HUBG - NASDAQ

Hello, and welcome to the Hub Group Second Quarter 2025 Earnings Conference Call. Phil Yeager, Hub's President, Chief Executive Officer, and Vice Chairman; and Kevin Beth, Chief Financial Officer and Treasurer, are joining the call. [Operator Instructions] Statements made on this call and in other reference documents on our website that are not historical facts are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by this discussion and therefore, should be viewed with caution. Further information on the risks that may affect Hub Group's business is included in the filings with the SEC, which are on our website. In addition, on today's call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release and quarterly earnings presentation. 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. Joining me today are Kevin Beth, Hub Group's Chief Financial Officer; and Garrett Holland, our Senior Vice President of Investor Relations. I wanted to start by once again thanking our thousands of team members across North America for their diligence and focus on delivering for our customers and shareholders through this rapidly evolving environment. The second quarter was challenged versus typical seasonality due to tariff-driven adjustments to shipping patterns. Our more transactional service lines were impacted less than we anticipated, but we did experience a decline in demand due to slower import volumes near the end of the quarter. Offsetting those headwinds, our contractual services performed well and maintained resiliency. This consistent performance is helping us maintain our strong balance sheet and free cash flow profile, giving us the ability to invest in our business through cycles to deliver long-term value to our customers and shareholders. Through this dynamic environment, we are focused on executing our strategy of delivering best-in-class service at scale, continuously improving our productivity while investing in high-return initiatives and returning capital to shareholders. We are executing on this strategy as illustrated by the acquisition of Marten Transport's refrigerated intermodal fleet and our success in our cost reduction program. The acquisition allows us to enhance our scale and capacity in one of the highest growth segments of our intermodal network and expand our customer base while generating strong returns due to our ability to capture synergies within our platform. We have a robust pipeline of additional acquisitions and plan to continue deploying capital towards long-term growth opportunities. We are also controlling what we can control by implementing our cost reduction program. And thus far, we've completed the vast majority of our initial $40 million goal while identifying additional opportunities for savings and efficiency gains. This success is allowing us to raise our target to $50 million of total cost reductions. As we look ahead, near-term demand trends off the West Coast are strong, and we are seeing indications of an early West Coast peak season, which coupled with several sizable start-ups in our logistics services, should lead to improving revenue through the remainder of the year. It remains unclear how long elevated import demand will persist as we are seeing variances in forecast by customer, but we believe we are in an excellent position to support our customers with our best-in-class team, service, capacity, and solutions while executing on our strategic priorities. I will now discuss our business segment performance, beginning with ITS. ITS revenue declined 6% due to lost dedicated sites and lower intermodal revenue per load, while we increased operating income by 6% year-over-year. Intermodal volume increased 2% year-over-year despite a decline in import activity at the end of the quarter, with local East down 1%, local West down 2%, Transcon down 6%, Mexico up over 300% and our refrigerated business growing 18%. Revenue per load declined 9% year-over-year in the quarter due to lower fuel and accessorial revenue as well as a shorter length of haul. Dedicated revenue also declined due to small loss sites and equipment count reductions in existing operations. Despite these revenue challenges, we improved operating margins through increasing our percentage of in-sourced drayage by 700 basis points to our stated 80% goal. We also maintained network fluidity and reduced empty repositioning costs by 43% year-over-year in the quarter, along with lower rail, drayage, and insurance expenses. Our service with our rail partners is excellent, and we are seeing customers convert volume to intermodal to take advantage of the cost, capacity, and performance benefits. We've completed the majority of this season and performed well on our goals of network balance and velocity while maintaining yield despite the competitive environment. As we look ahead, we anticipate an early West Coast peak season due to inventory pull forward in advance of potential tariff implementation and seasonal sales, as well as improved bid realization rates, which, along with new dedicated start-ups, should lead to higher revenue from current levels. In Logistics, revenue declined 12%, while operating income declined 13% year-over-year in the quarter. The decline was driven primarily by our brokerage operations, where load count declined 5% and revenue per load declined 9% year-over-year due to a soft dry van market, which we offset partially with strength in LTL and flatbed as well as better relative performance in our contractual services. An area of strength for Hub Group has been our Final Mile division due to our excellent service, competitive cost, and flexible operating model. This performance is leading to significant growth for the business as we will be onboarding $150 million of net new annualized revenue in the third and fourth quarter with both new and existing customers. This growth will lead to short-term start-up costs. We are excited to onboard this new business into our network and deliver for our customers. These final mile wins will be executed in conjunction with new onboardings and consolidation in brokerage that we believe will lead to improvements in revenue as the year progresses. We remain focused on driving profitable growth, but are also remaining vigilant on our cost, service, and productivity. Our recent warehouse network alignment initiative has helped improve earnings resiliency through a 1,600 basis point improvement in warehouse utilization while enhancing service levels. Due to the prior success of those alignment actions, we will be completing the transition from the vast majority of our remaining third-party warehouses beginning in the third quarter, which will lead to additional margin and service level enhancements. We're also focused on delivering improved results in our brokerage operations, reducing negative margin shipments, which were down 160 basis points year-over-year in the quarter, while maximizing our purchasing power and enhancing our organizational structure to improve efficiency, yields, and maintain our excellent service. We believe these growth and efficiency actions, along with our continuous improvement process, will enable profitable growth over the near and long term across the segment. We are pleased with our performance through the first half of the year in an extremely dynamic environment. We remain focused on delivering best-in-class service through all of our capabilities, enhancing our efficiency, and investing in our business to deliver long-term growth. With that, I will hand it over to Kevin to discuss our financial performance.

