Hub Group, Inc. (HUBG) Q4 2020 Earnings Report, Transcript and Summary

Hello and welcome to the Hub Group Fourth Quarter 2020 Earnings Conference Call. Dave Yeager, Hub’s CEO; Phil Yeager, Hub’s President and Chief Operating Officer; and Geoff DeMartino, Hub’s CFO are joining me on the call. At this time, all participants are in a listen-only mode. [Operator Instructions] Any forward-looking statements made during the course of the call or contained in the release represent the company’s best good faith judgments as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company’s Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin.

Good afternoon and thank you for participating in Hub Group’s fourth quarter earnings call. I am joined today by Phil Yeager, Hub’s President and Chief Operating Officer and Geoff DeMartino, Hub’s Chief Financial Officer. The fourth quarter saw a dramatic reversal from the depressed volumes earlier this year to a market of strong demand and limited capacity. Much of the surge in demand was driven by strong import volumes as customers sought to replenish inventories. Hub was able to capitalize on this market with strategic customer wins that help drive a strong peak season. We believe we are well positioned for 2021 due to the ongoing strong market conditions, coupled with our customers’ continued demand for high service levels and cost effective solutions. And with that, I will turn the call over to Phil to review our business lines.

Thank you, Dave. Before I discuss our business unit performance, I would like to commend the hardworking women and men at Hub Group on successfully managing through the most dynamic year we have had in recent memory. For the quarter, intermodal volumes increased 9% and revenue increased 5%. We achieved year-over-year volume growth in 2020 despite a large deficit in the first half of the year due to the pandemic. For the quarter, transcon volumes increased 13%, local West increased 20%, and local East declined 2% as we experienced a significant amount of demand off the West Coast driven by depleted inventory, tight truckload and intermodal capacity and strong import volume. Our investment in our container fleet supported our growth and was a key enabler in meeting the demand of our clients. Gross margin as a percentage of sales declined 290 basis points year-over-year. While demand was extremely strong, leading to peak season surcharges, and our trucking operating efficiency continues to improve, volume was very imbalanced. This led to increased repositioning in outsourced drayage costs, which, along with increased rail costs and lower pricing from earlier and mid-season, offset those improvements. We believe that with this tight capacity and high demand environment, along with our strong peak performance that we are in an excellent position heading into 2021. Logistics revenue declined 1% and gross margin as a percentage of sales declined 170 basis points year-over-year. Revenue growth continued at CaseStack and declined in our transportation management services. However, CaseStack margins were compressed as we experienced higher transportation and warehousing costs, along with the onboarding of some higher revenue for lower profit customers. We are very excited about the newest part of our logistics business, NonStopDelivery, which we acquired in December. NSD executed a best-in-class service experience for our clients and a year of significant growth, showing the value of our non-asset-based model. We are excited to have this new offering in the high-growth last-mile logistics segment and are maintaining a strong pipeline for growth across all of our logistics solutions. Brokerage volume declined 8%, while revenue increased 27% and gross margin as a percentage of sales declined 400 basis points year-over-year. Volumes declined across all of our offerings, but we executed well in the spot market while maintaining commitments and service for our customers in our contractual business. We believe this commitment will position us well to grow and expand margin in this upcoming bid season. Capacity costs increased throughout the quarter, but we are now seeing much more stability in the market. As we continue to invest in technology and our inside sales force, we believe we can generate more prolonged growth in a variety of market conditions. Dedicated revenue for the quarter declined 3%, and gross margin as a percentage of sales declined 530 basis points year-over-year. Large insurance and restructuring charges as well as increased search capacity costs in non-core markets were headwinds. However, we continue to make significant progress in improving our operational and commercial discipline which we anticipate will generate margin expansion in 2021. I will now hand it over to Geoff to discuss our financial performance.

