HUBG - NASDAQ

Hello, and welcome to the Hub Group Second Quarter 2024 Earnings Conference Call. Phil Yeager, Hub President, Chief Executive Officer and Vice Chairman; Brian Alexander, Chief Operating Officer; and Kevin Beth, Chief Financial Officer, are joining the call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the prepared remarks. In order for everyone to have an opportunity to participate, please limit your inquiries 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 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.

Good afternoon, and thank you for joining Hub Group's second-quarter earnings call. With me today are Brian Alexander, Hub Group's Chief Operating Officer; and Kevin Beth, our Chief Financial Officer. I wanted to start by thanking all of our team members across North America for their hard work and dedication to serving our customers. The domestic grade market has continued to be challenged with a highly competitive bid season, balanced demand, and excess supply of capacity. We have seen a more stabilized inventory environment as well as incremental capacity attrition and anticipate some peak season in the West Coast due to solid import demand and potential East Coast labor disruption, which along with our recent wins should support strong volume performance through the remainder of the year. We've seen some signs of market tightness, but nothing that would denote a sustainable trend at this time. Our customers continue to have options in selecting their providers, and we are supporting them with our full portfolio of services, strong cost and financial position as well as our best-in-class service, which we believe will lead to improvements in growth and returns. In intermodal, we are providing record service sales along with a cost-competitive product leading to 8% volume growth in the second quarter. A few highlights that stand out are continued growth in the local East of 26%; and in Mexico, which was up 60% year-over-year in the quarter, while we also grew our TransCon volumes. Our margin per load day focused bid plan is enabling better-balanced growth, which is leading to cost reductions in our drays network and lowering empty repositioning costs. All of these initiatives are allowing us to win in this environment and position us for the future. We remain focused on servicing our customers through their fluctuations in demand and reducing costs to drive ongoing growth. In Dedicated, we continue to see top-line momentum as we onboarded new sites for existing customers. However, earnings performance in the quarter was impacted as we invested in servicing our customers through their spring search. This investment, we believe, will support additional growth opportunities and retention of our customer base in the long term. Our brokerage team continues to drive growth in LTL to offset the challenges of the broader truckload environment. Despite the first volume decline we have seen in several quarters, we are confident in the performance of our team and our value proposition to our customers, which is leading to strong bid wins that will be starting in the near term. In our contractual logistics services, margins have been strong, consistent with our diversification strategy, and we are completing our integration of our Final Mile acquisition from last year. Our best-in-class Final Mile service offering and cost optimization efforts are leading to new wins, which will onboard during the second half of the year. In Managed Transportation, we are winning with new customers and full outsources and LTL management, helping them reduce costs and enhance control of their supply chain. Finally, within our consolidation network, we are focusing on optimizing our network to improve our service and costs and anticipate improvements in the months ahead. We continue to take action to position Hub Group's success. We are maintaining our focus on successfully navigating this challenging market through our disciplined operational investment approach while providing best-in-class service to our customers, which we believe will position us well for the market recovery and drive strong shareholder returns. Our diversification strategy has helped us deepen our value to our customers while stabilizing our margin profile, and we are continuing to successfully manage our costs across the organization. Finally, while results have been challenged given broader market conditions, we are in a phenomenal financial position with strong free cash flow generation, little net debt, and ample liquidity to continue to grow via acquisition and invest in our business while returning capital to shareholders through our dividend and ongoing share repurchases. With that, I will hand it over to Brian to discuss our operational results.

