Hub Group Inc (HUBG) 2012 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, our Chief Financial Officer, followed by an overall business discussion to be conducted by Dave Yeager, our CEO. The Company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, our 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 would like to introduce Terri Pizzuto.

Thanks, Keith, and thank you all for being with us this afternoon. We had a record third quarter and I'd like to highlight three points. First, truck brokerage fired on all cylinders. Second, gross margin as a percentage of sales held steady. And third, intermodal volume growth was solid.

Here are the key numbers for the third quarter. Hub Group's revenue increased 7%, to $805 million. Hub Group's diluted earnings per share was $0.50. EPS is up 9%, compared to an adjusted 2011 EPS. 2011 diluted earnings per share, excluding one-time costs related to the Mode integration and Hub truck brokerage restructuring, was $0.46.

Now I'll discuss details for the quarter, starting with the financial performance at the Hub segment. The Hub segment generated revenue of $619 million, which is a 10% increase over last year. Taking a closer look at Hub's business lines, intermodal revenue increased 11%. This change includes a 9% volume increase. 200 basis points of the volume increase came from Hub fleet containers sold to Mode agents. Our fastest growing customer segments were retail, which was up 14%, and consumer products which was up 9%. Prices, fuel and mix were all up slightly this quarter. Truck brokerage revenue was up 6% due to 13% more loads, partially offset by a 7% shorter length of haul. Logistics revenue was 14% higher than last year.

Hub's gross margin increased by $3.7 million, due to growth in truck brokerage and logistics. Truck brokerage gross margin increased $2.2 million year-over-year. Truck brokerage gross margin as a percentage of sales is up 180 basis points compared to last year. The increase in margin comes from more cost effective purchasing, as well as success in winning new business. We look for more good things to come from truck brokerage, since the new organization is just hitting its stride. Logistics gross margin is up $1.5 million, due to an improvement in yield, as well as an increase in business for both new and existing customers. Intermodal gross margin is flat, since volume growth, price increases, and savings from doing more of our own drayage, were offset by rail cost increases.

Hub's gross margin as a percentage of sales, was 10.9%. This margin percentage is the same as the first and second quarter of 2012, and it is down 40 basis points compared to last year's 11.3% margin. The driver of the decrease in the gross margin percentage is intermodal. While intermodal cost increases were about what we expected, the challenging and competitive market dynamics made it difficult to fully pass along the cost increases. As a result, intermodal yield was down 110 basis points compared to last year. Yield was up both year-over-year and sequentially, for logistics and truck brokerage. We expect the Hub segment gross margin percentage to be slightly lower in the fourth quarter.

Hub's costs and expenses were $41.9 million, compared to $38.7 million last year. Last year's cost included $335,000 of one-time expenses, related to truck brokerage restructuring. We had several claims settled this quarter, which resulted in claim expense being $1.5 million higher than normal. Higher IT costs also contributed to the increase in general and administrative expense. Finally, operating margin for the Hub segment was 4.1%.

Now I will discuss results for our Mode segment. Mode's revenue increased to $200 million. The revenue breaks down as $93 million in intermodal, $80 million in truck brokerage, and $27 million in logistics. Mode's intermodal business was up, while truck brokerage and logistics sales were down. Mode's gross margin increased $1.2 million over last year, due to growth in IBO business. Gross margin as a percentage of sales was 12.2%, compared to 11.7% last year. Mode continues to buy well. $700,000 of the increase in gross margin resulted from a positive adjustment to the bad debt reserve.

Mode's total cost and expenses decreased $2.1 million compared to last year. Mode had $800,000 of one-time costs in 2011, related to the integration. Salaries and employee benefits are down, in line with our cost-reduction plans. Operating margin for Mode was 2.5%. We expect operating margin in the fourth quarter to be between 1.5% and 2% at Mode.

Turning to headcount, we had 1,339 employees, excluding drivers, at the end of September. That is down 23 people compared to the end of June. Logistics and truck brokerage headcount is down compared to last quarter.

Now I will talk about 2012 full-year earnings guidance. We are comfortable that our diluted earnings per share will be within the current analysts' range of between $1.78 and $1.87, for this year. We think we will have 37.2 million weighted average diluted shares. We are estimating that our fourth quarter costs and expenses will range between $60 million and $62 million.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $80 million in cash and no debt. During the quarter, we spent $13.6 million on capital expenditures, bringing the year to date capital expenditures to $35 million. In the fourth quarter, we think we will spend between $20 million and $25 million on capital expenditures, primarily for containers and our new corporate headquarters.

To wrap it up for the financial section, we are confident that we are taking the right steps to navigate through this challenging pricing environment. And now you will hear from our CEO, Dave Yeager.