Thank you, Phil. We are pleased that our business has continued to grow coming out of a challenging period earlier in the year, with Q4 revenue up 6%, led by our intermodal and truck brokerage service lines. As expected, intermodal volumes grew high single digits in the quarter, benefiting from strong demand from our strategic customers. Q4 gross margin was $106 million, or 11.1% of revenue, and included a $3.5 million pretax charge related to our insurance and claims reserve estimate. We continue to exhibit strong cost control, with quarterly cost and expenses equal to 7.8% of revenue as compared to 9.7% last year. Salaries and benefits expense for the quarter declined by over $10 million as compared to the prior year due to lower headcount and a decline in variable compensation expense. Our non-driver headcount is down by 9%, excluding the impact of the NSD acquisition, due to our efficiency and technology initiatives. Q4 general and administrative expenses declined by $3 million as compared to the prior year and included a $1.4 million restructuring charge related to the closure of an office that supported our dedicated operation and $1 million of transaction expenses related to the acquisition of NSD. Hub Group’s diluted earnings per share for the quarter was $0.67, which compares to $0.84 of diluted EPS in the fourth quarter of 2019. Our tax rate for the quarter was 22.9% as we benefited from several state tax credits. For the full year, revenue was $3.5 billion as compared to $3.7 billion in 2019. Diluted earnings per share for 2020, was $2.19 as compared to $3.20 last year. We generated $63 million of EBITDA in the quarter and ended the year with $125 million of cash after spending approximately $90 million in cash to acquire NSD in December. We continue to have solid liquidity and low levels of net debt. We view our capital structure as an asset, and our priority continues to be reinvestment in the business through capital expenditures and strategic acquisitions. For 2021, we expect revenue will grow in the low double-digit range, with intermodal volumes up high single-digits and revenue growth across all of our business lines, including the addition of NSD. We expect year-over-year revenue growth will ramp up as the year progresses. We expect consolidated gross margin as a percentage of revenue will begin the year at a level similar to Q4 and project margins will increase during the year as we progress through the bid season and realize rate increases. Our outlook is based on the assumption that positive economic conditions will continue to benefit consumer demand and that low customer inventory levels will continue to drive the need for restocking. We expect quarterly costs and expenses will increase from Q4 levels due to incentive compensation expense, merit increases, the addition of NSD and more normalized travel spending. For the year, we expect costs and expenses of $365 million to $380 million. For Q1, we expect costs and expenses to range from $85 million to $87 million and will increase throughout the year as we book more variable compensation expense in line with growth in overall profitability. For the full year, we expect our tax rate to be 25%. We will continue to invest in the business in 2021. Our capital expenditure forecast is $150 million to $170 million. We expect to add approximately 2,500 containers, which will result in net growth of 2,000 after retirements as well as 150 refrigerated containers. We are also planning to add approximately 750 trackers, 500 of which are for replacements of old units and 250 of which will support growth in our drayage and dedicated fleets. Dave, back to you for closing remarks.

Thank you, Geoff. The fourth quarter reflected very strong demand as our customers continue to restock. Demand continues to be strong in 2021, with January intermodal volumes up 16% on a business day adjusted basis. We expect that this strong demand will continue through much of 2021. And with that, we will open the call up to questions.

[Operator Instructions] And our first question comes from Justin Long with Stephens. Your line is open.

Thanks. Good afternoon.

Good afternoon.

So, maybe to start with the 2021 guidance, Geoff, I don’t think you provided anything specific about margins. I know you said the first quarter gross margins would be similar to the fourth. But any way to help us think through what you are expecting from – for gross margins for the full year and maybe operating margins as well, just trying to get to an EPS guidance and curious if you could give us some more color around that?

Sure. So, I think if you take Q4’s gross margin and adjust out the insurance charge, which was kind of a resident in that quarter that gets you to about 11.4%. For the full year, we think anywhere from maybe 100 to 150 basis points on that for the full year. We think Q1 certainly will start off closer to Q4. Price is a very important driver of our gross margin profitability and our – what we think repricings will be mid to high single-digits. The cadence of that reprice activity is much more impactful in the back half. For example, in Q1, we repriced about 41% of our volume but the vast majority of that happens towards the end of the quarter. So, we won’t see as much of that price impact on margin in Q1.

Okay. And just to clarify that 100 to 150 basis points of improvement, is that relative to the full year 2020 gross margin or relative to the 11.4%?

Relative to the 11.4%.

Okay. And then maybe second on pricing, I think you just mentioned kind of mid to high single-digit increases. I think what we have been hearing on intermodal is something above that level more in the high single-digit to low double-digit range. So am I reading into that correctly or maybe you could just speak in general about what you are expecting on intermodal pricing and what’s baked into the guidance?

