Hub Group Inc (HUBG) 2013 Q3 法說會逐字稿

Hello and welcome to the Hub Group, Incorporated third quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question.

Any forward-looking statements made during the course of the call represent our best good faith judgment as to what might happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project. Actual results could differ materially from those projected in these forward-looking statements.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Yeager, CEO for Hub Group. You may now begin.

Welcome and thank you for joining us today.

Earlier, we released earnings of $0.50 per share, which is the same as last year's third quarter. During the quarter, we faced some significant headwinds in both our intermodal and brokerage lines of business.

On the intermodal side, it's no secret that it has been a challenging pricing environment. While we were able to secure some modest increases, they were lower than budgeted. In addition, we experienced a late start for peak with unfavorable geographic mix, including soft demand off the West Coast.

On the truck brokerage side, we saw less new business than expected due to the soft market and intense competition from asset-based carriers. Additionally, we faced unfavorable business mix due to a decline in demand for high value-added services.

Our other lines of business performed well this quarter. Unyson posted outstanding growth of 42% as we on-boarded several new customers. Additionally, Mode grew 9% while continuing to expand its agent network.

And with that, I would like to turn it over to Mark to discuss the details of our quarter by business line.

Thanks, and good afternoon, everyone. As Dave mentioned, we faced some challenges in the Intermodal and truck brokerage divisions this quarter, where we struggled with positive yet less-than-anticipated Intermodal price increases and brokerage volume deceleration.

We saw a reacceleration of Intermodal volume with mid-single-digit growth against very tough comparables. Mode Transportation performed above expectations, growing Intermodal, truck brokerage and logistics. Unyson posted yet another quarter of exceptional growth. Comtrak also continued to expand, adding more drivers and terminals and handling more loads than ever.

Focusing on each business line in more detail, hub Intermodal volume grew 5%. Once again, local West was our fastest-growing region with volume up 11% for the quarter. Local East volume bounced back into positive territory, increasing 6%, while the trans-con business declined 1%. Volume out of Southern California has been slightly positive but slower than anticipated. Hub's big-box direct volume was up 7%.

Overall, combined Hub and Mode Intermodal volume was up 8%, matching growth trends in the domestic intermodal industry.

Thus far we have received [3300] (corrected by company after the call) of the 4029 containers that we ordered this year. The remainder will be delivered in the next few weeks. We expect to have a fleet of 26,000 containers by year end. Despite an influx of additional capacity during the quarter and a slight decline in rail service, fleet utilization improved to 13.6 days from 13.7 days last year.

Comtrak added nine drivers for the quarter, bringing our total driver count to 2695. Since the beginning of the year, we have added 221 drivers. As planned, we opened two new Comtrak terminals this quarter, in Portland, Oregon and Kalamazoo, Michigan, and plan to open Salt Lake City by the end of the year.

Comtrak handled 66% of Hub's Intermodal freight. They handled 18% more loads for Mode Transportation and 42% more regional highway moves this quarter. Although higher than normal attrition produced relatively modest driver growth, Comtrak grew overall volume by 11% for the quarter.

Our truck brokerage division grew volume 4% this quarter with revenue up slightly on a year-over-year basis. Consumer products grew 8% and retail grew 3% while durables declined 6%. The bid environment has been highly competitive as asset-based carriers continue to price aggressively. We also saw a decline in average length of haul, a slowdown in demand for high value-added services and very little load board activity.

On a brighter note, Unyson Logistics revenue grew an outstanding 42% year over year. Fueling this growth was the successful implementation of accounts that were on-boarded during the second quarter. We also maintain a healthy pipeline and expect the growth to continue. Unyson is well on its way to becoming a $500 million 3PL in 2014.

Mode Transportation produced top-line growth of 9% in the third quarter and delivered operating income growth of $900,000. All services offered by Mode Transportation exhibited growth in the quarter, led by LTL with 19% revenue growth and Intermodal with 16% volume growth. This is the third quarter in a row of double-digit Intermodal volume growth for Mode. During the quarter, Mode added two new IBOs and four new sales agents to the network, reflecting increased strength in the recruiting pipeline.

This wraps up my section. I am now going to turn the call over to Terri for financial highlights.

Thanks, Mark and hello, everyone. As usual, I would like to highlight three points.

First, because of the challenging Intermodal pricing environment, we weren't able to increase Intermodal prices as much as we expected. Second, Logistics was our bright spot with 42% revenue growth. Third, operating income increased $1 million over last year, led by 18% growth at Mode.

Here are the key numbers for the third quarter. Hub Group's revenue increased 10% to $883 million. Hub Group's diluted earnings per share was $0.50 this year, which is the same as last year.

Now I will talk about details for the quarter, starting with the financial performance of the hub segment. The hub segment generated revenue of $679 million, which is a 10% increase over last year.

Let's take a closer look at Hub's business lines. Intermodal revenue increased 5%. This change includes a 5% increase in loads. Price was up, but was offset by the impact of lower fuel and unfavorable mix. Each of our three largest customer segments grew this quarter. Loads from retail customers were up 11%. Loads from durable customers were up 6%. And loads from consumer products customers were up 4%.