Great, thank you, Terri. Despite a relatively weak economic environment, each of our business segments did well in the third quarter, resulting in record net income of $18 million, an increase of 14% over last year. Our intermodal business had another solid quarter with volume up 9%. From a geographic perspective, our transcon interline, had the highest growth at over 13%, followed closely by local West at 9%. The intermodal market continues to grow, as shippers look for ways to save money and help the environment by converting from truck to intermodal. We continue to gain share, thanks to our 24,000 unit container fleet, nationwide drayage network and focused customer service. Overall, rail service was excellent in the third quarter, with both of our major partners providing consistent and reliable service. As a result, our fleet utilization remained strong at 13.7 days.

We are indeed seeing a peak season this Fall. As a result of peak, there are pockets of tightness in capacity, predominantly in California. Hub has received most of our 2,100 boxes we ordered for this calendar year, with about 200 due to hit the Los Angeles ports in the next several weeks. This will bring our fleet size to over 24,000 units. Once peak is over we intend to terminate 1,000 older aluminum containers. While we have not as yet finalized our container bid for next year, we will minimally replace the 1,000 containers that we intend to retire.

We continued to grow our drayage operations this quarter, increasing our volume of dray moves by 24% year-over-year. Comtrak handled 63% of Hub dray moves on record high intermodal volume. Given Hub's intermodal growth, it is doubtful that we will get to the 70% target we had set for the end of this year. That being said, we are very pleased with the pace of recruitment, that has allowed us to grow by another 40 drivers during the third quarter, bringing Comtrak's driver pool to close to 2,400 drivers. We continue to work diligently to mitigate our driver attrition, by maximizing productivity and minimizing empty miles. Overall, we remain confident that we are well on our way to achieving our ultimate goal for Comtrak to handle 85% of Hub's dray.

Since our last earnings call, our highway brokerage business has made significant progress. If you recall on January 1, of 2011 we changed the reporting structure of our truck brokerage operation. Don Maltby, who oversees our Unyson Logistics business, became the leader of both organizations. Bringing these two groups together under a single management team helps us design enhanced solutions, deliver better service, and develop a more meaningful customer relationship. Don and his team undertook some massive changes within brokerage. We went from 23 operating centers to 5. We turned over 70% of the headcount, and the operating model was dramatically changed to be focused on zone management. These changes have allowed us to better serve our clients, as well as to purchase capacity at a better price point.

As Terri indicated, our highway brokerage business posted a 6% revenue growth, while at the same time increasing volume and margin. We are currently seeing growth in all of our customer segments and across industries. Our brokerage operation is again growing, with existing clients while at the same time bringing new opportunities to the table. We believe this organization has turned the corner, although we are by no means declaring victory. A lot of work remains, but we believe the table has been set and that our truck brokerage operation is poised for growth.

Unyson continued its history of solid performance, delivering 14% revenue growth year-over-year. We have successfully renewed contracts with key existing customers, expanded our engagements with top accounts, and secured several new clients this quarter. The pipeline is robust and the value proposition more compelling than ever. We are very pleased to say that Unyson was again named as the top 3PL service provider by Inbound Logistics, and has received the number one ranking in every category with Logistics Management Magazine. We believe these are strong testimonials to the customer satisfaction and loyalty that Unyson continues to create.

Mode continued to benefit from an improved cost basis. Our agents have successfully enhanced market performance over the course of this quarter, by leveraging the Hub fleet, and Comtrak drayage operations. At the end of the quarter, we began implementation of our new technology platform, that will be rolled out to the 100 Mode offices over the next 12 months. This new technology will bring better information, and improved operating efficiencies for the Mode agent network.

In conclusion, while the general economic outlook remains somewhat uncertain, our ability to offer a diverse set of services contributed to another strong quarter for our Company. The hard work of improving Hub highway operations is now delivering solid results. Unyson Logistics continues to deliver strong growth, and our intermodal business continues to grow with record volumes this quarter. We are pleased with the momentum as we remain focused on better serving our customers. At this point in time we would like to open up the line to any questions you may have.

(Operator Instructions)

John Barnes, RBC Capital Markets.

Couple of things, number one, the improvement that you noted in your purchase transportation in the truck brokerage group, I'm curious as to how much of that you ascribe to initiatives that you put in place versus how much -- what percentage of that improvement you saw just as a result of lower truckload rates throughout the industry?

John, that is a really good question. It is really hard to break down the two of them. Certainly, right now, as we are in the middle of peak season, truck capacity is very loose. There is a lot of capacity out there, and not a whole lot of demand. So, certainly a part of it is the market itself. But we do believe also that our zone focus is really helping us with the pricing, and is opening up some opportunities for us. But I really don't know how we can split out the -- it's a combination of both, it's the changes we made internally as well as the market itself.

