Hub Group Inc (HUBG) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Hub Group third-quarter conference call.

We will begin with a discussion of the financial results led by Terri Pizzuto, Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The Company will make its prepared presentation, followed by a question-and-answer session. Mark Yeager, Vice Chairman, President, and Chief Operating Officer, will join us for the question-and-answer session. (Operator Instructions).

Comments made by Dave, Mark, or Terri during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements.

Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the Company or the SEC.

I would now like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

Thanks, Crystalyn, and thank you all for joining us. I want to begin by covering three main themes. First, we had solid growth in all three of our business lines. Second, as we predicted, gross yields improved to 12%. And third, operating income increased by $4.8 million, which is the best growth that we've seen since 2006.

Here are the key numbers. For the third quarter, Hub's diluted earnings per share increased 31% to $0.34. Hub's third-quarter operating margin was 4.3%. That's compared to 4.1% in 2009. Gross operating margin hasn't been this high since the fourth quarter of 2008.

At the end of September, we had $118 million in cash and no debt.

Now, I will discuss details for the quarter, starting with revenue. Our business generated revenues of $478 million, which is a 23% increase over last year. Taking a closer look at our business lines, Intermodal revenue increased 25%. This change includes a 22% volume increase, a 4% increase for fuel, and a 3% price increase, partially offset by a 4% decrease for mix.

Customer direct 53-foot business, which is the biggest piece of our Intermodal business, was up 26%. Driving that growth was a 41% increase in loads with retail customers and a 33% increase in loads with durable goods customers.

Intermodal prices were up 3% this quarter. That's because we successfully passed on price increases and peak season surcharges to our customers.

Mix was down 4% because the average length of haul went down by 3%, or 52 miles. That's due to local east business being up 34%. Our fastest growing customer in the local east market converted freight from truck to Intermodal. Truck conversion freight is a large part of our growth in this market.

Truck brokerage revenue increased 16%, due to a 7% increase in loads, a 3% increase for fuel, and a 6% increase for price and mix. Pricing is up to cover increased purchase transportation costs. These price increases were partially offset by mix being down. Mix changed because our length of haul decreased by 30 miles, or 4%. The most significant growth came from consumer products' customers, primarily in the health and food industry.

Logistics revenue was 23% higher than last year. We continue to land new accounts and produce savings for our customers. Services for our newer customers range from a full transportation outsource of traffic from DC to stores, to managing the delivery of displays to stores.

Gross margin as a percentage of sales was 12%. That's down slightly compared to last year's 12.4%, but it's up 100 basis points compared to last quarter's 11% margin. This upturn from the second quarter is a direct result of actions we took to increase Intermodal prices and improve truck brokerage yields. Truck brokerage gross margin as a percentage of sales was up 260 basis points compared to the second quarter.

Total gross margin increased by $9.2 million. This is the biggest gross margin dollar increase since the first quarter of 2007. In order of magnitude, Intermodal margin grew the most, followed by truck brokerage, and then logistics.

We executed on target in all three of our business lines. It takes a lot of cross-functional teamwork, exploring innovative solutions, and attention to detail to expand margins. Specifically, in Intermodal we did 22% more loads, did more of our own drayage, and worked with our customers to more efficiently manage equipment in order to grow margin. In Truck Brokerage, we increased prices, shed business where we lost money, and expanded our carrier base to increase margin. In fact, compared to the second quarter, Truck Brokerage volume was down 6%, but gross margin dollars were up 19%.

Turning now to headcount. We had 1,098 employees, excluding drivers, at the end of September. That's an increase of 18 people compared to the end of June. We added 12 people in logistics, mostly for new business that started in the third quarter.

Total costs and expenses were $36.7 million in the third quarter of 2010, compared to $32.3 million in 2009. The main reasons for the increase in costs and expenses are higher salaries, bonuses, and commission. We think that our fourth-quarter costs and expenses will range between $37 million and $38 million. This wide range of costs is due to the EPS-based portion of our bonus.

Now I'll discuss 2010 full-year earnings guidance. For 2010, we're comfortable that our diluted earnings per share will be within the current analyst range of between $1.10 to $1.19. Our weighted average diluted shares for the year are estimated to be 37.4 million.