Thank you, Phil. In ICS, intermodal volume grew 8% year-over-year. On a subsequential basis, second-quarter volume growth was 12% over the first quarter, highlighting our momentum and implementation of new contracts. By region, Transcon volume was up 1% year-over-year. Global lease volume grew 26% and local West declined 3%. The volume growth we are seeing is helping to improve driver productivity and network balance as we improved driver productivity 15% year-over-year in the quarter and reduced empty repositioning costs by nearly 25%. With our continued focus on controlling costs, new contractual frameworks, and aligning this strategy, we believe we are well positioned to support our customers' peak needs and for the eventual market upturn. We delivered top-line growth in our dedicated business with an increase in revenue per tractor per day as we brought on new wins and drove efficiencies in our network. The profitability was challenged with increased expenses to support strong demand from our customers. Now turning to our Logistics segment. We continue to be pleased with the growth and profit expansion of our Logistics segment with the second quarter earnings generating a 60 basis point improvement in operating margin over the first quarter. Revenue growth in our [ClioMile] business more than offset challenges in our brokerage business, resulting in logistics revenue of $459 million, 1% higher than last year. Final Mile generated strong growth on both the top and bottom lines with several new customer inorganic implementations in the first half of 2024. We expect this to continue with several confirmed wins to implement in the third quarter. Our successful integration is allowing us to leverage our combined non-asset-based operating model to improve our cost structure. Brokerage continues to benefit from our diverse mode offering across several sales channels. We have maintained our roughly 50-50 split between contract and spot market, allowing flexibility to respond to our customers' needs. Despite market headwinds, the team has made productivity strides resulting in sequential improvement in revenue per load of more than 300 basis points when comparing the second quarter to the first quarter. Another bright spot is LTL, which has generated several transactional in contract wins in the first half of 2024, resulting in volume growth of 18% in the second quarter. In addition, we have several confirmed wins that have already started onboarding in the third quarter. From a cost perspective, we've leveraged our technology to improve our lows per team member by 24% and have additional IT initiatives that will implement throughout the rest of 2024. Overall, brokerage is well-positioned for accelerated growth as market conditions improve. We also continue to invest in our network of national multipurpose logistics facilities with our largest location onboarding in the Northeast at the start of the third quarter. We are successfully optimizing our network of locations, resulting in a quarter-over-quarter improvement of 411 basis points in warehouse utilization, and expect this improvement to accelerate in the third quarter as we expand our service footprint to better serve our customers. The managed transportation team continues to grow as they are onboarding just under $60 million of new freight under management during the third quarter that will give us increased purchasing power, along with additional optimization opportunities for our customers. The integration and diversification of our non-asset-based logistics solutions is continuing to play out well, and we expect continued growth and margin expansion in 2024. With that, I'll hand it over to Kevin to discuss our financial performance.

Thank you, Brian. I will now walk through our financial results for the second quarter before commenting on our outlook. Hub reported revenue for the second quarter of $986 million. Revenue declined 5% compared to last year and was roughly in line with first-quarter revenue of $999 million. ITS revenue was $561 million, which is down 9% from the prior year as higher intermodal volume was not enough to offset lower rates, lower fuel, and softer market conditions. Lower fuel revenue of approximately $5 million contributed to the decrease as did lower asset revenue. Intermodal volume was up 8% year-over-year. Sequentially, second-quarter IPS revenue grew 2% over first-quarter revenue of $552 million, and volume was up 12% over Q1. Logistics revenue was $459 million, an increase of 1% year-over-year as the contribution of the Final Mile business more than offset lower revenue in our brokerage business. Moving down to P&L. Purchase transportation and warehousing costs decreased by $36 million from the prior year due to lower accessorial costs, lower third-party expenses, and lower rail costs. Salaries and benefits were comparable to last year despite the integration of the Final Mile acquisition as we continue to manage overall headcount. Total legacy headcount, which excludes acquisition employees, drivers, and warehouse employees declined by 7%. Depreciation and amortization increased $2.4 million or 40 basis points due to intangible amortization related to the Final Mile acquisition. Insurance and claims increased by 20 basis points due to rising claim costs, which were mitigated by our ongoing improvements in safety and claims handling. G&A increased 20 basis points compared to prior year, driven by costs associated with the Final Mile acquisition, partially offset by cost management efforts. Gain on sale was $400,000 in the quarter. As a result, our operating income margin was 4% for the quarter, which is an increase of 30 basis points over first quarter. ITS operating margin was 2.4%, in line with Q1's OI percentage of 2.4% as we benefited from intermodal volume growth, dedicated margin expansion and cost management efforts in the quarter. Logistics operating margin of 5.6% increased 60 basis points from the Q1 OI percentage of 5% due to strong results from Final Mile, offsetting a lower brokerage margin. Interest and expense and other income totaled $1.9 million, an increase of $1 million from last year. Although our debt balance decreased year-over-year, interest expense increased due to an increase in our average interest rate. Our tax rate was 22.8%, slightly higher than our Q1 rate of 21.5%. We expect our tax rate to sequentially increase as we move through the back half of the year due to timing of stock-based compensation, tax refunds, and the closure of certain tax matters. Overall, Hub earned $0.47 per diluted share for the second quarter. Now turning to our cash flow. Cash flow from operations for the first six months of 2024 was $150 million. Second-quarter capital expenditures totaled $14 million and was down 22% from the first quarter. CapEx spend included replacements for tractors that have reached their end of life, warehouse equipment purchases, and technology projects. For the first half of the year, our CapEx was $31 million. We continue to expect full-year spend to be between $45 million and $55 million with Q3 and Q4 spend closer to the lower Q2 level. Our balance sheet and financial position remains strong. In the first six months of 2024, we returned $48 million to shareholders through dividend payments of $15 million and stock repurchases of $33 million. We ended the quarter with cash on hand of $220 million and generated a free cash flow of $119 million year-to-date. Net debt was $94 million, with a 0.3x EBITDA, below our stated net debt-to-EBITDA range of $0.75 to 1.25x. We continue to expect EBITDA less CapEx for the full year 2024 to be greater than the $257 million generated in 2023, demonstrating Hub's cash resiliency as we expect cash earnings growth in a challenging freight environment. Additionally, we remain confident in our ability to execute on our capital allocation plan, which includes paying quarterly dividends, stock repurchases, and strategic acquisitions. Next, I will conclude my remarks with a few comments on our 2024 guidance. The macro-environment remains challenging, and while outperformed well in the second quarter with intermodal volume growth as anticipated, we expect the competitive pricing environment to continue through the rest of 2024, impacting our intermodal and brokerage lines of business. We believe that the market inflection point has shifted further out from our Q1 assumptions impacting top-line expectations and reducing the high end of our range. We expect full-year ITS in the range of $1.75 to $2.05 per share and revenue of $4 billion to $4.3 billion. In our ITS segment, for the full year, we continue to expect intermodal volume growth in the high single digits and price to be down mid-single digits for the full year. For Dedicated, we now expect revenue for the full year to be up low single digits as recent wins are ramping up more slowly than originally anticipated. For the total Logistics segment, we expect revenue to grow mid-to-high single digits for the full year. When excluding brokerage, we continue to expect low to mid-double-digit revenue growth. In brokerage, we continue to expect volume up low single digits and for pricing to remain challenged given the overcapacity in the market. There continues to be upside potential in our guidance. If restocking demand is higher than anticipated, there is a more traditional intermodal peak season and the market allows for surcharge revenue in the second half of the year. Another market conditions that would push results to the high end of guidance is truck conversions to intermodal, helping to increase intermodal volume growth and increase margins. We are well positioned to capitalize on a market upturn but higher intermodal and truckload rates and a tighter truckload market will drive higher demand for our services and improved financial results. As mentioned at the beginning of the year, we are facing some headwinds versus last year, including higher interest costs, the normalization of incentive compensation, our annual tax rate being closer to 24%, and minimal gain on sale. This quarter, we updated assumptions to assume that the challenges that we have experienced the last few quarters will continue throughout the year. As we exit the first half of the year, we are pleased with our performance to date with intermodal volumes growing, strong financial discipline, strong free cash flow generation, and a strong balance sheet. With that, I'll turn it over to the operator to open the line to any questions.