Okay very good, and then just as a follow-up, we'd had conversations back at our conference where there were still some speculation as to what was going to happen with the East Coast port labor situation. And your Company made some comments then about potentially seeing a little bit of an uptick in business potentially as a result of that. Maybe some surcharges on equipment and that type of thing. Did you see any of that before they were able to reach some extension of the contract? Did you see any pre shipping or anything that might have influenced volumes in the quarter at all?

Hello, John, this is Mark. I would say that there were a few customers that took some actions to get out ahead of any potential strike on the East Coast, but I would not say that it had any significant impact on overall volume.

Alright, very good. Nice quarter thanks for your time.

Alex Brand, SunTrust Robinson Humphrey.

Let me start with the volume growth. Dave I think I heard you say transcon and local West did you say what local East volume did?

I did not, but go ahead Terri.

Up 5%, Alex.

And is that still just not growing as fast as we would think because of the tough comp issue and when do you lap that?

Well, it is partially the tough comp I believe, but we did lose some business in bids this past year. It was a very aggressive pricing market. So, that is certainly a major point. We do still continue to see diversion from truck to intermodal. It is just that we had lost a few key lanes that set us back a bit. But again we see the local East as a tremendous opportunity for us to grow share and certainly our clients at this point in time are still inclined towards conversion from truck to intermodal.

And Dave you said that you finally started seeing some tightness on the West Coast in containers, is it normal at this point for this time of year or it still hasn't quite gotten to where it normally is?

No, it should be very tight right now. This is the peak of peak if you will. So, realistically, from the middle of September through the end of October should be the time when capacity becomes very constrained. And again we are very pleased that we have been able to service all of our commitments that we've made to our clients, as far as the surge capacity. But, yes, this is the time that you would see peak and I would say if anything it is probably right on target with how we foresaw it but it may be a little more muted for other people.

Okay and in light of that, capacity has been pretty loose most of the year that has obviously had an impact on spot pricing this year and your intermodal yield down 110 basis points. How do you think about -- as you head into 2013 where is capacity going to be from an industry perspective? And what kind of pricing power do you need to get that gross margin impact back up to where you can again be talking about yields going back up a little bit?

Do you want to handle Mark?

Sure, I can do that. Yes, Alex, I think certainly with the significant additions in equipment that we saw, that undoubtedly had an impact on pricing power for everyone. We have been in a fluid equipment situation, but there are clearly competitors who have chosen to attempt to fill their boxes, at times, sacrificing price in the process. So, I think that the industry though has posted good solid growth this year, and has grown into that capacity addition. I don't think we will see significant capacity adds next year. So, we do think that we will see a little bit of improvement in the pricing environment, though, absent a significant uptick in the economy, it is likely to continue to be challenging.

And just one last thing then on this topic. So, if pricing power is challenged again for you guys and that is not how you can get your yield going back up, is there an ability to scale up the network and just have your -- your network scale be how you drive the efficiencies and not be as dependent on price?

Well, fortunately, one of the things we do pretty effectively Alex is we have been working internally on removing cost whether it is doing a higher percentage of our own drays, whether it is spinning our containers quicker, whether it is reducing our empty miles. So we are doing many of those things, and it just so happens that this past year the savings that we -- the operating efficiencies we've been able to bring to bear, plus our customer price increases, were less than what our railroad increases were. And I would suggest that next year again we will see our rail partners will be looking for price increase, but we do believe -- we will be very focused on passing that on, and while at the same time working on our internal efficiencies.

Thanks for the time guys I appreciate it.

Brad Delco, Stephens Inc.

Dave, maybe just to focus on intermodal a little bit more. I guess 90 days ago we were talking about seeing some margin expansion in the Hub legacy business, and I was just trying to get your take at what went well for you. It sounds like truck brokerage did, versus what really happened on the margin side with intermodal, and how much of a surprise was maybe some railroad increases that you got?

Yes, Brad, I don't think that the rail rate increases were a surprise. I would say that if you look at the intermodal pricing environment it was a little bit surprisingly aggressive. If you looked at the Cass Intermodal index you would have seen that it really flattened out. In fact, it actually went negative for some time period. So I would say that, that was a little bit surprising. At the same time we saw great success in transcon, we saw good solid success in local West, brought on some new accounts, and still managed to grow volume ahead of the industry. So, we feel like it was successful albeit we were not able to accomplish our primary goal, which was to reestablish some of the ground that we had given away due to market pressures. So, I think we got through the bids well, albeit we tested the market several times and found that the market just wasn't as receptive as any of us would've liked.