Turning now to the balance sheet and how we used our cash. During the quarter we spent $11.3 million on capital expenditures, mostly for containers. We are prepared to spend another $17 million on capital expenditures during the fourth quarter. $14 million of the $17 million will be for our beautiful green containers. These capital expenditure estimates do not include any purchases of property to support our drayage operations.

We spent $10.8 million during the quarter to purchase 367,947 shares of our stock at an average price of $29.44 a share. $7.7 million remains on our current share buyback authorization that expires in March of 2011.

Of course, we'll always continue to explore acquisition opportunities.

To wrap it up for the financial section, we are energized by the progress that we made this quarter that resulted in operating income growing by 30%. And now you'll hear from our CEO, Dave Yeager.

Great, thank you, Terri. As you just heard, we are very pleased with our third quarter. Our results reflect strong volume momentum and a continued focus on margin improvement.

The third quarter was marked by an outstanding 22% growth in our Intermodal loads, making it the largest volume quarter in Hub's history.

Last quarter, we had committed to expanding our margins in Q3 and we're happy to report that we're right on track. We were able to pass along rail price increases and peak season surcharges, while still capturing significant market share and continue to be very encouraged by the current pricing environment.

An anecdotal point of reference is that our new business being on-boarded today has more favorable margin levels than our legacy business. So effectively, prices are continuing to go up.

Unlike some truckload carriers that have already reported earnings, we experienced strong demand through September, which has carried through to October. At this point, although it's very early in Q4, we do not get any indication that peak season will end early or that demand after peak will be lower than normal.

Capacity started tightening well before our traditional peak season this year. Although securing capacity was at times challenging, we had a significant advantage due to our fleet additions that arrived just when we needed the equipment. We've received 2,000 of our new containers in Los Angeles over the last several months, allowing us to better handle the surge in business we've seen nationwide. The remaining 500 containers we have ordered for 2010 will be arriving on schedule in October or November.

As always, we continue to closely monitor our fleet utilization to ensure that we are getting full use out of the additional capacity. In the third quarter, we continued to enjoy excellent fleet utilization rates of 13 days per load. This is the best third-quarter asset utilization Hub has experienced in any environment.

Even with significant volume growth, railroad service remains very good, allowing us to further enhance our on-time performance to our customers. And based on our analysis of market conditions, we intend to acquire an additional 3,000 containers next year.

Our contract drayage business is another success story. In October, Comtrak is handling 45% of Hub's dray business, compared to 34% last year. In order to accomplish this, Comtrak continues to grow its driver base, and we're now up to 1,535 drivers, which is 35 drivers more than our original goal for the entire year. Included in this count are 21 drivers that came on board as a result of our October acquisition of a small, Dallas-based drayage company, A.J. Transport. We are seeing substantial savings on our drayage expense as a result of growing Comtrak and we will continue to look for opportunities to expand our driver base in the coming months.

Our Brokerage business had a solid quarter with volume up 7%. During our last call, we had committed to improving our Brokerage margins. During the quarter, we were able to achieve this goal and improve our margins substantially, despite significant increases in costs. Our Brokerage margin is now close to historic norms. Although our actions resulted in somewhat slower volume growth, we remain yield focused and are satisfied with our progress.

Unyson Logistics is also experiencing solid growth as we continue to acquire new business and grow our existing client base. We completed the onboarding of a new, large pharmaceutical customer this quarter and expect to onboard additional new customers through the end of the year. We expect Unyson to continue to grow in the coming quarters.

So in conclusion, I'm pleased with our performance this quarter. We have great momentum with our volume growth. We have a solid pricing strategy that is supported by the market and we continue to deliver strong financial results. I'm looking forward to wrapping up 2010 with a great finish.

And at this time, we will open up the line to any questions you may have.

(Operator Instructions). Scott Group, Wolfe Trahan & Co.

I wanted to start with -- the 3% pricing that you talked about in Intermodal, does that include peak surcharges or is that just core price? And if it does, can you break it out between price and surcharges? Just trying to understand what we should be thinking about for pricing entering 2011 when the peak surcharges will be gone.

You can figure that most of it is in fact price increases as the peak surcharges didn't even enter into effect until August 15. So, quite a bit of it, and then many of them -- some of them were somewhat lagged with that. So, do you have an exact number or --

Yes, Dave, exactly right. Scott, when you look year over year, the increase was the 3%. And that peak season surcharge went in 8/15, and it was only on 23% of our business. So it wasn't even on our full book of business. So you have to factor that in, as well.

