind of start with that point, if I think back to when you gave guidance in October versus these results today that came in roughly $1 above what you were expecting and the street was expecting, can you just help us bridge the gap into where the upside primarily came from? And I guess more importantly, can you talk about those drivers and what you feel like is sustainable going into 2022 versus anything that is maybe more transient or one time?
Sure, Justin, this is Geoff. Thank you for your comments there. Yeah, Q4 did exceed our expectations. We saw strength in a couple of areas across our business. Certainly intermodal, the impact of surcharges around the holidays, the impact of our yield management actions really did lead to higher than we had anticipated when it came to the gross margin generated by intermodal. In addition, we did bring in Choptank in Q4 . Choptank's performance did exceed our expectations as well. Our logistics business has done a really good job of bringing up yield. The top-line results have not been where we want them to be yet.
We do expect that to improve next year, but they've really done a great job of managing the gross margin side of the business there. Below the line, we did outperform our expectations really based on strength in gain on sale. We were able to sell more units than we had anticipated at significantly higher gains per unit. That really led to the outperformance in Q4. Going into next year, we do expect conditions will continue to remain like this in terms of freight demand constrained supply chain conditions. You know, we anticipate we'll be able to build on our price going into next year. We do have cost increases coming significantly on the rail side on the third-party drayage side.
We expect we'll continue to be competitive on the driver wage part of our business. We'll have increasing costs there during 2022. Below the line, we do expect to have our typical merit increases that'll come into effect here in February, as well as, you know, we do expect the used truck market will have some softening at some point in the year, so we're not anticipating quite as strong of a performance next year on gain on sale.
Okay. That's a helpful rundown. Maybe as my follow-up, any way we could get a little bit more color on the intermodal expectations that are getting baked into the 2022 guidance? I know you said volume should grow, but could you give us some kind of order of magnitude on the growth you're expecting for intermodal volumes, maybe intermodal price and the trend in accessorials?
Sure. We are expecting a return to growth next year on the intermodal volume side, low- to mid-single digits, really driven by the container deliveries, you know, a lot of which we got in in Q4, and then we're starting to take deliveries right away in Q2 here in 2022. That'll help with our volume. We expect rail service will continue to improve. That'll help create some capacity in our network to be able to handle that volume that we think will be there. On the price side, we're expecting for the full year, we'll realize mid-single digit price.
We'll start off stronger in the first part of the year, and then the year-over-year increases will come down into the low single digits by the time we get towards the end of the year.
Okay, that's helpful. Thanks again.
You're welcome.
Next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, thanks. Good afternoon, guys. You said at the beginning that you think pricing outpaced costs. When I look, the guidance is for gross margins to be flattish year-over-year. Maybe help us understand those two comments and maybe just along those lines, if you have thoughts on first half, second half gross margins and the guidance?
Sure. We do expect the margins will be roughly flat. We are gonna cover our cost increases with price. We do expect you know the transportation costs we mentioned earlier are gonna be increasing year-over-year. They'll be you know some of that will be more back half weighted as the year goes on. You know Scott you typically would see surcharge and seasonal you know strength in the back half of the year. We do expect that but we expect that'll be kind of offset by some of those transportation costs that rise throughout the course of the year.
What do you think that roughly means for first half or second half gross margin?
Gross margin percent, I think it's gonna be pretty consistent throughout the course of the year.
Okay. Then on the volume guidance low- to mid-single-digit, I think if we're thinking about this right, the container count's gonna be up over 10%, and sounds like you're assuming some improvement in service and then maybe some reduction in accessorial, so implying improved fluidity. Why isn't the volume better?
Well, the containers come in throughout the course of the year, so on a full year basis, we're expecting kind of that low to mid-single.
Okay. Just last thing, maybe just what is the latest you're seeing at the ports, if you're seeing any improvement, and then your thoughts on the market share shifts coming to UP this year, next year, and what that means for you guys. Thank you.
