Hub Group Inc (HUBG) 2011 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.

At this time, all participants are in a listen-only mode. 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. Now I'd like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

Thanks, Jonathan, and thank you all for being with us today. I want to begin by covering four main themes. First, despite choppiness in the current economic environment, intermodal performance and execution is solid. Second, logistics revenue and pipeline are strong. Third, we're moving in the right direction with Mode. And fourth, truck brokerage is building a foundation for more profitable growth.

Here are the key numbers for the third quarter. Hub Group's revenue increased 59% to $760 million. Excluding one-time costs of $1.1 million, Hub Group's diluted earnings per share increased 35% to $0.46.

Now I will discuss details for the quarter. As a reminder, on April 1, we bought Mode Transportation. We now report two distinct business segments, Hub and Mode. The Mode segment includes only the newly acquired business. The Hub segment includes all business other than Mode. When we say Hub Group, as opposed to just Hub, we're referring to the consolidated results for the whole Company, including both the Mode and Hub segments. First, I'll talk about the financial performance of the Hub segment, and then the Mode segment.

The Hub segment generated revenue of $561 million, which is a 17% increase over last year. Taking a closer look at Hub's business lines, intermodal revenue increased 19%. This change includes a 10% volume increase and a 9% increase for fuel, price, and mix. Directionally, fuel was a larger increase than price and was negative. 160 basis points of this volume increase came from fleet boxes sold to Mode agents.

We're excited that this was the seventh straight quarter of double-digit intermodal volume growth.

The major reasons for this growth include success in bids, focus on strategic accounts, and customers converting freight from truck to intermodal. A large part of the truck conversion freight is in the local East market, which was up 14% for the quarter. Because of the growth in this market, our average intermodal length of haul went down 1%.

Truck brokerage revenue was down 3% on 12% lower volume. Our truck brokerage business unit is going through a restructuring this year. We're adding resources to our larger regional offices as we consolidate some of our smaller offices. The changes that we're making will drive efficiency and will improve customer and carrier dynamics. We recorded $210,000 of severance and $125,000 of lease-termination costs this quarter.

Logistics revenue was 39% higher than last year. We continue to win new business. One of our existing customers recently renewed and restructured their contract. Moving forward, we'll be recording gross revenue instead of net revenue for this customer. While this change results in gross margin as a percentage of sales going down, it has a positive impact on total gross margin dollars.

Hub's gross margin increased by $6.2 million due to significant growth in intermodal gross margin and modest growth in logistics gross margin, partially offset by a decline in truck brokerage gross margin. A big contributor to intermodal margin being up is our focus on growing and improving drayage operations.

The Hub segment's gross margin as a percentage of sales was 11.3%. That's down 70 basis points compared to last year's 12% margin. There are three main reasons why the margin percentage is down from last year. Number one, logistics margin is down 260 basis points, since we're doing more transactional as opposed to management fee business. Number two, truck brokerage margin is down 170 basis points. And number three, mix negatively impacted yield. Truck brokerage, which is our highest-margin business, is now a smaller piece of the revenue pie, while logistics, which is our lowest-margin business, is a larger piece of the revenue pie.

Hub's cost and expenses were $38.7 million in the third quarter of 2011 compared to $36.7 million in 2010. The biggest piece of the increase in costs and expenses is salary, which is up a total of $1.5 million. Salaries includes the $210,000 of severance related to truck brokerage that we classified as a one-time cost.

Finally, operating margin for Hub improved from 4.3% last year to 4.4% this year.

Now I'll discuss results for our Mode segment. Mode's revenue was $206 million. The revenue breaks down as $88 million in intermodal, $81 million in truck brokerage, and $37 million in logistics. Compared to last year, revenue at Mode was up 10%. Mode's gross margin was $23.1 million. Gross margin as a percentage of sales was 11.2%. Mode agents decided to ship 8% of their intermodal modes in Hub fleet containers.

Mode's total cost and expenses were $21.4 million. Included in these costs are one-time expenses totaling $ 800,000. The one-time costs consist of $440,000 that relates mostly to technology transition costs and $360,000 that relates to severance. The severance results from integrating Mode's finance organization with Hub.

To summarize our one-time costs, on the Hub side, we had the $210,000 of severance costs and the $125,000 of lease termination costs. On the Mode side, we had $440,000 of mostly technology transition-related cost and $360,000 of severance, for a grand total of $1.1 million.

Operating margin for Mode was 0.8%. If you exclude those one-time costs, it was 1.2%.

Turning to head count, we had 1,354 employees, excluding drivers, at the end of September. That includes 1,171 Hub employees and 183 Mode employees. Hub head count increased by 49 since the end of June. The majority of the increase relates to Comtrak, since we added more drivers.