That's great color, thanks. In terms of the gross yields, Terri, last quarter you talked about Brokerage being down 500 bps year over year and Intermodal down just a little bit. Can you give us those numbers for this quarter?

Intermodal gross margin as a percent of sales compared to last year was up just a touch and Truck Brokerage was down compared to last year about 90 basis points.

Okay, and if I heard you, you said that Brokerage yields were up 260 bps sequentially.

Correct.

Do you have that for Intermodal?

No, it's up some.

Okay. Okay. And then, when we think about overall gross yields going from 11% to 12%, I'm guessing you finished third quarter a good amount better than 12%. Can you give a little color, either maybe where you finished in September or where you are in October?

You know, well because the peak season surcharge just went in in the middle of the quarter and it was in for the whole month of September, pricing was better in September than it was in July or August. And then, for October, nothing has changed. We are against an easier comp in October because our pricing in the fourth quarter of 2009 was down 5%, whereas in the third quarter it was down 4%.

Do you think it's a fair comment that yields are trending better than 12%, though, in fourth quarter?

We think it's going to be fairly consistent with third quarter.

Okay, great. Then one last thing, Dave, just to clarify, your comments about peak season, that wasn't exclusively on the truck side. You were talking about the overall piece of the business, including Intermodal?

Absolutely.

Alex Brand, Stephens Inc..

Let me start with -- just on the drayage piece. It sounds like you're continuing to make progress on bringing that in-house. Where does that stand versus your goal of 50% by year-end?

Alex, it's Mark. I think as Dave mentioned, currently we're at 45% of our own drayage is being handled by Comtrak. That does represent in the third quarter, we did 53% more drays for Hub.

So, we're making significant progress there. We're over 1,500 drivers at 1,535 drivers, which is beyond our goal. So, we feel we still have a long way to go there. It's going to be tough for us to get to 50, but we think we've got a realistic shot at it, and then it's onto 60 for 2011.

And is it just implicit in the statement that you're getting to your target that you're achieving the desired results from doing that? Is it improving your profitability in a material way?

We feel very good about the improvement that we're seeing in dray economics as a result of being able to improve our street operations, and this is a pivotal part of that strategy. So, yes, it is definitely producing what we had hoped it would.

Okay. Now along the lines of margin, when we look at where you're headed, now you've got some price increases in place. How do we think about your prior peak EBIT margin was 5.5% in 2007, and I know you want to get past that. I think you've said before -- 7% was a number that you've thrown out there. How should we think about when is it realistic to get back to that type of profitability? Is it just when you get the price back, you can get to those margins?

Well, you know, Alex, I think -- what we have said, obviously price is the driver here for us to continue to make progress towards 2007 levels.

We think that's very attainable. What we have said is we're going to need to be disciplined from a highway perspective, in terms of both pricing and purchasing, but also that we're probably going to need two full pricing cycles on the Intermodal side to get there.

We got through the first one. We got -- made a lot of progress, I think, getting 3%. We feel good about that, but it will realistically take another pricing cycle, which a lot depends on the economy, but we're hopeful with a firm demand environment that we'll be able to make similar progress next year, and that would put us, for the second half of 2011, to begin to -- to get close to those kinds of numbers.

But it will definitely take two pricing -- two healthy Intermodal pricing cycles for us to be able to get back to those type of historic levels, and then from there, we need to grow brokerage and we need to grow our in-house dray and we need to continue to grow logistics to get to a number like seven.

Fair enough. With respect to growing Brokerage, it sounds like you kind of spent some time fixing, and that went well. And there was some growth, but what are your thoughts on how you move that ahead in terms of -- I think you've historically been focused on your Intermodal customers. Is the strategy to branch out and go beyond that core customer base and really try to have that be a core part of your growth strategy?

Absolutely. We do think, though, within our core group of customers that have exposure to Hub Group from an intermodal perspective, there is still a lot of fertile ground, and so we think we've still got a long way to go there. So we are focusing quite a bit on cross-selling and we are -- also, with the growth in Unyson, that helps us to contribute to highways growth, but there's no question it's a big market out there.