Truck brokerage revenue was up slightly. Truck brokerage handled 4% more loads. However, price, fuel and mix combined were down. The average length of haul for a truck brokerage shipment decreased 5% to 599 miles.

Logistics revenue growth accelerated to 42%, due to the continued growth with customers that we on-boarded in the second quarter.

Hub's gross margin was flat. Logistics' gross margin grew the most but was offset by a decline in truck brokerage gross margin. Intermodal gross margin was flat. Logistics' gross margin is up due to new customer growth. Truck brokerage gross margin is down because of unfavorable traffic mix, including growth in short-haul lanes. Intermodal margin was flat since volume and modest price increases were offset by higher transportation costs and unfavorable mix.

Hub's gross margin as a percentage of sales was 9.9%, or 100 basis points lower than the third quarter of 2012. The largest decline was in truck brokerage, which was down 200 basis points due to unfavorable mix, including less high value-added business as well as a very tough market. Logistics' gross margin as a percentage of sales was down 150 basis points because of the fee structure of our new business. Intermodal gross margin was down 50 basis points due mostly to a change in traffic mix. For example, the customer mix of outbound West Coast business was unfavorable.

Hub's costs and expenses were $42 million in 2013 and 2012. An increase in salaries was offset by a reduction in bonus expense.

Finally, operating margin for the hub segment was 3.7%, which was 40 basis points lower than last year's 4.1%.

Now I will talk about results for our Mode segment. Mode had a strong quarter with revenue of $217 million, which is up 9% over last year. The revenue breakdown is $102 million in Intermodal, which was up 10%; $82 million in truck brokerage, which was up 2%; and $33 million in logistics, which was up 22%.

Mode's gross margin increased $1.6 million year-over-year, due mostly to growth in Intermodal gross margin. Gross margin as a percentage of sales was 11.9% compared to 12.2% last year. Mode's total cost and expenses increased $700,000 compared to last year due to an increase in agent commission. Operating margin for Mode was 2.7%, or 20 basis points higher than last year's 2.5%.

Turning to headcount for Hub Group, we had 1413 employees excluding drivers at the end of September. That's down seven people compared to the end of June.

Now I will discuss what we expect for this year.

We estimate that our 2013 diluted earnings per share will be between $1.85 and $1.95. We think we will have 37 million weighted average diluted shares outstanding.

Our costs and expenses will probably range between $64 million and $66 million in the fourth quarter. We will spend about $1 million on a strategy project in the fourth quarter. The project will continue into the first half of 2014.

We are not certain how long or how strong peak season will be. As a result, our gross margin as a percentage of sales at the hub segment in the fourth quarter could range between 10% and 10.5%.

Our effective tax rate went up to 40% because of the change in the Pennsylvania income tax law. The effective tax rate in the fourth quarter will be about 38.5%.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $92 million in cash. For the first nine months of this year, we spent $66 million on capital expenditures. We will probably spend between $40 million and $50 million on capital expenditures in the fourth quarter, primarily for containers, our new headquarters and technology projects.

$13 million remains on our current share buyback authorization.

To wrap it up for the financial section, we held our own and believe that we will benefit from the opportunities that we have identified for improvement.

Dave, over to you for closing remarks.

Thank you, Terri. In conclusion, this has been a quarter with some strong headwinds. However, all of our business lines are consistently growing and we continue to provide the high level of service that our customers have come to expect.

With that, we will turn the call back over that to the operator to take your questions.

(Operator instructions) Ben Hartford, Baird.

Maybe just a little bit of context to what went on within Intermodal during -- there was a lot of discussion about mix. I'm trying to get an understanding of maybe some of the dynamics through the third quarter. It sounds like pricing was more challenging than expected, which is consistent with what we have been hearing. There has been some noise in terms of how strong or weak the third quarter was and what the fourth quarter looks like, and then even some chatter recently about some transloading activity that it sounds like has picked up.

I'm just wondering if you can provide a little bit of context of what is going on. What really was the pressure during the quarter within the intermodal segment? If you could just touch on that, that would be helpful.

Yes, there is no question that it was a challenging environment out there in the third quarter. We spend a lot of time trying to position our network for strong demand out of Southern California, in particular, and we did not see the kind of uptick, the kind of spiky uptick that we would traditionally see, particularly in the second half of the third quarter.

When we are thinking about our mix, we ended up handling a lot of freight that is not as compensatory as other types of freight. Not all freight is created equal, even within the same customer and sometimes even within the same geography.

So what we ended up seeing, I think, was softer demand than what we had anticipated out of Southern California and some other markets that are generally better opportunities to produce adequate margin. And that really continued throughout the third quarter. We saw some weeks that were solid and some weeks that were not nearly as solid. Aggregate demand was pretty good, as you saw. Our overall volume was up 5%, but the composition of that volume was just not as favorable.

As we have gone into the fourth quarter, we have seen some good weeks with upticks in demand off of the West Coast. One of those weeks, in fact, was a record volume week for Intermodal. At the same time, nobody is really quite sure just how long that uptick in demand will last. So that's really the big variable as we think about how are Intermodal will perform in the fourth quarter.