Now I'll discuss 2011 full-year earnings guidance. For 2011, we're comfortable that our diluted earnings-per-share, excluding one-time costs, will be within the current analyst range of between $1.55 and $1.67. Our weighted average diluted shares for 2011 are estimated to be 37 million.

We think that our fourth-quarter costs and expenses will range between $58 million and $60 million, excluding one-time costs.

Turning now to the balance sheet and how we use our cash. We ended the quarter with $43 million in cash and no debt. During the quarter, we spent $20 million on capital expenditures. $19 million of this $20 million was for containers. We think that we'll spend between $24 million and $26 million on capital expenditures in the fourth quarter. About $18 million is for containers. $2 million is for a building addition, and most of the rest is for technology investments. We're working on a building addition at our existing Comtrak Memphis facility that should be done by year-end. The Mode employees in Memphis are moving to this location in mid-January.

You'll see that we have a new caption on our balance sheet called capital leases. In August, we entered into a 10-year lease for 3,100 chassis. These chassis were contributed to a railroad pool, meaning we don't manage them. In connection with that deal, we recorded assets of $26 million, as well as the capital lease obligation.

We've now finalized the purchase price for Mode. On April 1, we paid $90 million in cash to buy Mode based on an estimated purchase price. During the third quarter, we got $8 million back from the seller for a final purchase price of $82 million.

To wrap it up for the financial section, the healthy 29% increase in operating income confirms our belief that we are continuing on the path to improving profit. And now you'll hear from our CEO, Dave Yeager.

Great. Thank you, Terri. During our second-quarter conference call, we expressed the view that the then-current truckload markets seemed to be in a traditional shipping cycle versus the prelude to a double-dip recession. As you can see from our results, we continue to see very positive momentum in our business during the third quarter. The overall intermodal market remains healthy as we continue to benefit from the secular trend of modal conversion, especially in the East. So far, this peak season has proven to be a traditional demand cycle. Volume strengthened through the third quarter, and we don't expect to see a slow-down in demand until early December.

As is typical this time of year, equipment demand is outstripping supply off the West Coast. In other markets, we see a more stable environment where supply and demand are at equilibrium. Because of our well-timed new-container arrivals, we have been able to meet our customers' needs in Los Angeles. As of today, we've received 3,400 containers, with an additional 600 containers scheduled for delivery in the next few weeks. Once our build is complete, our fleet will be composed of 23,000 containers. After peak season, we will evaluate the market and decide what, if any, increases need to be made to our fleet in 2012.

The weather certainly did not cooperate this quarter. But the rails responded, and despite the challenges, we have been able to meet our customers' service requirements. Even with a much larger fleet and the weather challenges, our utilization remains solid at 14.1 days for the quarter.

Growing the size and efficiency of our drayage business is a core strategy for Hub Group. In a very challenging driver market, we've been able to continue growing our driver base. As of today, we have 1,978 drivers associated with Comtrak, and we're well on our way towards our goal of 2,000 drivers by year-end. Today, Comtrak handles 50% -- 57%, excuse me, of Hub's drayage, and we're confident that we'll be able to achieve our 60% goal by year-end.

We are increasing our driver count, both through organic growth and through tuck-in acquisitions. Earlier this month, we purchased Challenge Transportation, located in Newark, New Jersey. The 41 drivers from Challenge will allow us to better service the Northeast. As far as organic growth, we continue to expand our existing terminals. As an example, earlier this year, we purchased Domestic Transport in Seattle with 22 drivers. Today, that same terminal has over 40 drivers. In Milwaukee, we have a similar story. We started the year with 20 drivers. We now have 65. At Indianapolis, we grew our driver base from 20 to 50 over the course of the year. In addition to growing our driver base, we're also focused on improving the efficiency of our drayage operation by reducing empty miles and improving driver productivity.

Our truck brokerage division is still in a state of transition. Our new leadership is making the changes necessary to position this business for long-term success, and we are confident that once the restructuring is complete that we will be well-positioned for growth.

Our Unyson Logistics division had another strong quarter, delivering consistent year-over-year growth that was driven by customers on boarded earlier in the year and strong volumes from existing clients. In addition, the new business pipeline for logistics remained solid, and we continue to expect growth in this business unit.

As we look at Mode six months after the acquisition, we're very pleased with the way the integration has progressed, as well as the results we're seeing from this business. In the third quarter, Mode was able to generate a healthy 11% gross margin. We remain focused on agent retention and recruitment, and we're pleased that there have not been any agent defections. Our primary focus during the integration has been to provide our agents with a compelling value proposition. We believe we're succeeding, as during the third quarter, our Mode agents chose to increase their usage of both the Hub container fleet and our drayage operations. Both businesses benefit from this collaboration, and we expect this trend to continue in the future.