We think that there is a lot of opportunity for highway to grow with other customers and we think that the capacity situation that is likely to occur next year should favor a broker who has access to a significant number of carriers, and we hope to capitalize on that. So, yes, we still feel like brokerage should be a double-digit grower for us for the foreseeable future.

All right, just one more, if I could, and I'll turn it over. And I guess this could be either you, Mark, or Dave. And this is a tough question, but the volume growth has been phenomenal, and admittedly against easy comps. But the market has changed too, and it sounds like you still are feeling pretty good about where the volumes are in terms of a peak season, but as you look out to next year when you have really tough comps on volume growth, how are you guys thinking about what's a realistic growth rate for the Intermodal business in terms of maybe the industry growth, but also that the industry has changed and market-share opportunities are probably there for you as well?

Well, I think -- if we look at the overall industry from where it was, it's changed a dramatic amount in the last year. There is no more fourth parties, if you will. That is no longer a factor within the entire -- the intermodal environment.

I think also that with our conversion to one western carrier, that adds a tremendous amount as far as our strategic positioning. And that, coupled with our street operations that we're becoming more and more efficient with and being able to realize savings, I think we are very well positioned for next year, Alex. I feel more confident today than I have in quite some time in where we're positioned and what we'll be able to take advantage of with the intermodal growth because I think that we are well positioned.

Local east has tremendous opportunities right now, as is reflected in our results this past quarter. It will have those same opportunities next year to continue to grow that.

The Transcontinental, with our conversion to the Union Pacific, has some serious service advantages versus the competing lines, so we have great opportunities there as well for service -- customers that are very service-sensitive. So, all in all, again, I think that we've never been better positioned to take advantage of Intermodal's potential.

Thanks. And sorry, Terri, what percentage of the mix is local east, and then I'm done, I swear.

It's about 32.1%.

Thanks for the time, guys.

Jon Langenfeld, Robert W. Baird & Company, Inc..

Container side. Dave, can you run us through the numbers in terms of where you're at, again?

And then, the 3,000 you talked about, do you think that will be a net addition or will there be some retirements in there as you look through next year?

There will not be any retirements as we look at it. Our post-peak fleet size will be about 17,000 containers, so the 3,000 add will be a net add.

So, 17,000 would be -- when you say post-peak, post-peak this year?

Right. Because we're still expecting 500 containers, which have not arrived yet, that are a thin-walled container that we are experimenting with. So, yes, it will be at over 20,000 for next year.

And then, what is the flexibility there? If the market does change, obviously you have the flexibility of the containers that aren't exclusive to you. But would there -- is there the potential -- are there boxes old enough in your fleet to retire if you got into a situation where you needed to?

No.

There aren't, yes, okay.

Jon, we do have a fair amount that do come due in 2012. And I don't have that for you off the top of my head, but we can certainly get that to you (multiple speakers)

There -- about 3,500 (multiple speakers)

3,500.

And those are like the [oh four] boxes?

Oh three, oh four boxes?

They're the ones that we've leased from the bank.

Right, so they'd be the 05 boxes.

05, okay. Right, right, right. Yes, all right. And then, when you talk about the Truck Brokerage side and the improvement in the gross margin, how -- just qualitatively, how much of that do you think is internally driven and how much of that is externally driven?

As far as the gross margin improvement?

Yes.

We worked very hard on our loser loads, which was a -- one of the things that drove down our gross margin in the last quarter, and we were very aggressive with price increases. So, much of this is internally driven that we were just very aggressive with -- if we couldn't make money on a particular lane, we would drop it. And that's why you see that our growth slowed down a bit year over year.

And then, I'm assuming you're okay with that, relative to the fact that your gross margin actually improved.

Yes.

Yes, we also have a program in place to convert truck freight to intermodal. So that also helped the yield, that some customers did that.

And how do you think about the whole effort to try to drive more transactional business in that business line?

Well, I think we did a good job -- actually that was one of the other things that we did was we did quite a bit more activity of a transactional nature, sourcing load boards where customers were having trouble covering their freight, and so, that definitely contributed to our ability to improve margins, getting a little bit more transactional focus.

Okay. And then, just two number questions. What was the drive -- the number of drivers for the quarter? And then, what should the tax rate look like moving forward?

We had -- at the end of the quarter, we had 1,491 drivers, and as Dave mentioned, as of today we have 1,535 drivers.

