Participants

Phillip Yeager; President, Chief Executive Officer, and Vice Chairman; Hub Group Inc

Kevin Beth; Chief Financial Officer, Executive Vice President, Chief Accounting Officer, Treasurer; Hub Group Inc

Scott Group; Analyst; Wolfe Research

Bascome Majors; Analyst; Susquehanna Financial Group

Bruce Chan; Analyst; Stifel

Jason Seidl; Analyst; TD Cowen

Jonathan Chappell; Analyst; Evercore ISI

Brian Ossenbeck; Analyst; J.P. Morgan

Thomas Wadewitz; Analyst; UBS

Christopher Kuhn; Analyst; The Benchmark Company, LLC

David Zazula; Analyst; Barclays Capital Inc

Presentation

Operator

Hello and welcome to the Hub Group First Quarter 2025 earnings conference call. Phillip 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 or forward-looking statements. These forward-looking statements are not guarantees of future performance and involves risk, uncertainties, and other factors that might cause actual results to the 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 risk that may affect Hub Group's business is included in the following with the SEC, which are on our website. In addition to 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, Phillip Yeager. You may now begin.

Phillip Yeager

Good afternoon and welcome to Hub Group's first quarter earnings call. Joining me today is Kevin Bath, Hub Group's Chief Financial Officer; and Garrett Holland, our senior Vice President of Investor Relations. I'd like to start by thanking our thousands of team members across North America for their efforts to support our customers and our Hub Group family through this dynamic market.
These efforts drove a 40-basis point improvement in operating margins during the quarter. And are setting us up for success both in the current market and long term. Our customers have taken different approaches to managing through the implementation of tariffs, with the majority taking a wait and see approach, while others pull forward inventory depending on their end markets, product types and origin of their finished goods.
It remains unclear what the near- and long-term impacts will be as many of our customers have diversified their vendor base and supply chains to ensure fluidity through these potential disruptions. However, this is also created an increased focus for our customers to drive savings in their supply chain, which is supporting over the road conversions to intermodal and increasing the pipeline for our consolidation and managed transportation solutions.
There will likely be a near term impact to import volumes to the west coast, but the magnitude remains uncertain as our volumes have remained safe. We are closely monitoring the situation while staying in constant communication with our clients on their need. Through this current turbulence in global trade, we are focusing on what we can control, winning profitable growth across all of our segments by leveraging our great service.
Decreasing costs through our newly implemented $40 million cost reduction program. And maintaining our strong balance sheet for lower long-term leverage target, giving us flexibility to invest in our business, return capital to shareholders which total $21 million in the quarter, identify strategic acquisition opportunities, and preserve our strong culture and team.
I will now discuss our business results starting with ITS where we delivered an 8% increase in year-over-year operating margin due to improvements in dedicated operations, higher intermodal volumes, and the EASO joint venture. This margin improvement was partially offset by slightly lower revenue driven by declines in dedicated volume due to lower demand, as well as small lo sites and lower intermodal revenue per load.
Intermodal volumes increased 8% year-over-year due to bid wins, a pull forward of inventory, and benefit from the EASO transaction. Local East volumes increased 13%, Local West increased 5%, and Trans town shipments were down 1% year-over-year, while we had significant volume growth in Mexico through organic expansion and our joint venture.
Revenue decreased due to a 12% decline in revenue per load which was impacted by fuel mix and price. We're executing well in mid-season, onboarding wins with a mix of new and existing customers and networks in official lanes due to our excellent service. We are closely monitoring award compliance and although shipping patterns have been more erratic, we are seeing improvements as we onboard new awards.
During the quarter, we reduced insurance expense, increased our insource rate percentage, drove better container utilization, and empty repositioning costs, while cost per day and driver productivity remained relatively flat year-over-year. We have further actions in place to enhance these operational areas and anticipate further improvement in the quarters ahead.
In dedicated, we are operating in a competitive environment, and while we have had losses of smaller sites to one-way truckload, we've had a strong renewal rate and new winds we are on boarding. We improved our revenue per day by 9% year over year in the quarter and are focused on delivering value to our customers to our strong service levels and cost reductions.
In logistics, our operating margin percentage improved 70 basis points year over year due to improved efficiency in our facilities, as well as the completion of the network alignment initiative that was offset by lower margins in our brokerage. We experienced a larger decline in revenue of brokerage due to limited stock market opportunities and decline in rates as well as the negative mix.
This is offset by better relative performance in our contractual logistics offerings. Brokerage volume declined 9% year over year with a 10% decline in revenue per load, which was primarily driven by lower fuel price and mix. Our LTL offering is performing well, helping to drive sequential margin improvement from the fourth quarter.
We also reduce negative margin shipments by 210 basis points year-over-year. And are winning with new and existing customers in bid season while reducing our purchase transportation costs. In our manage solutions, we delivered operating margin percentage improvement in all of our services, the largest being in CFS following the implementation of operational efficiency enhancements and our network alignment initiative completion.
This has led to an 1100 basis point improvement in warehouse utilization year over year. We are focused on growth across all of our offerings and improving our cost basis through productivity enhancements. And we have a strong pipeline as we leverage our scale and service to compete and win in the market.
With that, I will hand it over to Kevin to discuss our financial results.

