Hub Group, a major intermodal transportation provider and a company that would be on the front lines of a merger between Union Pacific and Norfolk Southern, likes what it sees.
In the prepared statement released in conjunction with the company’s second quarter earnings, Hub Group (NASDAQ: HUBG), said it was “supportive” of the two companies and their merger plans to create the nation’s first transcontinental railroad. .
“The announced transaction would further accelerate our long-term growth opportunity,” the company said. “Specifically, a transcontinental network removes friction in gateways, reduces transit times, provides access to new markets, and increases competition with truck volume through new single-line service.”
Can we talk about something else?
When President and CEO Phil Yeager first brought up the merger on the company’s call with analysts Thursday after the numbers and statement were released, he echoed the positive sentiments in the earnings release. But he also asked the analysts on the call to not focus on the merger and the impact it might have on Hub Group. “We would appreciate questions being focused on the company and our results,” Yeager said.
And then when the phone lines were open to questions, Yeager’s request was promptly ignored and the first question was about the merger.
Despite his earlier admonition, Yeager took the question and continued to express support for the creation of the cross-country rail supergiant.
Yeager, in his prepared remarks, said Hub Group were “exclusive partners” with both Union Pacific and Norfolk Southern. With the two of them together, he said, “there are several catalysts that should create significant intermodal conversion,” citing “improved fluidity” in gateway cities, “faster transit, better asset utilization, enhanced fuel efficiency and access to additional lanes and markets.”
Yeager said about 30% of the Hub Group’s current business is “moving in a transcontinental fashion.” But since there is no single transcontinental railroad–establishing one being the point of the Union Pacific-Norfolk Southern (NYSE: UNP) (NYSE: NSC) tieup–Yeager expressed optimism about the efficiencies that could come from the existence of such a system instead of needing transfers between regional railroads..
Yeager said on the call that the transcontinental business is “typically a positive mix” for both revenue and margins.
Optimism on the Marten acquisition
Hub Group’s earnings release was the first since it announced its plan to acquire the intermodal operations of Marten Transport (NASDAQ: MRTN). Yeager said the acquisition “allows us to enhance our scale and capacity in one of the highest growth segments of our intermodal network,” which is refrigerated.
While the Marten intermodal operations had been consistently running with an operating ratio in excess of 100% for several quarters, Yeager said he believes the operations inside Hub Group will “”expand our customer base while generating strong returns, due to our ability to capture synergies within our platform.”
As for more purchases, Yeager said Hub Group has a “robust pipeline of additional acquisitions designed to continue deploying capital toward long term growth opportunities.”
Kevin Beth, the company’s CFO, after reviewing a decidedly mixed and not overly optimistic outlook on the state of the freight business for the rest of the year, did note one sign of strength for rail transportation.
“It’s very positive that we’re seeing peak season surcharges in July, and we hopefully will see that momentum carried forward in August and September and through the remainder of the year as well,” Beth said.
Beth, in response to an analyst question, said the surcharges Hub Group has seen in the market this year are larger than last year, but they also were implemented by railroads later this year than in 2024.
Yeager said the company anticipates an early West Coast peak season as part of an “inventory pull forward” driven by importers trying to get ahead of tariffs. But specific to Hub Group, he said, the company has had an “improved bid realization rate” and has added several new dedicated customers, “which should lead to higher revenue from current levels.”
The company’s second earnings reported that several financial measures were weaker for Hub Group in the quarter. Operating income declined 13.1% from the second quarter of 2024 to $34.3 million. Net income dropped 13.7% to just over $25 million.
The cost of purchased transportation at Hub Group, which is easily the largest expense at the company, declined 9.8%. It accounted for 72.4% of all operating expenses, down from 73.7% a year earlier.
Specific units of the company both reported significant declines in revenue, though the Intermodal and Transportation Solutions segment, which is the asset-heavy part of Hub Group, did see an increase in operating income. Revenue was $528 million, down from $561 million a year earlier. But operating income rose to $14.4 million from $13.6 million a year ago.
Logistics revenue was $404 million, down from $459 million. Adjusted operating income for the segment was $23 million compared to $26 million a year earlier.
Sequentially, results at Hub Group were mostly weaker but only by minor amounts. Operating revenue sequentially dropped 1%. Purchased transportation was down less than half a percentage point. But operating income was down 8%. And net income declined 7.1%.
Total legacy headcount, which excludes acquisition employees, drivers and warehouse employees, declined 3% from prior year.
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