In conclusion, we continue to focus on our core strategies. We are growing our intermodal business while maintaining pricing discipline. Our Comtrak driver base continues to grow, and we're improving our operating results by reducing empty miles and enhancing driver productivity. Logistics is growing and has a robust pipeline. And while our truck brokerage business continues to be a work in progress, we are realigning the business for future growth. And lastly, the Mode integration is progressing well, and we see many opportunities for ongoing growth and profit. And so with that, we'll now open up the line to any questions.

(Operator Instructions)

Scott Group, Wolfe

Thanks. Good afternoon, everyone. So, Terri, just real quick. I'm not sure if you mentioned it, but are there any restructuring costs that you do expect in fourth quarter or in 2012?

There will be some restructuring costs in the fourth quarter, for Mode. Probably more integration-related costs that are one-time costs totaling about a little over $1 million. Those, again, are really integration-related costs. The severance is out of the way. And in terms of truck brokerage --

Okay.

There will be very little, if any.

Okay. That's helpful. So, when I look at the intermodal pricing, when we think about -- so I guess you're now consolidating pricing mix and fuel, and the three combined accelerated by, I don't know, give or take 300 basis points relative to the second quarter. Is that just fuel, or is the pricing mix also decelerating in there? It's tough to tell now with the way you guys are breaking it out.

You're comparing third quarter to second quarter for intermodal?

Yes. Yes. So if I just look at 9% and in the third quarter growth of pricing mix fuel, and it was 12% in the second quarter.

Right. So, mix was a little different from the second quarter to the third quarter. And fuel wasn't as big of a component in the third quarter as it was in the second quarter.

Okay. So mix getting a little bit worse. And is pricing holding firm?

Pricing's good. Yes.

I know it's early, but how do you think about pricing for next year in intermodal?

You know, Scott, I think that's a really good question. I think that it really is going to depend upon the overall market. At this point in time, I don't think anybody has a clear view of whether we're going to continue bumping along at 1% GDP or if it's going to accelerate. So, at this point in time, we're kind of -- it's kind of like our fleet increase. We're kind of -- it's kind of wait and see right now.

Right. Okay. And then with Mode, so I think I heard you say that 8% of Mode's volumes are going with Hub. Is there a target on where you want to take that? And how should we think about that flowing through the income statement as -- well, if Mode does more volume with Hub overtime?

We want that. You're correct, Scott. It was the 8% of Mode's intermodal moves went on Hub fleet containers. And we want that to be at a run rate of around 20% by the end of the year. And how you see that in income statement is a lot of times when the Mode agents use our fleet, they will experience savings, and so you see that in increased gross profit.

Is there a good rule of thumb, like for every -- for Mode volume in a Hub box, its X% more profitable, kind of like what you guys have broken out in the past with doing your own drayage?

Not so much, because it depends what market that we're letting them use the fleet container for.

Right, and pricing is all variable. So it really -- it will not be a consistent pattern.

Okay. Thanks for your time. I'll get back in queue.

Alex Brand, SunTrust Robinson Humphrey.

Thanks. Hey, guys. So Dave, I think in your remarks you talked about acceleration throughout the quarter and that you feel pretty good about peak. Can you give us a little more help on what that looked like? I mean, how much did it accelerate month to month? And what does that imply your growth rates might look like so far into the early part of the peak here?

You know, it did increase by -- month-to-month. For the first three weeks in October, I mean, we're seeing increases that are in the low teens. So we did see a pick-up substantially from July through August, and it did hit the low-teen growth in September. It is a peak. How long it'll last think is anybody's guess. But certainly, at this point in time, we're looking at least until Thanksgiving and hopefully a little bit beyond.

Okay. And can you remind us what did last December do? I mean it sounds like you're saying if it's normal, then Decembers didn't used to be that great of a month. How was it last year?

Terri, do you --?

I don't have that handy, Alex. I can get back to you with that.

Okay. No problem. Terri, you mentioned local east growth of 14%. How much was transcon growth?

10%.

Okay. So that was good. When I think about local east of 14%, which is obviously good, I want to give credit, but certainly a lot's lower than your largest facing competitor. Did something change there that would have made that a lot different? You guys have been matching up pretty closely for a while now. I mean, is there a customer loss or anything like that?

No customer loss. We, like you, kind of think it was strong at the 14% since domestic intermodal was only up 6% for the quarter. Our growth was a little lower in local east than it had been historically because we lapped some significant conversion freight we brought on last year. So, we still think there's a lot of opportunity for truckload conversion in other regions as well as local east, but that's the primary reason for our growth being the 14%.

Yes, Alex, if you recall -- this is Mark -- our Q3 2010 local east growth was 34%, so obviously we had a very challenging comp.