Okay. So if we think about gross margins within Intermodal, the pressure seems more to stem from the imbalance in the network because of the mismatching of freight as opposed to kind of, quote unquote, intermodal pricing dynamics. Is that fair?

I think, certainly, the pricing dynamics were challenging, there's no question. But we did get, we think, positive price. I know others have reported flat price. We think that our price in the aggregate was positive. We had some cost increases at the same time, but they were what we had anticipated. What we didn't anticipate, I think, was that we just wouldn't see the kind of uptick in demand out of some key markets.

Okay. The pressures to the brokerage growth in the segment -- I know in the release you had cited asset-based competition and we know the brokers (inaudible) generally are competitive. And there wasn't a lot of load board activity. Given the strong growth you are getting out of logistics and the assumption that some of that freight was going to make its way into the brokerage network, can you talk a little bit about what the disconnect was there? And as you guys march toward a $500 million 3PL in logistics in 2014, can we see some of that freight funnel into brokerage, and we could see accelerating growth within the truck brokerage segment in upcoming quarters as a result?

I don't know that it was really any disconnect. As a logistics provider, we look to get the optimal price for our clients. So at times, our brokerage operation can manage that. At times, it cannot. In today's environment, there is a plentiful supply of equipment for the asset-based carriers. And it's just very difficult. It's not constrained; there's not a surplus. Once again, it's that Goldilocks economy that is very difficult for a truck broker.

So I don't think there was any real disconnect between our truck brokerage operations and logistics. It's just a question of logistics being able to buy better for their clients.

Well, I think that's right. And in a lot of circumstances, the freight that comes to highway comes as a result of core carriers within the logistics program not covering that freight. And in this type of environment, and it's another reason why you don't see much activity on the load board, you just don't see that kind of what we would call spillover freight coming to our logistics arm.

In some ways that's a good thing because the customer is getting what they negotiated for and we are actually producing a better savings for them. But it's not producing volume for the brokerage arm.

Okay, that's helpful. Thanks, I will turn it over to someone else.

Michael Weinz, JPMorgan.

My first question -- I just wanted to make sure I understand this, because on the second quarter call you indicated that you had 70% of your pricing locked in for your customers. Did anything change with respect to how you were getting pricing for you, not necessarily the rail costs but direct pricing to customers? Did anything change after July, or was that still intact and it really just was isolated to the type of traffic you were moving?

Yes, I don't think anything really changed. I cannot say that we saw the pricing environment improve. Things remained competitive throughout the quarter, as they had been in the first half of the year. But really, what did change was the difference between what had been awarded and what actually, to date, has moved. And that mix has just not been as favorable.

What changed the most compared to our expectations was the customer mix, more than anything.

The mix within the customers.

Yes.

The mix within the customers?

Yes.

So we did see a fair amount of churn within our business, so a lot of business -- same customers, different types of business.

Right.

Okay, that makes sense. On the brokerage side, I was wondering if you can describe some of these high-value services that were lost. Are these gone temporarily, or are they permanently gone? How should we view that?

Think about them as marshaling capacity when it's needed most. So for some of those things, are work to help with disaster recovery. That's clearly a specialty that we have, and our highway group is very good at it. And that is something that, when you don't have a lot of disasters, which is a good thing for everyone but our highway group, you don't tend to recognize the rewards. It's also things that are more repetitive and maybe a little bit more predictable like special projects.

But what we have seen, which is a little concerning, is that while we are getting special project opportunities, they are not as large as they were. So holiday preparation work and special promotional work, those kinds of things just don't tend to be, right now in our world, at the same scale.

So we are hopeful that -- as the economy firms up and consumer confidence continues to build, we are hopeful that we see those get back to the kind of size that we saw a few years ago. But our experience right now is there aren't as many and they aren't as big.

Since you mentioned disaster recovery, did you have any benefit from some of the projects that might have been available from Hurricane Sandy last year in the Northeast?

We did.

Yes, we definitely did, and I think we talked about that. So that's a headwind that the brokerage group definitely faces.

Okay, that's fair. And just on the cost side, I wanted to make sure I think about this directly. Salaries and benefits was down sequentially because you had the bonus true-up. Is it fair to think that you are not going to have as big an impact in fourth quarter?

Yes, that's exactly right, Michael. We had about $2 million that you would say was out of period related to the first half of the year that was a bonus reversal. We won't have that recur in the fourth quarter.

Okay, and just one more question, actually, on Unyson. You've had such very strong growth throughout the year. How should we think about framing where fourth quarter could be? You are adding a lot of new customer contracts in there. Maybe some expire, go away or reduce. But how should we think about how to anchor that?

It should be similar growth to what we saw this quarter. It's doing pretty well and the comp actually gets -- it's not as bad in the fourth quarter as it was in the third quarter. So we probably can keep on a roll.

Sure. Well, I guess just looking at a 40%, roughly, growth year on year, you get to around $105 million, which is a material step down from $124 million in the third quarter.

Yes.

So does that seem reasonable? Can you have that kind of seasonality?

We can, yes.

Okay, that's very helpful, thank you.

