Executive Summary / Key Takeaways

• Hub Group has strategically transformed its business model, emphasizing diversification, asset-light logistics, and operational efficiency, which has significantly improved its profitability and cash flow profile compared to prior market cycles.
• Despite a challenging freight market characterized by excess capacity and competitive pricing, the company demonstrated resilience in Q1 2025, achieving a 40 basis point year-over-year improvement in consolidated operating margin to 4.1%, driven by cost controls and efficiency gains in both ITS and Logistics segments.
• Strategic initiatives like the EASO joint venture in Mexico and the completion of the Logistics network alignment are positioning Hub Group for future growth, particularly capitalizing on nearshoring trends and enhancing service capabilities, contributing to intermodal volume growth even in a soft market.
• The company maintains a strong financial position with low net debt (0.4x EBITDA) and robust cash flow generation, providing flexibility for continued investment, strategic acquisitions, and returning capital to shareholders ($21 million returned in Q1 2025).
• The 2025 outlook reflects market uncertainty with EPS guidance of $1.75 to $2.25 and revenue of $3.6 billion to $4 billion, contingent on factors like the timing and magnitude of import volume impacts from tariffs and the pace of inventory restocking and consumer spending recovery.

A Transformed Hub Group Navigates a Complex Freight Landscape

Hub Group, Inc. stands today as a leading supply chain solutions provider in North America, offering a comprehensive suite of transportation and logistics services. Its core business spans intermodal, dedicated trucking, truckload, LTL, warehousing, and final mile delivery, serving a diversified customer base primarily in the retail, consumer products, and durable goods sectors. The company operates within a highly competitive and cyclical industry, facing rivals ranging from large, integrated logistics giants like J.B. Hunt Transport Services (JBHT) and XPO, Inc. (XPO) to specialized truckload carriers like Knight-Swift Transportation Holdings (KNX) and Schneider National (SNDR), as well as numerous smaller regional players and brokers.

Over the past several years, Hub Group has undergone a deliberate strategic transformation. This pivot has involved a conscious effort to diversify its service offerings, build out its asset-light Logistics segment, and sharpen its focus on yield management, asset utilization, and operating expense efficiency. This strategic evolution, coupled with targeted acquisitions like the Final Mile business in 2023 and the controlling interest in EASO in late 2024, has aimed to fundamentally improve the company's profitability, predictability, and free cash flow generation, positioning it for greater resilience across market cycles.

Central to Hub Group's strategy is its leveraging of proprietary technology. While specific, detailed quantitative metrics on the performance of all proprietary technology components are not extensively disclosed, management commentary and strategic focus highlight its importance. The company utilizes technology for various functions, including transportation management, shipment optimization, load planning and execution, and enhancing customer visibility. Management has noted that technology implementations are "paying off," contributing to reduced spend in outsourced support systems and IT consulting. In the brokerage segment, technology has been leveraged to improve efficiency, with "loads per team member up 24%" in prior periods, and further IT initiatives are planned. The strategic intent is clear: to use technology to drive operational efficiencies, improve productivity, enhance service levels, and ultimately lower costs, thereby strengthening its competitive position against rivals who may rely more heavily on scale or traditional methods. This technological edge is intended to provide tangible benefits like faster processing and improved data analytics, contributing to a competitive moat by enabling more agile and cost-effective service delivery.

Operational Discipline and Strategic Expansion Yield Results

The impact of Hub Group's strategic pivot and operational focus is evident in its recent performance, particularly in navigating the challenging market conditions that persisted into early 2025. For the first quarter ended March 31, 2025, total consolidated operating revenue decreased 8% year-over-year to $915.2 million, primarily reflecting lower volume and revenue per load in the brokerage business and seasonal softness in other Logistics areas, along with lower fuel revenue. However, despite the top-line pressure, the company achieved a notable 40 basis point improvement in consolidated operating margin, rising to 4.1% from 3.7% in Q1 2024. This margin expansion underscores the effectiveness of cost control efforts and efficiency initiatives.