How many of those are employees?

There's 18% of the group is employees and 82% are owner-operators.

Okay. And then, the tax rate?

For the tax rate going forward, it will probably be close to 40%.

40%, thank you.

John Barnes, RBC Capital Markets.

Terri, you talked a little bit about, I think in your prepared comments, local east was up 34% year over year. Can you talk a little bit about your purely western traffic and your transcontinental traffic, just a little bit of detail around growth there?

Sure. Our traffic to the West Coast was up 10% and our transcontinental traffic was up 13%.

Thank you. In terms of -- the balance of the fourth quarter -- I guess there's been some commentary around shipper size and larger shippers still -- volumes still doing pretty good, smaller shippers not. As you look at your customer base and you divide out where that strength in the fourth quarter is coming from, is it pretty broad-based or are you seeing any changes in your customer base as well?

I don't think we're seeing a lot of shift. A lot of the growth that we've been enjoying really all year has come out of our enterprise group, which tends to be our larger accounts that have the most potential.

So, what I would say is that that hasn't changed in any meaningful way and we aren't seeing a slowdown with our larger shippers, and the mix looks very similar to what it has for the first two quarters of the year as well. So we haven't seen a fundamental shift.

I don't know that we would necessarily be as attuned to a slowdown among smaller shippers because of the fact that a lot of our growth has come out of our larger shipper community.

Yes, okay, all right, makes sense. I want to take the container question from the other side, and just talk a little bit about flexibility to get additional containers, if there -- if the demand were to increase a little bit. Can you talk about the ability to take that 3,000 containers or even what would precipitate your desire to increase that order number in 2011, or do you think that kind of meets all your needs for a while and gets you to kind where you need to be?

John, this is Dave. I do think that the 3,000 is an adequate number. I think your question is a good one because I do think that the fabrication capacity, in China anyway, is probably going to get filled pretty quickly, and that's one of the reasons we moved so soon.

But we feel very comfortable that the 3,000 will be adequate, particularly when you take into light that several of the railroads that we're working with are also making some relatively strong container acquisitions.

Then, lastly, just -- Terri, you talked about the balance sheet condition. A lot of cash, no debt. That's kind of a similar for you guys. It looks like fundamentals from here should accelerate. If these margins get better, I would imagine your free cash flow generation is going to get better.

Can you talk a little bit about where you are in the use of cash? Are there enough acquisition opportunities out there to kind of preclude the use of cash in anything else, or where do you stand on kind of the whole share buyback, dividend use of cash, return to shareholder type of decisions?

Well, we spent $10.8 million in the quarter buying stock. We still have $7.7 million left on our authorization that expires in the first quarter of 2011. So you can assume we'd use our cash to use up that authorization, as one use.

We also owe about $14 million on our containers for this year. That would include the 500 that Dave referred to that are coming in in October and November. And then, for next year's 3,000 containers, we'll have to figure out whether we want to lease or buy, depending on what the lease rates are. So that could be $30 million next year.

And then, we would have cash left over for acquisitions. We continue to look for acquisitions. As Dave mentioned, we did add 21 drivers for this Dallas-based company that we bought the drivers from this quarter. So we continue to look for drayage acquisitions, other intermodal marketing companies, truck brokerage fits. But nothing imminent.

Okay, nothing imminent. I've got one more question as well. I can't help myself. On the expenses, taking out -- understanding that there is some variability to that EPS-based compensation expense, is this kind of the level of operating expenses we should think about for the foreseeable future? Taking out that variable component, or is there anything that would lead to a significant step up or even a modest step up in this expense base?

So you can think about it just as you said. The big fluctuating factor is the EPS-based portion of the bonus. So, taking that out, it's pretty constant.

All right, very good. Nice quarter, guys. Thanks for your time.

Todd Fowler, KeyBanc Capital Markets.

It's actually Ryan Cieslak in for Todd this evening. I've got a quick question on the peak surcharges here in the quarter. I guess first off, I just wanted to get a sense of, given your outlook on the peak going forward, how long would those last here into the fourth quarter? Is that through October and into November, or just maybe some timeline around that?

And then, secondly, what was the sort of acceptance level with the surcharges as you guys pass those along? Any pushback at all on the peak season surcharges?

To answer your first question, Ryan, it will last until December 15. And on the second question, because capacity is so tight, we were able to pass those peak season surcharges onto our customers.