Okay. This is Dave. You know, as far as some of the new entrants that are coming on to the Union Pacific, we've been competing with them for many, many years. We really don't foresee a significant competitive change. You know, I'd point out that Hub is the largest intermodal partner on the UP. In fact, we're over twice the size of Schneider Intermodal and 5x the size of Knight-Swift Transportation. We also have 40% more drivers that we have allocated towards intermodal than either of our competitors. We have a great relationship with the UP. I think on a very positive note is that we have a long-term contract that features benefits that come with that kind of scale.
I would suggest to you it's also on the positive side that UP is gearing up for the additional business by investing $600 million of capital in 2022, targeting specifically chassis as well as terminals. Bottom line is, we view these conversions to be basically a net neutral for Hub and not a major competitive change.
Yeah. This is Phil. The other thing I'd highlight is, you know, obviously with, y ou know, one of the other providers coming onto UP being aligned with the Norfolk Southern, that'll give us maybe a little bit more density than the two other asset-based providers that are aligned with UP and CSX. We think with NS, we have a better reach, more density, and we'll have more interline options that will provide a good service. On the port side of your question, I think we aren't seeing a rapid improvement in congestion there. You know, demand for international remains very strong. You know, we're seeing that in the import of our own containers. You know, if we even see, you know, some improvement over the next few months, you know, you're in Q2, Q3, you're already back in peak season again.
At this point, we don't see a massive improvement to port congestion this year. That should, you know, continue to provide opportunities for us to grow well into 2023.
Thank you guys. Appreciate it.
Thanks, Scott.
Our next question comes from Todd Fowler from KeyBanc Capital Markets.
Hi. Great, thanks and good evening. I wanted to ask kind of your views on rail service, and I guess in the context of how important. I understand from the volume guidance and kind of the expectations that you're embedding improvement in rail service. When I look at Q4 , and I think about, you know, kind of the results that you're able to put up, you know, is the message that if rail service doesn't improve materially, you know, you can still kind of get to a similar answer, and it's just a movement between volume and price. I guess how important do you view, you know, rail service in the context of your guidance? I understand it's important from a service perspective, but just from an outlook standpoint, how are you thinking about that?
Yeah, you're absolutely right, Todd. We do wanna see improved service. Long term, that's the right thing. That's gonna allow us to convert more business from over the road. I think as our customers get their inventories in better order, they're gonna look to expedite fewer shipments, wanna convert more to intermodal. So having capacity and a better service product, and a more consistent one, if it's available, is really gonna help. We have seen, at least at this point, a slight deterioration from Q4 to Q1. I think that's winter weather driven, as well as we just haven't seen the investments really take hold. We're hoping as weather really starts to subside, that we can see that improvement.
You know, I think the other piece for us is we've actually seen an improvement year-over-year in our end-to-end service product to our customers, so we're really excited about that. Even in disruptive times, we're able to improve our service product. Really, you know, pleased with that. I think with you know, the question around margins and does that deteriorate if service improves, I don't see that at this time, given the demand that is out there, given the you know, constraints in the driver market. And you know, it really with accessorial revenue potentially subsiding at this point, we'd much rather be moving that volume. The opportunity cost is much higher. You know, we think that'll be a good formula for us going forward.
Yeah. No, Phil, that makes a lot of sense, and really was more in the context of, you know, it seems like the business, the guidance isn't so much dependent on the improvement in rail service, and we certainly understand the service component of it, so that's helpful. I guess just for my follow-up, you know, how do we think about the 2024 guidance in the context of the 2025 guidance? I know that, you know, 2025 wasn't supposed to be a straight shot, but when I look at the high end of your revenue guidance for 2022 and the low end of your guidance for 2025, I mean, you're pretty close. Would your expectation be that, you know, things level off, you know, post 2022?
Is it something that you feel more confident in achieving the 2025 targets, maybe on the earlier side? Thanks.
