Hub Group Inc (HUBG) 2015 Q3 法說會逐字稿

Hello, and welcome to Hub Group Inc. third-quarter 2015 earnings conference call. I am joined on the call by Dave Yeager, Hub's CEO; Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our CFO. (Operator Instructions)

Any forward-looking statements made during the course of the call represents our best good-faith judgment as what may 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 turn the call over to your host, Dave Yeager. You may begin.

Great. Good afternoon, and thank you for participating in Hub Group's third-quarter earnings call. As Vivian stated, I am joined today by Don Maltby, Hub's President and COO, and our CFO, Terri Pizzuto.

In the 45 days since Don returned to the organization, we've made numerous positive changes. We focused on flattening the organization in order for Hub to become more responsive to our clients. One of the major changes made is that intermodal now reports directly to me. Don has the added responsibility of having our information technology group reporting to him, as well as sales, customer service, truck brokerage, Unyson Logistics and our specialized equipment group.

In addition to changes being made to the existing organization, we are currently performing a search to fill the newly created role of Vice President of Corporate Development. We plan to execute our acquisition strategy through this new position as well as the use of other internal resources. We will integrate each acquisition fully into the Hub organization prior to adding additional targets, and we are prepared to use our balance sheet and a moderate amount of leverage in order to expand and enhance our service offerings.

Turning to our results, the business levels in the third quarter continued the positive momentum we experienced in the second quarter. Revenue for both highway and intermodal did decline somewhat due to the reduction of fuel costs, but volumes and pricing continue to be strong. Unyson Logistics had a slight decline due to the loss of a major customer, but we feel as though the pipeline is strong and that the business levels will continue to recover for the remainder of the year.

Now I will talk about our intermodal results. For the third quarter, our consolidated big-box intermodal volume increased 4%. The Hub segment grew 3.5%, while Mode increased its intermodal volume by 6%.

On a consolidated basis, volume was up uniformly across all regions, with local east volume up 4%, local West volume up 6%, and trans-con up 2%. We continue to see positive growth in Mexico, with a 52% increase in volume in the third quarter. And despite the industry slowdown and surplus of truck capacity, we remain confident that the Hub intermodal segment volume will grow between 3% and 5% this year.

We are currently in the middle of what appears to be a normalized peak. Therefore, we are currently experiencing very high volumes out of Southern California with increases of between 20% and 30% versus normalized unit volumes. We anticipate that the surge in volumes will dissipate sometime around the Thanksgiving holiday.

Overall rail service improved incrementally throughout the quarter. On-time service improved in the low double digits on a year-over-year basis and high single digits on a sequential basis. For the quarter, transit improved 2/10 of a day year over year, although transits are still a half day longer than they were in 2013.

Fleet utilization was flat with last year at 15 days, or 1/10 of a day better than the second quarter. In September, utilization improved to 14.5 days, or about a half day better than last year.

We onboarded 1,000 new containers in September and October, which increases our fleet size to 29,300 containers.

Our satellite tracking system has been installed on over 11,000 containers, and installations will continue with the goal of adding tracking systems to 4,000 more containers this year and the remainder of the fleet by the end of 2016.

Pricing improved slightly throughout the quarter. New pricing tools utilized in the bid season have helped us to expand margin, grow our business and improve our network efficiency by assisting us to make better pricing decisions.

On another positive note, our load acceptance process that was implemented in the last few months has improved our business mix through greater selectivity of acceptable business, thereby enhancing our service as well as our margins.

We are continuing to focus on outsourcing more of Hub's drayage versus performing the work in-house. This is helping us to achieve the most cost-effective mix of in-house and outside power. As a result of this sourcing initiative, Hub Group trucking handled 11% fewer loads in the third quarter of 2015. Hub Group trucking moved 60% of Hub's drayage during the quarter, compared to 70% last year.

With that, I will pass the call on to Don to guide you through the specifics on our other business segments.

Thank you, Dave. I'm excited to be back at Hub. Before I dig into the operational results I would like to say a few words about my new role as the Chief Operating Officer of the Hub Group. As you most likely know, I've been part of the Hub Group's history for more than 25 years. I've held a variety of leadership roles across all lines of business, all a very good rehearsal for my current position. As a result, I'm quickly immersing myself in all aspects of daily operations and am determined to provide strong, focused leadership as we are building a more robust logistics Company with a broad spectrum of offerings that will work seamlessly with one another. To that extent, as Dave mentioned, we have developed several key initiatives focused on enhancing our customer experience while driving bottom-line growth and Company-wide productivity across all of our business lines.

One of the initiatives is our multimodal account management team that is focused on providing our customers a single point of contact with all modes of transportation. During 2015, we rolled out our first account-specific management pilot program with much success. Building on that success will be adding many more multimodal accounts in the months ahead while continuing to enhance our talent and technology solutions to support our customers' experience. We believe our account-managed, customer-centric initiative is a key component to our growth strategy.

Our other Company-wide initiatives are focused on driving productivity efficiencies by streamlining processes throughout all of our business lines. We will continue to make investments in technology, which will allow us to gain numerous internal efficiencies, expand margin and provide our customers with a better experience.