Yes, Justin, this is Phil. What I would tell you is we are guiding on the mid to high single-digit for effective price for the year. So as Geoff mentioned, 41% renewing in Q1 in the latter portion, 24% in the second quarter and then 33% really in Q3 with a very small amount in the fourth quarter. So as we think about the implementation of those rates it should be mid to high single-digits, but that also implies high single-digit renewals for the renewals that are upcoming, right. So, that’s just – I hope some clarification around that, but we believe in line with really what we are seeing in the market and what you are hearing as well.

Okay, great. I will leave it at that. Thanks for the time.

Thank you.

And our next question comes from Scott Group from Wolfe Research. Your line is open.

Hello. Can you hear me?

Yes, that’s a better start.

Okay. I will pickup the headset. So, on the gross revenue guidance of low double-digit top line, so I think the acquisition alone adds about 4 points and obviously, you have got easy comps relative to 2020. Are there any – what are the offsets that we should be thinking about here that gets you to low double-digit and not something better than that, any customer losses or churn?

Yes. I mean I think it’s the same story we have been talking about in Q3 and Q4. We did have some customer losses midyear in 2020. We have been working to fill the hole. This is in dedicated and logistics primarily, although some of the logistics customers drove brokerage volumes, so brokerage did see the impact that as well. It’s just cycling those midyear 2020 losses and then filling those with new customer wins that haven’t kind of fully – not yet fully offsetting the impact of the losses.

I might add, Scott that these will be also – these were candidly not overly profitable customers. And so we think that we will backfill it with our customers where we will be able to make a more fair return on our investment.

And one other point to add too just in terms of the cadence, we typically do see a step down in revenue between Q4 and Q1. So I would expect that as well, but we certainly believe they will be ramping up revenue growth throughout the year.

Okay. And then on the gross margin guidance, if we use 2018 as maybe is the best sort of example, we started around 11% at the beginning of the year. We ended at close to 14% and we got a 14%, I guess the following year in ‘19. Directionally, is that how you are thinking about this playing out as this year plays out and exiting this year?

Yes, maybe exiting the year close to that rate, I think it takes 2 full years of strong pricing to get back to that 2018 run rate level.

Got it. Okay, alright. Thank you guys.

Thanks, Scott.

And our next question comes from Thomas Schwartz from Stifel. Your line is open.

Good afternoon. Thank you for taking my call. I am filling in for Dave Ross. So it’s a bit of a platitude that 2020 was a very unusual year. Just curious I suppose more from a theoretical level, what would a 20 – a very successful 2021 look like for your company given that year-over-year comps aren’t going to be as meaningful as they perhaps typically would be? Thank you.

Yes. This is Phil. I think there is a few key factors for us. Obviously, we want to get back to strong growth trajectory. We did a really nice job in ensuring that we got our cost structure and a really good position through the pandemic. We think that there is a great opportunity this year to grow and to – at a nice high clip across all of our service lines. That varies. Intermodal, we think is going to be a great story with high single-digit volume growth and high single-digit – or mid to high single-digit pricing, so very good story there and we are investing in that. Brokerage is another great, we think, double-digit revenue growth story that we have a great opportunity in and I think we are showing that we can deliver on that. Logistics, with the addition of NSD and the growth in the final mile space, we think is another area of great growth opportunity. CaseStack, with increasing OTIF fines, continues to have a great spot in the marketplace as well and customers are really looking at a need for additional solutions to offset the cost increases they saw this year. So our transportation management service is a great place as well and then dedicated, right, I think one-way truckload rates really caught people off guard this year. And so there is a significant demand for dedicated services. We need to be intelligent in particular in the dedicated growth. So I think they will see us meter that a little bit more. Obviously, it’s more capital-intensive and we want to make sure we are generating the right return in that business given the asset intensity. So I think it’s growth across all the service lines that varies across them. And then it’s leveraging our cost structure and continuing to be more efficient. I think one of the things that I was really pleased with this year is the productivity enhancements that we were able to drive. Just as an example, our Q4 brokerage productivity was up 20% year-over-year. Our driver productivity in intermodal was up 9% year-over-year. So there is an opportunity to continue to drive that forward and improve the cost structure through that as well and obviously take advantage of the pricing. So, I know a lot of things we need to do there, but we think all very feasible and will deliver a very good year both financially and for our customers.