Story Continues

Kevin Beth

Thank you, Phil. I will walk through our financial results before commenting on our outlook. Our reported revenue for the first quarter was $915 million. Revenue decreased by 8% compared to last year and was in line with fourth quarter revenue. ITS revenue was $530 million which is down 4% from prior year revenue of $552 million as the intermodal volume growth of 8% was offset by lower intermodal revenue per load due to a change in mix and slightly lower dedicated revenue in the quarter.
Additionally, lower fuel revenue of approximately $11 million negatively impacted the top line. The logistics segment revenue was $411 million compared to $480 million in the prior year due to lower volume and revenue for load in our broker's business, exiting of unprofitable business in CFS, and seasonal softness in our band's transportation and final mile lines of business.
Lower fuel revenue of $14 million in the quarter also contributed to the decrease. Moving down the P&L for the quarter, purchase transportation and warehousing costs were $658 million, a decrease of $82 million from the prior year due to strong cost controls, as well as lower rail and warehouse expenses. This results in a 220-basis point improvement on a percent of revenue basis when compared to Q1 of 2024.
Salaries and benefits of $149 million were $5 million higher than the prior year due to additional employee drivers and warehouse team members and the (technical difficulty) transactions. Total legacy headcount, which excludes acquisition employees, drivers, and warehouse employees, was lower than last year by 7% as we continue to manage headcounts across the organization.
Appreciation and amortization decreased $6 million over Q1 2024 due to our updated useful life assumptions. Insurance and claims expenses decrease by $2 million as we continue to see our safety focus and training programs pay dividends. Even after the EASO transaction last quarter, our cost controls allowed our general and administration expenses to remain in line with the prior year.
As a result, our operating income increased year-over-year, with an operating income margin of 4.1% for the quarter, an increase of 40 basis points over the prior year. ITS quarterly operating margin was 2.7%, a 30-basis point improvement over prior year. The first quarter of logistics operating margin was 5.7%, a 70-basis point improvement over Q1 2024. EBITDA was $85 million in the first quarter.
Overall, Hub earned an EPS of $0.44 in the first quarter, in line with Q1 2024. Now turning to our cash flow from operations for the first three months of 2025 was $70 million. First quarter of capital expenditure totaled $19 million with the majority of spend related to tractor replacements, with technology making up the remainder of the spend.
Our balance sheet and financial position remains strong. Through the first quarter, we returned $21 million to shareholders through dividends and stock repurchases as we purchased $14 million of shares and issued our quarterly dividend of $12.50 per share. Net debt was $140 million which is 0.4 times EBITDA, below our stated net debt of EBITDA range of 0.75 times to 1.25 times.
EBITDA left CapEx was $65 million in the first quarter. We are pleased with our cash EPS of $0.55. The spread between EPS and cash EPS was $0.11 for the quarter, and we ended the quarter with $141 million of cash. Turning to our 2025 guidance, we expect full year EPS in the range of $1.75 to $2.25 and revenue to be between $3.6 billion to $4 billion for the full year.
We project an effective tax rate of approximately 24%. We also expect capital expenditures in the range of $40 to $50 million as we focus on replacement for tractors that have reached their end of life and technology projects. We do not plan to purchase containers in 2025.
Our assumptions at the high end of the range include either a short West Coast slowdown of China imports or a strong bounce back of demands in the West Coast, leading to a surge of volume in the back half of the year that allows for increased pricing for peak season surcharges. The low end of the range would be due to an extended slowdown in China imports and or the weakening of consumer spending.
The decrease in volume and margin dollars would be partially offset by further cost management efforts. The assumptions in the middle of the range contemplate a volume decrease in the second half of the second quarter due to our customers changing shipping patterns to combat tariffs with a return to directional seasonality in the third quarter as consumer strength holds.
Additionally, we should recognize additional cost saving benefits through the year as the team remains committed to disciplined expense management. For the IPF segment, we expect pricing to be relatively flat for the remainder of the year as we continue to focus on network needs and new customer acquisitions. We think there is an upside, should we see a bounce back of volume, which would allow for peak season surcharges and pricing increases.
Due to the expected second quarter slowdown, we expect sequential operating results to be plated down from first quarter. Then we would expect to be back to normal seasonal operating income patterns. We expect dedicated revenues to be less than 2024, that new customers are not enough to offset lost customers and demand softness.
For logistics excluding our brokerage business, we expect some general softness in demand, but there should be some mitigating factors affecting revenue. In our warehouse business, if we experience lower transportation revenue, we expect to see an increase in storage revenue. And in our final mile and managed transportation business, we have a good pipeline which, if onboarded, could offset slower shipping from current customers.
For brokerage, we expect volume for the remainder of the year to be flat to down from current volume results, with pricing to continue at current levels. The business has potential upside if we see a pronounced bounce back in inventory restocking. We continue to manage what we can control, and our cost savings initiatives have resulted in improved profitability.
We are pleased with the progress the team has made as the operating income percentage increase in both segments. ITS with 30 basis points, and logistics with 70 basis points of growth, resulting in a 1% increase in consolidated operating income or growth of 40 basis points on a percent to revenue basis. We also reported Q1 intermodal volume growth of 80%, free cash flow of $51 million and cash EPS of $0.55.
As we manage through this unpredictable environment, our longer-term strategy continues to guide us. We remain focused on managing our people costs, reducing discretionary spending, and driving down transportation costs. At the same time, a strong balance sheet allows us to make value add acquisitions.
As I have noted in the past, the important strategic changes we have made to our business, including our focus on yield management, asset utilization, and operating expense efficiency, and investing in asset-like logistics offerings have significantly improved profitability, predictability, free cash flow, and returns. We believe these strategic changes allow groups to be successful in a variety of macroeconomic environments.
With that, I'll turn it over to the operator to open the line to any questions.