Breaking down the performance by segment provides further insight:

• Intermodal and Transportation Solutions (ITS): Revenue in the ITS segment decreased 4% to $530.0 million in Q1 2025. This was primarily attributed to mix, price, and fuel, partially offset by an 8% increase in intermodal volumes. This volume growth was driven by bid wins, some inventory pull-forward, and the contribution from the EASO joint venture. ITS operating income, however, increased to $14.0 million, resulting in a 30 basis point margin improvement to 2.7%. Management highlighted cost control efforts, lower dedicated start-up costs, and improved insurance and claims expenses as key drivers for this profitability gain. Operational metrics like empty repositioning costs, which were down 17% year-over-year in Q1 2025, and improved intermodal turn times (up 4% year-over-year) demonstrate tangible efficiency gains. The company also increased its insourced dray percentage sequentially, aiming for further improvements.
• Logistics: The Logistics segment saw a more significant revenue decrease, falling 14% to $411.0 million in Q1 2025. This decline was primarily due to lower volume and revenue per load in the brokerage business and the strategic decision to exit some unprofitable consolidation and fulfillment business, alongside seasonal softness. Despite the revenue headwind, Logistics operating income saw only a modest decrease to $23.3 million, leading to a substantial 70 basis point improvement in operating margin to 5.7%. This margin expansion was attributed to improved efficiency in facilities and the completion of the network alignment initiative, which led to an impressive 1,100 basis point improvement in warehouse utilization year-over-year. Positive contributions from consolidation/fulfillment, managed transportation, and final mile businesses helped offset the lower brokerage margin. The brokerage business, while facing headwinds from limited spot market opportunities and rate declines, saw a 210 basis point year-over-year reduction in negative margin shipments, indicating yield management efforts are taking hold.

The acquisition of a controlling interest in EASO, a leading intermodal and trucking logistics provider in Mexico, is a key strategic move positioning Hub Group to capitalize on nearshoring trends and the growing cross-border trade activity. While the financial impact in Q1 2025 was included in the ITS segment and contributed to Mexico revenue growth ($24.7 million in Q1 2025 vs. $0.1 million in Q1 2024), management sees the biggest opportunity in cross-selling and synergy capture, particularly leveraging EASO's local knowledge and drayage fleet. This investment expands Hub Group's footprint in a high-growth market and enhances its ability to offer integrated cross-border solutions.

The completion of the Logistics network alignment initiative in 2024, which involved consolidating 2.6 million square feet of multipurpose space, is another significant operational achievement. Although this initiative incurred associated costs in prior quarters ($8.4 million in Q3 2024, $3.5 million-$4.5 million in Q4 2024), it is expected to provide a tailwind for margin improvement in 2025, estimated at 100 basis points for the Logistics segment based on 2024 guided revenue. This restructuring aims to create a more efficient and higher-service network, enhancing competitiveness and client retention.

Financial Strength and Capital Allocation

Hub Group maintains a robust financial position, providing a solid foundation for navigating market volatility and pursuing strategic objectives. As of March 31, 2025, the company reported $112.7 million in cash and cash equivalents. Net debt stood at $140 million, resulting in a low net debt to EBITDA ratio of 0.4x, well below the company's stated long-term target range of 0.75x to 1.25x. This conservative leverage profile offers significant financial flexibility.

Cash flow generation remains a key strength. Cash provided by operating activities was $70.0 million for the three months ended March 31, 2025. While this was an $11.0 million decrease compared to Q1 2024, primarily due to changes in operating assets and liabilities, it still represents solid operational cash generation. Capital expenditures in Q1 2025 totaled $19.0 million, primarily focused on tractor replacements ($13.0 million), technology investments ($4.0 million), and warehouse equipment ($2.0 million). The company expects full-year 2025 capital expenditures to range from $40 million to $50 million, with a focus on replacements and technology, notably planning no container purchases in 2025, reflecting sufficient existing capacity (estimated 35% incremental capacity before purchases needed).

The company's strong balance sheet and cash flow support its capital allocation strategy, which includes investing in the business, pursuing strategic acquisitions, and returning capital to shareholders. In Q1 2025, Hub Group returned $21 million to shareholders through quarterly dividends ($0.125 per share paid) and share repurchases ($13.8 million under the $250 million program). The company also has $349.3 million available under its credit facility, providing additional liquidity if needed.

Competitive Positioning and Market Dynamics

Hub Group competes across various modes, facing different sets of competitors in each. In Intermodal, it competes with large asset-heavy players like JBHT and SNDR, as well as other IMCs. Its competitive advantages here stem from its partnership with railroads, its growing owned drayage fleet (76% insourced in Q1 2025), and its technology platform, which aims to provide better visibility and service. While larger competitors like JBHT may benefit from greater scale and potentially lower operating costs per unit in some areas, Hub Group's focus on network balance, driver productivity, and cost control (evidenced by reduced empty repositioning costs) allows it to compete effectively. The EASO joint venture specifically enhances its competitive standing in the high-growth cross-border Mexico market, where intermodal is seen as underpenetrated.