No, I mean, we did give a range, so I think, you know, the guide is gonna get us a big chunk of the way there. I mean, part of the way we're getting there is both organic, but also through the benefits of the acquisition of Choptank, which I think, you know, we're gonna continue to do. If we can continue to make acquisitions like that, we would anticipate being towards the higher end of the range by 2025.
Okay. Thanks for the time.
Welcome.
Our next question comes from Jason Seidl from Cowen. Your line is open.
Great. Thank you. On the brokerage side of the business, last quarter you discussed some of the cross-selling opportunities for Choptank. Can you discuss some of those wins in the quarter and kind of whether most of that low-hanging fruit has materialized and kind of how we should think about the brokerage margins in 2022?
Sure. Yeah. This is Phil. We are really excited about the Choptank acquisition. It's been a great cultural fit thus far. They have a great team. We move with a lot of speed with that group in particular, and that's been phenomenal. We've actually seen three record months from the Choptank organization right out of the gate, which is phenomenal, and we wanna continue to see that. We're ahead of schedule on our cross-sell targets, but to me, we've only really scratched the surface of that. I think the only other interesting thing I'd share with you is that sometimes during an acquisition you get a little nervous around shared customers, right? And how that'll play.
We've actually seen a real positive come out of that, where we have a joint relationship with those customers. We're actually able to create even more value, not actually deteriorate the existing relationship. I'd say, you know, all in all, we're really excited about the progress we're making and, you know, think there's a huge opportunity that we're really just getting started on. It's been exciting. I think only other piece I'd share is the refrigerated market continues to have a significant amount of demand, and we're actually going to be investing in 550 incremental refrigerated containers this year to help support our selling into that market, supporting existing Choptank customers, but also our existing Hub customers building that real refrigerated product offering.
Feeling very good about that as well.
Okay. Should we think about that margin structure of the brokerage business staying relatively the same this year?
I think you'll see, Choptank typically has had a lower gross margin percentage, mainly because of moving higher revenue per unit spot shipments that have that lower gross margin percentage. You might see that come down, I think, but we will be consistently focused on getting that higher throughout the year. I think our existing brokerage between LTL and truckload, you'll see that remain relatively similar, you know, depending on what the spot market does throughout the year. Our forecast is, you know, at least coming out of the gate, we'll continue to see a similar sort of trajectory.
Okay, great. Thank you.
Your next question comes from Bascome Majors with Susquehanna Financial.
Thanks for taking my questions. You know, into what were strong fundamental years before, you certainly saw some conservatism in the initial outlook. You know, I guess that argument could be made on the back of what you just did for Q4 in the idea that not a lot of market conditions are changing near term. Can you talk about sort of the puts and takes, you know, where might there be some conservatism? Where might people risk getting ahead of themselves when we think about projecting out the next, you know four quarters for your business? Thanks.
Sure. Yeah, happy to do that. You know, our forecast, and we did give a range, was meant to encompass kind of the current market conditions with some input cost inflation. You know, additional strength areas could come in areas like, you know, stronger surcharge revenue in the back half of the year. We certainly are aiming to grow intermodal volumes at a higher rate than mid-single digit. If there's continued tightness in the truckload market, that's gonna obviously benefit our pricing. Rail service is another area of potential upside, which would facilitate more truck to intermodal conversions.
There could be additional strength in the used truck market, which would result in more gains on sale for us. Of course, you know, we're on the lookout for additional strategic acquisitions that could be another source of upside. You know, on the downside would be any weakness in consumer spending if consumers, you know, shift their spending back to services. You know, there is a pretty big backlog of inventory that needs to be rebuilt. So that we think will be a tailwind for a while, but if there's a sustained shift back to services, that could be a negative. If there's a return of oversupply in the truckload market, that would weigh on price.
Just additional driver turnover, if we can't bring that down into 2022, you know, that could go the other way. Those would be the big pluses and minuses to the guidance.
You know, thank you for that. Do you expect anything fairly abnormal for seasonality this year?