Question and Answer Session

Operator

(Operator Instruction). Scott Group, Wolf Research LLC.

Scott Group

So can you just talk about what percentage of intermodal is tied to West Coast ports? And then maybe I think in the past you give us monthly trends, maybe just give us the monthly trends. And what April was, and then I know this is a bunch, but all sort of in the same thing. But it feels like this import cliff is starting this week, so just what you're expecting to happen to your volumes going forward.

Phillip Yeager

So I'll start, yes. So volume, I'll start with volume trends, January was up 18, February was up 1 March was up 7, and then April was up 6. Thus far in May we haven't seen the slowdown that is obviously much anticipated. But, at this point not showing up in our data, we think that's going to be varying by customer and how much they pulled forward, how much seasonal product they have, how much diversification in their sourcing strategy they've been able to execute on.
As far as exposure with China, about 25% of our West Coast volume is port related, 30% of that, coming from China. We are obviously anticipating that slowdown. Once again, we'll vary by customer, but we're also going to have opportunities to reduce costs. Our empty repositioning costs are going to go down. We're going to insource more of our drainage.
As Kevin mentioned in the prepared remarks. Our storage revenue and warehouse utilization will improve. So we're certainly monitoring it closely, but once again haven't seen an impact at this point.

Scott Group

And is what's like the typical lag from when it shows up at a port to when it shows up in your volume. And do you have a sense is there like is there a lot of freight, at the ports or near the ports and warehouses that they're still like that was built up to like, you still have volume to move even if there's not a lot of new stuff coming into the ports. Is that possibly happening?

Phillip Yeager

Yes, I would agree with you. I think it takes a few weeks and we haven't seen that show up yet, but yes, indications are there's still a good amount of warehouses and still clearing through the port infrastructure. So yes, we're, but we're staying very close with our customers on it.
And once again it's going to varied by customer and by and market and by product type and so you know it really is a very by customer and we're so we're having to stay very close and just really watch those day to day week to week award compliances and forecasts from our clients.

Scott Group

Okay, helpful. And then last one I'll just I'll pass it off any update you can give us just on bid season and what kind of pricing you're seeing?

Phillip Yeager

Yes. That, -- I would say it's competitive but certainly not irrational, if you look at Q1, there was actually a pull forward of bids. We had about 48% of our business get bid in Q1, which we think was actually advantageous for intermodal truckload carriers came out with a little bit more aggression on rate that led our customers to look at the cost differential as well as the service product we're delivering an intermodal and push, a little bit more conversion than they may have otherwise.
In Q2, 38% of our business is getting bid out. I would say it's been a little bit more aggressive, which is leading us to really say, we think flattish on pricing for the full year, but we've executed our bid plan. We've done really well in back haul lanes and efficient business for our drivers. We're growing well in the East and in Mexico and also with our temperature-controlled products.
We've added 50 new logos thus far for good season. So really pleased with those results and I think the focus for us is keep delivering a great service product, keep reducing costs so we can compete and win, and we'll be in a good position as we see volume normalized.