Thank you, Phil. I will walk through our financial results before commenting on our outlook. Our reported revenue for the second quarter was $906 million. Revenue decreased by 8% compared to last year and declined 1% sequentially. ICS revenue was $528 million, which is down 6% from prior year's revenue of $561 million as intermodal volume growth of 2% was offset by lower intermodal revenue per load and lower dedicated revenue in the quarter. Additionally, lower fuel revenue of approximately $18 million negatively impacted the top line. The Logistics segment revenue was $404 million compared to $459 million in the prior year due to lower volume and revenue per load in our brokerage business, exiting of unprofitable business in CSS, and subseasonal demand in managed transportation and Final Mile businesses. Lower fuel revenue of $9 million in the quarter also contributed to the decrease. Moving down the P&L. For the quarter, purchased transportation and warehousing costs were $656 million, a decrease of $71 million from the prior year due to strong cost controls as well as lower rail and warehouse expenses. This resulted in a 130 basis point improvement on a percent of revenue basis when compared to Q2 of 2024. Salaries and benefits of $143 million were $1 million higher than the prior year due to additional employee drivers and warehouse team members, and the EAU transaction. Total legacy headcount, which excludes acquisition employees, drivers and warehouse employees declined 3% from prior year as we continue to manage headcount across the organization. Depreciation and amortization decreased $5 million over Q2 2024 due to our updated useful life assumptions. Insurance and claims expense decreased by $2 million as we continue to realize benefits from our safety focus and training programs. When adjusting for the vendor settlement expenses in the quarter, our general and administration expenses declined by $2 million or 5% year-over-year as our cost takeout started to make an impact. Altogether, our adjusted operating income decreased 7% year-over-year, but our adjusted operating income margin was 4.1% for the quarter and increased 10 basis points over the prior year. The ICS quarterly operating margin was 2.7%, a 30-basis-point improvement over prior year. The second quarter Logistics adjusted operating margin was stable year-over-year at 5.6%, even with a more difficult brokerage environment. Adjusted EBITDA was $85 million in the second quarter. Overall, Hub earned adjusted EPS of $0.45 in the second quarter, down from $0.47 in Q2 2024. Now turning to our cash flow. Cash flow from operations for the first 6 months of 2025 was $132 million. Second quarter capital expenditures totaled $11 million, with spending evenly balanced across tractor replacement and technology. Our balance sheet and financial position remains strong. Through the second quarter, we returned $29 million to shareholders through dividends and stock repurchases. Net debt was $96 million, which is 0.3x adjusted EBITDA, below our stated net debt-to-EBITDA range of 0.75x to 1.25x. Adjusted EBITDA less CapEx was $74 million in the second quarter. We are pleased with our adjusted cash EPS of $0.55. The spread between adjusted EPS and adjusted cash EPS was $0.10 for the quarter, and we ended the quarter with $164 million of cash. Turning to our 2025 guidance. We expect full-year EPS in the range of $1.80 to $2.05 and revenue to be between $3.6 billion to $3.8 billion for the full year. We project an effective tax rate of approximately 24.5%. We also expect capital expenditures in the range of $40 million to $50 million with continued focus on technology projects. Recall, the upper end of our prior revenue and EPS guidance ranges reflected a strong bounce back in West Coast import demand, translating into a surge of volume in the back half of the year, allowing for higher pricing and peak season surcharges. We stand ready to meet customer needs, but have not incorporated significant peak season surcharges into our guidance at this time. Combined with still lower demand visibility, we adjusted the upper end of our revenue and EPS guidance ranges lower. Realizing the upper end of our revenue and EPS guidance range will now depend more on the timing of our sizable new business awards in addition to stronger peak season activity. We also recognize that the consumer spending has held up better than the weakening scenario reflected at the low end of our previous EPS guidance range. While there is still risk of moderating demand through the back half of the year, momentum with cost savings initiatives and benefits from new business awards gives us confidence to increase the low end of the EPS guidance range. The path to the lower end of the current guidance range would reflect incremental weakness in consumer spending. The related decrease in volume and margin dollars would be partially offset by further cost management efforts. The assumptions in the middle of the range are consistent with the return to seasonal demand pattern in the back half of the year. Directionally, we expect higher EPS in Q3 versus Q2 before some seasonal moderation in Q4. For the ITS segment, we expect pricing to be relatively flat for the remainder of the year as we continue to focus on network balance and serving new customers. Consistent with typical seasonality, we expect sequential operating income and margin improvement for ITS during the third quarter, led by Intermodal. We still expect dedicated revenue to be less than the 2024 as new customers are not enough to offset lost customers and softer demand. For logistics, excluding our brokerage business, we expect muted demand will be partially offset by new business awards, especially for Final Mile. Productivity gains at Managed Transportation help mitigate lower customer volumes, and improving warehouse utilization for CFS should help counter lower demand. For brokerage, we expect volume for the remainder of the year to be flat to down from current volume results, with pricing trending near current levels. We continue to protect profitability with expense management and brokerage offers attractive cyclical levers in a market recovery. While market demand was better than some feared at the time of our first quarter earnings call, the operating backdrop remained challenging during the second quarter. Nevertheless, Hub Group secured meaningful new customer awards through bid season and continues to respond with cost savings measures. Well over half of the savings outlined in May have been realized on a run-rate basis through the second quarter. The team's continuous improvement approach has identified additional opportunities, which gives us confidence to increase the savings target to $50 million. In addition to some seasonal improvement, cost savings support our outlook for sequential margin improvement in the second half of the year. Despite top-line pressure, operating margins stabilized year-over-year and sequentially for both ITS and the Logistics segment. Performance through this freight recession, as measured by EBITDA, margins, and free cash flow, reflects resilient and structurally higher performance relative to the prior cycle trough due to portfolio mix changes and steady execution. Our strong balance sheet also continues to provide significant flexibility and enables value-add acquisitions like the recently announced acquisition of Marten Intermodal. Investments across business lines and leverage to recovering freight markets position Hub Group well for longer-term upside. With that, I'll turn it over to Phil for concluding remarks.