On November 1, we will launch our first customer into a new technology solution, and we will continue to transition many of our accounts over the next two to three years into this new environment with the end goal of housing all of our key operational work streams in a single technology program.

Now let's talk about the business lines performance. Truck brokerage once again produced strong results with the 14% volume growth, reaffirming our strategy. As we move forward, the entire Hub Highway team remains focused on targeting core business growth as well as expanding our value-added services and spot opportunities with both new and existing customers, no small feat during this time of soft demand. We continue to implement this strategy through directed carrier development programs in key markets and are pleased that the Group's collective expertise and newly improved execution are producing positive results and customer approval. Last quarter, we were named the 2015 Toyota Motor Sales Truckload Service Proprietor of the Year. The award was given in recognition of Hub Highway's outstanding creative solutions and for providing exceptional value-added services, both of which stand as further proof of our commitment to our customers and to growing our highway brokerage division. We are also focused on developing strategic carrier relations that will provide longer-term stability that will benefit our carrier partners and customers.

Turning to logistics, we recently promoted Brian Alexander to Executive Vice President in charge of the Unyson Logistics team. During his 13 years with Hub Group, Brian has held positions of increasing responsibility in all of our business lines including highway, intermodal and Unyson. Most recently, Brian served as Unyson's Vice President of Operations responsible for all of our customer deliverables. Brian brings an abundance of talent, energy and supply chain expertise to his new role, and we're looking forward to continued success in growing our 3PL product and service.

During the quarter, we saw logistics revenue decline 7%, largely due to a key customer divesting a portion of its business combined with the loss of a sizable customer in May. On a positive note, we increased revenue in the retail segment by providing innovative solutions for our customers in that space. We are projecting Unyson sales will be down again in Q4, due primarily to these account losses and lack of new onboardings. Unyson will continue to see headwinds through the first half of 2016 due to the losses I just mentioned, along with the uncertainty of renewing several legacy contracts that expire in early 2016. With that said, we expect Unyson to continue to make positive contributions to the bottom line and increase revenue in the second half of 2016. Organic growth with our existing customers has been strong in 2015, and we expect this trend to continue in 2016 through continuous improvement initiatives, enhanced service offerings and addition of new business in the second half the year.

As previously mentioned, we are making additional investments in transportation management technology which are needed to answer our customers' demand for innovative solutions as we retain our position as the top 3PL in the marketplace.

We are proud to have won a number of awards including the Quest for Quality Award from Logistics Management, where we were ranked number one for the second consecutive year. While we are proud of the awards we have received, we continue to strive for even greater success.

Mode Transportation operating margin was a solid 3%, and operating income grew 2%. In the quarter, we added 218 customers while simultaneously maintaining a strong pipeline. The intermodal, truckload and international businesses experienced volume growth while intermodal, international and LTL lines also grew margin in the period. Our IBOs expand their presence by adding 8 new salespeople to their organizations, a notable feat given the historical difficulty of adding new salespeople heading into peak season. On a year-to-date basis, we are 30% ahead of 2014 recruitment levels with a pipeline full of promising leads.

Once again, I'm excited to be back at Hub Group, and I will turn the call over to Terri for financial highlights.

Thanks, Don, and hello, everyone. As usual, I would like to highlight three points. First, we had a record third quarter with earnings per share of $0.55. Second, the Hub segment gross margin increased over $10 million with margin increases across the board in all three service lines. And third, Mode continued its streak with 14 consecutive quarters of operating income growth.

Here are the key numbers for the third quarter. Hub Group's revenue decreased 1.5% to $900 million. Hub Group's diluted earnings per share increased 12% to $0.55 compared to an adjusted earnings per share of $0.49 last year. 2014 earnings per share was adjusted to exclude $0.37 of unusual costs related to owner-operators in California and the write-off of software development costs. All the numbers that I'm reporting today have been adjusted to exclude these charges. Now I will discuss details for the quarter, starting with the financial performance of the Hub segment.

The Hub segment generated revenue of $681 million, which is a 2% decline compared to last year. Taking a look at our business lines.

Intermodal revenue was flat. Intermodal volume was up 3.5%. Price and mix were also up. These increases were offset by a decline for fuel. The price increase this quarter was higher than the price increase in the second quarter. The volume growth was driven by a 16% increase in loans from durable goods customers, a 4% increase in loads from retail customers and a 15% increase in loads from paper customers.

Truck brokerage revenue was down 0.5%. Truck brokerage handled 14% more loads, but fuel, mix and price combined were down.

Logistics revenue decreased 7%. This decline was due to losing one customer in May and another customer selling a portion of their business and then taking a portion of their business in-house.

Hub's gross margin increased by $10.4 million. Gross margin as a percentage of sales was 10.9%, or 160 basis points higher than the third quarter of 2014.

Intermodal gross margin increased because of a 3.5% increase in loads, price increases and more favorable mix. Intermodal gross margin as a percentage of sales increased 180 basis points because of price increases, improved assessorial cost recovery and effectively using our new load acceptance optimization tool.

Truck brokerage margin increased because of growth with targeted customer accounts, which included an increase in seasonal business. Truck brokerage gross margin as a percentage of sales was up 240 basis points due to more value-added services, price increases and better purchasing.