Some seasonality, yes.

Kevin Sterling, BB&T Capital Markets.

Just touching on Intermodal here, do you think there is excess industry intermodal box capacity? How do look at industry capacity, given some of the challenges you are seeing?

Well, if you look at the number of boxes, there certainly -- this year and last year, there was no constraints whatsoever. You would see some geographic pockets that would intermittently have some constraints. But for the most part, the overall amount of boxes in the system is greater than what demand is. So yes, it's a very plentiful box supply at this point in time.

Okay, thanks, Dave. And then I'll just stick with Intermodal. When we think about the challenges for pricing, what do you need to see to get that turned around? Is it a matter of truckload pricing getting better or your competition finding religion, or maybe both? Or how should we think about that?

It's probably both. I think what you really -- you need to see truckload pricing getting its feet under it. They really have not been able to maintain any type of pricing discipline in the truckload sector because they are trying to protect their business and protect their drivers and keep them busy.

So when a customer has 80% truckload volume and they are not seeing increases, it's difficult for them to understand why their intermodal pricing should be going up. And they really haven't had to worry about capacity the last few years. So they have been able to really focus on price and have done a good job keeping the lid on pricing in both modes, there's no question.

So I think you probably need the truckload market to firm up. That probably is going to require an uptick in demand in order for that to happen. And then, certainly, it would be helpful if some of the larger players in the industry were not as focused on share growth and were more focused on pricing discipline. But obviously, that's not our decision.

Right, right. And I guess, too, with oil prices not getting too wacky, that doesn't help, either. Is that fair?

Well, I think that's right. I think that's certainly right. Folks are less alarmed, right, and probably less eager to do whatever it takes to make the conversion move over to intermodal as long as oil prices look relatively stable. But I will say that I think Intermodal domestic demand has continued to be solid, despite the relative sanity in the oil markets.

I do think a lot of it is just when a lot of large, progressive companies look at the overall driver demographics, the regulations, CSA, they see that in fact it's going to become more and more difficult to get trucks over time. They are not experiencing that right now, have not in the immediate past. So, again, pricing remains the focus. But I think a lot of our clients and a lot of the conversion we saw in local east this past quarter was directly related to clients thinking over the long term and knowing that intermodal is the proper course of action in order for them to secure the capacity.

Right, well that's all I had. Thanks so much for your time this afternoon.

Todd Fowler, KeyBanc Capital Markets.

This is Ryan on for Todd. First, I just wanted to go back to the gross margin guidance that you gave for the fourth quarter. It looks like there's a sequential improvement from where it was in the third quarter. I just wanted to maybe dive a little bit into the detail of what exactly would be driving that sequential improvement.

It would be -- historically, we have gotten a little more price in the fourth quarter than we have in the third quarter. So it would be that historical pattern due to seasonal adjustments.

So primarily, Terri, it's seasonal more than anything?

Yes, that's right.

Okay. That's my next question, is how when you look at the quarter and how the gross margins played out sequentially in the third quarter, just directionally did you see them stabilize at all or was the mix greater towards the latter part of the quarter? Just trying to get a sense of the sequential progression of margins excluding any seasonality within that.

They stayed fairly consistent, I would think, throughout the full quarter.

Yes, whereas I think what we would have hoped for was an uptick as you get into more of the holiday-related type of activity, and we did not see that.

Right.

Okay. And then, Mark, the comments about the West, the trans-con volumes being weak, I just wanted to make sure I understand. It sounds like it's more of a function of just overall market being soft than the competitive nature within that market. Is that correct?

I think that's right. I don't think we were losing share. Obviously, our retail growth was solid. It just wasn't retail growth off of the West Coast. So the folks that normally would be shipping quite a bit off of the West Coast just weren't quite as active.

So I think that this is just more of a broader industry reflection than a Company-specific issue, although we certainly did see a pretty aggressive trans-con pricing market as well. So undoubtedly, we turned away from some opportunities that might have otherwise turned that into a positive number.

Okay, yes, that's helpful. And then on Mode, a really nice quarter for you guys there. The margins were ahead of our expectations and getting closer to the mid to high end of that 2% type mark on the operating margins. Going into next year, I think you guys, at least near-term, had targeted that 2% level. Is closer to 3% a good way to be thinking about the operating margins in Mode? Or are we still maybe a little bit longer off from that?

It would probably be a little bit longer off from that 3%. You are right; we did really well this quarter at the 2.7%, which was higher than we expected, to be honest. And in the fourth quarter, it will probably be similar to what it was for fourth quarter last year at Mode. So maybe for the year, we end up at 2.3% for the year.

So to jump all the way from 2.3% to 3% in 2014 would be pretty quick. But probably in a couple of years we can get there.

And the last one I had, and I'll let someone else have it, on the buyback, the share buybacks, just trying to get a sense of what you guys are thinking at these levels and in terms of use of cash here going forward, with what you have left on the authorization. Is that something that certainly you guys would be thinking about utilizing here going forward?