Fair enough. Last question. Truck brokerage, it sounds like has become a bit bigger of a project then maybe you guys thought. I guess I'm just not sure. Where do you guys feel like you are in the process, and when might it become maybe a growth engine again and a more meaningful contributor?

Alex, this is Mark again. You know, I would say that we are well on our path year with the restructuring of highway. We've taken a lot of the significant steps that we need to take. It certainly is a large project. There's no doubt it's going to take us through the end of the year, but we feel that we're going to hit ground running in the first half of next year, and we should begin to see some positive numbers in 2012, certainly.

Great. Thanks for the time, guys.

Ben Hartford, Robert W Baird.

Yes, thanks. I wanted to touch on, Dave, your comment about fleet growth expectations within intermodal in 2012. You had the caveat, if any. I'm just trying to get a sense for how much of it externally dependent. How much of it is dependent on Mode, meaning if you were to hit that year-end target that Terri, you highlighted, 20% utilized by-year end, would that be enough to require fleet growth independent of the environment? Can you talk a little bit about that?

Sure. Strictly making the 20% growth with Mode would not necessitate us to acquire more equipment. I think, again, what we're waiting and seeing as how the macro environment is. Again, if GDP is bumping along the bottom, we ourselves grew our fleet this year by 28%, and the overall market grew by 23%, the number of containers available. So, it was a very significant build year. And I think we just want to make sure that we're going to build into a strengthening economic environment.

I don't want to get too much into hypothetical, but what type of environment would it take, how sensitive would you be to contracting the fleet on a year-over-year basis?

Well, that's certainly something we have the ability to do. We can contract some of the containers. But at this point in time, I don't see anything that would lead us to next peak having a smaller fleet than 23,000 containers.

Okay, good. On the Mode side, the revenue number, it came in a little lighter than expectations. Maybe not internally, but you had made the comment that all of the Mode agents had been retained. So, is there any business that was not successfully transitioned over? Was the sequential improvement in revenue expected? Can you talk a little bit about the top-line trends there in Mode?

Yes, we were pretty pleased with the growth, and especially pleased with the gross margin percentage at 11.2%, which means that cost increases were also successfully passed along at Mode. So the 10% revenue increase was in line with our expectations, and really, the gross margin percentage was higher than we expected.

Okay. And then on the driver side, you had talked about a number of regions that had expanded the fleet. Any incentive or increases to driver pay to induce that sort of growth? What was the driver of the growth and the driver count in those locations?

You know, we have adjusted some pay. We have put some, depending on market, we have put some incentives in place to attract drivers, to retain drivers, as well as for safety. So we certainly are using compensation to both bring new drivers on and keep the drivers that we have, because you have to win both sides of that battle. So we think we are in line with market, but certainly incentivizing the behavior we want.

Okay, great. Thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Great. Thank you. Good evening, everybody. I think, though, this is for Terri. Going back to the gross margins in the core Hub segment, I think I got what the impact of logistics and what truck brokerage was. Did you specifically state what the impact of intermodal was during the quarter?

I did not, but I can tell you that intermodal gross margin as a percentage of sales was up slightly.

It was up slightly on a year-over-year basis?

Correct. And sequentially, for that matter.

Okay. And then I think that either last quarter or in the past, you talked about gross margins for the segment being better than where they were 2010. It sounds like there's some change in presentation going forward, the impact of the truck brokerage business. I guess how do we think about the gross margins for the fourth quarter for all 2011 at this point?

We think that the gross margin percentage in the fourth quarter will be about the same as it was in the third quarter. And you're right, we have a new customer -- an existing customer in logistics renewed their contract, so we will be recording gross revenue instead of net. So that has a slight impact on logistics gross yields, but not material to the Hub yields.

And so, with kind of some of the things going on there, I mean the change in presentation with what's going on in the truck brokerage business, can the legacy Hub margins get back to some of the run rates where they were at in the past? Or because in the change of the mix and because some of the change in the presentation, are we at kind of a new level to think about as a base place for those gross margins should be?

For truck brokerage --

For the entire segment.

For the entire segment. They should be able to get back where they used to be, because like Mark said earlier, we expect truck brokerage growth in 2012. And if that business is a bigger piece of the revenue pie, we definitely think we can get back to the margins we've been at historically.

Okay. That helps. And then just one quick one on the truck brokerage growth in 2012. Does it shrink in the fourth quarter before it grows in 2012?

This is Mark, Todd. You know, the volume shrink improved from -- throughout the third quarter from July through September, so that was a positive. I still think there's going to be a slight negative in the fourth quarter, but it won't -- I do not believe it will be as significant as it was in the third quarter.

Okay. And then the last one I had, can you talk about the decision to enter into the capital leases on the chassis, what drove that, what you're thinking there is? Some of the -- what that actually does for your business relative to some of your peers who aren't doing that? I'm curious to hear your thoughts there.