Thank you. I would also like to remind participants that this call is being recorded, and a replay will be available on the Hub Group website for 30 days. [Operator Instructions] Our first question is from Scott Group of Wolfe Research.

Can you just walk us through the monthly intermodal volumes and July volumes? And then I don't know if I missed it, just like -- maybe just the overall volume and yield trend for Intermodal in the quarter.

Yes, Scott, thanks. This is Phil. For April, volumes were up 12%, May was up 9%. June was up 2%, and then July was up 14% on a year-over-year basis. If you look at the yield on a revenue per load basis, that was down 17% in the quarter price, which we said would be down about mid-single digit for the full year was obviously an impact. I think the other piece that we wanted to call out was mix-related. Local East volumes being up 26%, obviously is a good thing, but has a negative mix impact from a revenue per loan basis. And then second would be that through our bid strategy, we've really done a nice job and Brian highlighted it in his prepared remarks and filling in more backhaul freight, which has taken out repositioning expenses. That empty repos were down 25% on a year-over-year basis. But those loads also have a negative mix impact on revenue per load. And then just lastly, fuel and accessorial is a headwind there as well.

And so that trend of the volume slowing throughout the quarter, but then spiking in July. Is that -- is there like a per-day issue there? Is that the market getting better in July with transloading? Is it bids happening so you're winning share? The volume trends are sort of lumpy. Any color?

Yes. This is Phil. I would say we are seeing wins come online. That's certainly part of it in July. July started out a little slower given the holiday that was a little more elongated. But in the last two weeks, we've really seen some nice improvement as some of the wins that we've got really started to ramp up. We're hoping to see that continue. We haven't realized those full awards yet. So we think that will continue into August. I think part of it is also year-over-year comparables and then business days as well.

Okay. And then just one more, and then I'll pass it along. So I heard like what gets you to the higher end of the guidance. If I just take the low end, it implies that 3Q and 4Q earnings are lower than Q2, which I don't think we've heard from anybody else in transports this earnings season that we could actually go down in the second half of the year. Can you just talk about what causes that? And just any color there.

Yes, Scott, this is Kevin. Thank you for your question. Right now, we just feel that the market, both the macro and the freight market is very hard to predict. There's been some new information just this week that's come out on the macro side. But at the end of the day, we think the freight market is very challenging. It's a competitive bid season. We have excess capacity impacting intermodal and brokerage as you well know. While we do expect strong volume growth, we are expecting pricing to remain low with pricing inflection moving into 2025. So we just thought it'd be a conservative route to adjust the guidance.