Kevin Beth

And Scott, this is Kevin just for, -- our normal cadence on bids is about 30% to 35% in first quarter and about 35% in the second quarter, so you can see that that bid pool score that Phil was talking about.

Scott Group

Thank you guys. Appreciate.

Operator

Bascom Majors, Susquehanna Financial Group.

Bascome Majors

Maybe adding a little more qualitative commentary to that. Can you walk through how your conversations with your largest customers, which are the largest retailers with sophisticated ways to deal with this situation? How has that evolved over the last six-seven weeks? And are your forecast in the kind of high- and low-end scenarios or revenue that you talked about.
You're tied to what they're sharing with you for their forecast. Just trying to understand how quickly this is moving and how much visibility you think you do or don't have at this point. Thank you.

Phillip Yeager

Sure, yes. This is Phillip. So I think you know we do anticipate a drop in import demand in the second half of the second quarter. I think the scenarios or potential outcomes we're trying to lay out are, if we see a quick rebound. And things snap back really quickly and we're getting surcharges, then you're at that high end of the range that we gave you if it's really prolonged and you start to see it impact the consumer, you could be at that low end.
And based on what we know, there's probably somewhere in the middle that things will land. And so you know that that's kind of the midpoint of the range and based on what we're seeing with our customers. The discussions we've had with them, there is some pull forward that's occurred certainly I mean you look at our January volumes of 18% there would certainly pull forward.
But not enough where inventories are over stocks at this point and there's also a whole lot of seasonal shipping that needs to occur that hasn't taken place yet. So our customers, many had already been proactive and diversifying their supply chains and vendor base and others are reacting more in real time. So I would tell you it's also quite varied in in how people have managed through it.
Those that were more concentrated on Chinese imports pull forward, those that that didn't start taking that. Wait and see approach, and so it really has been a mix, but you know we're once again we're watching it closely. And this is the guidance is really based on those variety of potential outcomes and informed by, the discussions we're having with our customers and what we anticipate happen.

Kevin Beth

Yes. This is Kevin. I just said, certainly we're taking as many data points as we can get our hands on when we're coming up with our scenarios. So yes, that factors in what we're hearing from customers, but also what we're reading, and you know what's available publicly.

Phillip Yeager

And the last thing I'd add is that the primary impact, at least in the near term, would be ITS or modal. Our other businesses are going to be somewhat more resilient through this our managed transportation business is not as import heavy. Our warehousing business is going to see an influx of storage demand likely. And so we have some offsets and obviously we're doing a good job managing costs to ensure we're in a good position.

Kevin Beth

And finally, one thing I would add is, this really gives Hubs that opportunity to work with our customers. And show them that we can save them money and come up with better transportation and to really meet their needs. So that is an opportunity that we're trying to take advantage of as well.

Bascome Majors

And if we work backwards from the holidays through this uncertainty. And just think about, retail inventory needing to move inland and hit store shelves by, November early December. When do you think that you know you'll have the visibility in those decisions on how to manage this will be made by those customers?

Phillip Yeager

Yes, I think, there's certainly an air pocket of freight that's coming. I think there is going to be some replacement of that from other origin points. There once again are the seasonal items back to school, Halloween, that are going to need to be brought in or you're going to miss sales. And then, I think, for the holidays, you typically see Q3 be our strongest shipping quarter. August, late August, September, and then October are normally our strongest shipping month.
So to get that product, you're really seeing those decisions in the July time frame, July. -- June late June or early July and you know we should hopefully start to see it in the data at that point. I think if there's clarity around trade, people are, the consumers remaining resilient and people are going to ship. And once again inventories just haven't been overly built in a lot of the segments that we operate in. So we're keeping a close eye on it though and we'll certainly continue to stay very close to our customers.

Bascome Majors

Thank you all.

Operator

Bruce Chan, Stifel.

Bruce Chan

Kevin, you talked about some of the additional levers that you can pull on to, offset some of the pressure of the environment, kind of trends towards the bar side of the outlook. And that was certainly helpful. Specific to headcount, last year, I think you talked about headcount being down about, I want to say 3%. Where was headcount this quarter and if you think about a potential deterioration in the market, where can that number you know sort of go to?

Phillip Yeager

So I'll start. So headcount was down to 7%, I mentioned in my prepared remarks we have about $40 million of cost deaths that we're executing on. Half of that's been implemented really at the time of the call. So you start to see that kind of back half of Q2 and more materially in the third quarter. And we'll implement the remainder as the year progresses. But 2/3 of that about is purchase transportation. So drainage, truckload, LTL, as well as temporary labor in the warehouses.
The other third is more salaries and benefits weighted with the reduction in head count, not backfilling roles that you know are necessary. But we're also doing a really nice job and have made some significant reductions in our outsourced labor there as well. So we're once again we're controlling what we can, -- we'll, we want to be in a position where, -- we can support our customers as we see a rebound in demand as well.
So we're certainly being thoughtful in our approach around it. But obviously the opportunities to reduce costs.