Sure. You know, we think that it's important for us to be investing in -- with our rail partners, and this gives us an opportunity to reduce our costs and be more competitive with our largest competitor. At the same time, it gives us skin in the game in an asset pool that -- whose efficiency is very important to our rail partners and, therefore, is very important for us. It's a way for Hub to step up and use its resources to become more fully invested in intermodal, and at the same time, reduce cost structure.

Okay. Thanks for the help tonight.

Kevin Sterling, BB&T.

Okay, thank you. Dave, you said you had not lost any Mode agents. Have you added any new agents since acquiring Mode?

We did. We added two Mode agents in the second -- two IBOs in the second quarter and two IBOs in the third quarter. And we've also added sales agents, about 10 in the second quarter and 12 in the third quarter.

Okay, great. It sounds like the Mode acquisition is doing better than maybe you initially thought. Is this because of the capacity you're able to provide those agents that maybe the agents didn't have access to before?

You know, I honestly think it's a variety of things. I think number one, it's -- first of all, it was a very good agent network. I think that these people have been with Mode for many years. They know their business. They're [here]. They know their clients. They work very well with them. I do think that the one -- we can bring assets for them. We can enhance the systems. And thereby, we can bring a lot of value so that, in fact, they can continue to grow their business and we can expand the overall agent base.

Okay. Thank you. And Dave, you talked about the fleet growth that you guys had this year in terms of your containers. You know, that the industry's roughly a 23%. Are you concerned about excess capacity, or do you think that's pretty close to equilibrium?

You know, I think right now we certainly have not seen any signs, any deterioration in pricing. And in all candor, with the amount of potential for conversion business, with the overall growth in intermodal, which is well ahead of GDP, I do think that right now we're right-sized. And I think again, depending upon what happens from a macroeconomic perspective, a further build could very well be justified.

Okay. Thank you. That's all I had. Thanks again for your time.

Thanks, Kevin.

Thanks, Kevin.

Michael Weinz, JPMorgan.

Hey, good afternoon, everyone. Touching on one of the questions a few minutes ago about the chassis investment. Does this lower your cost with the rail service provider across the board, or is it when you use those assets in particular?

Well, we don't have a specific assigned pool, so it lowers our chassis cost across the board.

Okay. Is that something you might consider ramping up further going forward, or is this more of an experimental kind of thing in the near term?

You know, if it's something our rail partners want to entertain, we would certainly entertain it. Because it still only represents a relatively small percentage of our actual chassis usage.

Could you give us what percentage that would be?

Gosh, I don't have that off the top of my head.

Okay.

We can get back to you with that, Michael.

Okay. With regards to your customer segments, are there any in particular that are performing really well? And the flip side, are there any that are performing with pretty poorly, just in terms of year-over-year growth?

Retail was up 13%, consumer products up 9%, and durable goods up 8%. So retail, clearly, the biggest grower. And we had some new customers in the mix that helped.

Okay. But that's pretty consistently solid, I would think. Okay. And then on the brokerage side, are there some regions where you're seeing the capacity's really tight or really loose?

Capacity's tight going to the East Coast.

Okay. Not necessarily in the East Coast but going to the East Coast?

Right. The trucking community's being a little more disciplined right now, and they're trying to avoid going into areas they might have trouble getting out off. So particularly the Northeast is a little bit challenging, looking at capacity into there.

Okay. And on the logistics side, you had talked about a pretty good pipeline of growth opportunities. Is that more of a 2012 event, or 2013 event? How should we think about that? And is there anything coming up in fourth quarter we should look at?

A little bit coming up in fourth quarter, but it mostly relates to 2012.

Okay, great. Thanks for the time.

Matt Brooklier, Piper Jaffray.

Hey, thanks. Good afternoon. Hey, could you just -- and I think you talked about -- or at least talked to some of the numbers. How many new containers were added in the third quarter?

Dave did. We have about 3,400 of the 4,000 -- oh, during the fourth quarter.

No, no, no. I want to see -- or get the number for how many containers were added during third quarter. If you have them by month, great. If not, we can follow up. And then wanted to talk about what's anticipated from a container addition in fourth quarter.

Yes, we -- I don't have that handy by quarter, but --

Probably about 3,150, I believe, for the third -- No?

I just don't remember that number, but we can get you that --

We have about -- this is how much I know. We do have about 600 remaining to receive thus far this year, and we will receive all those within the next several weeks.

So, 600 containers coming on in fourth quarter. I think that's in line with your original plan.

It is.

You also talked to a CapEx number for fourth quarter. What was that number again?

$18 million on containers. It was a total CapEx for fourth quarter of $24 million to $26 million. And actually, in the third quarter, we spent $19 million on containers, which would lead you to believe that we got about 1,900 containers in during the third quarter.