Logistics gross margin increased due to providing additional services to existing accounts and growth with new customers. Logistics gross margin as a percentage of sales was up 80 basis points due to purchasing more cost-effectively and price increases.

Sequentially, the Hub segment gross margin as a percentage of sales increased 40 basis points. Intermodal gross margin improved 60 basis points, and logistics improved 80 basis points.

Hub's cost and expenses increased $7 million to $48.2 million in 2015, compared to $41.2 million in 2014. The increase relates to a $5.5 million increase in salaries and benefits and a $1.5 million increase in general and administrative expense. Salaries and benefits are up due to a $3.5 million increase in bonus, higher headcount, annual employee raises and an increase in commissions. General and administrative costs are higher because of an increase in legal fees and costs for our new transportation management system and satellite tracking.

Finally, operating margin for the Hub segment was 3.9%, which was 60 basis points higher than last year's 3.3%.

Now I will discuss results for our Mode segment.

Mode had a solid quarter with revenue of $239 million, which is down 3% from last year due to lower fuel revenue. The revenue breakdown is $124 million in intermodal, which is up slightly, $80 million in truck brokerage, which was down 8%, and $35 million in logistics, which was up slightly. Mode's gross margin increased $1.5 million year over year due to growth in all three service lines. Gross margin as a percentage of sales was 12.8% compared to 11.9% last year, due mostly to a 70-basis-point improvement in intermodal yield and a 110-basis-point improvement in truck brokerage yield. Mode's total cost and expenses increased $1.3 million compared to last year because of an increase in agent commission. Operating margin for Mode was 3% compared to 2.9% last year.

Turning now to headcount for Hub Group, we had 1,582 employees excluding drivers at the end of September, which is up 7 people from the end of June.

Now I will discuss what we expect for this year and the fourth quarter.

We believe that our 2015 diluted earnings per share will range from $1.90 to $2. This guidance has been adjusted to exclude the one-time cost in the first quarter. We think we will have about 36 million weighted average diluted shares outstanding for the year. We anticipate rail service will improve gradually and that utilization will be a little bit better in the fourth quarter than it was in the third quarter. We expect gross margin as a percentage of sales for the fourth quarter to be between 11.5% and 11.8%. The main levers to get to the high end are price increases, truck brokerage growth and increased operational efficiencies in intermodal. We think that our costs and expenses will range between $73 million and $74 million in the fourth quarter.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $184 million in cash and $123 million in debt, including capitalized leases. We spent $17 million on capital expenditures this quarter. This includes $13 million for tractors, which was funded with debt. This brings total year-to-date capital expenditures to $41 million. We expect our 2015 capital expenditures to range between $85 million and $95 million. We are purchasing 1,000 containers, 300 tractors, and we are investing in technology projects including transportation management systems and satellite tracking.

We intend to fund the 2015 tractor and container purchases with debt.

And to wrap it up on a positive note, during the quarter we paid $15.4 million to buy 394,504 shares of stock. We have $23.7 million remaining on our share buyback authorization.

Dave, over to you for closing remarks.

Great. Thank you, Terri. To summarize the call, we are pleased that the third quarter continued to build on the positive momentum that we've experienced throughout 2015. The pricing environment maintained its upward direction, and we are seeing increased volume in both intermodal as well as highway. Our rail partners have incrementally improved their on-time performance, which has allowed Hub to provide better and more consistent service to our clients.

And with that, we will open up the line to any questions.

(Operator Instructions) John Barnes, RBC Capital Markets.

So, two questions I've got. Number one, I think you are still making some pretty decent progress on asset utilization. Can you just talk a little bit about how you anticipate utilization going -- improving from here? And especially in the new role as COO, where do you think you can begin to maybe change or influence that utilization that maybe wasn't being attacked before?

Yes, John, this is Dave. I think I can answer that. I think, number one, we are seeing that the rail service is incrementally getting better. And so I think that that is very positive, as it should begin to eliminate the need to make double appointments. Because during the worst periods, we were doing an awful lot of that.

I think the other is that Don and I, actually the entire team, are really digging into where our bottlenecks are. Whether those bottlenecks are that our containers waiting too long to make appointments prior to actually -- when we know the container is going to be available the following day, we're looking at an awful lot of how we leave our equipment to sit in some remote locations for extended periods. It's going to require a lot of operational focus as much as anything else, and I think that there's a lot of opportunity there that we have not tapped.

It's taking it in order from cradle to grave and looking at it and how it impacts our efficiencies with their boxes. So we've got some projects underway that are looking at that and digging into it.

And the other item that will help is the satellite tracking devices. With those, we expect that next year we will get at least a half-a-day improvement in utilization from the trackers. We are seeing a little bit of benefit now, and it's only on the 11,000 containers. And we see benefit from utilization as well as driver productivity because the drivers don't have to go hunting for a box. They have an app that they can touch and that will tell them where the box is.

We're not waiting for that though because there are a lot of things we can do without that technology just from a process standpoint and a focus standpoint.

Okay, all right. Very good. All right, then, just a couple of questions on maybe your thoughts around the outlook for the balance of this year and going into next year. And the two things I want to highlight -- number one, your commentary around the peak right now seems to be maybe a little bit more robust than what we've heard from others in the last couple of days. And then as you look out maybe over the next few quarters, both of the eastern railroads, especially Norfork today, slid domestic intermodal over into the headwind column when they were looking at the outlook. And even Union Pacific, I think, is calling into question some -- maybe some of the road-to-rail conversion opportunity just where diesel fuel prices are, and beginning to acknowledge that is a bit of a headwind.