We continue to look at the share buybacks. We do think that the best use of cash for us is to either through acquisitions or reinvesting it ourselves. So we are going to continue to look at those. We have this discussion at each and every Board meeting. We will continue to do so. So we will be discussing it later on this month and we will let you know at that point which way and which direction we are going in.

All right, thanks, guys.

Kelly Dougherty, Macquarie.

I just wanted to touch on intermodal mix a little bit more for fourth quarter and going forward. Do you think what happened in the third quarter was any kind of isolated event, or is it something that might persist going forward? There has just been changes with what your customers are doing, so should we start to think about this as maybe the base case?

It's hard for us to say, really, Kelly. Certainly, we hope that we see a more normalized peak season pattern as the fourth quarter develops. There's some reason to think that that's the case, but there's also some reason to be concerned, given some of the feedback particularly we have heard from some of the big-box retailers and some folks like that.

I don't think that this is anything that is permanent. I don't think this is a shift, for example, away from transloading or anything along those lines. If anything, we would anticipate that the longer-term trend favors transloading and that we will see more normalized patterns in the future as we have a healthier economy.

So as for this year, I don't know that we are on the brink of any type of significant economic recovery. So I'm not as optimistic as I am over long-term patterns. But the big question for fourth quarter is just how long demand continues at peak-type levels. And then we will probably go back into a more typical demand pattern after the holiday season winds down.

So I don't think there's a fundamental shift, though, that is occurring here. I think this is just more a little bit of a factor of some caution out of the consumer products and retail sectors.

I think, if you look over the last five years, that we may have had one normalized peak. They have all been just a little quirky, little off-center. Again, I think the economy just is not fully adjusted yet. It certainly is not growing at any rapid pace that we are seeing.

So I would suggest that it will get back to a more normalized peak when you do see a substantial amount of imports coming in at a pretty predictable time period. It's just 2013 did not play out to be that way, and hopefully 2014 can fall back into the normal patterns.

But you would say the shift that you saw is more an industry issue? It's not necessarily your customers may be moving different products with you and the higher value or the more profitable products of someone else?

No, I don't think that's the case at all. I think we kept share, certainly, with our customers. And I don't feel like they are adopting a supply chain strategy that's any different, other than the fact that they are very concerned about maintaining inventory levels and not getting caught with a lot of excess inventory. That continues to be a major theme that we hear from a lot of our customers.

Great. And then just one more from me -- going back to the question about capacity within the industry, I think on the second quarter, you guys announce that you are adding an incremental 1000 containers. How should we think about your expected utilization, given that maybe the demand hasn't been exactly as expected and kind of unclear of what it may be for the fourth quarter? Is there any kind of headwind or way to quantify how underutilization may or may not impact you in this coming quarter?

I think if you look at our adds over time, and I think this is a good example is what we did in the third quarter, we actually did improve by 10 basis points despite the fact that we have a larger fleet. And so we are very conservative in the amount of box adds we have. We feel very certain we're going to have enough business to, in fact, fill them and keep them moving so that we don't have idle assets. And again, I think that the best predictor of that is what we've done in the past.

Great, thanks very much, guys.

Scott Group, Wolfe Research.

Good afternoon, everyone. So just in terms of the guidance again, so it's a really wide range. I understand some of the uncertainty around peak season, but I feel like we never know when peak season is going to end each year. Can you maybe give some thoughts on what's it going to take to get to the high end of the range, what's it going to take to get to the low end of the range; and if you have any feel based on what you know about peak right now and directionally which way you are tracking were trending within the quarter?

Like Mark said, Scott, it's hard to predict exactly which of our customers are going to be up and down this quarter. Peak has been slower than we expected. It didn't start as early as we thought it would. Demand hasn't been that great. We haven't seen the surges that we've seen in previous years. So that's why we have a wider range there from the 10% to the 10.5% at the hub segment. How we get to the top end of that range is more surges and more seasonal pricing adjustments.

And if we would continue -- the volumes have been pretty good --

They have.

-- Now for these first two weeks, but it's two weeks.

Yes.

And two weeks does not make a quarter. I wish it did.

Right.

So that's the big variable; right? It's just how long people have. And I wish we had a better crystal ball. We just don't.

Yes. So just in terms of the pricing, so I understand it's tough to know what the rails are going to do what your competitors are going to do. I guess you don't have control over what your competitors are doing on pricing. What do you think -- what are you guys thinking about doing internally to get a little bit more control over pricing? It strikes me that in the first half of the year, you didn't have great volume growth but you actually had pretty good pricing and gross yields in intermodal and pretty nice earnings growth. Do you think about maybe a little less volume and a little bit more focus internally on price? Or how do you think about balancing them?

It's definitely a fine line. It's one that we try to walk all the time. In the first half of the year, I think that we did a very good job with pricing discipline. At the same time, there was a lot of folks that were unhappy with 2% volume growth. So what we are trying to do is balance that out, make sure that we are on top of it and make sure that we are doing the best job that we can understanding the market. So we've done some things to get better feedback from bids, to get better feedback from our salesmen to understand the market better and to make sure that we are pricing in the optimal fashion that strikes that balance between price and volume.