Right.

Okay. So, if we're adding 600 containers in fourth quarter, but you're spending an incremental $18 million on containers in the fourth quarter, that would suggest that there's even more containers coming on board. Are you trying to position yourself for 2012? Is there some bonus depreciation that we're trying to take advantage of? Maybe just talk to the $18 million of containers spend in the fourth quarter. How many containers does that equate to?

Well, we had some containers that we had received, about $3.4 million, I think, of containers that we received at the end of the third quarter that we hadn't paid for yet. So that's in the $18 million cash outlay.

Okay.

Total purchase remains about 4,000 as we had laid out, I think, in the second quarter.

Correct.

Okay. So, there's no change to the all-in 4,000 number that you had discussed earlier?

That's right.

Correct. And like Dave said, 600 to go.

Okay.

As of right now, this very day.

Okay. Could that number, and it sounds like volumes are accelerating in September and into October into a low-teen digit year-over-year growth rate, would it be possible to add more containers in the fourth quarter to your own fleet? Are you able to go out into the market and secure incremental capacity? How do you think about capacity if things are maybe a little bit better than anticipated?

We would not be able to add additional containers into the fleet in the fourth quarter, other than we're expecting, the additional 600. Right now, though, the capacity situation is pretty fluid. We have been able to secure capacity from our rail providers as well, so we would probably just be using more rail boxes in the event that we saw higher demand than anticipated.

Okay. I'm not trying to get ahead of myself here, but you had previously provided 2012 Mode EPS accretion guidance range of $0.08 to $0.12. I think all of that was on Mode's improving gross yields. It looks like that is going according to plan, maybe a little bit better than anticipated. You talked to some severance in the quarter at Mode. I was just curious as to whether you had an update in terms of your 2012 EPS expectations from Mode.

We haven't updated that yet, to answer your question directly. But we do think that the initial estimates that we gave are probably a little low, given where we're at today.

All right. Thanks, guys.

Brad Delco, Stephens.

Good afternoon, and thanks for taking my question. The first one I had, it's second quarter now you guys have operated with Mode. I imagine you know a lot more now in terms of how it's impacting your business, maybe even a quarter ago. Can you give us an idea how you're managing the business and how it's evolved over the last six months? What are your areas of focus now?

Our areas of focus for Mode is retaining the agents, keeping them happy, and getting new agents. That's the main focus.

That's right. What we decided was early in this process that we were going to maintain the business model and support the business model. And we're continuing down that path. Agents are showing that they're disciplined and, to my brother's point, very solid operators of their business. What we're trying to do is make sure that they have the appropriate information, the appropriate human resources, support, as well as access to both our fleet of containers and our drayage fleet. So trying to be a good host for the Mode network continues to be our strategy.

Thanks, Mark, for that color. The second part of that question, I guess, is when I look at the adjusted operating income at Mode, so about 40 basis points sequential improvement. Was that driven more from moving the duplicative efforts and part of the reason why you saw some of the severance cost? Or is this driven more so by just the dynamics of the market and you seeing the net margin improvement that you already discussed?

It was really the latter, the net margin improvement, because we're not seeing any of the savings from the severance until next year.

That's right. I think we'd love to take credit for that, but the credit has to go to the agents on that one.

Right.

Understood. Is it fair to assume that the 28% margin you saw in the second quarter, that's probably the lowest mark we're going to see, and we've established a new base assuming that current industry dynamics maintain at current levels?

Well, we certainly hope that's the case. You know, a lot of it does depend on what happens within the industry. But yes, we certainly hope that it's improvement from here.

Got you. And then the last question I have, and I know you guys wouldn't provide an idea on capital budget, but is it correct that a maintenance CapEx number for you guys is about $10 million to $11 million? Is that fair?

It really depends on our container purchases, and we haven't decided on those yet. So --

Yes, I guess I would assume that as growth CapEx. But just assuming that there are no container purchases, what would be a fair CapEx number?

Yes, maybe between $5 million and $10 million for IT-related projects.

Okay. And if this -- if the current, I guess, macro conditions, uncertainty, kind of choppiness like you guys have suggested continues, what would be the use of cash in 2012 if it were not to be on containers?

We're evaluating different options for our space here at corporate, for one thing. We could buy some tractors at Comtrak for the drivers - for our employee drivers, as well as IT. Those are the three main uses of cash. And then we could buy back shares, of course.

Well, great. Thank you for the time. That's all I have.

Thanks, Brad.

Mike Baudendistel, Stifel Nicolaus.

Thank you. Wanted to ask a question on the operating segment breakdown that you provide. I think that we appreciate that you break down the results between Hub and Mode. With the Hub operating margin over 4%, and with Mode less than 1%, wondering if you had a longer-term target for Mode in mind over a few-year period.

