Hub Group Inc (HUBG) 2016 Q3 法說會逐字稿

Hello and welcome to the Hub Group third-quarter 2016 earnings conference call. Dave Yeager, Hub's CEO; Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our CFO, are joining me on the call. (Operator Instructions)

Any forward-looking statements made during the course of the call represent our best good faith judgment as to 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 call is being recorded.

It is now my pleasure to turn the call over to your host, David Yeager. Please go ahead.

Great, thank you. Good afternoon and thank you for participating in Hub Group's third-quarter earnings call. I'm joined today by Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer.

We successfully executed on our strategy to increase market share this quarter and saw strong growth with targeted customers across all of our business lines. We fully understood that deploying a growth strategy in this soft freight environment would result in lower gross margins. But the alternative of losing share was unacceptable.

Our focus remains on providing excellent service to our clients as we continue to invest in our people to provide differentiated service and an energized culture. We are also prepared to implement our acquisition strategy to further diversify our service offerings.

Today I'm going to talk about the intermodal business. Don will then discuss the other business lines, followed by Terri, who will cover the financial results.

Generally speaking, demand is muted and intermodal peak season got off to a slower start than we anticipated. Although volume in the domestic intermodal market declined 2%, Hub's consolidated intermodal volume was up 4% in the third quarter. Local East volume increased 1%, local West was up 3%, and trans-con increased 8%.

We broke two records this quarter. First: intermodal volume the last week of September was our highest weekly volume ever. Second: the third-quarter intermodal volume was the highest in Hub history.

We were able to grow more than the market because of our customer-centric strategy, growing with the right customers in the right markets and providing superior operational execution. In fact, on-time performance increased 360 basis points year over year.

We project that we'll see volume growth of between 2% and 3% for the full year, which would imply growing mid-single digits in the fourth quarter. We believe the peak will extend through the end of the year due to changes in our customer mix and retailers' evolving shipping patterns.

The most recent bid season brought positive results, as our targeted approach to the market allowed us to increase business levels with our strategic accounts while at the same time grow targeted markets. Obviously, price is very challenging in this market. However, we were disciplined in our approach to support and protect strategic customers and markets.

Margin erosion from price decreases and rail cost increases was partially offset by cost-saving initiatives resulting in intermodal margin declining 3%. For the third quarter, rail on-time performance improved 15% on a year-over-year basis and was flat sequentially.

Fleet turns improved 3/10 of a day to 14.8 days and the fleet installations of the GPS units are on track to be completed before year end. Finally, our current fleet size is 31,600 units, which enables us to meet our customer commitments.

And with that, I'll turn it over to Don.

Thank you, Dave. As we mentioned in our previous calls, our focus over the past year has been to improve overall service performance across our network and service lines, eliminate redundant costs, and at the same time strengthen our relationship with our customers.

Most recently, we conducted an extensive customer survey which shows that we've made significant progress since last year in improving our standing with our customers. In fact, based upon these results, along with our current metric performance, I am pleased to report that Hub service levels are the highest in our Company's history.

With these service-level improvements, we have increased our efforts to cross-sell our services and have taken a targeted approach to growing with our strategic accounts, specific verticals, and specific markets. Over the past year, our newly formed multimodal account management approach has made significant strides as we work with our customers to solicit new business, provide supply chain solutions, and cross-sell our product offerings. We expect to have all of our customers in this model by the end of the first quarter of 2017.

The changes we have made to our structure over the past year along with the development of our personnel position us well to deliver future growth while providing value and first-rate service to our customers. With little evidence indicating the challenging pricing marketplace will change, we will remain disciplined in our pricing approach, focus our energy on improving cross-selling opportunities, and remain diligent in improving our customers' experience.

Now let's talk about the business. Mode. In the third quarter, Mode overall volume grew 6%, with truck brokerage leading the way with 10.6% growth. This is due to our continued focus on cross-selling along with the onboarding of a new logistics account.

We are pleased to say in the quarter we experienced volume growth in all of our service lines. In addition, we made significant progress in completing and stabilizing several large new customer implementations in the quarter. We will continue to focus on the deliverables for these accounts as we now move to the continuous improvement stage of the onboardings.