In this market, unfortunately, it was very challenging to get price. I do think that we have done better than some others in terms of getting at least some level of positive price. At the same time, we do have cost increases that we are faced with that we need to more than offset.

So what we try to do is get visibility with our costs and then build a strategy around how we are going to go to market with a plan to get price increases. And I don't think we executed on that perfectly this quarter. I think we will improve, but it is something that's a constant challenge for us. And I think that, as we go forward in this environment, we have to continue to push our sales team hard and make sure that our pricing really understands the dynamics in the marketplace.

That's helpful, Mark. Just last thing -- the $1 million strategy project -- can you give some color on what that is and what you hope to accomplish with it?

Sure. Every five or six years, we do an overall, a broad strategy project. We are very, very active as a management team, all of our section 16 and even the next level down, on creating it. Basically, we are looking at the market, how we operate within the market, some of the assumptions that, Scott, you had alluded to with pricing, with market flows.

And I think the good news about this is this type of investment -- the last time we did it was six years ago. And from this investment, many of the things you see today -- Comtrak at 66% of our overall volume, a container fleet that's substantially larger -- these were all outpourings of that strategy that, in fact, we successfully implemented.

So overall, it's not a project that we take, have somebody create, throw it over the wall and then we put it in a drawer. We actually -- this is how we conduct our business and grow our business.

Okay, great, thank you, guys.

Justin Long, Stephens.

I was wondering if you could talk about the amount of drayage you do in-house with Comtrak in your Eastern network versus what that number is in the Western network. You always provide, I guess, that number on a consolidated basis. But just curious if there's a significant difference in that metric between the two geographies and how that could be impacting both margins and mix.

Yes. I don't have those numbers handy. We can certainly get those for you. We do track it. Really, it's more by -- rather than Eastern versus Western, it's more about individual markets. We are actually very strong in the Southeast. We have an extensive network. We are strong in the Midwest. We have a solid operation in both NorCal and SoCal; a growing operation in the PNW, fairly new presence there. So we are a bit less penetrated in that market. Looking to grow in the Texas markets and been fairly successful doing that.

So if we look at the markets that we participate in, our percentage of drayage is around 72% or 73%, which is how some of our competition looks at it. We choose to look at the broader pie, and it's 66%. But, generally speaking, we are probably the most proportionately penetrated in the Southeast with some big opportunities to expand, particularly in the Chicago area, is probably our biggest opportunity to expand our -- the percentage of dray handled in markets that we are already present. Those are long-haul drays, so the opportunity to really improve your margins obviously increases as the length of haul increases.

So there really aren't any markets, though, where I would say we are fully penetrated. Our goal remains to get up to 85%. We had hoped that we could get there in the next couple of years. It may take a little bit longer with the current hiring environment, but nonetheless we continue to make progress and move it up in some pretty challenging recruitment conditions.

Got it. That's helpful. And you mentioned length of haul. Could you give some color on what length of haul did in intermodal on a year-over-year basis, and also sequentially?

It didn't change much.

It might have come down slightly.

Yes. That's right.

Right, with local east up ticking, it came down just slightly. But Terri has got the exact number, I think.

It's like 1608 miles.

Yes. So, obviously, we saw a decline in trans-con, which clearly lowers your average miles. Then we did see local east get back into positive territory.

Okay, great. And one more from me -- I know it may be a little bit early for this, but could you provide any insight on CapEx expectations for 2014? I know the new headquarters is getting wrapped up, so I imagine that number probably comes down relative to what we've seen in 2013, but just wanted to get your thoughts.

Next year will probably be a little bit higher, although not as high, necessarily, as this year, because some of the containers that we have are coming off lease, and we are going to buy those. That's about $7 million, for example. On a normalized basis, it might be between $50 million and $70 million.

Okay, great, I appreciate the time today.

William Greene, Morgan Stanley.

Terri, can I just ask for a little bit of clarification on the cost of the strategic review? Does it all fall in the fourth quarter? I think you said it goes into next year. How does the cost work on that?

Sure, Bill. Yes, there's about $1 million in the fourth quarter. The total cost for the initial project is about $2.5 million. So call it another $1.5 million will be in 2014. And then we may expand the scope of the project. If we do, then we will let you know about that next year.

Okay. So this is implicit in your guidance, right? Because the guidance at the low end of the range actually has earnings down, I think, in the fourth quarter, which would be the first time since 2009 that happened. So I'm just curious. Should we get a lot more aggressive on cost or something? Because it seems like -- it doesn't seem like the economy is that bad. So I get puzzled a bit why earnings would actually be down.

Well, I don't think we said earnings would be down. We just gave a range of cost and expenses from the $64 million to the $66 million. And to answer your question, that does include the strategy project.

Okay.

-- And we really didn't give any guidance for what exactly earnings per share would be for the quarter.

No, but if you give the range for the year we can figure out fourth quarter. That's all. Right? And so at the low end of the range, you would have less than last year's earnings was the point, I think.

Yes.

So to me, it was sort of like, wow, that down earnings would be a pretty big departure from some of the growth you have been showing in recent years. So it felt like maybe we should delay the strategic review, if we are actually seeing down earnings.