Well, we definitely want it to go up. I think last time we talked about it, we said, get it to 2%. We would think even higher than that at this point over the next couple years. But we haven't updated all of those numbers yet.

That's helpful. And then when I think about the revenue growth rates between those two segments over a few-year period, do you think the intermodal Hub segment will grow faster because you're adding drivers and because that local east outperformance? Or how do you think about that, Terri, like growth rates?

For each of the segments within the segment?

Well, not within the segments. Just between Hub and Mode.

I think, certainly, we're hoping that the Mode agents take advantage of our Comtrak drayage capacity, and we are seeing a large transition there. And we think it's going to be a very important product for them as we continue to see the driver pool continue to contract, and if certain regulations are passed, that could even add to the contraction in the number of drivers that are available. And hopefully, their clients, they'll be able to begin to discuss with them and convert more local east. Again, they've got a very solid relationships with their client base, and I think that it's a great opportunity for them to be able to expand their businesses.

Okay. Sounds like they'll both be growing then. Just one last one. Just refresh my memory. What was the main driver behind the highway brokerage restructuring effort? What was the main thing that you saw that caused you to start the restructuring effort?

We've added resources to our larger regional offices while we've consolidated some of the smaller offices, so it was a matter of taking advantage of scale.

Yes, I think what drove it, I think was your question, and what we were seeing was it was slowing down its growth, right? We did not feel like we were able to offer the service to our customers across our network that's consistent with Hub. So, we wanted to create an experience with highway brokerage very similar to what I think our customers experienced on the intermodal and logistics side. So, we felt that we needed to bring some scale, as Terri said, and bring a little bit different approach to operating that business.

Thanks very much.

Anthony Gallo, Wells Fargo.

Thank you. Can you hear me okay?

Sure.

We can, Anthony.

Would you mind spending a moment talking a little bit more the nature of the -- what you think are going to be one-time expenses in the fourth quarter for Mode? Severance, I get -- I'm trying to get there emotionally on the technology side. But I want to make sure I understand what our true acquisition integration costs and what are let's call it necessary upgrades to infrastructure. So a little color on that would be helpful.

Sure, what we're doing is - - - - Mode is using the former parent IT system for EDI with the customers and with the vendors. And so one of the biggest costs is transitioning all of that EDI to our system. And we're using outside consultants to do that. So that's majority of the cost.

Okay. Then unrelated question. On this topic of restructuring within brokerage, consolidating into, I guess, a fewer number of larger offices. That seems to be in contrast to the approach that C.H. Robinson and J.B. Hunt are using. I guess I want to make sure I understand. Does Mode for fulfill your smaller shipper needs, because they're in so many places and dealing with those smaller shippers? And then Hub brokerage will be focused on the larger shippers? I'm just trying to understand this strategy versus, say, your peers.

It's not necessarily divided directly like that, but the outcome is exactly like that, yes. Mode does handle a lot of small mid-tier customers. Basically, I think a lot of it is that the way that we were buying when we had offices all over was not up to speed. It wasn't where we felt as though it needed to be. And we think that there's more centralized focus to allow us to a,) buy more efficiently, b,) to Mark's point, I think that the experience with Hub will be more consistent. It's easier to control if you have a few finite sites that, in fact, you can use some best practices and really execute.

Okay. You mentioned the buying side. That was very helpful. How about on the selling side? Is there going to be a slightly different focus now that it's these larger office is trying to -- it's sounds like you're focusing more on existing Hub customers, which is fine. I just want to make sure I understand it.

Sure. Yes, no, we will certainly focus on existing Hub customers. That's always been the key to our growth strategy with our highway product. And I think it is important to remember that with our highway product, we are doing nontraditional brokerage services, more complicated pool management multi-stops. Things like that are not the typical spot market brokerage activity that you might see. It does enable us, certainly, to sell a different type of product, a product that's more about repetitive business. And adding to scale also enables us to have dedicated pricing resources so that we can be -- we can have a more knowledge-driven product out in the marketplace. So by adding scale, you're able to create some specialization that doesn't necessarily exist in the highway model as we've always known it.

Got it. Makes perfect sense. Thank you.

Right.

Jeff Kauffman, Sterne Agee.

Hi, it's Kanchana Pinnapureddy in for Jeff. Just had some follow-up questions on the intermodal business. Does the 10% volume growth that you quoted, is that including the Mode acquisition, or is that an organic number?

That includes Hub fleet containers sold to Mode agents.

What percent did that account for?

The 160 basis points.

And then, could you also talk about some of the market-share shift that you're seeing in intermodals [since these seem] to be growing faster than the market?