Thank you so much.

And your next question comes from Todd Fowler from KeyBanc. Your line is open.

Great. Thanks and good afternoon. On the expectation for high single-digit volume growth in ‘21 obviously, you are starting up the year very strong with the 12% in January, you have got easy comps in the first half of the year. Do you look at high single-digits as kind of where the market is going to grow on the intermodal side in ‘21 or do you think that, that’s some share opportunity or with the pricing are you planning on maybe being a little bit below the market? I am just kind of curious how you think about market growth rates versus what you are expecting this year?

Yes, it’s a great question. Yes, we are anticipating that we are not going to under-price the market in any way and we are looking to continue to yield up. But we think that we will grow above market. We did a phenomenal job as an organization stepping up for our customers during what is probably the most hectic peak season any of us can recall or remember. And that is going to give us an opportunity to continue to grow and take share in the marketplace while improving yields. And we also had some great opportunities we think to improve the balance in our network, improve continually the productivity of our drivers. So there is a lot of opportunities out there both in the cost and volume side and we are going to focus on both, but we would – we are assuming share growth and continuing to price very, very well.

And I would just add, this is Geoff, I think our strategy of investing in equipment certainly paid off in the second half of 2020. We outgrew the market and we are going to continue down that – with that strategy in 2021 with our container investment.

Okay, good. Yes, that helps. And then I guess maybe just for my second question, now that you have had NSD in-house for about 1.5 months or so, I am just kind of curious if there is anything that you have learned now that you have had a better look at the business and how you are kind of thinking about the relationship with that business and your other service offerings and kind of how that fosters additional growth or additional opportunity going forward? Thanks.

Yes. No, we are really excited about that acquisition. I would start just culturally we have become more and more excited about the alignment that we felt during the diligence process, so really excited about that. Our cross-selling pipeline is extremely active and really I think the bigger challenge that we are going to have is ensuring that we are picking the right opportunities to go after that have the right long-term growth profile and fit with us while continuing to support the great customer base that they already have, so really excited about that. And I think a lot of customers experience significant service challenges this year. And what NSD was able to do is deliver really in my opinion and what we have heard from multiple clients and they have won multiple customer of the year or carrier of the year awards since the acquisition is that they were the highest service provider in their network in last mile. And so we are going to other new clients with that as really the sales pitch and we are gaining a lot of credibility and opening a lot of doors very quickly. So we think there is a great opportunity here and very excited about the non-asset based model, because it just gives us a significant amount of flexibility. And I think customers are recognizing that that’s more and more important. The only other piece I would highlight is we are finding a lot of opportunities to improve the transportation costs that NSD has. And by doing so, we think we are going to be even more competitive in the marketplace and be able to continue to grow while maintaining the strong margins that NSD already had. So, we are really excited about what we are seeing and just think there is huge opportunities with our retail customer base, which is around 45% of our customer base at this point, so very excited.

Yes, okay, that’s interesting. Well, thanks for all the color there. Thanks for the time.

Thanks, Todd.

Yes. Thanks, Dave.

And the next question comes from Jason Seidl from Cowen. Your line is open.

Thank you, operator. Good afternoon, gentlemen. I wanted to ask a little bit about your customer base since you just brought that up. You do have a lot of exposure on the retail side. There has been a bunch of restocking this year. Is there any sense for sort of how long that’s expected to continue? And do you think this year, we might hit a little bit of a pocket after that’s done?

Sure. So yes, this is Phil. I think there is going to continue to be a significant restocking taking place. If you look at import volumes, the number of vessels that are really just sitting off, off the West Coast right now ready to come in, there is a massive amount of demand out there. And what we are hearing and seeing from our retail clients is that the spring surge that typically comes on, in particular, in the home improvement space, is going to be – and we’re very large in that, is going to be extremely active. We’re hearing that our other customers, who are a more traditional retailer, e-commerce, need to continue to restock. And even after demand slows down, it’s going to take them a 3-month period to even catch up beyond that. So we don’t see, at least through the first three quarters of the year, really a slowdown. We do think that there’s going to be a pull forward of inventory this year to avoid some of the challenges that people – that our customers went through during this past peak season. So it should be, through the first three quarters, a much higher level of volume, but probably more stable and less spiky than what we saw this past year. So it’s something we’re certainly watching for the fourth quarter, but I would tell you, the first three, we expect to be much higher demand, much higher volume. And obviously, capacity continues to remain tight and with the amount of drivers coming online and delays in bringing capacity on, we don’t see that slowing down any time soon either.