So, given all of that, can you just talk a little bit about, number one, the peak? Maybe why you think you're seeing maybe something that others aren't. And then, number two, just given those headwinds facing the road-to-rail conversion, how do you think that plays out?

Yes, I think that's a really good question. We have a lot of retail business, and our retailers this year -- again, it's more of traditional peak that we are used to seeing, John. Last year, we had a lot of retailers that pulled business forward because they were concerned -- rightly concerned about the potential labor disruptions. And this year, it's much more normalized where we saw it begin to build, late August and September. And now it's -- we are really in the heart of it right now and will be for the next three weeks or so. So I think that the reason we are seeing that is we have such a large retail component.

As we look at the overall market -- maybe Don can comment on the truck brokerage market and how we are viewing carriers right now. But it is certainly soft. And I would agree with -- I haven't seen what Norfolk Southern said. But certainly we've seen some limited amount of conversion back from rail-to-truck. And it's for two reasons is, A, it can be serviced, or, B, it can be just with the lower cost of fuel that truck is competitive once again. Do you have anything to add about the truck brokerage market?

No, it's -- capacity is plentiful right now in peak season, and the economy is soft. So our strategy has been to try to penetrate customers that we haven't in the past with a bimodal solution. But this is softer than normal peaks with regard to the truck capacity.

Very good. And Dave, are you saying, then, this is a normal peak, not as robust as it was a year ago? But is that what I'm hearing you say?

Well, actually, no. I think it's just as robust. It's just the timing is different to where we get -- you get big bunches in October. Unlike last year, so many people -- they were shipping for Christmas in June and July. And people just didn't do that this year because they didn't have the potential labor unrest issue. So this is more of a traditional peak where right around this time period in late October, early November is the biggest three weeks or four weeks that we see all year.

Okay, very good. Thanks for your time, guys. I appreciate it.

Ben Hartford, Robert W. Baird.

Welcome back, Don. Wanted to get your opinions. Very good summary at the beginning. Wanted to get your take. You obviously know the organization very well, left, maybe gained some perspective in retirement, come back to the Organization with a fresh start. How long do you think it's going to take for you to -- you talked about broadening the logistics offerings in addition to some of the operational focuses. But how long do you think it will take realistically for you to make some of the changes to the point that you really feel like the organization is maximizing its potential? I will ask that first then ask a follow-up.

Good question. Yes, I look at the potential at Hub Group as being able to satisfy our customers first. That's number one. If we do that, we will be very successful and grow. So we are focusing right now on being able to deliver that value to our customers on all lines of business. Part of it is structural and part of it is just focus. Part of it is technology.

So to answer your question, we've got a number of initiatives underway. I would say in the next six months or so, you'll start to see some improvement overall in how we go to market.

I would add that Don did not come in and rest at his desk very long. If you just look at the structural changes that we have made with management -- and the reason for those changes is to flatten the organization, have more people have access to Don and also have more decision-making power than the hierarchal model that we had. So in 45 days, there has been a lot of changes. And as Don said, there's a tremendous amount of initiatives going on that will also be embracing change in how we conduct some of our businesses.

Okay, good. And then a follow-up maybe to Terri, when we think about 2016, there's a lot of moving parts as it relates to gross profit margin overall. Obviously logistics growth is a little below trend here, but brokerage is as well. Core rate growth could slow, but fuel prices have fallen. So is there -- to what extent do you have confidence that next year gross profit margin -- the percentage on an overall basis can be higher? And if the confidence is high, maybe can you talk a little bit about what some of the drivers might be and help us understand some of the constraints or opportunities in 2016 as it stands today?

Sure. Our confidence is high that gross margin as a percentage of sales would go up. One, Dave and Don mentioned all the efficiencies that we are working on in intermodal, which should improve. But the biggest driver of improvement would be pricing both vendor and customer. That's the biggest lever. We expect to cover our cost increases with a price increase. And we will be able to use our new pricing tool that we used this year. That was effective in helping us get business at the right price and the right mix of business. We're going to continue with our dray sourcing events so that we optimize the right freight for the right carrier. And driving that dray balance improves efficiencies, that lowers our cost and increases our capacity.

Truck brokerage, I think we're probably ready to say we have a victory now. It's been a couple quarters where we have really excelled, and we expect that business to continue to grow in 2016. That's our highest-margin business. And then Mode, with its 14th consecutive quarter of operating income growth with 12.8% margins. Mode has been successful bringing on new customers. We expect that to continue in 2016. And between Mode and truck brokerage and then improving our intermodal margin, we should be successful. You are right; the one headwind would be logistics, but that's our lowest margin business, anyway. And that will grow in the second half of the year.

We think it's second half the year for logistics because the pipeline is strong. And as you know, it takes time to bring those in and get them onboarded. So I think we're going to have headwinds in the first six months on logistics. I think -- to Terri's point, I think the Highway group has done a very good job. We're stable. We've got our service up to line. We are now offering our customers spot opportunities. So, we're confident in that.