Yes, this is Phil. I'll just add in. I think at the midpoint, which is where I would point you, we do anticipate earnings growth first half to second half. I think ITS revenue is going to be up on more volume. Q2 to Q3, we think we'll see a little bit of a sequential dip in operating margins in ITS, mostly due to a lag on rail price reductions, but also the volume realization that we were just mentioning. On logistics, first half to second half, we're anticipating sequential revenue growth and operating margin growth. I would highlight, first, we've got a lot of new wins that are going to be ramping up. But second, we've got some really nice cost reductions that we're putting in place. So I would point you more to the midpoint. I think that's our best view of the market as it exists today, which, as I mentioned, would imply sequential earnings growth. And last piece, I would just highlight is the free cash flow generation being up on a year-over-year basis.

Our next question comes from Bruce Chan of Stifel.

Yes. Maybe just to take a look at some of the positive sides of the print here. Final Mile is looking pretty good. And wondering if you can help us maybe just sift through some of the moving parts of it there, especially in terms of the profitability. And I know you mentioned some business wins there. But how much of that underlying performance is coming from top-line appreciation? How much from legacy OR improvement and how much is coming from faster-than-expected synergies in that acquired business?

Sure. Yes, Bruce, this is Brian. I'll take that one. Yes, we've been really pleased with the integration of our Final Mile acquisition, and it's complemented obviously our previous position in Final Mile. And on top of the top-line wins that we've been able to get by adding new logos, we've also been able to cross-sell a lot of organic and continue to grow there. And that's really driven a lot of the top line. As far as the cost perspective, when we put the two models together, we've been able to leverage a best-of approach to each of the overlapping geographies and be able to find efficiencies to drive up our yield there. I think we are -- we still have more runway and that we'll see play out in Q3 and Q4 in that and it's going to continue to position us to win both on price as well as service and capabilities in the Final Mile.

Okay. Appreciate that. And if I could just follow up on that runway comment. When you think about how far you are through that integration process, are you about halfway? How much more is there to go?

I would say we're a little more than halfway on the cost efficiencies. But on the pipeline growth and the continued cross-selling, we're going to see that continue well into 2025 as we continue to stretch our stride in new ways there.

Our next question comes from Bascome Majors of Susquehanna Financial Group.

As we look to the peak season, how are you feeling about the potential for some of the surcharges that in the better year can drive a decent 4Q lift for your business? And when will you know what the state of play is on that as we get deeper into the calendar?

Yes. Bascome, this is Phil. I think our conversations with customers are kind of varied around their demand right now. I would say there's a lot that are very positive and we're going to see a nice sequential inflection and a very strong peak. We've got others that are saying demand will remain pretty similar. So customer discussions are a little bit mixed, but good to see some positive signs in there. I would say, as I take a step back, you're seeing that import demand continue to be strong. You have the East Coast labor disruption. All of that points to diversions to the West Coast, probably more transloading and domestic intermodal opportunities. So I think we're seeing the signs that there will be a peak, how robust that's going to be, and whether it points to surcharge revenue. I would say we'll know in the next few weeks here. It's a little early to tell. I think around the end of August after Labor Day likely have a pretty clear picture. We're anticipating September, and October, we'll really see the kind of typical seasonality bumps. But a little early to tell at this point, but I would tell you that at least from a macro and from a customer conversation, we're seeing some positive signs.

And as we get into next year, what are the conditions that you think will ultimately drive your ability or lack thereof to price the intermodal portfolio up more meaningfully? And is it peak season? Is it just what's happening in truckload when we get to spring, just what are the levers or market indicators that you and we need to see to get more confident in a price-driven lift out of the profit situation that we're in today?

Sure. I think it's a little early to give a 2025 guide or call. I think we're certainly hopeful for a positive inflection. I think we are seeing demand improve. We've done well in bid season to drive more velocity into our network and get it more utilized. We're seeing capacity attrition, a strong peak would certainly help. I like what we're seeing in the spot market where there's more volatility right now and the contract pricing has remained pretty flat sequentially. We're not really seeing any deterioration there. So that's always a good sign. So I think the fundamentals are getting into place. We need to see demand continue to improve and capacity continue to exit. But at the same time, we're going to constantly be assessing our network and making sure that we're maximizing our margin per load day, constantly having conversations with our customers around their demand and shifts in that and what that could do to our network and needs we might have around pricing or additional volumes offset challenges. But hopefully, we'll see the trends that we're seeing currently continue and at a more rapid clip, and that would frame up well for a positive 2025.

Yes, I'd just like to add, there are really two market recovery and brokerage pricing are certainly two of the data points that we are looking to get into our model before we're willing to give any guidance on 2025. So longer in the year that we'll see how that progresses, and we'll be able to make a determination there. But we do believe we position ourselves well for the eventual market upturn as we're focusing both on service and cost efficiencies as well as the volume growth that we've already seen.

And as you think about your strategy into next year, how do you balance container utilization versus pricing power on the existing business?