That’s super helpful. I wanted to talk a little bit about some of the expenses, particularly the outsourced drayage. It looks like you’re bringing on some more tractors to probably help you out there going forward. Also some of the rail congestion cost. Should we look at these as sort of transitory in nature, and as we move throughout the year, those will sort of abate?

Sure. So as – from a third-party drayage perspective, yes, we are going to continue to add in the key markets that we have. What really happened this year on third-party was we had significant growth in some very key large markets, and that led to a significant increase over what we were running our tractors at. Now I am really pleased with the improvement we’ve made in the productivity of our drivers, but we can still be better. So that would be – I see that coming more in line as we bring more tractors and drivers on. And from a rail congestion issue, we are seeing service improve sequentially and are going to continue to see that, we think, throughout the year. So – and Dave, I don’t know if you would add anything?

I would just add that there was some congestion. It was, to a large extent, the COVID virus did, in fact, impact a lot of warehousing, creating labor shortages, which creates lack of capability to unload quickly. So we did see containers bunching in certain locations, which caused chassis costs and also chassis shortages. So there was a combination of things. But to Phil’s point, we have seen sequential improvement both throughout the fourth quarter and into January. So we are hoping we can get our on-time service back up to the levels that, in fact, we targeted.

Encouraging signs gentlemen. Listen appreciate the time. As always, everyone be safe.

Thank you.

Thank you.

And our next question comes from Bascome Majors with Susquehanna. Your line is open.

Yes. Thanks for taking my question. The margin improvement efforts that you made over the last couple of years seem to really be focused on a lot of the non-intermodal businesses but certainly not exclusive to those. Could you talk a little bit about if we were to peel the onion back and look at where the intermodal margin were to stand, if we could see it more stand alone, how that compares to some of your peers who ride on the BN that were tracking for, call it, 10%, 11% operating margins? And what opportunity you see to potentially bridge that gap as you make more efforts on that front and pricing starts to cooperate? Thanks.

Sure. Yes, definitely. Good question. Yes. So I would tell you that intermodal is our largest segment. So, it certainly carries a larger portion of our corporate costs. But at the same time, our margins would be lower as compared. But we have a less asset-intensive model as well. We’re running about – for a full year, around 50% of our own drayage, outsourcing the remainder and we obviously don’t have the capital investment into chassis as well. So I would tell you a different model, so it’s somewhat of a different margin profile. But we still have opportunities to improve, and we’ve highlighted those around continuing to improve the productivity of the drivers that we have. As I mentioned, 9% productivity improvement for our drivers in the fourth quarter, 120 basis point improvement in load of miles. So we are running the tractors better. And I think from a repositioning cost perspective, that’s another area we’re really targeting and focusing on this year is to create more balance in the network, reduce those costs and our reliance on empty repositioning, in particular, during peak season. So those two buckets alone can help us significantly in continuing to close that gap. And then lastly is we do agree that we need to continue to take more control of our drayage, and we’re investing, as Geoff mentioned earlier, in the tractor fleet to drive that.

Thank you for that. I appreciate the walk-through of the different drivers there and maybe tops down follow-up to that. You’ve talked about it going to be pretty challenging to get to that 5% operating margin target for the year, given when the pricing kicks in and what that means for margin. Does it still feel like you could exit a year on a run rate basis and potentially breach that level in ‘22 or – and if the answer is maybe, can you talk about what the levers are that could get you above or below that, depending on how things shake out this year? Thanks.

Yes. This is Geoff. I think we can certainly – it’s in the realm of possibilities that we could be at that level exiting 2021. And with another strong pricing environment, stable truckload capacity market and favorable economic conditions, I think we can get there. We’re focused on driving margin expansion, not only through price, but through operating better and more efficiently, both in the transportation cost side of the P&L as well as the operating expense side of the P&L. We’ve spent the last 2 years really optimizing the operating expenses side of the business. And as we continue to grow, we’re going to look to leverage those expenses, which we did in 2020, and we’re going to continue to focus on that in the future.