Throughout 2016, we've been working closely with our IBO network and customers to improve cash flow by lowering our DSO. This quarter, Mode's DSO was 48.7, which was the best quarterly DSO result in over 3 years.

Finally, during the quarter, five new IBOs were added to the network along with IBOs adding 10 new salespeople to their organization. Our pipeline remains a strong for new recruits.

Truck brokerage. Our truck brokerage division grew volume 17% in the quarter in spite of a challenging market and continued static demand. Our strategy continues to focus on core customers for targeted multimodal growth opportunities and overall value-added services to our customers.

We saw strong uptick from newly onboarded business in the third quarter that should continue during the remainder of the bid season. We've seen increased volume as a direct result of these awards from new and existing customers.

During the quarter, we continued to enhance our relationship with core carriers to more effectively service the newly awarded business. We believe the truck brokerage marketplace will stay highly competitive for the remainder of the year. Our team continues to remain bullish about new opportunities and our overall position in the market.

Logistics. Our logistics group demonstrated strong top-line growth of 12% for the quarter combined with increased margin performance. This was due to the new customer onboardings we've experienced throughout the year and the quarter.

With these onboardings along with our existing accounts, we will continue in our efforts to drive cost from customer supply chains while seeking operational improvements, driving margin growth. The demand for our logistics services remains strong as our pipeline is robust, with additional onboarding scheduled for later this quarter and early 2017.

In addition to our new business, we continue to expand our solutions and continuous improvement initiatives across our customer network, resulting in organic growth. We are right on schedule with our TMS technology upgrade and we are benefiting from the improved operational platform.

Now I will turn it over to Terri to review the financials.

Thanks, Don, and hello, everyone. As usual, I'd like to highlight three points. First: logistics had a record quarter, with sales of $154 million, gross margin increasing 22%, and 4 new customer onboardings.

Second: truck brokerage gross margin increased 20%. Volume growth of 17% was an all-time high. And third: our financial results were slightly lower than we expected due to logistics and intermodal customer bid award volume falling short of projections.

Here are the key numbers for the third quarter. Hub Group's revenue increased 4% to $933 million. Hub Group's diluted earnings per share was $0.54 compared to $0.55 last year.

Now I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $717 million, which is a 5% increase compared to last year.

Taking a closer look at our business lines, intermodal revenue was up 1%. This increase was due to a 5% increase in intermodal load, partially offset by lower fuel revenue and a price decrease. The volume growth was driven by a 12% increase in loads with retail customers and a 20% increase in loads with automotive customers, partially offset by a 1% decline in loads with consumer products customers.

Truck brokerage revenue was up 16%. Truck brokerage handled 17% more loads.

Logistics revenue increased 12% due to growth with new customers that we onboarded this year.

Hub's gross margin increased by $4.1 million or 5%. Gross margin as a percentage of sales was 11% or 10 basis points higher than last year.

Logistics and truck brokerage gross margin increased, while intermodal margin declined.

Logistics gross margin increased primarily due to growth with new customers. Logistics gross margin as a percentage of sales was up 80 basis points due to improved customer mix, operational efficiencies, and more cost-effective purchasing.

Truck brokerage gross margin increased because of growth with targeted customer accounts, including new customers. Truck brokerage gross margin as a percentage of sales increased 50 basis points due to more value-added services and better purchasing.

Intermodal gross margin decreased because of lower customer prices and rail cost increases. Partially offsetting the decline was higher volume, improved accessorials, better utilization, and lower dray costs. These same factors drove a 40-basis-point decline in intermodal margin as a percent of sales.

Sequentially, compared to the second quarter, the Hub segment gross margin as a percentage of sales deteriorated 180 basis points. Intermodal gross margin declined 200 basis points, truck brokerage decreased 270 basis points, and logistics was down 100 basis points.

Cost and expenses increased $8.5 million to $56.7 million in the third quarter of 2016 compared to $48.2 million in the third quarter of 2015. This increase relates to a $5.9 million increase in salaries and benefits and a $2.3 million increase in general and administrative expense.

Salaries and benefits are up due to higher headcount, annual employee raises, and an increase in bonus expense. General and administrative costs are higher primarily because of an increase in IT costs and legal fees.

Finally, operating margin for the Hub segment was 3%, which was 90 basis points lower than last year.