That's great. Thank you.

Todd Fowler, KeyBanc Capital Markets.

I guess I wanted to go back to John's question about the asset utilization. The 15 days here in the quarter, it sounds like that the GPS tracking is going to get you a half a day in 2016. Dave, what do you think that the rail service is still costing you at this point?

Go ahead, Terri. What did you say?

It's about half a day worse than 2013 still, so we hope that it's back up to those levels.

I would add, though, that there are some things that we can do more effectively with our process, our focus on equipment management that's just not being done right now. So there's no question that satellite tracking is going to help. There's no question that the rails are -- they did get better in September; we did 14.5 days utilization, and the rails are getting better. But, candidly, a lot of it is focused also. And so that all that rests on us.

And Dave, do you think that you can eventually move the turns back below the 13.5-day level where you were in mid-2013? It sounds like with -- that's assuming normalized rail service. But it seems like with everything else that you are doing internally that there should be additional opportunity above and beyond where you've been historically.

We should be able to get to the 13.5 or better, particularly with the satellite tracking. When we first tested it, when we were looking to the technology, we forecasted it was going to be about 18 hours of benefit just because our customers aren't telling us that containers are empty and available for 18 hours. And that's actually in -- with a limited number we have -- actually as we've gotten a broader number of units, it's actually closer to two days. So it's -- or not two days, excuse me, but 24 hours. So it's -- there's a lot of opportunity there.

Okay. And Terri, just as a reminder, what is the earning sensitivity to every day in container turns on an annual basis?

$6 million a year for every one-day improvement.

Okay. And then just for my follow-up if I could, with everything that you have in place with the GPS and with the pricing tool, can you give us a sense of how -- I don't know the right way to ask this -- but how utilized do you think each of those are right now? And I hate to use the baseball analogy, but maybe like what inning you are at as far as you are using the pricing tool and the GPS on the fleet. I'm just trying to get a sense of where you are in the whole process.

I would say with the pricing tool, we are probably in the beginning of the middle innings. I think that we've grown accustomed to it. We understand it better, how to utilize it better, how to run a sensitivity analysis as far as price ranges where we have a high probability of retaining business. It's using big data in this fashion has really helped us become -- to operate more efficiently during their bids.

The GPS, that's very early innings. We are probably still in the first inning on it. And as it will progress quickly as we are able to get a larger and larger percentage of the fleet with the tracking devices on them -- and in addition, just some of the software is not even written yet that will help us utilize -- better utilize the GPS and where the containers are. And so as that comes into being, that will be pretty quick. All of that will help our dispatchers and our route planning managers to make better and smarter decisions.

Okay. I wasn't sure if it was too soon with the Cubs to do the baseball analogy, but I appreciate it. Thanks for your time.

With the Cubs where they are probably, but Mets seem pretty strong, too. So does Kansas City.

All right, guys. Thanks so much.

Scott Group, Wolfe Research.

I want to ask about pricing, both from a customer perspective and then from the rail perspective. We started to see truck growth pricing slow. Hearing today about LTL pricing slowing. What's the -- can you talk about the momentum in intermodal pricing and what your outlook for next year would be there? And then from a rail perspective, can you just give us any insight on rail cost increases in the fourth quarter and if you think that 2016 has similar, bigger, or smaller rail cost increases than 2015? So, a few things in there.

Yes, Scott, this is Dave. I would suggest to you that we don't have any more price increases for the remainder of this year with our rail carriers. For next year, I would say that increases will be similar to a little bit larger. We are talking to our eastern and western partners right now and working towards bringing that to closure. As always, it's just like with clients; it's a bit of a knife fight. But I think, you know, they've been very good partners, and there's no reason for us to believe that that's going to change dramatically.

So we expect -- and what our focus will be is to make sure that we can pass on the increases that do occur in 2016. So we will have a much better idea of it. Of course, our bids don't really start to kick in until probably the mid-late first quarter and then are actually awarded closer to the middle of the year. So we're hoping we can get our rail price increases to coordinate with, in fact -- when, in fact, we are able to get price increases with our clients.

That's great color. Do you think that you can get from your customers similar to bigger increases next year?

It's a really good question, and we're kicking it around a lot internally. I think we are -- one of the biggest things that concerns us is the amount of truck capacity out there. So I think on the shorter-haul lane, that getting a large price increase is going to be difficult, or at least more -- to put it this way, more difficult than this year. For the longer haul, for the 1,200-plus-mile haul, that's really more of an issue with how our competitors behave. And if we are all -- if everybody's looking to increase prices on long-haul business, they will increase if they are not -- that could become difficult as well.

Okay, great. And if I could just ask one last one. So Dave, your prepared comments on the beginning about acquisitions, it sounded more like a when, not an if, which to me is a change. Maybe just talk about if I'm right that there is something changing where you are -- seem more definitive about doing deals and what kinds of deals and how big and things like that.

Yes, our last several Board meetings -- and I will put a lot of it with our Board -- we've been looking at our long-term strategy, and we concluded that really there's a certain amount of organic growth that can be performed. But if we are really going to branch out and offer some of the services that are being requested and required by our clients, then we need to have a much greater focus on acquisitions.