Got you, and Terri did you mention what the length of haul was on your intermodal business?

No, but it is 1,625 miles, so it was actually up slightly compared to Q3 of last year.

Got you, and then maybe last question. It looked like I guess relative to our expectation, Mode with the big outperformer and I think I heard a comment about some one-time costs their, maybe associated with reversing some bad debt. So is that one-time in nature are you guys doing a better job with collections? Is this something that could be more sustainable going forward? I guess how should we think about Mode's performance in the 4Q and then next year?

Yes, you are right, Brad. We called out a $700,000 positive adjustment to the bad debt reserve which improved gross margin this quarter. And you are right, it is because we collected more than we basically thought we would, which is good. But that probably will not recur in future quarters. It is just because we revised our collection percentage to be higher. And that is why operating margin was pretty high this quarter, which was 2.5% and gross margin as a percent of sales was 12.2%. We think that for the fourth quarter, the gross margin as a percent of sales will be closer to what it was in Q1 and Q2, and that the operating margin will be between 1.5% and 2%. And then for 2013, we are still working on our budget for that so we really haven't come up with that number, yet.

Okay, that is good color. And I guess final question, intermodal volume is up high single digits consistent with some of your commentary last quarter. Is that something we should continue to expect? I guess given the peak season what you're seeing so far? Do we think high single digit volumes is the norm at this point for 4Q?

Certainly, our predictive capabilities are somewhat limited, but certainly for the remainder of this year, at least our current run rate is in the high single digits.

Okay, well, great guys. Thanks of the time and congrats on the quarter.

Kevin Sterling, BB&T Capital Markets.

I think Terri, you had mentioned the Hub gross margin being down in 4Q. Is that on a sequential basis or a year-over-year basis?

That is on a sequential basis.

Okay.

So if you look at it, you will see that historically the gross margin percentage for the Hub segment does go down in the fourth quarter compared to the third quarter. And also there may not be as much opportunity for truck brokerage project work in the fourth quarter due to the economic environment which also impacts that number.

Right, right. And as we think about intermodal yield too in the fourth quarter, should we expect that to fall in the fourth quarter on a year-over-year basis like we saw in the third quarter?

We haven't gotten to that granularity on the margin percentages by service line for the fourth quarter. But overall it will be down slightly from the 10.9% that we were at in the third quarter.

Okay. And, Mark, when you talked about your customers not being receptive to price increases, do you think that is primarily because of squirrely intermodal pricing by your competitors, or is it truckload pricing, or maybe it is a combination of both?

I think it is a combination of both. I think that as people are looking at flat truckload pricing, knowing what is going on with the cost structure of the over the road provider, they find it hard to accept more significant increases from the intermodal product. At the same time, in a capacity environment in which people have some capacity to negotiate with, a lot of freight goes to the most irrational player in the intermodal game. So that squirrely pricing isn't just a paper rate, it is something that actually moves freight. So I would say it's a combination of the two factors.

Okay, thank you. And then on Unyson and logistics you had some very nice revenue growth there. Is that primarily attributable to new business wins or maybe it is a combination of new business wins and expansion with existing customers? How should we think about that?

It is the latter. It is a combination of new business and growth in business with existing customers as well as improvement in yield.

Okay that is all I had. Thanks so much for your time this evening.

Michael Weinz, JPMorgan.

I guess the first question I have is simple. I might have missed it, but did you mention the volume growth for brokerage in the quarter?

Yes, it was up 13%.

Yes, that is very strong. How much of that is due to easy comparison and how should we think about that going forward?

We certainly did have a lowball. We like to think of it as tremendous progress from all the hard work that we've done. There was no question it had a low comp, but at the same point in time, it is good to see it begin to grow again, to gain that momentum. I think the focus of the organization now is very clear and so we look for them to continue to grow at a good pace.

Okay so but it seems like it would be reasonable to think it would be decelerating in the fourth quarter because of the comp issue?

Yes, our truck brokerage volume declined in the third quarter 2011. It was down 12%. So, you're right. And then Q4 of last year we were down 3% in volume in truck brokerage, so the comp gets harder in Q4.

Okay, that is very helpful. And then on the in-house drayage. I think I missed the number but you'd indicated you're not going to make it to 70% by the end of the year?

Right, and partially that is a result of the overall growth that we have experienced with our intermodal product. It grew 24% year-over-year as far as number of drays hauled, and yet it is relatively flat versus the second quarter just because of our 9% volume growth in intermodal.

Yes.

So yes we do believe that we will not make that 70% target this year.

And what was the percentage of this quarter?

63%.