You know, coming out of the gate to start the year, we're seeing very strong demand. You know, we don't foresee a change at this point from conversations with our customers and what we're seeing in the data. You know, feeling like market conditions will continue and which gives us confidence in the guidance.
Thank you.
Our next question comes from Tom Wadewitz from UBS.
Yeah, good afternoon, and congratulations on the really strong results. I wanted to see if you could offer some thoughts on just the M&A backdrop. I mean, you know, obviously, you've got a lot of momentum and firepower with the ability to go and do more deals. You know, should we expect you to do something in 2022? You know, you think that's likely, and then also just, you know, you bought a really high-quality brokerage company, a lot of momentum there. Where would you know, where is the next place to look in terms of what might be a, you know, a place you wanna add in terms of businesses?
Sure. Yeah, no, we definitely expect to be active on the M&A front. We've got a very solid pipeline. We've got engagement from a lot of our business unit leaders. You know, we've had really good success when we are out just knocking on the doors of companies that we think fit our profile. You know, we spend a lot of time upfront getting to know the management team and the ownership. I think that's what really has led to the successes we've had recently with Choptank, with NSD. The commercial synergies that we're penciling out in diligence, you know, we're finding those are coming to fruition. We've got a great customer base with our existing business, and they're willing to give us opportunities to sell new services to them.
That will really inform our strategy going forward. Choptank was a great example of both adding scale to an existing business as well as adding a new capability. We scaled up in brokerage, and we now have a very solid refrigerated transportation platform to build off of. Areas for, you know, targeting future acquisition really gonna be non-asset-based logistics providers. We have a great footprint with Nonstop in the final mile space really around the big and bulky, as an example. What we don't really have today is the ability to do appliance deliveries and installations. That would be an area of interest to us. Things like e-commerce fulfillment with our customer base being retail and CPG, we think there's a lot of opportunity there.
That's another example of an area that we'll target for growth.
Okay. Yeah, great. Wanted to ask you one on the volume side as well. I guess, can you give a little more perspective on the timing of the container adds? Then maybe just, you know, what should we really pay attention to in terms of the constraints that, you know, if they get better, you can do upside on the volumes and are kind of, you know, important inputs? Is it, you know, your own drayage capacity? Is it, rail terminal operation? What are kind of some of the key factors that feed into the intermodal volume output?
We've really received all of our 2021 orders at this point. We only had, you know, less than 5% kind of bleed into the first part of the year. We'll have the remainder of the 2022 order really coming in throughout the year leading up and into peak season, probably the last deliveries come in, you know, around November. It'll be a pretty even sort of trajectory and cadence throughout the year. I think that obviously is gonna be a nice tailwind, assuming we don't see any drops in service or turn times or any new COVID variants or anything like that that create staffing shortages.
We would anticipate throughout the year you're gonna see a better percentage growth. We did start with January down 6%, but we were up 3% on our volume sequentially. We think that's a nice trajectory. If we see that continue as we start to overlap the shutdown Union Pacific had during February of last year, you know, we could see momentum start to carry out of the first quarter for growth and into the remainder of the year.
On a monthly basis, maybe March easy comp, you could actually potentially be up in March, something like that?
Yeah, agreed. Yes. You know, if service continues to improve like we think it will as, you know, Norfolk Southern and UP start to get staffing up and more chassis online, we and our customers become more fluid, and we do as well, we think we're gonna see, you know, upside to that. That growth trajectory, that volume percentage growth trajectory should be moving, you know, progressively upwards throughout the year.
Great. Okay. Thank you. Appreciate it.
Thanks, Tom.
Our next question comes from Allison Poliniak from Wells Fargo.
Hi, good evening. Just wanna ask about Choptank. It sounds like it's growing better than you anticipated. Is there a way within the context of your revenue guidance in terms of what the contribution from core versus the acquisitive growth would be for 2022? Any color there?
Sure. I can just repeat that. At the midpoint, we're looking at about 19% growth in total. We would be at about 10%, organically.