Yes. This is Phil. We are getting improvements in utilization. We saw a 14% improvement year-over-year from this year to this quarter to the last year and a 7% sequential improvement. So we are getting better. We still have room to run on just what we have out in the fleet right now. Pricing is a far larger lever for earnings power than volume for us. And so if we see the opportunity to begin to raise rates, we will certainly do so. I think we're doing the right things to position us to be able to take rates up. As we get that velocity back into the network, we think that's the right move for right now. And as market conditions change and give us more pricing power, we'll certainly be looking to participate in that.

Our next question comes from Thomas Wadewitz of UBS.

I wanted to see if you could offer some perspective on that mix of volume in Intermodal, pretty heavy on growth in the East. Is that changing as you've got some of the other contracts coming on in July? So I don't know if you can offer directionally some thoughts on what that volume mix looks like in July.

Yes. This is Phil. I would tell you it's pretty similar. We continue to see a lot of momentum in the East. Now part of that is lower comparable, and we're overlapping that at this point in time, but we will see a return to improvement in the Western portion of the network. Transcon continues to hold up well. That's been a really strong point in our network really through the entire downturn in the market here. But we are anticipating sequential improvement in the third quarter in West Coast volumes as well as that continuing really through the remainder of the year. But Local East will continue to carry the majority on a percentage basis.

Okay. Yes. And then how do you think about the stickiness of business that you win? You've done a nice job winning share this year and really pretty strong volumes against a soft freight backdrop. I'm wondering is that -- I don't know if the East is primarily from truck or from other intermodal players. But how do you think about your ability to keep that volume as you go into next year? And then presumably, you want to price it up and make more money on it. But I guess, how do you think about the ability to keep that and avoid next time around you give some of the volume back when you try to price it up?

Sure, Dan, this is Phil again. We do think the majority of that volume has come from truck. There are many specific examples where we know that we lost that business to truck, and we're able to convert it back because of the great service that we're giving really highlights that as where we're winning. Our service product in Orcel Southern right now is the best that I've seen in my tenure at Hub. And I think with that gives then the price differential we're seeing versus contract rates right now, which is about a 20% truckload versus intermodal I think in that length of haul, I think we're in a very good position to retain that business, one, because of that cost differential, but two, because of the service product. And I think that creates a lot more stickiness at this point in time. Our customers are also just looking to derisk their capacity sources at this point. I think there is concern that the market is beginning to shift and people want to watch that capacity in. And you're far less likely to be market-tested if you're performing at a high-level service one.

I'll just add to that, too, Tom, this is Brian. I think in the comments of retaining our customers and their volume, we're also cross-selling them into other services, which allows that to become more sticky. And so with that transactional volume, we're also offering them the ability to forward deploy their inventory, position that inventory throughout our warehousing network, bring them into our final mile network, often then diversified brokerage mode offerings and as well as our managed trans cost solutions. And I think LTL has been a big part of that, too, we've seen that grow, and that's a big part of how we're going to be retaining that volume.

Our next question comes from Christopher Kuhn of The Benchmark Company.

We heard earlier today about some increasing transloading activity. I don't know if you guys are seeing that. Just wonder if you have a comment there.

Yes. This is Phil. I would say we are seeing that. It's a little early to tell how robust that could be in leading into peak season, but we certainly are seeing that. During the quarter, even our outbound Southern California volumes were up 5% year-over-year. Our inbound is actually up 7% year-over-year, which is a really good cost offset for us and reduces a lot of our entire repositioning costs. But we are seeing sequential demand improvement. We've also done quite well in some of the RFPs that drive a lot of West Coast volume. And so we are seeing incremental transload volume. We're hopeful that, that's a sign of a strong peak, and we'll certainly have more to say as that develops.

And also on the acquisition front, any areas you'd be looking at going forward? Do you need to sort of integrate the Final Mile acquisition fully first before looking somewhere else? What's the time frame there that we should be thinking about?

Yes, this is Phil again. I think we've done a really nice job on the integration there. We're through the vast majority of our synergy capture. We've done a lot of really good work on integrating systems and our platform. So we feel good about the opportunity we have to go out and do more acquisitions. We think we have the right set of service offerings. It's now about how do we add scale and differentiation to those service offerings. And we are seeing more opportunities come to market, especially businesses that have performed well through this downturn. And obviously, we have the financial flexibility to go out and execute an acquisition that if we find the right fit. And we're certainly exploring that right now, and we'd be hopeful to complete something this year.

Yes. Chris, this is Kevin. I was just going to say that falling upon to come. The balance sheet is certainly ready for acquisitions. So we've been out pounding the street, and hopefully, we'll be able to get a deal here and use some of the cash that we have, the leverage ratio being where it is, we're much lower than our range. So we'd like to put that cash to work via the acquisition.

Our next question comes from Elliot Alper of TD Cowen.