63%, okay so it did go down a little bit sequentially. Okay and then on the SG&A side you said that there were higher IT costs that contributed to the spike in SG&A costs during the quarter. What else was there? I think there was another component?

We had settled a few claims and so claim expense was $1.5 million higher than normal.

So presumably that wouldn't recur in fourth quarter?

Correct.

Correct.

Okay. And then I guess some broader questions. It is really hard to ask this because it is more of a chicken and egg question, which one came first. But if we think about the Crescent corridor, I guess there is something like 34 new lanes opening up. What do customers want to see first, because you kind of need volume to show that the service works, but you also need the service to get the volume, right? So how do you go about trying to get customers to sign on, and what does that path look like over the next year or two?

Yes, there is no question that is definitely a chicken and egg, right? Hopefully, I think that the Norfolk Southern has built up enough credibility in the marketplace for the customer to feel comfortable that they are going to live up to the commitments that they make. I think it is one of the reasons that Norfolk Southern hasn't been real vocal about what the service levels will be in these lanes until they really have a strong commitment that they are going to be able to deliver on that. So I think their caution in the long run is good, because we won't have disappointed customers. In the short run it has been a little bit more of a challenge to prepare folks for these new services and try to garner excitement. But, most folks I think believe in intermodal at this point and judging by the performance oft Norfolk Southern over the course of last several years, they have every reason to believe they're going to hit those commitments.

Okay, so if you are comfortable that Norfolk can create a very strong product here, at what point do you start buying the containers? Do you lock in the customers ahead of time, or do you primarily leverage the rail fleets before that business at first and then add capacity later?

Well, I think that is less of a chicken and the egg because we do have a pretty much direct control over the amount of capacity that we may need in as much as we can pretty well forecast what some of our increases -- volume should be. So I think for that it is a question of sitting down with our sales and marketing team, determining where they see demand going, and then creating a build accordingly.

Okay, that's helpful. And the last question I have for you is with respect to Mode. You had referenced this new technology push that you're going to be implemented over the next couple of quarters. What is the endgame here? Is it for scalability of your existing headcount, or is it focused on cost savings, or improving asset turns? How should we think about what the effect this is going to have over time?

Yes, we are bringing the Mode agents up onto our system. A version of our system, and the idea here really rather than reducing cost, is to give them better visibility into the marketplace. So enable them to really see -- to have the advantages of Hub's purchasing power in the marketplace to better understand the highway market dynamics and better understand what their options are from an intermodal perspective, so that they can be a more informed purchaser of transportation. So, it is really to help them do their jobs better.

Can that have a positive impact on how they handle pricing with their customers?

That is the whole idea.

Okay. Great, that is very helpful. Thanks for the time.

Todd Fowler, KeyBanc Capital Markets.

Dave, on the intermodal gross margins, when do you think that you get another swing at the plate as far as looking at the pricing either with your rail partner or with your customers? And I think it probably could work both ways. If there is more competition in the marketplace on the pricing side, you're locked into the first quarter where gross margins you shouldn't see them slip sequentially as you move throughout the first part of the year. Or is there some risk that the rail -- that the competitive pricing comes to manifest itself a little bit more in the first half of next year?

Well, I think most of our business right now has been repriced and so we are going to live with that and we will see bids begin to come out and repricings in the first quarter that actually probably won't really be effective until the middle the second quarter. So, we will be focusing on that. There will be a lot of internal discussion and analysis about where we think -- what pricing we can get and then of course a completely separate issue is dealing with our rail partners, who obviously have invested tremendously into the intermodal product, and are looking for an adequate return. So, there are two separate issues, so we will have -- we will have a lot more clarity, come the middle of the second quarter minimally. But certainly our analysis and internal discussions will be before then.

But I guess I mean some of the comments that you have about the market being a little bit more competitive on price. It feels like that you're locked in and I don't think a big percent of your book is doing spot business. So, really the gross margins as you get into the first quarter it is really as you to start to think about the second quarter and the mid part of 2013, when there could be some variability in the margins. Is that the right way to think about it I guess?

That is the right way to think about it.

Okay I mean as far as your relationship with your main rail partner at this point, thinking about your volume growth and where they have been, obviously you are a big contributor to the volumes. What do you bring to the table? How does that help you with your position in working with them, and thinking about your cost structure, and some of the things that you have from a negotiating standpoint?

Well we don't get into publicly a lot of our negotiations and where that leads, but our Eastern rail partner, the Norfolk Southern, as well as our western partner the Union Pacific, we have ongoing dialogue with them. I think an awful lot of what we focus on, certainly it is the price we pay to the rail, but at the same point it is on internal efficiencies that we can garner and that we can actually control and drive. Because our view is that intermodal will be won or lost on the street ultimately. And so we've gotten a lot better. We have room for improvement, and we will continue to focus on that.