In the Logistics segment, Hub Group competes with a wide array of brokers (like XPO, KNX, SNDR's brokerage arms), managed transportation providers, and warehousing/final mile specialists. Its diversified offering across these non-asset services is a key differentiator, allowing for cross-selling and providing integrated solutions. While brokerage faces intense price competition due to market overcapacity, Hub Group's yield management efforts and focus on higher-margin services like LTL and project freight help mitigate the impact. The completed network alignment initiative is expected to enhance competitiveness in consolidation, fulfillment, and final mile by improving service and efficiency. Compared to competitors like XPO with strong LTL focus or KNX/SNDR with truckload dominance, Hub Group's strength lies in its multi-modal approach and integrated technology platform, aiming to provide a more holistic supply chain solution.

Financially, Hub Group's operating margins (4.1% consolidated in Q1 2025, 2.7% ITS, 5.7% Logistics) are generally lower than those of larger, more asset-heavy or specialized peers like JBHT (TTM operating margin ~7%) or XPO (TTM operating margin ~8%), but competitive with or better than others like KNX (TTM operating margin ~3%) and SNDR (TTM operating margin ~3%). This reflects the competitive pricing environment and the mix of services offered. However, Hub Group's strategic focus on margin enhancement projects and cost discipline is aimed at closing this gap over time. Its strong balance sheet provides a competitive advantage in terms of financial stability and the ability to invest through cycles.

Outlook and Risks

Hub Group's outlook for 2025 reflects the prevailing market uncertainty. The company provided full-year guidance with an EPS range of $1.75 to $2.25 and revenue between $3.6 billion and $4 billion. This wide range underscores the lack of clear visibility regarding key market drivers.

Management's assumptions for the guidance range highlight the critical factors at play:

• High End: Assumes either a short slowdown in China imports to the West Coast or a strong bounce back in demand in the second half of the year, potentially leading to a surge in volume and opportunities for peak season surcharges and pricing increases.
• Low End: Assumes an extended slowdown in China imports and/or a weakening of consumer spending, resulting in lower volume and margin dollars, partially offset by further cost management.
• Midpoint: Contemplates a volume decrease in the second half of Q2 2025 due to customers adjusting shipping patterns in response to tariffs, followed by a return to directional seasonality in Q3, assuming consumer strength holds. Continued benefits from cost savings initiatives are also factored in.

For the ITS segment, pricing is expected to remain relatively flat for the remainder of 2025, with upside potential tied to volume recovery. Sequential operating results are anticipated to be flat to down in Q2 compared to Q1 due to the expected slowdown, before returning to a normal seasonal pattern. Dedicated revenues are expected to be lower than in 2024. In Logistics, some general demand softness is expected, but potential increases in storage revenue and a strong pipeline in managed transportation and final mile could provide offsets. Brokerage volume is projected to be flat to down, with pricing at current levels, but potential upside exists with inventory restocking.

Key risks to this outlook include the uncertain impact of tariffs on import volumes and shipping patterns, the resilience of consumer spending in the face of inflation and interest rates, the potential for a significant increase in transportation supply or aggressive competitor pricing, and the ability to pass through cost increases. Geopolitical concerns also add a layer of unpredictability.

However, potential positive factors, such as continued capacity exits in the truckload market, declining retail inventory levels eventually leading to restocking demand, and a return of typical peak season dynamics, could push results towards the higher end of the guidance range.

Conclusion

Hub Group has strategically repositioned itself, leveraging diversification, operational efficiency, and targeted investments to build a more resilient business capable of generating stronger profitability and cash flow across market cycles. The Q1 2025 results, particularly the improvement in operating margins despite revenue declines, demonstrate the effectiveness of the company's focus on cost control and efficiency initiatives like the Logistics network alignment.

While the near-term market remains uncertain, influenced by factors like tariffs and consumer demand, Hub Group's strategic moves, including the EASO joint venture to capitalize on nearshoring and its ongoing technology investments, position it for future growth opportunities. The company's strong balance sheet provides the financial flexibility to weather potential downturns, continue investing in its capabilities, and pursue accretive acquisitions. The core investment thesis rests on Hub Group's ability to execute its strategy, leveraging its enhanced operational model and diversified service offerings to capture market share and expand margins as freight demand eventually recovers, while its financial strength provides a buffer against ongoing volatility. Investors should monitor the pace of market recovery, the impact of trade policies, and the company's continued progress on cost reduction and strategic integration initiatives.