We were able to, but there (multiple speakers) is always pushback. It's -- yes, there is always pushback, but it's a legitimate cost.

Part of the reason is that the railroads actually influence these in that their costs do go up during peak, as they have to reposition additional boxes, et cetera. So -- there is new train starts, there's a lot of costs that go into this, and I do think once you rationally explain it to our clients, although not necessarily willingly and -- but they do accept the increases ultimately.

Okay, and then, that December 15 sort of deadline or when those actually come off, I know we haven't seen a peak season surcharge in several years now, but how does that compare with the last surcharge that did come through, whether it was back in 2005 or 2006? Is that a pretty consistent -- December 15, or is this actually a little bit later just given the way peak is shaking out?

I think that's pretty consistent with historic practice. Now, if the economy was to completely slow down, they would probably opt to lift it early. And they did maintain that as an option when they were rolling it out, but based on what we're seeing at this point, we don't anticipate that happening. We think it will stay in until mid-December.

Great. Then just one last one, I think you had some commentary on a truck conversion to your Intermodal business in the quarter. Maybe just give some color around that -- a little bit of additional color around that. Was that onboarded for the full quarter or was that half the quarter, so we should see more of a benefit here in the fourth?

It was actually -- it's been in our numbers. It just -- for this quarter and previous quarters. It just ramped up a bit this quarter.

It's more of an [official] program, I think is what we can say now, and it's still very new and there's not a tremendous impact as of yet. But we do believe that even within our own brokerage that there is a significant amount of conversion that can, in fact, take place. And so, we're working towards it, but it certainly is a long way from being the end game.

Lots of opportunity.

Michael Weinz, JPMorgan Chase & Co..

I was wondering if you can talk a little bit about the competitive pricing behavior between yourselves and the other intermodal carriers, as well as the truckload providers, because, as you had mentioned earlier in the call, the -- some of the truckload carriers have indicated that the spot market is slowing and peak season for them is getting potentially a little bit weaker. So, does that influence pricing in the fourth quarter for you or in some of the discussions you're having?

Thus far, I think we are fairly pleased with the pricing dynamics that are out there. Certainly in Intermodal, we've seen a more rational pricing environment this year. There hasn't been nearly as much bid activity in either Intermodal or in the over-the-road side.

As I think David mentioned, the new business that we're seeing come in from both intermodal and from highway is higher margin business, more attractively priced than our legacy business. So, certainly there is a possibility if things were to slow down materially that we could see some aggressive pricing out of the over-the-road sector, which is typically much more volatile than the Intermodal pricing.

We anticipate things being relatively stable, and the opportunity, given demand conditions, to secure additional increases next year, all things being equal on the Intermodal side. And we're hopeful that on the over-the-road side, we'll see a relatively stable environment, but a lot of that depends, really, on what happens with the economy. We think that given what's likely to happen from a capacity perspective on the over-the-road side, we're probably going to see a fairly rational pricing environment from our over-the-road competition. But, we'll just have to wait and see.

Okay, and then on the -- let's see, I guess on the CSX call, they had indicated that one of the shippers that -- or one of the intermodal providers that operates on their network shifted away during the quarter, and I was wondering if that moved over to you, if that was business that you picked up.

That was one of their customers? One of CSX's customers?

No, it was an intermodal company that operates on CSX -- apparently lost a customer, and it sounds like it shifted to -- away from CSX, so I was wondering if it might have been Hub Group that picked it up.

I'm not sure. It's entirely possible. We do work with CSX as well, and we are using their new UMAX program. But -- obviously, we did have some wins, and not all of it was conversion business, so that's entirely possible, but I couldn't give you a definitive answer on that one way or another.

That's fair enough. On the cost side, it's my understanding, and maybe I'm interpreting this wrong, is that salaries and benefits likely ticks up in fourth quarter. That might be a little bit from headcount, but am I reading it right that your bonus comp accrual can also pick up sequentially versus third?

Yes, you're exactly right. Our bonus would be what could pick up from the third quarter. And really, there won't be a lot of headcount additions in fourth quarter, maybe 15 people, 15 to 20. But it would be more the bonus that would make it higher.

But if it does pick up, that's good because that means that we've earned more. So, that means that the earnings are higher. So, it's not all bad.