A lot of our growth is in local east, and a lot of that was truck conversion freight. We've also seen some new customers, about seven -- if you looked at our top 50 growing intermodal customers in the quarter, seven are brand-new customers.

But I think if you look, there's no question that we've -- that both us and Hunt have grown faster than the remainder of the market So the industry continues to consolidate, and we feel that that's probably likely for the foreseeable future.

Got it. That's great to know. And also, I was curious if you could talk about the bonus accrual difference between the third quarter this year and versus last year?

Between the third quarter this year and last year, it was down. It was down about $800,000.

Great. Thank you so much. That's all I had.

Great.

Art Hatfield, Morgan Keegan.

Thanks. Afternoon, everyone. Terri, you had made a comment in your guidance about 37 million shares outstanding. Was that for Q4, or for the full year?

That's for the full year, but it'll be close to that for Q4.

Okay. So that's helpful. And just real quick on Mode. Looking at modeling out going forward. I was looking at some of my old notes. The only number I had written down that you had given guidance for was for the three quarters that you had it this year, you would generate somewhere between $550 million and $600 million in gross revenue. Based on the last two quarters, unless there's something I don't understand about the seasonality of Q4, it looks to be that you're going to be somewhat ahead of that pace for the year.

We should be. You're right, Art.

So Q4 is basically similar seasonally to what Q3 has done historically?

Similar seasonality to Hub.

Okay, okay. And then just on Mode, too, not seeing their numbers in the past, can you kind of give us an indication of what Q1 historically has looked like for them from a seasonal standpoint?

It's the lowest.

Is it, say, 10% of a year total? 20%? Any kind of number you can give to help us think about it from a modeling standpoint?

It's hard to say, but it'll probably be up from where it was last year, we're thinking, but --

You know what the number was for last year?

I don't have that handy, but it's similar seasonality to Hub, where your first quarter is always the lowest.

Okay, that's fine. And just lastly, looking at truck brokerage at Hub. Looking at it a year ago, it looks like Q2 to Q3 revenues were fairly flat. This year, they went from $90 million down to $83 million. Can you talk a little bit about that? Is that -- anything going on there other than the restructuring and some revenues you're giving up because of that?

No, I don't think so. I think it is more of a Hub internal restructuring-driven phenomenon, certainly, than the marketplace is. And as I said, you know, the volume decreases were moderating throughout the course of the quarter. So we think that we've seen the worst of it, and it's likely to build from here.

Is this -- is a good way to characterize the decline types of business that was not favorably priced that you would want to get rid of anyways, or are you losing some of your better customers through this process?

I don't think we're losing our better customers. I think our larger customers are, you know, hanging with us and -- throughout this process. It's probably more smaller customers that we are seeing some drop-off in. We did see some drop-off in what I would call one-time or project-type of business throughout the course of the quarter. That was about half of the decline. And we know that that pipeline looks better for the remainder of the year. So I don't think we've lost significant customers. We probably were not as successful in bids earlier in the year, and that has produced some of the decline as well. So we think that with the new structure, we'll be able to make a lot of -- make a better showing in the bids going forward.

Okay, great. That's all I got. Thank you.

Keith Schoonmaker.

Thanks. I'd like to ask a trailing question. During the quarter, or maybe even this year, are you seeing evidence of customers bringing overseas operations back to the US or Mexico? And more generally, do you consider this near-sourcing the volume opportunity or a threat, or just the same volume in different [lanes]?

This is Dave. No, I -- we certainly are hearing a lot of discussion about it, and we certainly are seeing a fair amount of opportunity in Mexico. So, no, we do view it as a tremendous opportunity. We, of course, have a very good relationship with the Union Pacific, and they have great border connections all along the Mexico border. So there's a lot of opportunity. That business for us is up as a percentage basis, still very small, but no, some great opportunity on some of the near-sourcing as it occurs.

That's all. Thank you.

Matt Brooklier, Piper Jaffray.

Yes, thanks. I'm not sure the question had been asked yet, but can you talk about weather in the quarter and if it was in any way impactful?

Yes, weather was certainly a challenge operationally. I think we believe that the hurricane ended up costing us about 150 loads, something along those lines. So it wasn't material. I think the rails responded well in a very challenging environment, and we were, by and large, able to meet our customers' expectations despite I think one of the toughest weather periods that I can remember. So, it didn't help, but I don't think it hurt us too much.

Thanks.

And at this time, we have no further questions in queue. I would like to hand the call back to Mr. Dave Yeager for closing remarks.

Well, again, thank you for taking the time to join us with our third-quarter earnings call. As always, if you have any questions, please do feel free to contact Terri, Mark, or myself. Thank you.

Ladies and gentlemen, we appreciate your participation today's call. This does conclude the presentation. You may now disconnect. Have a great day.