Kevin Beth

Yes, just to add that, we also have some of our technology implementations are paying off. We're seeing some reduced spend in our outsource, support systems, that we needed for some legacy IT as well as the consulting on the IT spend is coming down as well. So we have pretty much every facet, we've looked under and we're finding things that are allowing us to decrease costs.
And it still mentioned, several of those programs have already been implemented. Other ones are being implemented as we speak, and so, we'll see some of that benefit grow as the year progresses.

Phillip Yeager

And it, and this these improvements are on top of the reductions we made in the network alignment initiative. And I think the team has done a great job in reducing repositioning costs which were down 17% year-over-year in the quarter. And then, we have also been reducing insurance expense. Team's done a great job in reducing accident frequency and severity and so that has been, a tailwind as well.

Bruce Chan

Okay. That's super helpful caller. And then, maybe just for the follow up, looking for some updates EASO in terms of business trends. I know you mentioned that the Mexican volumes there are pretty strong. Any evidence of sourcing shifts there yet?
And if you think about M&A, we've talked about that a lot in the past, but specific to Mexico, do you feel like there's still opportunity to kind of four to five presence there or do you think that you're pretty well built out?

Phillip Yeager

Yes, I would say EASO has been a fantastic joint venture and we've been off to a great start. Our volumes were about four acts on a year-over-year basis and we're cross selling really well, have some significant opportunities. We're working on with our rail partners. And it's very exciting. We have seen erratic shipping patterns with some of the news around, tariffs being on and off.
So I think the more we get clarity there the better. But for the time being, most of our customers are back to normal shipping and we're seeing increases in volume just on an organic basis. Even before some of the cross-selling and obviously just the upside from having EASO in our numbers, we are continuing to look at acquisition opportunities. We have a really good pipeline right now, some really interesting opportunities.
I do think, adding more solutions. To support our customers in Mexico over time will be the right approach and so we're certainly going to be opportunistic within that. We also have a lot of interesting opportunities in the states right now that'll help us continue to build scale and differentiation in the existing service lines. So a lot of good opportunities.

Bruce Chan

That's great. Thank you.

Operator

Jason Seidl, TD Cowan.

Jason Seidl

Hi, thanks. This is on for Jason Seidel. I guess just one on the, on surcharges. Your guide originally called for modest peak season surcharges, kind of preempting the pull forward. Are we still expecting that kind of in the in the base case? And maybe secondly on the high end, are you assuming we see surcharges maybe earlier in the year than usual if this air pocket kind of gives way to a big influx?

Kevin Beth

Sure. Yes, this is Kevin. I'll take that one, to answer the question on the surcharges, the base case, there is none incorporated in the base case. Certainly, in the full case, yes, surcharges are contemplated, not to the level that we saw last year of $5.5 million. But the timing of it is really in question. I think that's really, one of the big things that It is unknown at this time, that depending on when it tariffs change or, as Phil spoke about earlier, if that restocking really comes at a certain time.
That is probably when we would see the surcharges. But without knowing what's going to happen with tariffs, it's really hard to predict when that would happen.

Jason Seidl

Okay. That's pretty helpful. And then maybe just another clarification. I mean, you said it was advantageous that a big chunk of bid got pulled into one queue. Is that indicating that the intermodal pricing environment sort of deteriorated into 2Q and that we need some kind of stabilization in the second half to get to the flat year-on-year.

Phillip Yeager

No. I think, what we were seeing that the initial onset of this season was more aggressive truckload pricing and trying to push rates up, and intermodal was remaining, similar to what we talked about taking some rate and head halts, it's still very aggressive in back halls. What we've seen now in the second portion of this season is just more truckload competition. So not really any change in the intermodal space.
It's been more, or I guess less opportunities for near term conversion just given some of the pricing that we're seeing from truckload carriers. But we're still winning in the market. I mean we have a really good spread versus truck right now around 30% in aggregate. And we have a really good value proposition with service.
I think the other thing is, our customers are recognizing that if the consumer holds, there is going to be some significant shipping demand in the in the back half. And so they want to make sure they're locking in that capacity and Intermodals is obviously a good opportunity, one to reduce costs in the supply chain, but to make sure they're locking in capacity if there's a surge.

Jason Seidl

Okay, that's great. Maybe if I can squeeze one on dedicated. I mean, how many bid seasons do you think it'll take to kind of get rates to kind of the previous high-water marks, the previous cycle. Any thoughts on that?