Of course. And when did that pharmaceutical customer come online in Unyson during the quarter?

Mid-quarter.

Mid-quarter, okay, so the full -- we haven't seen a full quarter's effect on the revenue side yet.

Right.

And just a last question for you. What kind of effects can you expect from the opening of Union Pacific's Joliet facility? I think of it more of -- in a benefit to international shippers, but based on some of the pictures I've seen, it looks like there is a lot of domestic boxes that are moving through there as well. So I was just wondering if you can give a broad-based kind of a viewpoint of how you think about that terminal impacting your operations.

Mark and I, in fact, were there yesterday at the opening, and it is more of an international terminal. There's no question about that.

Of course, where it actually, the physical location, is very good to get to -- it's right adjacent to I-80, so it has access to the entire Ohio Valley, Michigan. But what it should do for us is it should ease some of the pressure on some of the other ramps that the Union Pacific has here in Chicago, which in fact are more domestically focused.

And so, what it does is if there is -- obviously, if there's less inputs and outputs as far as containers going in and out, it makes our drivers -- gives them the ability to get in and out faster. So, it's got a positive impact on domestic business from that perspective.

Great. Thanks for the time, guys.

Matt Brooklier, Piper Jaffray & Co..

Looking at your 2011 container additions, 3,000 in number, from a timing perspective, how should we think about when you start to, I guess, accept or those containers actually get delivered throughout the year?

We'll actually begin receiving them at the end of May and -- for the first 1,000. The next 2,000 would be coming in right around peak season.

And remind me this year when you received your new, I guess, 2,000, and then you have another 500 coming in October or November, but remind me when you guys got those new 2,000 boxes delivered this year.

Very similar story. They really started arriving in late May, which was really perfect timing because things were tight in Southern California early this year. So, they were spread out really throughout the summer and early fall. And that really helped us meet and deal with demand conditions that were pretty challenging. So we hope to have a similar type of a flow next year.

Is there any way -- if I look at the overall market and where it's growing at currently, I look at your volume numbers and you guys are outpacing the market, is there a need or is there any way for Hub Group to take on those containers earlier than May going forward?

I don't anticipate that being a realistic possibility, and we don't think that that's necessarily going to be required.

I think that between our significantly larger fleet than it was in the first half of last year and the ability to access the EMP and UMAX capacity, we should be fine in the first half of the year. So, we're really more concerned about the ability to meet demand in the second half. We think we'll be just fine to meet customer demand in the first half, absent some really extraordinary demand conditions.

Okay. And with the incremental equipment, and I know we've had the question a couple of times on the call in terms of how should we look at your kind of run rate costs, but adding 2,000 incremental containers or whatever the number is in 2011, how do you guys look at your headcount next year? Is there a need to add a meaningful amount of heads to handle those new containers or can you kind of utilize the current headcount in the current network and go from there?

You know, Matt, we're pretty scalable in Intermodal. We are still in process, honestly, of doing our budget for next year. But because we're so scalable, we don't think we'll have to add a lot of people.

Okay. And last question, in terms of potential acquisitions, could you just kind of rank opportunities and the types of companies that you would be looking at and would be attractive? From an intermodal -- IMC or drayage or logistics companies, where do you kind of rate those potential opportunities as companies you would potentially want to go after?

We would certainly be very interested in other IMCs. I think that's a high priority, and whether it's an IMC that may in fact have a similar business model to us that or one that is more transactionally focused, either would be of interest.

We honestly have not seen many that are interested in selling at this point, which -- but that could change very likely with a lot of the change in dynamics within the industry.

Certainly, a truck broker that's not like Hub that is more transactionally focused would be -- have a high degree of interest for us. I would say followed by drayage, particularly in geographic locations that we may not be located currently or where they have driver capacity in areas where we do not have adequate number of drivers for Hub's current business. I think those would be the initial points. I mean, there is other areas that we'd like to get involved in, but I think those are our primary areas of concentration.

Thank you.

Anthony Gallo, Wells Fargo Securities.

You talked about transcontinental and you talked about the success at local east. We haven't heard much about cross-border intermodal opportunities. Could you spend a moment just talking about what you think the opportunity could be there and what you might be doing right now?

For Mexico, you're talking about, Anthony?

Yes.