Got it. Just going back to the question on M&A, it sounds like a pretty active pipeline. Could you maybe talk your comfort level with leverage? It certainly seems like you have a lot of capacity today, but kinda where your comfort level would be within that leverage range, just given the active pipeline.
Sure, yeah. We're at about 0.3x net leverage on an EBITDA basis today, which, we think gives us a lot of flexibility to pursue investments both in capital expenditures in the containers and tractors, but also to give us the capacity to do acquisitions. We're comfortable going up kind of north of 2x , maybe 2.5x EBITDA for the right deal, but we'd like to maintain our leverage closer to 1x EBITDA over time.
Great. Thank you.
Welcome.
Our next question comes to Jonathan Chappell from Evercore ISI.
Thank you. Good afternoon. Phil Yeager, there's been a lot of focus in the industry on logistics, and the growth, you know, across the entire industry has been pretty remarkable in the last couple of quarters. You know, your revenue was maybe a little bit lower than expectations, but your gross margin on the logistics side up 390 basis points was huge. Are you trying to be a bit more disciplined with the onboarding of customers onto your platform to focus a little bit more margin as opposed to, you know, just growing the top line as fast as you can?
No, that's exactly right. I think we, when we look at our logistics segment, we have scale in the LTL and truckload space, so we get to be selective, due to our purchasing power that exists today. We wanna find customers that fit our profile, that wanna be with us for the long term, and that we can generate a strong return for the investment that we're making as well. Yes, we've been much more disciplined in our approach, and I think that has allowed us to bring on the right business that we hope will be much stickier, you know, longer term. Sometimes you see with some of those really high revenue, low profit sorts of engagements, those can, you know, be somewhat volatile.
We have been much more selective there. I think, you know, it's proven out to be beneficial for us.
Okay, great. Then just for my follow-up, I don't wanna just keep harping on the short term here, but you know, you're one of the last to report this quarter, and you know, we've heard about stick outs by employees and at shippers as well, labor shortages, terrible weather. You know, the volume has obviously been showing up in the rail data. Yet I think it was pretty interesting that Geoff said, like, the gross margin and the EPS will be pretty ratable on a quarterly basis throughout the year.
Should we just think about as a big needle mover, you know, intermodal pricing will continue to kind of be what it was like in the second half of the year, those huge kind of 26%-37% increases, and that kind of offsets a lot of these macro headwinds that you're facing in the early part, in the back half of the year, it's kind of really a more, quote-unquote, normalized operational backdrop?
Sure. Yeah, I think that's right. Yeah, we will see. We are seeing a strong start to bid season, and just to give you a cadence around it, 44% of our business in Intermodal is gonna be repriced in Q1, 34% in Q2, and then 19% in Q3. That Q2 is actually a little heavier than is typical in years past. Given where pricing is currently, and we forecast it's going to continue to be in Q2 , that could be a little bit of upside for us. There's a benefit to customers in that they wanna lock in capacity right now, right? Us making these investments is gonna allow us really to do that.
I would anticipate you see a little bit more of a normalized peak season next year, but you know, we also thought that that was gonna occur this year. If these issues and challenges and supply chain issues persist, you know, you could continue to see these conditions, you know, well throughout the year.
Okay. That's great. Thank you, Phil.
Our next question comes from Brian Ossenbeck from J.P. Morgan.
Yeah, thanks. Good evening. Appreciate you taking the question. Maybe just to follow up on the pricing commentary. It sounds like shippers are obviously pulling forward some of the contracts a little bit, trying to lock in capacity. Is there anything else that you would say is, you know, sort of different this time? Obviously, quite a few things are different, but at least from a contractual perspective, longer term agreements, different, you know, different forms of pricing. You know, how do you think that this whole experience over the last couple of years will change or has changed how some of these transactions get done, especially on the intermodal side?