So that's why we are currently interviewing for a VP of corporate development. We really think that we may be a little bit late to the acquisition party here, but we also might be avoiding some of the high multiple hangover that some of the aggressive acquirers might feel later on because we do think multiples have come down somewhat. There's still a lot of really good companies that could add value as a part of Hub Group, and we're going to be very, very focused.

As far as size, we definitely want something we've always had a certain criteria that basically we wanted companies that diversify our product offering, that are not fixer-uppers, good cultural fits, strong management teams, and immediately accretive. And we believe that they are out there. Our efforts in the past -- I think that myself and several others, we've looked but we have day jobs as well. And we just weren't as effective, and we need somebody that can solely focus on that. Someone with investment banking experience and deal experience that can bring these home for us.

All right. Good Stuff. Thanks, guys.

Matthew Frankel, Macquarie Capital.

Just add on to what Scott asked you about, would you be willing to take on more assets in an acquisition, or do you want to remain asset-light and -- how do you think about that?

Well, I think it depends upon the type of acquisition. If in fact, let's say, we would acquire a dedicated company, I think in that case what we would look to do is where we would derive synergies is not necessarily from cost takeouts of that company. It would be through sales synergies that we can bring with our book of business and with our client relationships that could allow that company to grow at a quicker pace and maybe a more profitable pace as well.

There could be certain times with other businesses that -- if it was aligned like an IMC, that would probably be more cost-synergy driven. But for the new services for the dedicated -- for the new logistics services, we need a really strong company with a very strong management team that we can work with to help drive their sales and revenue.

And how comfortable would you be in terms of taking on more debt? How much -- what kind of leverage (multiple speakers)?

We are thinking -- we are conservative by nature, and we always have been. We are thinking 2 to 3 times EBITDA is not unrealistic. That's kind of where we are thinking right now.

Okay. All right. Well, thank you very much. Appreciate it.

Thomas Wadewitz, UBS.

I apologize if I'm asking something you have talked about. I had to flip over from another call, so I missed a little bit at the beginning. But what -- did you comment at all on your outlook for volumes for fourth quarter? If that looked kind of similar in intermodal to what you saw in third or if you would expect it to be a little lighter given some of the weakness we have seen in trucking data points?

Yes, we did talk about that a bit, inasmuch as we are seeing a very strong peak right now. And the rationale for that for the most part is that we have a strong retail concentration. And as a result of that, it's been very, very strong. October and into early November will be the strongest periods for our business coming off of the West Coast. So Southern California right now is 20% to 30% more volume than we would regularly see -- non-peak, I'm talking about. Just normalized volumes. We've had a lot of -- a lot more shipping out of the P&W, Seattle specifically. So we think that it's going to continue to be strong up through Thanksgiving, and we think that the large surge in business will begin to dissipate as this appears to be a normalized peak.

We are thinking for the fourth quarter between 3% and 5% volume.

Correct.

3% to 5% volume growth. Okay. And what about the progress on the outsourcing of your drayage activity and just kind of -- I know you faced some easy comparisons, but the improvement in the drayage operation in general, where are you at on that topic?

As far as the outsourcing, I think that we've made some very positive momentum. Hub Group Trucking actually handled 1,000 basis points less of Hub business than they had the prior year. And so HGT is now 60% of Hub's business versus 70% before. From an operating inefficiencies perspective, I can honestly say we're still not there. We can get a lot better. We can focus better on equipment turns. We can focus better on our own trucking optimization as far as reducing empty miles. So that needs -- that's really getting down in the mud for us and that's what we intend to do, and that's really the only way to fix it.

Right. And that's what we plan on working on because of the allocation of third-party draymen. So, they are partners. We've done a good job of developing that and now we want to continue to work on the workflows.

So when you are in fourth quarter, would you expect it to be stable in terms of the -- at the run rate you want in terms of how much is in-house and how much is outsourced dray? Like at that 60% insourced?

You know, that's a really good question. I don't have a goal. I think that what we're looking at is to be able to optimize from a price and a service perspective the insourcing/outsourcing. And so if we are finding that outside draymen, in fact, are more cost-effective and better service-oriented than 50% of it or 60%, we will let -- we will shrink or grow HDT accordingly.

Okay, but it sounds like a pretty constructive read from the progress and what you are doing with it and probably a lot of runway left to go on the improvement in drayage and how that flows through to the net revenue margin.

Absolutely, Tom. There's a lot -- the good news is -- the good news and bad news is there's still a lot of room for improvement.

Right. Okay, thanks for the time.

Justin Long, Stephens.

I wanted to ask another one on 2016 with the final rule on ELDs potentially coming out in the next few days or so. Is this something that you think could materially impact your intermodal volumes and/or pricing for next year? And if so, any rough guess you would have on the order of magnitude be helpful.

I've read a lot of different things. First of all, all of our tractors with HGT have ELDs, whether it's an owner-operator-owned tractor or a Hub-owned tractor. It certainly would shrink the amount of available capacity. I've seen different numbers -- 8%, 12%. But whatever it is, it certainly will enhance the attractiveness of intermodal and certainly will change the pricing environment and the relationship with your customers.

So from a transportation company perspective, it's very positive. I think from a safety perspective, it's very positive as well, as you'll eliminate a lot of people going over on hours.