Now I'll discuss results for our Mode segment. Mode's revenue was $252 million, which was up 5% from last year. Revenue breaks down as $126 million in intermodal, which was up 2%; $46 million in logistics, which was up 32%; and $80 million in truck brokerage, which was down 1%.

Mode's gross margin increased $2.3 million year over year because of an increase in margin in all three service lines. Gross margin as a percentage of sales was 13.1% compared to 12.8% last year due to a 90-basis-point improvement in intermodal yields and a 60-basis-point improvement in truck brokerage yields.

Mode's costs and expenses increased $1.5 million compared to last year, primarily because of an increase in agent commission.

Operating income was up 12%. And finally, operating margin for Mode was 3.2% compared to 3% last year.

Turning now to headcount for Hub Group. We had 1,746 employees, excluding drivers, at the end of September. That's up 75 people compared to the end of June.

Now I'll discuss what we expect for this year. We believe that our 2016 diluted earnings per share will range from $2.15 to $2.25. This guidance excludes one-time costs in the first quarter.

This guidance is lower than the earnings-per-share range we provided on our second-quarter earnings call because logistics and intermodal customer bid awards are not materializing as we projected.

We expect gross margin as a percentage of sales in the fourth quarter to range from 11.3% to 11.8%. We project that gross margin as a percentage of sales will be down sequentially from the third quarter as we'll see the full impact of bid awards in the fourth quarter. We anticipate that utilization in the fourth quarter will be slightly worse than last year.

We believe that our fourth-quarter cost and expenses will range from $82 million to $84 million. Key factors that will impact our results in the fourth quarter are: how closely customer bit awards track to estimates, how long and to what degree capacity is tight during peak season, the strength of retail sales, and whether the current growth that we are seeing in truck brokerage continues throughout the quarter.

Turning now to the balance sheet and how we used our cash. We ended the quarter with $135 million in cash and $158 million in debt, including capitalized leases.

We spent $35 million on capital expenditures this quarter for containers, IT projects, and satellite tracking units. This brings total year-to-date capital expenditures to $60 million. Capital expenditures are expected to range from $95 million to $105 million for the year. And to wrap it up on a positive note, during the quarter, we bought $15 million of stock and completed our $100 million share repurchase authorization.

Dave, over to you for closing remarks.

Thank you, Terri. In conclusion, we were successful in executing our strategy in all of our business lines. Our intermodal business grew market share while focusing on customer service and minimizing margin compression.

Both our logistics and brokerage businesses continue to grow at double digit rates, and Mode continues to improve its operating income. We anticipate the peak, although muted, will continue through mid-July -- excuse me, mid-December.

With that, we'll open up the line for any comments.

(Operator Instructions) Ben Hartford, Baird.

Dave and Don, maybe interested in your take on the market here in light of some of the Hanjin disruptions. What type of opportunities might you see from an ISO perspective? What type of disruptions are you witnessing from a drayage point of view perhaps?

And are there any implications as we start to think about 2017 as it relates to shipper strategy from an ocean perspective, how that might benefit you guys?

Yes, Ben, we were hoping there might be some opportunities with this bankruptcy and maybe assisting our clients in getting their product to market.

You know, I think for the most part, while it's definitely disruptive, I think that overall it's been handled very well. And candidly, our clients were able to expedite their shipments.

So we haven't seen a lot of disruptions. We were very prepared for additional cross-dock business or assisting our clients with drayage, getting things off of the port.

I think the biggest issue that's faced, particularly the drayage in Los Angeles, is just they don't know where to bring the boxes and return the chassis. But unfortunately, that's outside of our bailiwick, so we really don't see much of an opportunity there.

Yes. We haven't seen much.

Okay, good. And then if I can get one more in, just turning our attention preliminarily to 2017. I know it's early, but the pricing environment in intermodal and truck has been tough this year.

How do you anticipate the 2017 bid season -- the tone to be? And assuming that there is little improvement from a pricing standpoint in 2017, what type of offsets do you foresee from a gross margin perspective might you have, assuming that we do see rail cost inflation next year?

Well, we think that number one, of course, through the first half of 2017, just as occurred in the first half of 2016, we had a carryover from the various bids that we participated in and business we were awarded. So in 2016, that carryover in the first half, of course, was positive, and we did have some substantial price increases that were given up in the second half.