Thank you, Kevin. Before we begin our question-and-answer session, one timely topic that we believe is important to address is the impact of the announced merger between Union Pacific and Norfolk Southern on the future of the intermodal industry, as well as Hub Group and its potential growth. For context, Union Pacific and Norfolk Southern are the exclusive rail partners of Hub Group in the United States. For decades, we have worked collaboratively with both companies to drive growth and scale our operations through excellent service and commercial alignment. The proposed merger presents a new and exciting opportunity for our partnership to grow and be differentiated. There are several catalysts that should create significant incremental intermodal conversion from over the road, including improved fluidity in the gateways, leading to faster transits and better asset utilization, enhanced fuel efficiency, and access to additional lanes of market. These enhancements should lead to a large opportunity for intermodal conversion due to improved reliability and service quality as well as improved freight economics. Finally, we believe that Hub Group is positioned for growth in both the current environment as well as with a combined Transcontinental partner due to our scale, flexible model, service, customer relationships, and rail partnerships. While we appreciate the interest in this topic, there are many steps ahead that will take time, and we have tried to clearly articulate our initial views on the merger and its potential impact to Hub Group in the intermodal industry. As the merger progresses, we will ensure we maintain alignment with our partners and our customers to position Hub Group for success. Therefore, we would appreciate questions being focused on the company and our results. With that, we will open the line to any questions.

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.

I appreciate it. And hopefully, you don't mind, but I'm going to break the rule if that's okay. The -- I just wanted -- just a very big picture question, right? We've been talking about intermodal share gains for a long period of time, and we haven't really seen them in a while. How much -- how big of a deal is this to unlock that potential? And is there any way to understand, like what percentage of your business today actually gets interchanged, and does single-line service, just does it really accelerate the TAM of what intermodal can be?

Yes. Thanks, Scott. No, I appreciate the question. We do think it's a significant opportunity. About a little bit over 30% of our business is moving in a transcontinental fashion today, so touching both railroads. And we feel as though there are significant opportunities to remove touch points remove some of the congestion that we saw when demand was really surging, as you remember during the COVID time frame. And our service as an industry didn't meet that demand. And so we feel as though with really those fewer touch points that significant flow-through and better asset utilization, that's going to reduce transit times, make us more competitive with over-the-road, and we think can unlock some significant value and additional over-the-road conversion. So in our view, a huge opportunity, one we're excited about and feel as though with our positioning with Union Pacific and Norfolk Southern, we can be a significant beneficiary of that.

And then just turning to the guide. Just you talked about strength right now. How do you get comfort that this is in a pull forward of peak season during this sort of tariff pause window, and things don't get -- if we typically see the bigger peak in Q4 that we're not seeing the bigger peak in Q3. Do you have any insight into that? How do you get comfortable with that? And just given that, just uncertainty, maybe just help with the guide, like help us think about, like the shaping of the year in Q3, Q4, is one quarter in your mind, higher earnings than the other?