Okay got it and then just last one I have at this point, with the turnaround in brokerage, I guess I'm curious and you went through a couple of different things and obviously I know there's been a lot of work for a couple of quarters, or several quarters at this point. If you had to think about outside of the external environment maybe like the one or two things that really helped you turn the corner here, and then how do we think about that business going forward from a -- the ability to grow both the top line as well is to improve on the cost structure? Thanks.

Sure, well I think that obviously brokerage was a difficult and painful process. Any time you go from 23 operating centers down to three main centers and three support centers, it is challenging, and we had a lot of attrition on the front lines to make that happen. But I think that aligning Unyson and brokerage under a single management team, bringing new blood and new processes and having the willingness to go out there and really completely re-engineer the thing, while it was painful, definitely in the long run produces a better product. And now, what is exciting to see is that the salespeople have embraced that new product and are selling it aggressively, because they believe in it. We have a better ability to execute now with the team that we have in place and that -- that creates the confidence in the sales group that they feel good about selling the Hub highway product. And I think that, that is something that should enable us and position us to reestablish the kind of consistent double-digit growth that we saw out of this product for many years.

Good, that was exactly going to be my follow-up. If you think about the business longer-term, you can get back to the historical growth rate with the changes that you've put into place?

Definitely.

Okay, thanks again for the time I appreciate it.

Anthony Gallo, Wells Fargo Securities, LLC.

Could you tell us what the mix within the brokerage business is now between contractual versus the spot and how you see that evolving going forward?

It is about 80% contractual and 20% spot. And we think going forward it will probably stay with that mix of business.

What you think it was before the restructuring was it more 50%, 50%?

It was like 60%, 40%.

Okay somewhat unrelated question. The transcontinental business where you had the growth, can you separate what portion of that growth was truck conversion versus just growth with customers or new traditional intermodal customers?

We really can't with any exactness. That is not a data element that we traditionally captured at the point of pricing, which is where we would need to be capturing it. At one point a lot of it ran truck, but probably not in the case of transcontinental. For the most part, most of that growth would be traditional intermodal freight as opposed to conversion. Although we were successful in finding some transcon that was in fact conversion freight, so some element of it but certainly not the majority.

That make sense, I was just trying to confirm.

Our second largest area Anthony, was local West and I do think that it is a higher percentage of that then in fact is freshly minted conversion freight.

Right.

That make sense. Thank you.

William Greene, Morgan Stanley.

I just wanted to come back to the growth rate on intermodal. So, high single-digit growth rates but you weren't able to keep the pricing as good I guess as what the rails have been able to push through. Do you think you would be able to push harder on price if you grew a little bit slower, or would that not be the right way to think about the relationship?

We will -- it is a very fine line and probably more art than science with pricing and making sure that you're market competitive and can actually gain some share while at the same point in time making sure that your costs stay line. So, in theory, yes, you could, in fact, slowdown growth and might marginally increase price, but we don't think that -- from what we saw within the bids, we felt as though our strategy was working, and it was the appropriate way to go.

So when you think about a path back towards your former peak margins at Hub, what sort of the milestones that get us there? What are the things -- what are the levers that you pull on?

An incredibly tight equipment market would be the first thing. And we have not seen that and probably will not see that in 2013, would be my guess. But certainly a tight capacity market is the very first step towards allowing for larger price increases.

Do you think there is anything on either the cost side or on the Hub specific side that you can do to get their, or is it you just have to get the macro better?

Well, no, we are very focused as I said before. We are very focused on enhancing our drayage, enhancing our street operations, doing more of our own street operations, and that drives an awful lot of cost savings. That coupled with our equipment, our equipment turns, simple things of acquiring containers for cash versus leasing, all these things contribute towards us enhancing our margins. And so, we are -- unfortunately there is no single light switch that you can just turn on, it just takes time and a lot of different levers to pull in order to get to the promised land of higher margins.

Yes, when we look at -- when we look at intermodal growth -- I know intermodal has some secular elements to it, and so I know we all try to think about same-store sales and this sort of thing, but as best you can, if you tried to look at what you are seeing so far in October in the same-store sales concept, or what not, do you see any evidence of a pickup in your numbers or you just don't have that kind of visibility?

Pickup in our volume?

I don't mean specifically volumes, I more meant in the context of what is happening from an economic standpoint? Can you see anything in the marketplace that suggests October is better for the intermodal marketplace relative to September?