So the second half of the year is going to start out light. We are hopeful that with the pending ELDs in the latter half of the year that in fact we'll be able to see clients focused a little bit more on value and capacity and less purely on price.

Now, I don't think that's necessarily just a wish and a prayer, because as the ELD deadline does in fact move closer and closer, we are going to see that change in focus by our clients. So we are hopeful ---- and looking forward to it being flattish worst-case and we are hopefully up small single digits this year.

Okay. That's helpful. Thank you.

Todd Fowler, KeyBanc Capital Markets.

Dave, just on what you are seeing with compliance on the bid awards and really the slightly lower volume outlook here for the full year, do you have a sense -- is that volume that's going to a competitor? Is that volume that's just not materializing in the marketplace? Or is that something that's maybe going into the truck market just given where capacity is?

Todd, you know, I'm sorry if I didn't speak properly on that. We are actually expecting our intermodal volume in the fourth quarter to go up in the mid-single digits: 4% to 6%.

So we are actually -- and the overall market, at least from the numbers I've been seeing, is going to be down sequentially again. So we will be actually gaining market share.

Yes, I think Todd, what we are alluding to is bid awards that haven't materialized at the level that we thought it would be. We are still up, but we were expecting to be up more based on those awards.

So we are still holding pat that it will come. We ramped up with people to start at the end of the second quarter and it's materialized, but not at the level yet.

Yes. And to answer your other part of your question, did that volume go to somebody else? We don't think so. We think that in some cases, customers projected higher volumes in their awards than are materializing. And we base our projections on their projections to us.

And in other cases, customer's business is down. And in other cases, the award started later than it was supposed to according to the customers' projections. So we don't think we lost that business.

I was able to get everybody to participate on that one. No, I got it. And Dave, I did understand your comments about what you were saying, and between Don's comments and Terri's comments, that's exactly what I was looking for. I was just trying to see if you had a sense of why you weren't seeing maybe the volume that you were expecting when you gave the guidance at the middle part of the year.

The second one I had is a similar question on the logistics side. Is that some business and revenue that's going to be deferred and you're going to start to see some of that ramp a little bit later? Or is that just lost revenue that's not going to materialize at this point?

It'll materialize. It just has not ramped up to the size that we wanted right now. So it will materialize in the fourth quarter.

That's what we are being told by our customers.

Right.

No, sure. I understand that, but I just wanted to see if that was -- if it was a timing issue, which it sounds like it is more than anything.

It's a timing issue and it's a retail account. And we are waiting for the big kick to come.

Understood. Okay. Thanks for the time.

John Larkin, Stifel.

Thanks for taking the question. It was interesting. This year so far during the third-quarter earnings season, we've seen gross margins at truck brokerage operations kind of be all over the map. Some of the larger ones have seen some compression, whereas I couldn't help but notice that yours has expanded. And you make reference in the press release to more value-added services that you are providing and better purchasing.

Could you be a little more granular with respect to what's happening there to give you that boost in gross margin when everyone else is having a bit of pressure there?

Sure, John, thanks. This is Don. Over the past year or so, we've tried to diversify our product offering on the truck brokerage side and really cross-sell the traditional intermodal customer into our truck brokerage business.

So we've ramped that up. And instead of attacking it from a bid perspective, we are going in surgically and looking at certain markets and certain capacity needs that our customer has. And we've been successful with that.

So I would say it's more of a strategy in our customer mix than it is the market. And we've also been able to leverage with our carriers because we've gone to more of a core carrier mix with our existing customer base.

Okay. And these are typically smaller carriers that you have relationships with? Or do you have larger-scale relationships with some of the more household names in the truckload sector?

It's more small to medium carriers.

Got it. And then congratulations on bringing in the four new customers in the logistics area. We all know you have very high service levels there.

Are those the result of what I would call proactive sales efforts where customers have chosen to do an outsourcing? Or were they doing business with somebody else and conducted a bid process and selected you due to your value proposition?

In each case, they handled it internally and decided to do a bid process. And then Unyson was selected as the logistics provider. So it was not moving from one 3PL to us; it was basically handling it internally and we were part of the bid process that won it.