Great. But just to maybe touch on the timing of when you think you could impact the market, if we get a final rule, do you think this is something that could impact the market and the pricing dynamics in 2016? Or do you think it's something that we are looking at impacting the market more so in 2017 and beyond?

I think it would -- if there's a ruling 2016, I would suggest that it would impact 2017 more so because clients would look at it, look at their bids and become very, very focused on trying to secure the capacity that they require.

Okay. And I know you don't break out margins by segment, but one of the things I wanted to ask about -- could you give us a sense for where OR in your intermodal business stands today on a relative basis to where it was in the prior peak?

We still have room to go. Our margins at the Hub segment were 10.9%. And back in the day, they were closer to 12% or 13%. So a couple of hundred basis points at least of improvement still to go to get back to those levels.

And would you say that's what the gap is if you just looked at intermodal specifically, or is the gap in intermodal bigger than 200 basis points or so? I know you have had some mix changes, especially with the growth in logistics.

It's mostly in intermodal. You are right; logistics gross margin as a percent of sales has gone down from 2013 levels as well. That business has grown, too, so it has a little bigger impact. But that will always be a headwind, we think. So most of the improvement would have to come from intermodal.

Okay. And last quick one, if you don't mind. I was going to ask about the $1 million in other expense during the quarter, Terri, could you give some more color on what drove that?

Sure, it was a Canadian exchange loss that's unrealized because we have cash sitting in Canada.

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

Brandon Oglenski, Barclays.

David, I wanted to circle back to the corporate development and the M&A discussion. Just because we've seen some of these recent deals get a little bit more challenging with investors at least, with the concern that you go outside your core competency and pursue a different service, does it really drive synergy with your customers?

What's been your experience as you have gone through some of your own acquisitions at Hub? Where do you find yourself deficient when you go to negotiate with customers? And is there actually some truthfulness in the fact that, hey, we need to be more things to our current customers to get more at the table.

Well, I think, first and foremost, I do think that if you are bringing a really well-run product to them that, yes, in fact, our existing clients do have a high degree of interest. And so specifically, again, I will go back to dedicated trucking. It's an area -- all of our retail customers use it, many of our durable goods companies do. And are there current providers? Absolutely. But I think if -- again, we would be looking at a really solid, well-run Company that we can proudly present to our clients that are going to deliver a service that's going to be value-added for them.

I get what you are saying about if you have got a management team that leaves shortly after the acquisition, we would be in trouble. And so that's why we are -- we would be very, very focused on the management team and their capabilities. And if you look at our history, we bought ComtTrak, and this is eons ago -- but 2006, which was a drayage company. We basically had them take over our drayage company and implement their processes and their systems because they were superior. And the president, who was the sole owner, he stayed with us for four years.

If you look at Mode, which we acquired in 2011, the entire management team remains with us. And, again, because we incent them to -- most of their bonus or a lot of their bonus is based upon those things that they can control. And we give them a lot of leash and we also assist them wherever we can.

So, no, I think it is very doable and -- but you always have do have to be leery when you are going into types of businesses that you don't fully understand. So I get your point.

Actually, I wanted to get your opinion on it because you guys are by far the experts compared to me. But I can just observe how the market reacts to these things.

On dedicated trucking, though, I would just add -- and I would love to hear what you think about it -- but it doesn't seem that there is that many examples of actual differentiated dedicated trucking models that drive higher financial returns. Most of the businesses, at least from our perspective, seem to be very commoditized. So, relative to your current business model that can spin off some pretty high returns, how do you think about getting into -- I guess this question was already asked, but more heavy business that could essentially be more commoditized?

Well, as I indicated, we've looked at some that we haven't pursued that -- but it can be not necessarily as asset-intensive, particularly if the equipment is coterminous with the contract that you have with the client, which is a relatively common practice. If you are going to go to all of the major retailers and those types of people, it can be commoditized; there's no question. Because what are you doing, you are bringing a truck and a driver? That's only going to get you a certain margin.

But there is a lot of other value-added services that, in fact, can be and are offered, whether it's specific to a type of industry, whether it's automotive that requires high degrees of service or other white-glove type of treatment. There are areas that, in fact, you can get into that are a high-margin or high-service sale. You've got -- and that's why the quality of the company and the leadership is so important when you make these acquisitions.

All right, I appreciate it. Thank you.

Casey Deak, Wells Fargo.

Just wanted to go back to the volume search off the West Coast that you guys are seeing. So when you put out a number like 20% to 30% volume surge -- and you've made some helpful comments here -- but is that within your expectations and what you would normally expect in a normal peak season environment? Or is 20% to 30% above typical trends?

It is a typical peak. So what -- the way we go about this is we do query with all of our large retail clients, and we ask them for their forecasts. And from that -- because we need to repo empties from Texas, from the Pacific Northwest and a lot of other areas in order to make sure we have enough equipment there for them. So it's a very collaborative approach with our retail customers so that we can supply them the equipment they need to get the goods into their warehouses and then ultimately their stores.

Okay, great. And to stay on the West Coast, can you give an update on where you are with the driver sourcing and drayage in California after the change out there?