All right. This is Eliot on for Jason Seidl. Maybe coming back to the guidance. So if we take the midpoint, culture dollar of earnings in the back half of the year, can you help frame the earnings cadence you see? There's been a lot of discussion about a pull-forward in peak. Curious if you're seeing that all. And if we should factor them to any earnings cadence in the back half of the year.

Yes. Thank you for the question. Certainly, the guidance we're giving is just half of the year. We're not giving the east individual quarters, and I think that's a little bit because we're a little unsure as well that will be pulled forward. But we are expecting the second half to be up mid-single digits when it comes to revenue, larger than the first half as well as larger than last year. That's going to be driven by intermodal and logistics that are benefiting from the seasonality and volume growth that we were experiencing. On the OI side, we're expecting a little step up. Certainly, logistics are strong. As Brian mentioned, we have some cost cutouts that we're working on, and we expect a nice OI increase on the logistics side, excuse me. For Intermodal, we expect margins to be modestly down based on the assumptions of the timing of our realized price with the implemented volume now as well as timing lag on the rail adjustments and cost benefits from the higher volume.

Okay. Great. And then I believe you said volumes in Mexico were up 60% in the quarter. Is this a meaningful contributor to earnings for you guys? Or how should we think about the size of this business or what it could grow into?

Yes. This is Phil, I would say it's not currently something that would be a meaningful driver of earnings. But what I would tell you is our customers and their vendors are investing there significantly. And we are very aligned with our partner, Union Pacific on driving growth there. We're very focused on automotive customers, both our retail clients, consumer products. We think there are significant opportunities for growth. So right now, not something that we would say is a huge driver of our intermodal business one way or another, but it's becoming more and more important and we believe will be a driver of growth for us for the foreseeable future.

Our next question comes from Daniel Imbro of Stephens.

So I want to start on the dedicated side. I think you mentioned you won some business, but profitability was softer invested into service for a spring surge. Curious if you could just provide some color quantifying or I mean what those investments were and then quantifying the headwind to profitability they were in the second quarter?

Yes, sure. It was good to see the new wins that we have come online and then see some seasonal improvement in volumes. It was really a spring surge for some of our retail clients. I think the challenge was we were ramping up hiring and then saw an increase in demand, which forced us to go out to third parties to support their high-service sensitivity business and make sure that we were providing them with the service levels that they expected. That's obviously a higher-cost service option than our own capacity, and that's what led to the margin deterioration. Within the dedicated business, it was probably mid-single 100 basis point impact. We don't see that going forward. Dedicated is a smaller portion of the ITS segment, obviously, not as large as intermodal, but it certainly was a headwind in the quarter, but one that we don't anticipate seeing ahead.

Got it. And so as we think about the ITS margin step down for the back half, that cost headwind goes away. It's just intermodal margins need to step that much lower that will drag down. Any way to help quantify kind of how you're thinking about the step-down in ITS margins?

Yes, not material, just I think in previous calls, we've talked about a little stepped-up, and we would think it's going to be a little more difficult to achieve that for the rest of the year.

Yes. I think it's volume realization in the quarter, right? We've got some really nice new wins that are coming on. And then we've highlighted, I think, in the past, the lag effect that we have on rail price reductions. And once we have those in plus the volume being realized, that's where we think Q4 would likely be a step-up from Q3, but Q3 is a slight decline from Q2.

Great. And then maybe last one for us. You mentioned logistics revenue should increase sequentially. There were some other brokers talking about brokerage trends flowing in July. Just curious which part of logistics you see improving as we move to the back half of the year.

Sure. Yes, I'll take that one. This is Brian. I think we -- Phil called out some of our wins that we've had within logistics. That includes our managed trans contract business as well as our final mile. When we integrated that in, we saw that pipeline and new opportunities coming in really fast. And so we're excited to have those on board and drive up a lot of the revenue. I think from a brokerage perspective, after having five consecutive quarters of volume growth, we had our first one where we didn't have volume growth, it was down modestly. But what we did see is margin expansion quarter-over-quarter of about 100 basis points but we've got a really good strong start in the third quarter with brokerage with volume in July, up 10% year-over-year, and we're maintaining that yield expansion. So that's what got us excited about what we can do in the logistics space.

Our next question comes from Brian Ossenbeck of JPMorgan.

Just wanted to see how the network was running when you've done a bunch of the -- I guess, call it share gains or re-appealing the network rebalancing network rather, with getting that significant growth in the local East. Maybe you can elaborate a little bit on what that's done for you in terms of efficiency and productivity. And if there's a bit more to go or you're coming up on some comps that will affect that, but it was a pretty big move. So I just wanted that turned out.