No, I think that's exactly right. We're seeing a lot of customers be very interested in moving to more of a multiyear framework with, you know, floors and ceilings related to, you know, publicly available data. Those are contracts that we're comfortable with, you know, with the right customers, and we will continue to pursue those, especially with business that we define as base load or that's network beneficial. You know, it might not be that we'll lock in an entire network with a customer, but we might say, okay, half the business is really good business for us that we feel comfortable with, you know, locking in these prices for a multiyear period. We are taking that approach, and for a lot of customers, they're very interested in it as well.
The other thing that we're seeing right now is a consolidation of providers, whether it's in brokerage or intermodal. For the providers, we think like ourselves with our, you know, our strategic customers that we've really stepped up for, we're gonna see some benefits coming out of that and opportunities to continue to grow with our strategic accounts through that process.
Okay, great. Maybe just one quick follow-up on that second one. Is there ESG part of the conversation at this point, at least, in a more material way.......
Yeah
......than it's been in the past?
Certainly. Yeah. I think every supply chain team at a large, you know, Fortune 500 company like which is our customer base is thinking about how can they contribute to the sustainability efforts of their company. We provide them with, you know, a lot of data around the carbon emission savings and, you know, what business could potentially convert to intermodal. That, you know, is gonna continue to be, we think, a story for several years to come. You know, we need to continue to get our service to the right level to fully take advantage of that. I think the other piece that is gonna continue to play into conversion to intermodal is fuel prices as well.
If you see that continue to move upward, that could be, you know, another good tailwind that comes into conversion to intermodal as well. All those factors, we think, are gonna continue to drive a nice conversion opportunity for the next year and we think beyond.
Can you just talk briefly about the IT spend to win within that $40 million total, including the headquarters. What are you focused on there? Is it still transitioning over to Oracle? Anything integration-wise on Choptank? Maybe some of the bigger projects you're working on would be helpful.
For us, you know this, we've really gone to a buy commodity, but built for differentiation approach, differentiating for our customers, for our vendors, for our team members. We've really been focused on utilizing our satellite tracking to provide end-to-end visibility. We've done a great job of automating workflow, getting better intelligence to our teams and our drivers so they can be optimal in their workflow. I think one great initiative that I've seen really benefit us over the last year was within our brokerage. We built a customized workflow management tool, and we've seen an 18% improvement in productivity on a volume basis within that team over the past year. A really impressive result, you know, we think.
We're gonna continue to make investments like that, and we're doing that across the organization. I think you're gonna continue to see us become more and more efficient and more effective and responsive to our customers. On top of that, to your point, we gotta do a great job in integrating our acquisitions. I think we have done a phenomenal job getting, you know, Choptank onto our ERP and integrated in with our human capital management, all of that is gonna be part of the work. As we do more acquisitions, we're gonna stay really on top of that and make sure that we integrate timely, but also very well. Those would be a lot of the big initiatives that we're focused on.
I'd also just highlight within truck technology, we continue to assess our investment in electric trucks. I think that's a great opportunity. We're doing autonomous vehicle tests. You know, a lot of really interesting things are out there from that perspective as well that are exciting, even just beyond the workflow management tools we have here at Hub as well.
Okay, great. Appreciate it, Phil. Thank you.
Our next question comes from Fadi Chamoun from BMO. Your line is open. Fadi, if your line is on mute, could you unmute your phone?
Yes. Hi, good afternoon. Congrats on the results, first of all, and thanks for the question. Can you remind us about the box turns that you have currently in the intermodal network, and what would that look like, you know, in more normal times?
For the full year in Q4 , we were up about 10% year-over-year. We actually saw a decline sequentially from Q3 to Q4 of 3%. You know, the year-over-year deterioration mostly was driven by rail service. You know, there's a mixed component in there. I think you can see that our Transcon volumes continue to outperform the remainder of our network. That elongates your transit a little bit, but that's not really a massive impact. It might be a percentage point or two. On the sequential decline, that was mostly driven by customer pools, you know, and unloading times at customers as I think. You know, that makes sense that demand was up and staffing levels were coming down, right?