Thank you.

And the next question comes from Brian Ossenbeck from JPMorgan.

Hi, thanks. Good afternoon. I wanted to ask a question about where you see the current gap between truck and rail pricing as it stands, I guess, primarily in the East. Volumes are down, I guess, the last two quarters. Clearly, there’s been a lot of volatility in the freight market. But do you expect that conversion to start to pick up as you go into the next year and rail service maybe improves a little bit and the network gets a little bit more balanced? And maybe how has the conversion, just in general, tracked versus your expectations maybe that local East isn’t the best barometer? So if you can put some context around that and then also some conversations about looking forward how much freight do you expect to be able to take off the highway?

Sure. So yes, I would tell you that, obviously, continual service improvement is going to allow us to convert more business off the highway, and we are targeting that very aggressively. I think the current differential is certainly expanded given where spot market rates were and where some of the obviously, rates are going up faster in the truckload market, and we will be catching that very quickly. So I do anticipate that gap, which is probably in the 20% to 25% range right now, would – will close throughout the year, especially as renewals come online. And we are seeing a very nice and strong pipeline of conversion opportunities, both outside of RFP events but also in RFP events. A lot of our customers are very seriously looking at large conversion back to Intermodal, given those constraints and the lack of commitment from contractual rates during what was a very busy time. So we see significant opportunities. And I think with, as you mentioned, improved service, once again, that opportunity just continues to expand. And it doesn’t need to necessarily be as fast as trucks, but just as consistent is really what we’re looking for. So it’s still a massive conversion opportunity and we are targeting that with our rail partners.

Okay, got it. And then in terms of the containers, you made a timely purchase last year. So assuming that, that helps, you probably not get the turns that you would like at this point. Do you feel like that’s helping fuel the growth a bit more than you would have seen otherwise? And that maybe a couple of quarters ago, you talked more about pivoting to growth a little bit harder. So the timing seems to work pretty well. But do you feel like you’ve gotten the full benefit of those considering how things are congested right now or are those actually adding a little bit more to the network providing some balance because you have these extra containers?

Yes. I would tell you that we aren’t getting the turns that we would expect or desire long-term, but we are seeing sequential improvement in that, both in rail transit as well as customer and loading times. Those are – both of those can be challenging. If you see sporadic changes in that, in particular, with winter weather, things like that, staffing levels can go down and you see boxes sit a little bit longer. And especially with some of our large retail clients, the amount of volume they were seeing certainly led to some congestion. But we are seeing really nice sequential improvement. And I would tell you that the investments that we made certainly enabled us to grow above the market, in particular, taking advantage of the volumes off the West Coast. And right now, it’s giving us an opportunity, I think, to continue to grow at that level.

Okay, great. Thank you for the time.

Okay.

And the next question comes from Tom Wadewitz from UBS. Your line is open.

Yes, good afternoon. Wanted to ask you a little bit about where you see the stronger volume growth in intermodal. Do you think it’s kind of balanced in East and West or are you more optimistic about the level of growth opportunity in one region versus another?

Sure. So I would tell you that initially in the first half of the year, we’re anticipating, until bid awards go into effect, we’re going to continue to see similar trends with local West and transcon volumes increasing at a higher clip. But as awards come online, I would tell you, we’re also anticipating that local East volume will start to pick up as conversions really come into place on a more permanent basis.

Right, okay. And then I wanted to ask you a little bit about the brokerage business. I think your brokerage business might move a little bit differently than what we typically think of. But I just wanted to see if you could give us some thoughts on how did brokerage net revenue perform in the quarter? I apologize if I missed the comments. And how do you think that business performs as you get the strength in contract rates in 2021? Do you see a pretty strong improvement? I think in general, we’re expecting a good environment for brokers. But maybe you could just give us some thoughts on how your business responds to the rising rate environment in truckload?