So service levels have been very strong. So that is certainly a benefit to us. As Brian mentioned in his prepared remarks, we were able to take down into repositioning costs about 25% year-over-year. Our cost per day came down about 13%. One of the good things there is productivity being up 15%. And while our share of grade declined about 600 basis points 1% to 73%, we did that with 15% fewer drivers. So we think we have some opportunities to add some drivers in a few markets to fill back that capacity and get our share back closer to 80%. We have some idle equipment that we're looking to redeploy within our drayage network as well as into dedicated configurations. But we think that those cost containment opportunities will continue. And as these new wins come on, it's network-friendly freight. So it will continue to benefit our productivity on the street as well as our network design and reduce repositioning costs further.

And I think you mentioned earlier, but is it a 20% discount in the East when it comes to rail, I just want to hear a little bit more about how -- with the loose truck market in the East, how you're able to make that accretive, I guess, on your operating income per box day model.

Yes. We continue to focus on margin per load day, as you mentioned, and the Eastern network is far higher in velocity. So we're moving boxes in the triangle very quickly. They're getting margin within those moves, and it takes out to them to reposition us. So it really does drive a nice margin per load day in an environment like this where margins can get a little skinnier on a per day basis, it's a higher return investment than maybe some of those longer hauls that still have lower margins. So we think that the East is a great place to continue to grow right now. We're very committed to that. The differential is we think about 20%, you look contract-to-contract, about 30% if you look at some of the longer length of haul. So the conversion opportunities are there. And once again, we're providing really good service, which is giving us the buy-in from our customers to continue to convert from over the road.

And then one last one on the rail contracts. You mentioned it's a little bit of a lag here and it will pick up again in the fourth quarter. Have you experienced any tailwinds in the -- I guess, in the first half of the year? And how should we think about this going into 2025, if you see sort of the broader freight market to stay where it is and not really improve a whole lot in the first half, I guess, '25.

Sure. Yes, this is Phil. So yes, it has been a benefit to us through our rail contracts have been a benefit to us through the first half of the year and continue to have some resetting on a quarterly basis. There is a lag effect associated with that. So that lag effect would continue when we see price inflect. So you get when prices going down, it does lag and it move a little bit slower. But as price is going up, it will lag and move slower. So there's a margin expansion opportunity that comes this pricing shift. Goes once again to our desire to see the market move with stronger fundamentals. And we know that price is a far stronger driver of profitability and returns and volume. And so we're certainly hoping to see that opportunity come to fruition, too.

Our next question comes from David

If I could ask a little bit about the brokerage side, specifically with respect to revenue losses and you're keeping the spot contracted 50-50. Was that maybe like a tactical strategic move? Did you potentially am wondering maybe turn down some contractual loads that were available with the expectation that you might see them come back in a different put environment later in the year?

Yes. Sure, Dave. This is Brian. I'll take that one. But yes, I think you're going along the right lines. What we did see is the volume decline in Q2, and some of that was our decision on where we needed to make some yield decisions. And that's where we're seeing it improve and where we had that 100 basis point improvement quarter-over-quarter, and we're seeing that carry through as well. Volume-wise, we're 50-50 from a revenue perspective on the spot, it's less than 50%, and it's weighted a little bit more towards contract. But that's the way we're thinking about it. I think overall, in brokerage, we continue to be pleased with our progress on where we're at, how we face the headwinds. We're providing a superior service product. We're providing the diversified modes for our customers. We're cross-selling those, we're leveraging our spend to buy down our purchase transportation. And we're being very methodical about how we approach technology in this space. And I called out the efficiency that we've had and Lowe's per team member. And we're going to see that continue to expand as we roll out more technology initiatives.

Very helpful. It's great to hear the color you had on the new business wins in Dedicated. If I could just ask on with existing customers, how is the retention coming? And how your conversations coming with those customers here in the back half?

Yes. So our retention has been very strong. We've certainly had some RFPs that we've had to participate in and defend incumbency, but I think we've done a very nice job there. Some customers are exploring portions of their fleet moving to one way, though we haven't seen many contract -- much contract churn. Most of our customers are looking to renew and it's very high service sensitivity grade, so they don't want a disruption to that high service sensitivity business. And so yes, our retention levels have been very strong. We want to continue that, and we think that gives us the best opportunity to keep growing with the right customers and the right contractual frameworks as well.

And then, Kevin, if I could just squeeze a quick one in. I see the color on the legacy headcount in the release. Do you have just the combined nondriver headcount number or sequential number?

Yes. So as I mentioned, it was down 7% year-over-year. So the number for that, the legacy headcount was 18.6% at the end of the quarter.

And just to add a couple of hundred on for the acquisition on top of that.

Yes, that would be correct.

And I would just highlight on the headcount side. I know we said down 7% on a year-over-year basis, but we've actually seen a 28% decline from our peak, which was in 2022. I think the team has done a great job of finding opportunities for efficiency through technology deployment and changes in workflow. So everybody here is very focused on efficiency and how we can do more.