I would say at this point in time it looks like you would expect a traditional peak. I think October is going to be strong as was September, but I don't think we're going to see anything extraordinary. And if you think about it, most of the imports coming in from the Far East they are on the water. They have been on the water for a week. I would say October will be good, but we're not going to suddenly see anything break out.

Yes, okay. And then just last question when you think about the business and the customers that you have, do you have any sort of estimate in terms of what percentage of the business might be related to the housing market?

Not a lot of ours is, we would guess less than 5%, really.

Okay, okay great thank you for the time.

Scott Group, Wolfe Trahan & Co.

So just one quick thing first, the growth that you're seeing so far in October. Is transcon still the best within the different regions?

Yes.

Okay, that is helpful. So, Terri, you talked about expectation for gross yields to fall a little bit sequentially from third quarter to fourth quarter, can you give us a sense -- if I look last year we saw a big drop off from third to fourth, and if I remember it sounds like -- if I remember, you guys got squeezed unexpectedly from some rail increases. Are you expecting anything to that magnitude in fourth quarter this year, or is it going to be more of a normal 10, 20 bit drop from third to fourth that you're thinking?

A normal 10, 20 bit drop. You're right, last year in Q3 we were at 11.3% gross margin. In Q4 we were at 10.6%. So more than a couple -- more than a little bit. We think it'll be down slightly, but not to that magnitude.

So what happened in fourth quarter last year where the rails unexpectedly put in some rate increases? And why is the environment different? Why do you feel that the environment is different right now, from their perspective?

We got another round of price increases in during the first half of the year, and so that is helping the margins this year. And there is a different cost increase this year than there was last year.

So you feel comfortable that there is not another one coming in fourth quarter?

Right.

Okay, and maybe at a higher level when we think about the intermodal yields, if you go back in your history in periods when the pricing that you are getting from your customers isn't as good as you wanted, and you are getting squeezed from the rail increases going up, how does it -- how do the rails typically react the next year? Are they receptive to the fact that you got squeezed and maybe they push a little bit less hard in the next year? I'm just thinking about in '13 is there an opportunity for some more modest increases from the rails or do they just go ahead every year with increases?

Well, I think it is clear that the rails are definitely looking to produce a return on the investment that they are making. So, we are anticipating that there will be increases associated with next year, just as there were this year despite a challenging environment. So, I don't think that we are anticipating that they are backing off in any measurable way.

Mark or Dave do you ever think about adding rails as service providers so you can play one versus the other or do you feel like that is not the right strategy?

We really think that our strategy of focusing our fleet and our business on a single carrier in the East and a single carrier in the West is the proper way to go. I think that you build the relationship. You continue to focus on expanding the market jointly. As well as some of the efficiencies of fleet operations, et cetera, are far superior when you have a sole underlying rail supplier. So, we really think this is the proper focus and so we certainly don't see any reason to change that at this point.

Okay and Dave, you talked about for next year in boxes doing at least 1,000, so I just want to make sure I understand. Are you saying at least 1,000 and maybe more or your thought at this point is just the 1,000 for replacement?

Minimally we will maintain the fleet at 24,000 units. So we're retiring 1,000 aluminum boxes so minimally 1,000. We need to sit down with our marketing and sales people, look at where we see the demand trends going, and make a decision about how many additional boxes we might have built.

If all you do is maintain the fleet, can you get double-digit growth again next year in volume or should we think be thinking closer to 5% or so?

We certainly could. We are very fortunate with our model and with our partners, the Norfolk Southern and Union Pacific, that we have the EMP product which is readily accessible. So, we actually could grow while not adding boxes if that was the choice we made.

Okay and then last thing for me if I can. Can you talk about the relationship today between Mode and the Hub brokerage business and where they compete and when do they work together if at all? It feels like so brokerage had a good volume quarter and Mode on the brokerage side feels like it didn't have as good a volume quarter. I just want to understand how they interact in the market with each other?

Sure that is a good question Scott, and the honest answer to that is they don't really work together very much right now at this point. And they don't benefit from the significant amount of purchasing that they are each participating in, in the marketplace. It is like making french fries and potato chips. We both use a lot of potatoes and what we want to be able to do and one of the reasons we are bringing them up on our system, is because we can each benefit from our mutual knowledge of the market and where the carrier base is and what we should be paying for transportation and what we should be charging for transportation. So there is a real opportunity for those two groups to work together, but that currently is not the case as of yet.

Okay, that is helpful. Thanks a lot, guys. Appreciate it.

Jeff Kauffman, Sterne, Agee & Leach, Inc.

I would just like to follow up on the brokerage question that was just asked. How much of the improvement and you kind of alluded that it was an easy comp on the Hub side. But how much of the improvement we see is the market for truck brokerage actually improving versus the organization improving?