Yes. Thank you, Scott, for the question. This is Kevin. When we were looking at the guide, first, we were looking at what do we think the overall second half is going to look like. And really, it really does look like it could be closer to very similar quarters. But we are expecting on intermodal to see that volume increase and get back to closer to a seasonal pattern that we've seen in the past. But we are excited with our Final Mile business wins that we think that, that is going to really help keep that normal moderation in the fourth quarter down to a minimum. And as we onboard the new customer wins there, that will help the profitability in the fourth quarter. So overall, with our mix of business, again, we don't have a great crystal ball to tell you exactly what's going to happen, but we do anticipate IPS to take a step up here in third quarter and then that normal seasonal moderation a little bit backwards in fourth quarter, while logistics increases slightly in both quarters.

Yes. And this is Phil. I'd just add in. I think there's 2 components. One is a little bit of a pull forward with the tariff window, but also some seasonal sales that's being brought in as well. We are staying really close with our customers, and there are several that are saying this might last through the end of the quarter and a little bit beyond that, but also others who are saying this will last through the remainder of the year. And I think it really depends on the inventory strategy that was deployed. And so we're trying to stay really close to our customers. But I think at the same time, it's very positive that we're seeing peak season surcharges in July, and we hope to see that momentum carry forward into August and September and obviously through the remainder of the year as well. But it's good to see some tightness at this early stage, really in the back half of the year.

Maybe just to that, just if I can ask one last follow-up, and then I'll pass it on. When did the peak surcharges start last year? And any sort of order of magnitude? Are these bigger surcharges than last year, similar, smaller? Any color?

Yes. On a dollar basis, the surcharges are actually larger. I think it remains to be seen how many we're going to get, but they also started later than this time last year. I believe it was really in the August, September timeframe where we really started to get into more peak planning.

Yes. I agree with Bill, Scott. From a dollar perspective, it was around $0.5 million or so in the third quarter. And then we actually saw the vast majority in October and even into November last year, which is unusual. And we saw about $4.5 million last year in the fourth quarter. I would just highlight, once again, we didn't build in a significant amount of surcharge dollars into the midpoint of the guidance.

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

In the prepared remarks, you talked about a big driver between the low end of the high end, that $0.25 gap over the next 6 months in guidance being the timing of the onboarding of the business. Would it be helpful if you could kind of frame the run rate of everything that you're talking about, if it's above and beyond what you talked about in Final Mile and ultimately, the potential contribution in profit or earnings from that?

Yes. Ben, thank you for the question. Yes, the Final Mile is definitely the largest driver. We're really excited. We've won new business there, some new logos for us in the final mile space, at least, customers that we're familiar with. But when it comes to onboarding, you never really know exactly if everything is going to stay on schedule. And also from a profitability standpoint, are there going to be some start-up costs that are hindering that margin profile a little bit? So we are expecting, if everything stays on schedule, we'll start to see some of that additional revenue towards the end of the quarter -- this quarter, and then sort of roll out into October and the beginning of November. The goal is to have a lot of those completed before Black Friday and the busy season that that brings with it. Additionally, we're excited about the close of the Marten transaction. That should also be happening here right towards the end of the quarter, and that will benefit fourth quarter as well.

Yes. And I'd just add, we really are excited about both the Marten transaction as well as the Final Mile wins. The Final Mile wins should be really accretive when you think about the overall logistics margins. And I think it's a testament to the team where we've really aligned since the acquisition we did in 2023, brought together the management teams and the operating model. And as we're getting a chance with our customers and they're trying our service stock, they're seeing the improvements in their Net Promoter Scores, and that's really leading to these significant growth opportunities. So this is a big milestone, and we're excited to bring on the growth, and we're going to be investing in the business to support it.

And if they both onboard in the way that you see fit and what you underwrote in these deals, do you have a sense of roughly the profit impact potential?

Yes, it will be -- if you think about the Final Mile wins, accretive to the incremental or incremental to the existing logistics margins. So good flow-through there on that $150 million annualized number. And then on Marten, we're anticipating about $0.01 or $0.02 accretion in the fourth quarter. And then in 2026, more mid-single-digit accretion on the 2026 number. So got that right.

Our next question comes from Jonathan Chappell of Evercore ISI.

Hate to harp on the guidance here. But Kevin, you laid out all the different scenarios. I'm just trying to understand the cost savings went up by $10 million. You had Martin, which is just $0.01 here and there, but it's still accretive. You talked about some optimism on an early peak in the West Coast in the third quarter. So for the midpoint to come down, what has changed to the negative? Is there something that was kind of core to the original midpoint that's maybe a little bit worse than you had anticipated 3 months ago, and it's partially offset by all those other good guys that you called out specifically?