We saw some longer dwell in our customer pools. I think if you look at normalized levels, there's a lot of upside here, you know, and could be, you know, as much as 15% on our turn times as we get back to more normalized service levels. It, you know, could be even higher than that. We're excited to see that take place and think that as the year progresses, we'll see that improvement take hold.
Okay. The second question, going back to the volume guidance on the Intermodal side. I mean, if I look back, you know, a few years now, five, six years, it feels like we've gone through multiple cycles where fuel prices were up or down and truck market was loose and tight. Throughout that, volumes in Intermodal have really struggled to grow. Here we are today with kind of record saving for Intermodal versus truckload. Yet the volume picture looks kinda, you know, not all that impressive. Like, what does need to happen on the Intermodal service product side to really start to see that structural growth opportunity in Intermodal play out?
Yeah. I think from a capacity commitment perspective, the intermodal industry, there are tender acceptance rates or, you know, versus the truckload industry or, you know, which have been in the high 70s%-low 80s%. Typically Intermodal, we're in the low- to mid-90s%. So the commitment to capacity, I think, is there. What is not there, particularly in shorter haul lanes right now, is a consistent service product. I don't think our customers are looking for necessarily the fastest transit. They're okay with, you know, two days extra, but to capture those savings. It needs to be two days. It can't be seven days longer one time and two days faster the next. It has to be consistently, you know, two days slower than truck.
I think that, on a consistent basis, is what we need. I know we're all, along with our partners, very focused on delivering that. That's why I think you continue to see our Transcon business perform better than our local business as well, is that where you can more consistently capture that service and those savings versus those shorter lengths of haul where you have maybe less of a room for error.
Okay. Thank you. I appreciate that.
Just as a reminder to enter the queue, please press star then one on your touchtone phone. Again, that's star one, enter the queue. Our next question comes from David Zazula from Barclays. Your line is open.
Hey, congrats on the quarter, and thanks for taking the question. Just wanted to ask, and you'd alluded a little bit to it in one of the previous answers about your use of rail-owned equipment. I think you talked about it in the east, but maybe can you discuss a little bit more your use of rail-owned equipment during the quarter? What, if any, challenges that presented and what challenges and opportunities you might have for that in the coming year?
That would be a part of the volume decline that you're seeing for us. Last year, we were about 93% of our business was done in our own fleet. This year, that's closer to 99%, mainly because we can better manage our own fleet. It's much less expensive when you have higher spot rates. We have really, you know, removed a lot of the rail network to under 1% of our volume is in rail-owned boxes. That has been a concerted effort, and it's part of why you're seeing, you know, some of that volume decline on a year-over-year basis.
Great. As a follow-up, I don't know if you have handy the sequential headcount number for Q4. Related to that, I guess you didn't note, you know, labor as being a constraint to volume kinda anywhere throughout any of the businesses. Maybe, you know, touch a little bit about what you're doing in human capital to kinda keep the labor count up in kind of challenging labor times.
Sure. At the end of the year, our headcount was non-driver headcount was 2,300. Last year, we were just under 2,000, so up by 300, but we did add around 400 employees through the acquisition of Choptank.
Then, you know, just from a human capital perspective, I think, you know, we really value our culture. We have a great human resources team, we have great managers, and we've really worked hard to provide a really great environment for our team so we can keep turnover at a minimum, but also make sure that we're giving them better and better tools so they can be more effective at their job and give people progression opportunities within their career. That's gonna continue to be our focus.
You know, I don't think we would say that we're perfect, you know, and we always have opportunities to improve. You know, we've experienced somewhat higher turnover, but not anything that has impacted us. You know, I think our whole organization has really rallied around the opportunity to service our customers and continue to grow.
Thanks.
We have no further questions. I'll turn the call back over to David Yeager for final remarks.
Okay. Well, thank you for joining us for the Q4 Earnings Call. As always, if you do have any additional questions, Geoff, Phil and I would be available. Thank you.