Well, I think that's -- I think the major thing is what we need to do is reinvest in our business and continue to look for areas to drive margin and expand. I think that retrenching just because something may not look good for one quarter is just overall a bad long-term strategy.

Yes. No, I hear you. I hear you. It's just the optics of it. But can I ask you another question on hours of service? Do you feel like that had any impact on the quarter? And as you look back in the past at different trucking regulations that came in, how soon should it be before intermodal would see some reaction in terms of demand change?

Well, to me, I don't know that there was an immediate acceleration in conversion because of hours of service or any of the other regulatory issues that are out there. It affects us in two ways, because we are a significant employer of drivers, and clearly it affects them. And we did see attrition in this quarter greater than we have seen in previous quarters. Now, some of that has got to be related to folks looking in the mirror and asking whether they really want to be a truck driver or not.

So I think there is some element of that. At the same time, I think as shippers look at hours of service and CSA and all of the regulatory burdens and costs that the trucking industry is faced with, I think that they become more convinced that intermodal is certainly part of the solution to what's otherwise going to be a pretty sharp cost curve over the long term.

So I do believe that there's a contributor to intermodal demand that's coming from these concerns over costs. How much of it is almost impossible to say. But clearly, with the domestic intermodal industry growing about 7%, 8%, you have to believe that share shift is, at least in part, occurring because folks are concerned that things like hours of service are going to drive trucking costs in the wrong direction, from their perspective.

All right, thank you so much for the time.

David Tamberrino, Stifel.

I believe I might have heard this during the prepared remarks on intermodal. But did you say that service levels from the rail have declined during the quarter?

Yes, there was a slight downtick in on-time performance and what we call LOGs, or left on ground, which is two ways that we measure rail service. They were not so significant that they impacted the ultimate service to the customer, but they were a bit of a headwind.

Was that weather-related, or what can you tie that back to?

By and large, most of the on-time performance issues would have been weather-related. There were a couple of pockets of excessive demand creating issues that led to more boxes being left on the ground. But for the most part, they would have been weather-related. And we are talking low-single-digit declines here, not anything material.

Okay. And then maybe this is just a broader question that you can speak to. The changing chassis environments here in the US with the shipping lines exiting and the pools of chassis showing up and maybe how that affects the terminal operations and the ground operations. How does that affect your drayage operations, coming into and getting out of those terminals in a timely fashion? And do you have any maybe preferred setup with your intermodal -- with the intermodal terminals where your trucks have a dedicated area where your boxes are always landing so that you can get in and out quicker? Maybe just speak to that changing shift that we are seeing out there in operations.

In the chassis world, in the domestic industry the rails have continued to maintain control of the chassis. So you haven't seen a shift in chassis ownership or chassis management responsibility in the domestic side, as you have seen in the international side.

We are a contributor to the neutral chassis pool and an equity owner in the neutral chassis pool, and we would love to continue to invest in the chassis product just to make sure there is enough chassis to support domestic intermodalism. But we haven't seen a problem with chassis. We also haven't really experienced an issue with terminal congestion. It has been a strategy of the rails over the course of the last several years to separate out international operations from domestic operations. So in most major markets, those two are really segregated from each other, so we haven't seen any type of congestion impact as a result of the shift in the international chassis programs.

Okay. And then maybe if you could quantify the increased driver turnover that you saw in the quarter, maybe just give us a little insight as to where you think your normal driver turnover was and maybe what it was for the quarter, what it ticked up to. Are we talking -- obviously, much lower than the large truckload industry average of 100% but maybe, on average, you're turning over 30% trend and maybe it ticked up to 50% for the quarter? Is that fair to say?

David, our driver turnover was 39% in the quarter. It was 38% in the first quarter, and then it was 44% in Q2 of 2013, so actually we are better at the 39%.

Right, as a percentage. Pure numbers, though, we ended up losing, I think, about, 312 drivers. And the normal for that period was in the mid-2s.

But it is the summer. It's just more difficult to recruit, and we seem to have a tendency to lose some as well.

Yes. It's certainly way too early to call it a trend.

All right, well thank you for your time.

Matt Brooklier, Longbow Research.

So just a question here -- Mark, I think you mentioned that the first couple weeks of fourth quarter is feeling a little bit better here on the intermodal side. Just curious to hear if you think with that improvement in the market, that potentially at intermodal you also see a little bit of improvement in terms of mix as we move through fourth quarter.

Well, we are certainly hoping to see a better demand out of Southern California. That would be the normal pattern in the fourth quarter, particularly in the early part of the quarter, obviously, as you are positioning for the holidays. So yes, we are hopeful that that would happen. We saw that happen last year.

We would be surprised if we saw it to the extent that we saw it last year, based on just what we know about concerns with inventory levels within the retail sector. So we would certainly like to see that. That would be normal. It's just a matter of whether we are dealing with normal or not.

Okay, but I guess my question being with the pickup out of Southern California, if we see that continuation, should we assume that it's going to improve your intermodal mix sequentially?

Normally, it would, but it has to be of a certain magnitude in order for us to really get the benefits of that. So a muted version doesn't really produce the kind of opportunities that we have to realize additional margins.