Sure. Thank you for the question, Jonathan. Yes, one of the things is we expected to start seeing a little bit of snapback on the brokerage margin at this time. And unfortunately, so far, we really haven't seen data points to really believe that, that's going to happen. So we're considering that now to be flat going forward, both on volumes and RPU as well. So that was one of the negatives. And the overall customer demand has still been a little less than we originally thought 3 months ago.

Yes. And I would just add, I think we tried to be conservative on what would show up in surcharges. There's at the midpoint, a pretty minimal amount built in. And then we did haircut the realization on the Final Mile awards as well, just given start-up timing. So there's certainly upside to the midpoint. And if we see things heading in the right direction and have more clarity on Q4, I think we'll be in a position to give more clarity on that on the Q3 call, but there is certainly upside to the guidance that we've given.

Okay. And then a follow-up. I know you've done most of your peak season in the first quarter, and you reported that on that 3 months ago. But I have to imagine it's mostly done at this point. Trucking has kind of been all over the map, a couple of little head fakes there, but then another weak part here in July. So just any updates on peak season -- I'm sorry, bid season. And should we kind of think about pricing being baked down to the middle of '26? Or is there any kind of shorter bids where you may be able to see more volatility if the peak really does come through?

Yes. No, thank you for the question. Yes. So we're through the vast majority of annual bids. I think completed through Q2 about 86%. So a little bit pulled forward, actually, from what we traditionally see. I would say it's certainly competitive, but I think very rational competition in shorter length of haul and backhaul lanes, but opportunities to really drive some yield in headhaul markets. And I think we came in with a few very clear goals. First, we gained a lot of share in 2024. So a big focus on maintaining that share. We're overcoming some tougher comparables than a lot of other folks right now on that volume side, but we want to make sure we maintain that and propel that growth through great service. I wanted to also make sure we were growing in network balance lanes that help us continue to reduce costs, but also get core pricing back on a positive trajectory. And I think the team did really well across the board. We've seen that core price improving month-to-month and sequentially. And we feel good about how we performed in bid season. We've done a great job managing costs, delivering a great service product. And we are seeing some more of those spot opportunities, in particular, off the West Coast, start to come together, and we have capacity available to support our customers as they need it.

Our next question comes from Daniel Imbro of Stephens Inc.

This is Brady Ls on for Daniel Imbro. I wanted to circle back to something you said in the prepared remarks. You mentioned increasing the cost savings target to $50 million, as you kind of continue to find more areas of improvement. But given just broadly, we continue to be in a subseasonal truckload environment, how are you balancing finding more areas of improvement with these cost savings, but also not hindering your ability to participate when the market turns? And then just is there a significant opportunity past $50 million, say, if this subseasonal environment were to continue into 2026? Just any color there would be helpful.

Yes. No, thanks so much. Yes, I think when we initially published the target of $40 million, about 2/3 of that was in transportation costs, another 1/3 in operating expenses. We've really outperformed on the operating expense side as we found some really nice efficiencies there and been about in line on transportation costs. We have found some additional opportunities I referenced in the prepared remarks, a continuing consolidation of warehousing space, which is going to be about another $6 million in savings that we'll be executing on over the next 6 months. So we keep identifying additional opportunities. Those won't hinder us if we see an improving market trajectory and there are certainly the right things to do to position the business for growth, but also make sure that we're maintaining a competitive cost structure so we can keep going out and win business like what we have onboarding in our warehousing service line or in Final Mile. So it's really a balance of making sure we keep that flexibility to be nimble for our customers and the upside, just like we are with this increase in West Coast demand right now.

And Brady, I'd just like to add that one of the places that we haven't cut is on our IT initiatives. And we really believe that because of those, that allows us to be more efficient. And as we're adding that efficiency, that's allowing us to be able to take out some costs, but yet still be strong enough to handle when the market returns.

Just as a follow-up, Dedicated is obviously a smaller piece of the pie in ITS. But can you just give some color on how Dedicated is shaping up year-to-date, as I was referencing earlier, just given the competitive truckload market, how is that affecting your go-to-market strategy, and kind of what businesses you're targeting? And any expectations there would be helpful.

No, I think it's a great question. Yes. So in the quarter, we had some lost sites that impacted us as well as just some equipment count reductions on existing sites, and we had some costs in the quarter of reallocations of equipment to make sure we were rightsized to serve our customers. Now that we're through that, we have some nice onboardings that are coming online as well as some driver sharing and optimization opportunities that we're really executing on. But I think the thing that's got me the most excited there is that I have been spending time with our customers, and the feedback has been that our service is just fantastic. And so that is developing actually a great pipeline. And I think for us, the big takeaway is making sure that when we're going after dedicated opportunities as we see the market tighten, it's not about going with customers who are trying to time the market and lock in capacity. It's about going with customers and agreements where service levels are crucial to the success of that contract. And that's where we're really going to thrive and have continued to.