Sure. That's one where we've been very successful with the sourcing. When we first changed the model from owner-operators to company drivers, we had 275 drivers. We now have about 125. And instead of handling 70% of our Los Angeles business, they are handling about 25%. And that feels about right.

Okay. Great. So that's where you would expect it to stay going forward?

Again, I think that that is something that we are going to allow to be fluid depending upon the service levels we're giving our customers and how the sourcing events work and how we are able to continue to grow our relationship with our outside providers. Los Angeles, we have got some really good ones -- very long-term relationships that I think that we can continue to get -- make that relationship stronger and stronger over time.

Yes, we are evaluating it by market.

Okay. How many third-party players are you working with? You had talked about going with a few strategic alliances out there. How many is that up to this point?

Well, as you can guess with the amount of volume we have, it's not a handful. It's probably more like 20. And we do try to concentrate volume. We want to make sure we are a significant client to them because we think that that's important that our business means something. And so it's in that range.

And we are always looking for others. It's a relatively low barrier to entry type of a business. And if you've got somebody that is really service-focused, the relationship can really build well.

Okay, I appreciate the time. Thank you.

Scott Group, Wolfe Research.

So just a couple last things. With the - Norfolk's change with Triple Crown, what do you hear from customers and what kind of opportunity is that for you next year on the volume side?

We have been looking at it. With our competitive intelligence we have a pretty good idea who their clients were and some of the lanes involved. An awful lot of the lanes that Triple Crown hauled are not a natural transition to the Norfolk Southern's intermodal network. There's really -- there's some fit, but it's a little more difficult, Scott.

So I don't look for huge surges as a result of this for Hub Group anyway. I do look for a lot of that business to convert to over-the-road. So that will suck up some of the capacity as well, so there's some positive things from that perspective. But I think Norfolk Southern had really designed the Triple Crown network and it could not compete with their intermodal network.

Does it overlap with the CSX? Is that an opportunity for them?

It probably has a little more overlap with them because just some of their terminal locations. But an awful lot of the traffic is just outside of Triple Crown. Naturally, it will move towards truck.

Okay. We've heard from your -- I guess, your competitor that they are moving some business -- or it appears they're moving some business from NS to CSX. Do you think that's an opportunity for you?

As far as just our relationship with Norfolk Southern?

Or a similar potential transition. Either way.

We never rule anything out. We have had a very strong, good relationship with the Norfolk Southern. We certainly have a lot of respect for CSX and their network which, unlike the West -- like the UP does -- has -- got to probably the most points of the two Western railroads. Norfolk Southern and CSX have very different networks. And so it's certainly something that could be interesting and attractive just from a perspective that there's markets that Norfolk Southern can't get to that CSX can.

Okay. And then just lastly real quick, with the focus on acquisitions do think you'll still be buying back stock, or do you (multiple speakers)?

Yes, we can do both.

We can do both, Scott.

We've got about $43 million remaining on our current share buyback authorization -- or $24 million. I'm sorry -- $24 million on our share buyback authorization remaining. And so we can certainly do that and acquisitions.

Yes, and we will talk to our Board about whether we need another authorization from them in the upcoming November meeting.

Okay, great. Thank you.

Matt Brooklier, Longbow Research.

I think the intermodal volume growth guidance range that the top end came down just a little bit, I'm just trying to get a sense for if that's just a function of maybe a softer macro here in 3Q versus when you gave guidance in 2Q, or if there's any other factors at play. If maybe rail service isn't improving at the rate you thought it would or some conversion from rail to truck, I'm just trying to get a feel for the components of the top end coming down a little bit.

Yes, you're right, Matt. We had originally said between 3% and 7% volume growth for the year. So now we think between 3% and 5%. And the reason for bringing it down is the overall domestic intermodal market growth isn't as strong as it was at this time last year. There are headwinds due to rail service and lower fuel. For the first nine months of the year we grew our volume 3.5%. And what growth we get to, either 3% or 5%, will depend on how long peak lasts and how strong it is. As Dave mentioned in his prepared remarks, it's going well now. It could dissipate at Thanksgiving. It could last longer with e-commerce. We're just not sure. And there is more tepid demand than last year.

Okay. It sounds like we're off to a good start. I guess the conversion part of it or capacity in the truckload market and additional freight maybe moving from rail over to truck, that sounds like it was -- that's a much smaller component of it.

Yes, we certainly saw some of that but not a lot. And it was more in the East than we saw in the local West business.

Okay. And then on the other end of things, your net revenue margin guide from fourth quarter -- you hit towards the higher end of the guide in 3Q. You took off the bottom end of the range. Just trying to get a sense for the contributors to having more conviction in the higher end of the range and if there's any headwinds that we should be thinking about in terms of the margin.

Yes, well, I mean a couple of things would have to happen to get to the high-end; the volume and price increases that customers awarded to us have to materialize; rail service and utilization improvement. We are assuming about a half day better than last year and slightly better than the third quarter. And then growth in truck brokerage and Mode will get us to the high end.

Okay. Appreciate the time. Thank you.

Thank you. And I'm not showing any further questions at this time. I will now turn the call back over to Dave Yeager for closing remarks.

Great. Well, again, thank you for joining us this evening on the call. Obviously, as always, if there's any further questions, both Terri, Don, as well as myself are available at any time. So thank you again. Have a nice evening.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.