That's perfect. Congratulations. Do you see a strong pipeline of new logistics opportunities coming down the path here over the next few quarters?

Yes. We are very bullish on the pipeline for logistics.

Excellent. That's all I had. Thank you very much.

Scott Group, Wolfe Research.

Wanted to start with the rails. And wondering, Dave, are you seeing any change in behavior from the rails that suggest to you that they are being more competitive or caring more about volume relative to pricing?

So more conceptually, that question and maybe more specifically: I don't know if it's too early, but do you have a view: are your rail costs going to be going up kind of more, less, or similar in 2017 as 2016?

Good questions. The railroads definitely are concerned about volume, but they are more concerned about pricing. And at least the railroads that we deal with our two partners, the UP in the West and the Norfolk Southern in the East.

I do see that trend will be ongoing. We fully get it that -- in fact, regardless of market conditions, they do in fact have capital that they need to deploy in order to maintain and improve their service levels. So that's just going to be -- and it's an ongoing point of tension, if you will.

But as far as what we'll see for next year, we have a fair degree of visibility with our Eastern partner. And we always, with our Western partner, it's always later in the year, I think, as we both have a better insight and visual into how 2016 may play out. So we'll have good visibility, I would say, when we report our fourth-quarter earnings.

Can you share maybe directionally in the East if you think you will be up similar, more, or less next year versus this year?

It will be pretty similar.

Yes.

Okay. And then on the brokerage side, maybe can you walk us through the progression of the margin pressure you saw sequentially? And is that pressure continuing or accelerating or worsening, I guess is the right word, in the fourth quarter? Starting to ease? Just what trend in brokerage gross margins you are seeing.

For the sequential compression, it was down 270 basis points. What happened there was contractual rates were pressured due to the soft truck brokerage market with ample capacity. And in some cases, we brought rates down to be more competitive.

The majority of our bid awards became effective in the third quarter and that reduced our contractual rates compared to what we had in the second quarter.

In terms of your other part of the question, what happens with the gross margin as a percentage of sales in the fourth quarter, we think it will stay about flat with where it sat in the third quarter.

Because we address the mix part, too. So we have the contracted rates that -- for bids that we had to address where the market was tough. And then we diversified the product offering to kind of shift it from contracted prices to projects. So that's why we're seeing a nice bounce in the overall brokerage business.

And are you seeing a rise in the purchase transportation cost or noncontract costs and things like that?

No. No. It's down, actually.

Down sequentially or year over year?

Year over year.

Okay. And how about sequentially, if you know?

It's up sequentially -- compared to fourth quarter?

I guess third versus the second. And your expectation for it versus third, if you have it, sure.

The cost would have been down sequentially in the third quarter. And it will probably be down compared to last year in the fourth quarter, but flat with the third quarter.

That's right, yes.

Okay. Very helpful. Thank you, guys. Appreciate it.

Tom Wadewitz, UBS.

I wanted to see if you could give a little bit of a broad sense in kind of customer pricing in intermodal. You talked about fuel was a headwind and price was down some. Is this kind of down in the low-single digits or is it a bit worse than that, just in terms of kind of broadly how contract intermodal pricing came through?

We, of course, don't really divulge that information. But you can see from the way that truckload pricing was down and assume that overall, the intermodal pricing was down approximately the same.

Okay, all right. That's helpful. What do you think about I guess -- I know the intermodal and truck markets move differently. But do you see -- are you optimistic -- there is a truckload carrier that reported tonight and is kind of constructive about October improving and constructive in outlook.

Do you see evidence that there is a little bit of tightening taking place? Or does it still feel like a pretty loose market to you in kind of September, October?

I'll address the intermodal; I'll let Don address the truck brokerage. But no, we are not seeing the type of tightness that we in fact had forecast for this peak season. We did not see it in October. We don't believe we are going to see it in November, December either.

We do think, again, that it will be an extended peak, as some of our customers ship deeper into peak season. But we really don't forecast that we are going to see a real tightness during this peak shipping from an intermodal perspective.

And Don, from truck?

No, truck is fluid. There was some tightness in the Southeast with the impact of the hurricane. The only slightly tight market now is the West Coast. But it's just slight. It's nothing like it normally is. So trucks are fluid.