Well I think certainly in terms of our ability to purchase better, there is no doubt that was facilitated by a softer market. That is always an opportunity for a truck brokerage, only if they are purchasing well, and I think in this case we improved our ability to purchase. I don't think that the market helped us grow volumes by 13%. And even though that was over an easy comp, that was still strong by all accounts still strong high single-digit kind of growth even though aided by any easy comps. So I would say that on the purchasing side, the market certainly helped us. On the volume side execution helped us.

Alright, so on the Mode side were they seeing the same trends on the purchasing or is there a structural difference between the way Mode's brokerage is set up and Hub's brokerage is set up? You were talking about the 80, 20 contract versus spot split earlier?

I would say that Mode realized some benefits from an ability to purchase at a better purchase point, certainly.

So you would argue that Mode volume was more indicative of the market, but both organizations benefited from better purchasing?

Yes, I think that's probably fair to say.

Second question this is just a clarification. My understanding on I guess what I would call unusual timing issues, would be the $1.5 million in extra claims expense that you mentioned this quarter, offset to a small degree by the $700,000 in a one-time adjustment to bad debt, but we don't see a forward benefit on that, correct?

Yes, that is exactly right Jeff.

Okay, all my other questions have been answered so I'm good. Thanks guys.

(Operator Instructions)

Ben Hartford, Robert W. Baird & Company, Inc.

Mark, could you provide a number of the number of productive or active agents that you had in Mode in the third quarter, and then compare that to the second quarter, and then I guess just envelop it with what is the recruiting pipeline like, now that you've absorbed Mode and you can focus on integrating it here with the system as the next step? And can you talk about how that agent pipeline is baking in now that you have it under control?

Sure, we had 93 IBOs which are independent business owners. That is the same number that we had in the second quarter. So, we didn't add any IBOs in the course of the quarter. One other thing, we are in the process of the systems change and so realistically for a larger agent to come on board just prior to our launch of the new system probably wasn't the smartest thing. So that pipeline has been put on hold just a little bit. In terms of sales agents, I think we added three new sales agents in the quarter. So, I would say that, that was a little bit slow from a pipeline perspective, but largely attributable to the systems initiative and we look to get that going again. If not the fourth quarter, certainly the first half of next year.

And then once you get the system installed now that you've got that in front of you, how should we think about top line growth in Mode relative to the Hub business? Should they be comparable? Should run rates be comparable at some point in time and I guess if so when should we expect that?

I don't know that we've ever thought that Mode would grow as fast as Hub. We don't have nearly as much control over that growth rate there as the Mode agent controls the price and really controls their appetite for expansion. So I think it can be a good solid growing company, but it's probably not going to grow as fast as Hub.

And I guess to drive the growth then is it more in your control to attract agents as opposed to push on the string of the individual agents, is that how we should think about growth in revenue in Mode?

I think that is absolutely right. We have to be able to attract new agents, so we have to have an attractive product for them to sell and the other thing we have to do is help our existing agents grow. And that is one of the real drivers behind the whole systems initiative.

Okay, that is good. The 85% target in Comtrak, what is a reasonable timeline to be thinking about when you can get that in a reasonable stable growth environment? When do you think you can get to that 85% threshold at the earliest?

Well, hopefully, we can continue to grow our intermodal business at a very rapid pace, but probably two years in that range would be a good goal.

Okay, and then one last question more conceptual, but building on the pricing discussion within intermodal, you've got some -- a little bit of sloppiness in the truck market here in the third quarter, and you're doing what you can in terms of restraining your container fleet growth next year. But this old rule of thumb about a 10% to 15% discount intermodal relative to truck, to what degree can that discount narrow at all as you guys in the industry prove out the service component to intermodal versus just being dictated by what core contractual truckload rate is growing at on an annualized basis, and therefore what it is giving you?

Well, I would say, Ben, that in a slightly more constrained market, it would be simpler to begin to shrink the difference between truck and intermodal. And I do think that over a period of time, that we will be able to in fact accomplish that. One other thing, your comment initially as far as us constraining the growth of our fleet for next year, that may -- that has yet to be decided. We are definitely going to look at and analyze how much growth we see and make a decision on fleet expansion from that. So, that is not a forgone conclusion that the fleet will not grow next year.

Okay that if helpful. Thanks for the time.

And this will end the Q&A portion of our call, I would like to turn it back over to Mr. Dave Yeager.

Great, well thank you again for taking the time to join us for our third quarter conference call. As always, if you have any additional questions or comments, please do feel free to contact Terri, Mark, or I.

Ladies and gentlemen that will conclude today's conference. Thank you very much for joining us and you may now disconnect. Everyone, have a great day.