Awesome. Maybe just quickly as a final follow-up, and then I'll pass it along. But I don't think I've heard you guys give intermodal volumes by month yet. Can we just get those?

Yes. Sure. Yes. No. So April was up 6%. May was up 1%. June was flat, and then July month-to-date is up 1%. So as we mentioned, I think last 2 weeks of June saw that kind of air pocket of demand impact the network. And then first, that kind of bled into the first couple of weeks of July, but we've seen a nice rebound since then. And I would just once again highlight, and I tried to hit on it, we are -- we did have some significant share gains this time last year. We're overlapping those. So we're not satisfied with the growth levels, but I think still quite strong given that backdrop.

Our next question comes from Dan Moore of Baird.

Opportunity to ask 1 or 2 questions here real quick. First off, it strikes me that next year could be a year where there's a lot of transition in business, not to focus on kind of the merger discussion itself, but more just how you think about being prepared for that, recognizing you're one of the only certainly in the public space best aligned with NS and UP to the extent that business does move or considers moving, how do you position the company to take advantage of those opportunities? And then maybe as a dovetail second question to that, thinking about capital allocation, you guys have been very active buying back stock, very active pursuing acquisitions. How does that shape that strategy as well?

Yes. No, thanks so much. Yes, and great to hear from you. I really appreciate the question. I think from a rail perspective, we do feel like we are really well aligned with UP and NS. We were before. But with this catalyst for growth, it's a significant opportunity, and we're excited to go down the path with them and try to support it. I think there's a few opportunities. Obviously, as transit tightened, we think OTR conversion is there, but we also think unit costs will be coming down, and there's an ability to be more aggressive to try to differentiate the service products there. So if you take better service, better cost should be a really good catalyst for OTR conversion, and we think we want to be part of achieving those very lofty growth goals that have been discussed. I think along with that, you did reference that we really think that we want to continue to invest in the intermodal product, not only in frayage and building out our network even further, but also in being a consolidator within the space. I think the Marten transaction is a good proof point of that. We think that we have great synergies there that are going to drive a highly accretive and high return on capital investment. And we're excited about that. And we do feel as though there's other opportunities that are out there. On the capital allocation, I'll let Kevin. Do you want to jump in on that one?

Yes. On the capital allocation, we certainly are happy with our 6 lines of business that we have now. Our M&A strategy is we're going forward to continue creating scale and geographical expansion. We're very interested in the momentum we have with Final Mile and our consolidation fulfillment businesses. Both are candidates for additional scale and geographical expansion. But as evident with the Martin transaction, if intermodal assets become available, we are definitely going to remain opportunistic buyers. So while we consider a larger transformational deal, we would. We do believe at this stage, really the tuck-in businesses are going to become more available, and we're starting to see those. So we're going to continue down that path, and we're looking for good assets at the right price with a good management team that will allow for our continued growth.

Our next question comes from Bruce Chan of Stifel.

Nice to see some of the progress here. You've got a lot going on. So maybe I'll just start with some clarifying questions on the new reefer business. It seems like a nice fit. Phil, I appreciate the commentary around the accretion. You also mentioned a couple of times the synergy opportunity. Just want to make sure that's not embedded in that accretion estimate. And I imagine it's also separate from the $10 million of incremental cost saves. And assuming that it is, maybe any thoughts on what you can generate either operationally or commercially in terms of the synergy?

Yes. So it's a great question. So that is separate from the cost savings targets that we've rolled out. But those synergies are really day 1 synergies, right? So they are related to chassis contracts, drayage costs, rail contracts, as well as not having to carry over any of the overhead expenses. So on that accretion, those are built in, but are really day 1 and contractual in nature and really already defined. So we did build those in, but I think a good example of a win-win for us and the seller.

Yes. Just to add, Bruce, the refrigerated intermodal space is one of our clear bright spots. We've seen refrigerated intermodal revenue increased 12% year-over-year in 2024, and it's at 9% increase year-to-date through 2025. Volume increased 18% this quarter. So it's definitely a bright spot. We're going to be able to add to that. And not only do we buy the equipment, but we also, more importantly, we're all of the customer relationships that came with that. And no additional people came with the deal. So we really feel with our current structure, we're going to be able to slide this right into our current refrigerated team and just hit the ground running.

And just 2 other points, I think feedback from customers has been extremely positive, which is great. And the transition is going very well. We were actually going to -- because of the growth of the business, have some capital requirements for investment into it regardless. And so this is a really nice way, as Kevin mentioned, to attain a book of customers and accretive acquisition as well as just necessary equipment to support the growth.