So I guess the all-in hub margin guidance, gross margin guidance of 10% to 10.5%, Terri spoke to it earlier. Part of that is some seasonal price improvement. Are we assuming we get a little tailwind from mix, or is that not baked into the range?

It would, if you were at the higher end of the range.

Right. That would probably be the determinant between the middle and lower part and the higher end of the range.

Okay, fair enough. And then again, intermodal, the market picking up in fourth quarter -- hopefully, that holds. You guys are adding 1000 incremental boxes. You did 5% volume growth, all in, for third quarter -- not a bad number. You talked to in the second half, earlier this year, being at a mid- to upper-single-digit volume growth number. I guess the question being, how comfortable are you with hitting that range in fourth quarter?

I think we are comfortable with that range. We still feel like we are going to be in the mid- to upper-single digits for the second half of the year. Keep in mind, our big-box number was 7%. So that was even a little better than the aggregate number of 5%, which also includes our wholesale effort and our ISO boxes, which were down from a volume perspective but performed well otherwise.

So, yes, we remain confident that intermodal demand will enable us to produce mid- to high-single digits.

Okay, good to hear. And just my last question, showing continuation of nice growth, add Mode -- you indicated you added some sales agents and, I think, some IBO's as well. Do you need that to continue this higher-end single-digit growth, or was more of the growth in the quarter organically driven?

Most of the growth in the quarter is being driven by our larger agents. The new additions, which I think now are 13 sales agents and eight new IBO's for the year, is producing some revenue but really not enough yet to move the needle. Most of that growth that you are seeing is coming out of, say, our top 25 IBO's.

Okay, that does it for me, thanks.

Ryan Bouchard, Avondale Partners.

A quick clarification. Terri, earlier you said truck brokerage margin was down 200 basis points year over year. Was that gross margin dollars down 2% or was that gross margin percentage down 200 basis points?

That was the percentage.

Okay. Can you tell us what that was in dollars?

We are not disclosing that. I can tell you that the growth in logistics gross margin was offset by a decline in truck brokerage gross margin dollars, and intermodal was flat, in terms of dollars.

Okay. Lastly, would you say that the Unyson pipeline -- you said that it was strong. Is it as strong as it was coming into the third quarter? So kind of in other words, do you have the opportunity to increase revenue by another $10 million sequentially there, or has most of that already occurred?

No, most of it is already in.

Right.

Because we are not on-boarding anything new in the fourth quarter to speak of. So you have to look seasonally, too, at the number, because it does go down. It did go down last year in the fourth quarter.

Yes. So it looks like about half the time it goes up and half the time it comes down, so there's no seasonal -- but we wouldn't necessarily expect another big jump or anything like that in the fourth quarter.

Right, but I can tell you that we still think they are growing strong and that we had 42% growth in the third quarter. We wouldn't be surprised to see it between 40% and 45% in the fourth quarter.

Okay, well that's helpful, thank you, guys.

Anthony Gallo, Wells Fargo.

I wanted to make sure I understood the logistics margins. Within legacy hub, you had about a $34 million sequential improvement in revenue, and yet operating income within legacy hub was flat sequentially despite about a $2 million reversal in incentive comp. And so $34 million of additional revenue sequentially, no change in operating income. I just want to make sure I understand the profile of the logistics revenue -- I'm sorry -- the margin profile of the logistics business coming on.

Yes, it's our lowest margin, gross margin as a percent of sales, to answer your question. And logistics gross margin sequentially was up in terms of the dollars.

Okay.

And it's lower because we are managing transportation spend for a customer, and so all that transportation revenue and cost goes through the P&L.

Okay, so I should say a good portion of that is pass-through revenue. Is that right?

With a margin on it, yes. That's right.

And because it's such a big number now, maybe could you give a little bit of color in terms of the length of the contracts? How much of it is gain sharing? How much of it is just transportation management with a margin tacked on, maybe a little bit more color on what the logistics business looks like.

Generally, a three-year contract. A lot of times customers will renew because we are able to save them money. And oftentimes, we share whatever we save with customer. So that's how they are structured. They look to us to save them money, and that's part of what we do. We share that information with them periodically, at least once a quarter, formally. That's kind of how they are structured.

Okay, thank you, that's helpful.

Scott Group, Wolf Research.

One thing -- so in terms of some of the issues in third quarter, the guidance for fourth quarter implies somewhat of a continuation of that. When do you think, either from a pricing perspective, that you will have opportunities to fix that? Can we think about earnings growth again starting in first quarter, or is it more realistic it's middle of second or third quarter once you've had a chance to go through bid season again, where we can start to see earnings growth?

Our book of business is pretty well set. It depends how it will fluctuate, what business is up and what business is down. We will give you more guidance on 2014 when we release our earnings for fourth quarter of 2013.

And we have not said we are not going to see earnings growth in the fourth quarter.

Right.

Okay, all right, thank you, guys.

Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back over to Mr. Dave Yeager for closing remarks.

Well, again, thank you for joining us for our third quarter conference call. As always, if you do have additional questions, Terri, Mark and I are always available. So thank you and have a good evening.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great evening.