Our Mexico business was up 80%. So we've seen some nice growth there and we've actually got people in Mexico City working with us, so it's grown nicely and we see a lot of opportunities there. Dave works on it a lot.

(Multiple speakers). It's a tremendous area of growth potential. Just obviously with many corporations that are, in fact, moving their production back to North America, and then they predominately go to Mexico, so there's a lot of opportunities.

We do have a local sales presence in three of the provinces at this point in time, and so, it's going to be an area of ongoing focus for us. I would point out that that 80% increase is great, but it is off of a relatively low number. So hopefully, it will continue and maybe get to triple digits for the near term.

What do you think it represents in terms of your overall volume? Less than 5% right now, do you think?

Yes.

Okay. And then, one last question, Dave, you mentioned -- or there were a couple of questions around pricing. You mentioned that I guess the runoff of legacy contracts continues to work in your favor. You have sort of built-in pricing over the next couple of quarters. Can you put some percentages around that? Maybe not around the increase, but the amount of business that's rolling through that is -- has been repriced. Help us think through that.

You know, we don't have a statistic -- last year, in terms of bidding, we saw a very active bid season, and I think we saw 76% or 78% of our business was rebid.

This year, it's really been all about negotiation, and bidding has been confined to less than 50% of our business and probably closer to 35% of our business, but just about everything -- we don't have a lot of multiyear pricing arrangements with customers. So, almost all of our business is rebid over the course of the year. So, it would be the unusual exception that isn't.

Okay, so the big rebid that we went through during the sharp downturn, we're hoping that that dynamic is behind us?

Exactly.

Yes.

Perfect. Okay. That's all I have. Thank you.

Art Hatfield, Morgan Keegan & Co., Inc..

Most of my questions have been answered. But just kind of a quick history lesson, if you could. When was the last year that you had a peak season surcharge?

It would've been 2005 or 2006.

I would say -- one that stuck, it was probably 2005 because 2006, if you'll recall, was kind of the peak that didn't happen.

Oh right, right, right.

And so, I think the last time we actually had a surcharge that stuck was 2005, and that was in the wake of Katrina.

Okay. And at that -- in 2005, you gave a percentage this year that the peak surcharge only impacted about 23% of your business. Was that, if you recollect, fairly similar to what you saw back in 2005?

It would be fairly similar. You know, I think the one dynamic that's changed our mix a little bit is the growth we've enjoyed in local east. At that time, local east was maybe 25% of our business, and now it's 32%. So, that would have the effect of -- that would mean that that peak impacts a little bit less of our business than it would have historically in 2005. But relatively speaking, it would be similar.

Right, because please keep in mind that the peak surcharges apply only to business that's out of California and out of Mexico. So, the remainder of the business, both the westbound into California, et cetera, had no peak increase, and that's why it only impacted 23% of our business.

Got it. Got it. And then, just one last question, and I don't know if or how you want to address this, but Terri, when you went through your kind of list of uses of cash and how you think about going forward, I don't think you mentioned anything about the potential for dividends. Can you talk about what may happen in the future or what needs to happen for the Company or for the Board to get more interested in paying out a regular dividend?

Yes, it's something, you are right, that we would discuss with the Board, and it really, given that we may need cash for containers or to buy a company or to buy property to support our drayage operation, that's going to -- we want our cash for that rather than a dividend right now.

Got it. That's all I've got. Thank you.

(Operator Instructions). Scott Group, Wolfe Trahan & Co..

Just one real quick follow-up on the new boxes. Is it a fair way to think about it, 3,000 new boxes off a base of about 18,000 this year that you're thinking double-digit plus volume growth or -- for next year or should we be thinking about it more off the 70,000 base, including EMP and UMAX?

We stay away from volume growth predictions because we're not so good at that.

We're not good with it, but we obviously feel as though we will grow volume next year. (Multiple speakers)

But directionally, how should we think -- do you think about needing 3,000 off of a base of 20 or off of a base of 70 to fulfill what you are hoping for?

We look at it off of a base of 20.

Great. Thank you, guys.

This concludes our question-and-answer session for today. I would now like to turn the conference back to Mr. Yeager for closing comments.

Thank you for joining us for our third-quarter conference call. As always, if you do have any additional questions, et cetera, please feel free to call us. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the presentation. Thank you for your participation. You may now disconnect and have a great day.