And then maybe just more of a theoretical follow-up on the Dedicated side. We've got some new legislation coming with some provisions on bonus fee and interest deductions. I'm wondering if you've heard any feedback from customers as to whether that might be a headwind to the value prop just because it maybe makes keeping an in-source fleet more attractive on a relative basis.

Sure. Yes. No, I think it's a good question. I think something that you've seen over the past few years is there are businesses that have said they're going to have their own fleets and operate them, and there's others that have exited that completely. And so I think for those where it makes sense and they feel like it's a core part of the business, it will stay that way. But for those that like working with scale providers like ourselves and others, they'll continue down that path. I don't -- I do think the bonus depreciation will be a benefit and hopefully will drive some additional capital expenditures and investments across the country. But I don't see it necessarily in the near term changing the dedicated model outside of changes that have already taken place.

Our next question comes from Jason Seidl with TD Cowen.

I wanted to talk a little bit about the transcontinental business. You said it was about 30% of your book. In terms of the margins, is it sort of an average margin business that they tend to get higher margins? How can you put that into perspective for us?

Yes. This is Phil. Yes, on the transcon side, it's typically a positive mix on both revenue per load and margin per load. And so when we see like we are right now, a tight West Coast just due to the length of haul and typical margins, it's typically accretive to our ITS margins.

And then, Phil, you talked about how the big goal is always winning back some more business. When you look at the transcon lanes, what's been sort of more important sort of the rail service or just the falling truck prices? So I'm just trying to think about what's up at stake if you do get a transcon? And obviously, it would be beneficial for you since you brought on both of the rails that are talking about it.

Yes. I think you have to have both, right? And it makes you more competitive. When our customers are making a decision on routing, it's rate, but it's also transit, consistency of service, inventory carrying costs. It's a decision that they don't take lightly. And I think right now, we're providing a really good service, but it does have some elongated transit because of those touchpoints. And to be able to take 24 to 48 hours out makes that decision a whole lot easier for our customers. And I think we're showing right now not only are we hitting on-time performance metrics, but we have a really resilient product that is able to -- as we have challenges, really rebound quickly. So I think our customers are looking at consistency, overall aggregate performance, and then the resiliency when challenges occur. Right now, we have that. And if you take 24 to 48 hours out, it should just make it incrementally even better along with likely a more cost-competitive product as well.

Our next question comes from Thomas Wadewitz of UBS.

So Phil, I guess I'll give you one first on Hub, and then I go to work in a related one, if you don't mind. But you've developed a portfolio of a variety of services. You've got the wins you described today, which are nice in last mile. I'm wondering how much cross-selling there is going on between your big service intermodal and some of the others you have. I don't know if you have like kind of how many customers buy multiple services and anything like that. Just has that already been taking place in a meaningful way? Or is that kind of future opportunity to, let's say, put green boxes at your warehouses instead of orange and white, or however you want to think about it?

Well, any time I show up at a warehouse, I like to see green everywhere on the outside for sure, and all green boxes. So that's certainly an important part is we do manage the transportation in and out of all of our facilities. And that's been a big point of sale for our customers as well when we are going to cross-sell to them. I would say, as you look at it, we put some numbers on it for 2 services, it's over 80% of our customers are using 2 services, over 60% are using 3, and it falls off a little bit from there, but we do have several customers that are using all of our solutions. I think where we've seen the easiest cross-sell and the most opportunities has been Final Mile recently, given the scale and service sensitivity of our retail customers around the big and bulky, but it also goes to the service quality that we have. We've also done a really nice job integrating service offerings. So if you think about our brokerage as overflow for intermodal, cross-dock solutions, where we're doing the inbound and outbound transportation and different configurations, that has worked very well as well. I think we've done a really nice job cross-selling in Dedicated, but we always have more opportunities. I think when we look at an acquisition day 1, we want to make sure we're saving money on the transportation side, especially if it's a warehousing or Final Mile offering, and then really targeting that cross-selling. We do a good job of it. We pay very close attention to it and track it on a weekly basis. And -- but there is upside. And I think the final mile wins are a proof point of that.

And then I guess a rail-related question, there's discussion on watershed markets. From an intermodal perspective, do you see good-sized freight markets that you say, oh, hey, I could do Dallas to Indianapolis, or I don't know, you make up the OD pair. And because it's on 2 railroads today, that's not feasible in the future would be feasible and if it's kind of a scale OD pair. Is that like a kind of apply in terms of the watershed idea? Or do you think that's more of a carload type of application?

No, I think it absolutely applies. And if you take -- where it doesn't make sense is that there's 24 to 48 hours of touch points today at the interchange. And so to be able to flow that through, it opens up a significant opportunity. We have not gone about sizing that yet. We'll be working with UP and NS on that and attacking that. But it takes out those touchpoints and time. So it makes sense for our customers. And if we're able to reduce the cost where it makes sense now as well, we really think there's a large over-the-road conversion opportunity there and are actually really excited about the opportunity. I think there is significant opportunity that exists within that and plan to target it with our partners.