Phillip Yeager

Yes, it's a dedicated multi-year contract. So we're constantly having renewals every year. Right now it's a little bit more competitive with one way. The rates are typically based off of driver pay with a fixed and variable portion. And, -- we, while it's been somewhat more aggressive and we're still doing a really good job on renewals and we've done a lot of self-help on controlling costs and improving our operating performance which is really supporting those improved margins on a year-to-year basis.
So you know we feel as though there's still opportunities regardless of what's going on with rate. And we'll constantly every year you renewing contracts and wages are going up, we'll be, taking rates up and vice versa. So right now though, obviously a competitive environment, but we're holding our own really well with strong renewals, strong service levels. And we are being proactive with our customers and identifying efficiency opportunities

Jason Seidl

All right. Thanks for the time.

Operator

Jonathan Chappell, Evercore ISI.

Jonathan Chappell

Kevin, just trying to put a pin on some of these things which I understand are difficult to put a pin on just given the uncertainty. But in the guidance in February looking for high single digit intermodal volume growth and low single digit pricing increases, given what you said for the midpoint today, volume decreases in the second half of two return to directional seasonality, ITS pricing flat for the rest of the year.
What would that translate to for full year, in a volume growth and pricing?

Kevin Beth

Yes. Thank you, Jonathan, for the question. Yes, we're not, due to the varying scenarios that we really came up with and the uncertainty, we're not providing for your forecasted volume numbers at this time. Like you said, we do anticipate a slowdown here in the second half of this quarter. But it's just, without having some visibility into, when that whiplash could come back. And how strong that is, we're not providing those amounts this time.

Jonathan Chappell

Okay. That makes sense. On the pricing side, if it were to be flat from today, would that be, would that still be positive year over year in the second half, or would that be kind of closer to flat year over year?

Kevin Beth

That it would be pretty close to flat year-over-year and like Phil said, we do have good, visibility to that with the bids being pulled forward so it will be depending on how the mix ends up being with. And that is again making sure how compliance, customers are with what they're telling us. And sticking to their actual guide of freight that they originally projected.

Jonathan Chappell

Okay. That makes sense. One just quick last follow up, again, in Feb you were looking for a normalization of incentive comp, which I think you would expect it to be a headwind. You talked about all the great things you're doing on the cost side. Is that dialed down a bit as well, or do you still kind of expect the same incentive comp headwind year '25 or '24?

Kevin Beth

Yes, I think overall we still expect some headwind there, but it is being muted a little bit now with the change in, the actual headcount itself.

Jonathan Chappell

Got it. Appreciate it, Kevin. Thank you.

Operator

Brian Ossenbeck, JPMorgan.

Brian Ossenbeck

So maybe just a broader question on the network and the utilization of it. And sort of the balance overall looks sounded like you had some pretty good reduction in empty repositioning costs. But maybe you can elaborate a little bit more on that. Do you still see pockets that are maybe a little bit less dense than you would like, or were you able to address those during mid-season?

Phillip Yeager

No, we are pleased with the progress on empty repos even with that January pull forward a freight, reducing repo cost 17%. We felt like was a really good outcome for us, and that was due to, those bid wins and creating better balance and velocity. And so, we're pleased with that. We think we've continued to execute well in bids on the targeted lane.
We'll likely see a step down just with the unknown of how far, West Coast volumes dropped with this import air pocket. But so we'll see another step down just due to less demand off the West Coast, but I think we're controlling what we can control and long term you still want to be filling in those backhaul lanes. So we've done a good job with that.
The growth in the east is going to continue to create more balance and velocity. There turn times in total we're about 4% better on a year over year basis, so you know we're pleased with that as well and so we're getting more out of what we have on the street. We need to keep that momentum. But it's about continuing to win in the right lanes and we're going out and executing on that.

Brian Ossenbeck

And it sounds like rail service is performing pretty well despite the volatility and the uncertainty based on the comments on certain times. And how is that translating to truckload conversion? Sounds like the spreads pretty favorable, but I'm assuming rail service is a big part of that conversation too.

Phillip Yeager

Absolutely, rail service has been really phenomenal and resilient. Both of our partners are performing very well, I think, if you think about what could potentially happen with more of a surge in import demand. I feel far more confident in our ability to manage that surge as an intermodal network than we were in the past just given the resilience of the operating models of our rail partners.
So we're excited about that and same with us, I think we've certainly learned a lot through the last few years and build more resilience into our service product as well. So we feel, very good about managing that for our customers and but once again rail service has been really strong.

Brian Ossenbeck

Let's follow up on the same sort of topic. What do you, -- how do you feel about stacked boxes and where they are, given we have seen some pretty big differences in the growth in different regions. So I guess maybe an update in terms of just general positioning for boxes, other equipment and [Dr]. And you know what's the current percentage stack. If you can give that thanks.