Our next question comes from Ravi Shanker of Morgan Stanley.

I think we've heard a couple of your peers in the brokerage side that you're seeing somewhat of a shift from asset-light to asset-based operators from shippers. Wondering if you guys are seeing something similar or kind of what kind of approach shippers might take to the up cycle in the broker business?

Yes, sure. Yes, Ravi, this is Brian. I'll take that one. I think what we've seen and Phil called it out too, in his comments, too. But in the spot market, we have seen a lot more volatility and our shippers have seen that as well. We are seeing them drive more of a shift towards contract. I think they've seen the bottom of the spot pricing and they want to secure instability with more contract pricing. We haven't seen that move more towards asset providers. I think they like the flexibility that the non-asset piece can bring to the table. I think that's where we offer our customers a unique solution of where they do want to move more towards dedicated volume or they want to lock in on longer-term contract pricing or mode shift into intermodal or LTL, we're able to really work with them and offer those types of solutions. And we find that they're less price sensitive and much stickier when we do so.

Yes. And I would just highlight, I think we think it's been very important to have a contract footprint with many customers as that gives you the opportunities in the spot market when you see that activity. I would also just highlight that we are seeing more project opportunities come our way right now, which is a positive as well. Those still shift generally more toward brokers, I think, given the flexibility and ability to surge. So we think our strategy of locking in contracts, making sure we get those opportunities as we see market shift is the right one, and it's certainly been playing out in our volume performance, and we hope to see that continue with margin performance as well.

Understood. That makes sense. And maybe as a follow-up, I think you guys had mentioned in your prepared remarks that you saw some increased expenses to support new customer wins. Are those just normal launch costs? Or was there anything unexpected or one-off there?

Yes. That was mostly related to Dedicated. It was start-up costs initially, and then we needed to -- given the ramp time line that we had and we were a little short on driver capacity, we need to bring in outside third-party capacity to support the high service demand that we had. And so it's really an investment in that business. And so, in our view, hopefully helps in retention and further growth opportunities with those customers.

Our next question comes from Jon Chappell of Evercore ISI.

So two quick ones, follow-ups. I think it was kind of beating around the bush a little bit on the shape of the second half. If we take the midpoint of the new guidance range and some of the commentary about the fourth quarter most likely being better on a peak, does that mean that 3Q looks very similar to 2Q with more of the tail in 4Q? Or is there a sequential kind of glide up from this $0.47 starting point?

Yes. I would say that I think your second comment is the most appropriate, a little slide up slowly but surely get there. I think as we bring on the volume that we're expecting as we see the peak season starts, whether that pulls a little forward or more the natural seasonality that we're used to. But either way, that would be the expectation.

Okay. And then Phil or Brian, just on duration of contracts, have you been able to take any shorter duration as this recession has been kind of long in the two tier, whereas if you see an inflection on volume of spot, you can maybe see it in the revenue per load a lot quicker? Or is the bid season that you've just gone through kind of baked in now through the first half of next year. So any inflection in price would be really kind of the second half, 25% of that.

Yes. This is Phil. I would say we're going to constantly be assessing our network. We're doing that right now. And so we're always discussing with our customers network needs, but also what fits or might not on an ongoing basis even with contractual business, right, because we want to have an open dialogue with our customers. So in our view, it's a constant evolution of our network, making sure that we're maximizing that margin for low day based on market conditions. And so we'll keep that dialogue as the market shifts and certainly want to honor our contracts and agreements, but also have open dialogue with our clients.

Our last question comes from Scott Group of Wolfe Research.

Thanks for the follow-up. So this dynamic with the rail pricing lag, I'm just wondering, is it any different in the East or the West or basically kind of the same?

Similar framework. Yes. I mean I wouldn't go into much depth around that. I would say very similar framework.

Okay. And I mean I'm kind of asking the idea that you made a comment, Phil, midway through the price is a lot more important than volume, which we've seen in your model over a long period of time. I'm just kind of wondering is our local lease volumes up 26%, have we overshot, right, with our approach to bid season, do we need to give up some volume in order to get some price and get a better balance to get these margins higher?

I don't think so. I think we highlighted one, margins were flat sequentially. I know we're highlighting that there will be some potential challenge in the third quarter sequentially. But fourth quarter, we're anticipating it kind of back to similar levels. So I would say we're reducing costs. We're improving velocity in the network. We're positioning for the market upturn. So at this point, I wouldn't say there's any pivot that's required. We feel good about the strategy we've deployed. And obviously, we're going to constantly be assessing with market conditions, can we do better. But at this point, we feel like we've executed the right strategy.

I would now like to turn the conference back to Phil Yeager for closing remarks.

Great. Well, thank you for joining us this evening. And as always, Kevin, Brian and I are available for any questions. Thank you, and have a good evening.