So the idea of kind of new markets resonates with you, you think that's--

Absolutely.

Our next question comes from Ravi Shanker of Morgan Stanley.

Just a couple of follow-ups here. On the tech projects that you said that you guys are focused on, and you said you're going to -- you're hoping that drives productivity. Can you elaborate on that a little bit more? Kind of just -- can you quantify that? Kind of what's the opportunity there? And kind of maybe some more detail on some of these parts as well?

Yes, yes, sure. No, this is Phil. Yes, I think there's a lot of opportunities. It starts with we've been over the past several years on a journey to really retire legacy systems and make sure that we are on best-in-class platforms. And we've really gotten through the vast majority of that. We have a little bit of work left there to implement baseline systems, but generally feel as though we're on best-in-class platforms. And now what we've been doing is really building the customization and AI on top of that to enhance decision-making speed for our associates, improve the customer experience. And Final Mile, I think we're doing actually a wonderful job in utilizing AI and Agentic AI. And I think that's been a great investment for us in brokerage. We're really on the front end of that. I think we're just starting there, but we have some great intelligence tools that we've built out, and we're utilizing all of our information that comes from intermodal, brokerage, managed transportation to really create better real-time decision-making and give our customers the most competitive costs, but also the right solution.

The one other thing I'd like to add is because of these transformations, we will feel good about our tuck-in acquisition strategy because now that the platforms are where they need to be, we could buy a company and they can move right into our platform, and it should be seamless from bringing them on and onboarding them and keeping their customer service at top quality levels.

So are you giving yourselves any explicit targets on headcount or shipments per employee or something as a result of this?

Yes. Yes. Those are in place, and those were -- did a lot of the driving to the cost analysis and the cost takeout goals that we have.

And super quick follow-up. Just the projects that you said you needed to ramp up to hit the high end of the guide, that's just like regular seasonal project business, right? Or is it like new launches or something more elaborate or structural in that?

Yes. No, there's kind of 2 components. The largest is the $150 million of net new annualized revenue in Final Mile. That's really kind of the biggest chunk that we were talking about. That should and contractually, we're set up to begin ramping those at the end of third quarter, start of the fourth. Just what we were caveating, I think, is sometimes you see delays or the full volume doesn't show up overnight, right? And so I think we were trying to be conservative in our approach there. And then the second piece is really just how long does West Coast peak really continue? It remains a little bit unclear, but we're at least seeing some really robust demand right now. And hopefully, we'll see that continue into the fourth quarter.

Our last question comes from David

If I could ask about Intermodal margins. Intermodal revenue ended up kind of in a relatively normal sequential range from what we can tell, at least not out of line with history, but intermodal margin seems from what we can tell to be maybe a little behind where we would normally expect and didn't get the boost that you normally see in 2Q. So maybe talk a little bit about what was behind the margin profile in the second quarter?

Yes, thanks for the question. Actually, I would say, seasonality, we thought that the intermodal revenue is actually a little down. Normally, we see intermodal growth continue during the quarter, where this quarter, we saw April being our strongest month and then slowing up due to the tariffs and that sort of a little bit of a cliff there from the ordering. But really, on the margin side, we're actually quite happy with it. The ICS margin stepped up and actually was sequentially the same, but higher than last year by 30 basis points. And that was with Dedicated having a little bit of a setback due to some lost customers. So our increase of our network utilization, the increase in our -- doing our own drayage have all added to our margin profile as well as our rail contracts. Rail PT costs did come down, and that is a testament to the rail contracts that are in place today.

And then if I could ask on the logistics side. With the cost-saving measures, how much of that do you think you're going to allocate to logistics going forward? And what do you think the impact will be on logistics margins moving in the quarters to come?

Yes. No, that's a good question as well. I think the logistics margin, we have 2 places really where the cost savings are going to affect logistics margin at the highest is third-party carrier purchasing. We have done a lot of bids. There's still some more bids to do, but we've been successful in driving down cost on our purchase transportation in that side. And also, we talked about the efficiencies on the people, and that's another option where we believe that there's still savings to come. So that, along with the Final Mile new business that Bill described in the last question, we anticipate seeing sequential increases on the OI percentages for the Logistics segment.

Excellent. And then cleanup, I think frequently, you do discuss intermodal yields, although in this release -- do you have what happened to intermodal yield during the quarter?

Yes. So revenue per load was down 9%, but I think what we highlighted in the prepared remarks is fuel and mix were really the biggest headwinds there. Core price is relatively flat, not really -- on a year-over-year basis, not really an impact one way or the other.

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

Great. Well, thank you so much for joining our call this evening. We appreciate your time and questions. And as always, Kevin, Garrett, and I are available for any questions. Thanks so much, and have a good evening.