Phillip Yeager

Yeah, we have, somewhere around 20 approximately 20%, 25% of our boxes stacked at this moment in time. We think we have about 35% incremental capacity before we have to really put any capital into containers, so we have a long way to go. We did improve our, insource rate percentage by about 400 basis points sequentially.
We've done a really nice job here in the second quarter thus far, so we should see another step up on in-source straight percentage, and we're doing targeted hiring but really just getting more utility out of our existing team. And so we feel good about the momentum there. And I think we have plenty of capacity and the drainage on the street we're doing a really good job. So a lot of good work by the team.

Brian Ossenbeck

Okay. Thank you, Phil. Appreciate it.

Operator

Thomas Wadewitz, UBS.

Thomas Wadewitz

Wanted to ask you, I know there's not a lot of visibility on volume, right? And you kind of gave us some of the parameters for how to think about that or high level. If we said, well, for 2Q, and kind of sequentially, would you, what's your kind of base case for 2Q intermodal volumes versus 1Q, April sounds like it looked pretty good, but you think full quarters down or maybe kind of flat factoring in some softening later in the quarter? Or how would you think about that?

Phillip Yeager

So I think you we're, it's a little unclear what the drop will be in the timing of it. If it, -- if we're still planning being transloaded and still in warehouses, that's going to delay that drop. Once again we haven't seen it in our numbers yet. So if it's three weeks out, I would tell you, we're still anticipating volumes being up. I it's, in the next two weeks then that that could vary, but at this point I would tell you we're still anticipating volume growth for the quarter. But it really does depend on how large that drop is and what the timing is as well.

Thomas Wadewitz

Okay. And so volume growth sequentially or year-over-year?

Phillip Yeager

I would say year-over-year sequentially is probably unlikely I would guess. But once again it's hard to know if we're in the second week of June and we still have products flowing. Then we're going to be up and you know I think at the same time we tried to give an indication of the exposure we have to China imports. I think, our customers have diversified their supply chains and. If 25% of our West Coast volumes are port related and 30% of that is China, it shouldn't be an outsized impact.
And we've done really well with growth in Mexico and growth in the local East. So those should be some offsets to that import demand drop.

Thomas Wadewitz

Right. Okay, wanted to also ask you a bit about how you're thinking about ITS and logistics, operating margins looking forward. Do you think kind of stable? I mean, -- I know 2Q's got the wrinkle with the, some weakening in volume. But how do you think about where we go from 2.7 and 5.7 and 1Q. And what might be some key levers to potentially see improvement off those off the one level?

Kevin Beth

Sure, Tom, this is Kevin. We don't provide qualification guidance on this, but you know what I will tell you is, again it depends on that timing. And if there is that fall off, but with that, -- we would expect to see the directional normal seasonal increases that you would see in in third and fourth quarter for both ITS. And for logistics, I think right now, second quarter is a little bit more up in the air.
If there really is the fall off that everyone's talking about with the imports, then that may be sequentially down.

Thomas Wadewitz

Okay. So probably versus 1Q some improvement in the second half but less clear for 2Q.

Kevin Beth

Yes. And again, those costs, items that that we talked about the $40 million of different projects that we have, they're going to be kicking in. And I think we'll be able to help even if there is some muted, volume in in the second half, especially maybe in the beginning of July.

Thomas Wadewitz

Okay, maybe one last one I'll hand it off. But what do you think about the kind of the key lever for intermodal margin improvement? You used to run at a lot higher level, and I feel like it's just been, the big weight on truckload and intermodal has just been, excess capacity and difficulty getting rate.
Is that really the thing you just got to get a stronger rate environment. And then that intermodal margin improves a fair bit or you know what's kind of the key lever, if you look a little, further out.

Phillip Yeager

This is Phil. I mean, -- I don't, really recall when we were running at a much higher margin. I think we've actually done a great job improving the rough for rough margin profile and actually more than doubling it. So yeah, I feel like we've actually done a great job. We did run higher in COVID when our boxes were being used for storage. But I, -- so I guess that would be the time where it was higher, but at the same time I think we do need more velocity in the network, that's priority one.
We need to continue to insource more drayage which right now we're running over 80%. We've got our chassis programs in place. We've got variable rate, in our rail contracts. So yes, I mean, -- I still think. mid cycle, this is a mid-single digit operating margin business in that 5% to 6% range. And as you get to the to the peak of a cycle, it could be much higher than that.
So demand would certainly help, but I think we've done a really good job controlling what we can control and improving the margins of the business.

Kevin Beth

Yes, certainly price moves the lever, easier than mine does, but, that day is going to come and, I think, we're ready for that growth opportunity.