Yes. No, that’s a great question. So I think traditionally, we run at about 80% contract. In the fourth quarter, we’re 64%. So we did shift into the spot market more to support our customers. And that’s really why you saw the 27% revenue growth on a year-over-year basis as the increase there. We did have some margin compression, 400 basis points. Obviously, that was tied to still our contractual business. We wanted to, with our strategic customers, maintain the commitments that we have, obviously, making sure they are aware of that. So that going into bid season, we’re in a very good position to take advantage of that price up our incumbency, but also align us for growth, as they see us as a partner that they can rely on. I would tell you traditionally, that would not be something we would have done. And so I’m very pleased that we are going to, in my opinion, see double-digit growth in the brokerage space this year. Traditionally, we were very reliant on our logistics segment to drive that. What we’re really focusing on now is building our inside sales force, which traditionally we did not have. And we’re seeing a lot of success in cross-selling to our traditional intermodal customers. The other area that we really like that we have a lot of opportunity in is the LTL brokerage that we acquired through the CaseStack acquisition, and that is an area we’re investing in as well. And it’s a very automated and streamlined process and one that we think we can continue to leverage and grow. So as you look at those segments, kind of full truckload and LTL, both have strong tailwinds, I think, this year. And then we’re continuing to focus on giving our customers high service project support as well. If they see surges in demand or inclement weather, hurricanes, we do a phenomenal job in servicing that, too. So we have a lot of opportunities. And I think given the investments we’ve made in technology, we’re much – and what we’ve done in aligning more on a regional basis and structuring as more of a traditional brokerage, I think we’re in a much better position to win in this market.

So is it fair to think that your net revenue growth would accelerate pretty coincident with contract pricing in truck? Is that when you really...

Yes.

Obviously, had the top line but the gross margin compression in fourth quarter. So it’s kind of like you get contract rates up and the net revenue really kicks in harder.

That’s a good way to think about it.

Yes, okay. Thanks for the time.

[Operator Instructions] And the next question comes from Brandon Oglenski from Barclays. Your line is open.

Hey, good afternoon. And thanks for taking my questions. Geoff, remind me, I think you guided first quarter cost to like 85% or 88%, I think that’s what I caught. It does seem to be a little bit of a step-up from where you were in the fourth quarter, especially if we consider some of the discrete items you called out. So can you talk to potentially what inflation you’re seeing in the business? And is this potentially acquired business costs that we just haven’t seen yet?

Yes, a couple of things. So the acquisition took place in the middle of December, so we’ll have a full quarter of operating expense there. The bigger driver though is going to be a couple of really – on the personnel cost side, we missed our bonus targets for 2020. So for 2021, we’re going to be accruing at a more normalized rate of variable compensation expense. We do expect that to ramp up throughout the year and commensurate with our profit improvement throughout the year. And then there is a couple of kind of typical Q1 items. The annual merit increase goes into effect mid-February. And there is some other payroll that tends to be higher in Q1 as well. So those are the biggest drivers from the Q4 number.

Okay, I appreciate that. And then my second question, just wanted to talk about longer term capital spending because I know the budget is up quite a bit this year. Can you speak to what you think would be a more normalized year or is this a more normalized year for Hub?

I’d say it’s going to be – this year is more representative than last year. Last year also did have a about $22 million for the headquarters building. So this year is a more normalized level of spend. We’ve seen the benefits of growing our container fleet, having those assets available to serve customers, also growing our drayage fleet. Both – this year is an upgrade cycle as well as just pure growth in the tractor talent to drive the amount of drayage that we could do on our own equipment.

Alright. Thank you.

Thank you.

And the next question comes from Charlie Yukevich from Evercore ISI. Your line is open.

Thank you for taking my question. My question is around PSR and your rail partners. Both of your rail partners made significant progress implementing PSR this year. Could you just think about the changes that you saw throughout these implementation efforts and any efficiencies that they contributed to you throughout the year?

This is Dave. I can’t speak specifically to the impact of PSR, but I would have to comment that during the fourth quarter and even prior to that and in January as well, we’ve been seeing that the railroads, when there is issues that occur, and they always occur, particularly in a high-growth market such as this, but the railroads’ ability to recover and to manage issues that come up has improved dramatically. It’s much quicker than it has been in the past. I do think possibly a part of that is as a result of the PSR investments that they’ve made.

Okay, great. Thanks for the answer.

And that concludes our question-and-answer session. I’ll turn the call back over to Dave Yeager for final remarks.

Well, great. Once again, thank you so much for joining us on our fourth quarter conference call. As always, Phil, Geoff and I are available if you have any additional questions. Thank you. Have a good evening.

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.