Thomas Wadewitz

Okay, all right. Makes sense. Thanks for the time.

Operator

Christopher Kuhn, Benchmark Company.

Christopher Kuhn

Can we just go back to the logistics margins? I mean, they were up 70 basis points. The brokerage business still seems like a pretty big drag on that. I mean, are the other businesses within that improving margins, or is that all just the actions you took last year? And what is the underlying margin in that business now? That you've done a pretty good job despite the brokerage being a drag.

Phillip Yeager

Thank you for the question. Yeah, we do agree. We think we've done a very nice job improving the margins and 70 basis points in this environment was pretty strong. If you look at it on a year-to-year basis, there was a drag from the brokerage offsetting some of the improvements we made in particular. In the consolidation business where we've done a much better job on managing our labor expenses, improving customer retention levels, improving service.
And then obviously, aligning our space to our needs, and we have some upside for growth and that should certainly be helped with some of the storage needs of our customers. But yes, we're continuing to. Improvement in our managed transportation business and final mile as well as in warehousing. I think on the brokerage it has been a headwind.
We have done a nice job reducing our negative margin loads. So it's down 200 basis points in the quarter. Our productivity continues to improve. But with the limited stock market opportunities that have been out there, it's kind of kept a lid on the margin profile though we're still profitable within that segment. But, no, I appreciate the question on it. I think we are doing a good job managing our cost there, but also bringing on nice new profitable wins and see more margin upside ahead.

Christopher Kuhn

That's helpful. And just see your last comment, we have heard that maybe some shippers are keeping inventory in containers. I don't know if you're seeing that, but just curious as to whether that might be something you might see in the next quarter or two.

Phillip Yeager

We haven't seen that yet. And I think you know there may be some customers who, overdo it on pull forward. We haven't seen it at that at that level yet, but certainly something we'll watch, but not we haven't seen that at this time.

Kevin Beth

I appreciate it. Thanks.

Operator

David Zozula, Barclays.

David Zazula

Kevin, notice the lowering of the CapEx guy. I wonder if you could give some color on that. I think you said you already were not putting anything into containers this year. So what are you cutting? What areas are you kind of looking at to trim down the CapEx for the year?

Kevin Beth

Sure, yes. Thank you for the question. The changes in the CapEx, as you noted, went from 50 to 70, with the original. We're now down to 40 to 50. It really reflects less fleet investment and steady upgrades in this environment, we're continuing to have no additional container investments. The no change on our IT front, those the projects that we had anticipated are we're still planning on it.
And moving forward with, really one of the things that we were able to do is really find, some solutions to be able to use some of our equipment down in Mexico. So that was an opportunity that allowed us to decrease that spend as well.

David Zazula

Awesome. And then on dedicated customer retention, I mean, you mentioned it is an issue and I think it had been an issue in the past. Is it something that is accelerating, is it something you're more concerned about now in the back half? Is this something that you do to the unstable environment, just it's harder to get customers to resign contracts?

Phillip Yeager

I think you know the facts that we lost were pretty small and mostly turned over to one-way truckload. And so our retention levels are still around 90%. If you look at just on a contract basis, amount of revenue would be even higher than that just given its smaller sites. So we feel as though we're in a good spot. We're providing really good service levels and being proactive on identifying efficiency opportunities.
And, as I mentioned we have some new on boardings we're bringing on with, actually some new and existing customers. So, I think we're doing a good job managing that business. We have good operational controls. We just need to continue to execute and we'll be in good shape.

Kevin Beth

And I think when you look down the road, this is going to be an opportunity for growth, when those one way rates change, we're going to be able to bounce back on with our dedicated solutions. And, hopefully win-win some contracts that way.

David Zazula

Would you bringing in some new customers or additional volume of the additional customers. It is the end market profile of dedicated changing at all? Are there some types of customers where it's easier to get them to look at dedicated now versus a year ago or two years ago?

Phillip Yeager

Most of our, dedicated business is retail centric. And the, -- but we also have a strong actually industrial, set of customers and a few consumer products as well. So the new wins are mostly in the retail and consumer side, with companies that are performing in very well through this turbulence in global trade. And see a need to lock in high service capacity.
So it's and the winds are in areas where we have density. So our ability to surge with them should be pretty strong so we feel good winds and good network lanes with good customers.

David Zazula

Thanks, Scott. Thanks Phill. I appreciate it.

Kevin Beth

Thank you. .

Operator

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

Phillip Yeager

Great. Well, thank you everybody for joining our first quarter earnings call this morning, or this afternoon, and as always, Kevin and I are available for any questions you might have. Thank you and have a good evening.

Operator

Ladies and gentlemen. This concludes today's conference call with Hub Group. Thank you for joining. You may now disconnect.

View Comments