Okay, great. Then just maybe one more. On the Company-specific initiatives that have been pretty helpful to you over the past year on drayage, continued utilization, and so forth, how much is left to go there as you look into 2017? Do you still have significant opportunity to improve the cost side into 2017? I don't know if we can frame that on those two initiatives.

That's a really good question. We have gotten better. I do think there's still a substantial room for improvement. If it was when the Cubs beat the Indians tonight, I'd say we are in the middle of the fifth, maybe.

So there is still is room. I think we did pick, in all candor, some of the really low-hanging fruit that was -- but there still is more. And with some of the systems we are implementing, I do think that we'll be able to achieve those over time.

And so you think we'll see those in the numbers in 2017, the further improvement?

I think you'll see some improvement in 2017, yes. But I do think that it's going to be something that is not just for next year. It's going to go into 2018 and 2019.

Great. Thank you for the time.

Justin Long, Stephens.

So, Dave, you talked last quarter and again this quarter about the strategy of growing market share. And I wanted to get some more insight around that.

As you got through the tail end of bid season in the third quarter and probably went after some business more aggressively, how did you make the decision to go after that freight versus walk away on price? Are you looking at the multiyear margin potential? A return threshold? What does your selection process look like?

Okay, that's a good question. And really, we were focused on this as we went through the first few months of this year and we saw that if in fact we continued and just try to protect margin that we could shrink in double-digit numbers. We chose that as a bad decision and so we became focused on being more cost competitive.

I think the criteria as we look at it is there's certain markets where we have either an inherent advantage or is very, very favorable within the US. And so we focus very much on those.

And we also focus on the longer-term relationship clients that we have versus the transactional clients who will switch for a buck. So we very much worked with them to make sure that we could get to the cost levels that they required in the markets that we were hoping to gain their business, and were able to execute on that strategy.

So while our gross margin is down, I think that if you look at our network today, it's better than when we started the year from a balance perspective. And I think that we have also further engaged those clients that we see as long-term customers that we want to continue to grow with.

Yes, if I'll add to it, too, I think it was a disciplined approach by customer. And what that customer contributed to our network, how they offered us across on our service lines. And also we were disciplined in not going to the market in some markets where it just didn't make any sense to us. So I think it's positioned well.

Great, that's helpful. And maybe could you give some more color on the markets where you do feel like you are favorably positioned?

Inasmuch as current capacity, pricing, etc.?

Yes. So when you described that process, you said you are focusing on markets where you are favorably positioned. Maybe it's an area where you have density in the network. So I was just wondering if you could provide some more color on where those areas of the network are.

Of course, we don't really want to go into what the specific market areas are. Because each carrier, whether any of the bimodals, we all have slightly different networks. So I'd really prefer not to go into the geographic regions that we feel as though we have an advantage or is really desirable.

Okay, fair enough. And then lastly, Terri, maybe this is one for you. But you gave the expectation for consolidated gross margins to be 11.3% to 11.8% in the fourth quarter.

Is that a good run rate to think about at least for the first half of next year? Or is there another -- any swing factors we should be thinking about as we model into the beginning of next year?

You know, we haven't done the budget for next year yet. So I'll give you more guidance on that during our fourth-quarter earnings call.

Great. I'll wait for that. I appreciate the time.

Brandon Oglenski, Barclays.

This is Eric Morgan on for Brandon. Just wanted to follow-up quickly on the initial comments on the materialization of bid awards. Is this something that has historically been kind of a swing factor for you guys? Or is there something else going on this year where maybe it's a little bit more pronounced?

You know, obviously, forecasts are just that. They are forecasts. They are inherently flawed. And in particular, we have won several customers that are -- I wouldn't say relatively new to us, but are growing quite rapidly that I think that had forecasted some numbers that were just off a bit.

And as Don had said, some of the logistics was more so instead of actually just missing the forecast, it was delaying the actual onboarding. So these aren't lost business. It's more so that we've had delays. There has been some forecasting which has probably not 100% accurate, but that's something we usually try to build in with various clients. Because we know nothing is going to be perfect for forecasting.

Okay. Appreciate that. And if you could just maybe provide some initial thoughts on capital priorities for next year. And also, I know you guys mentioned M&A. Maybe what you're looking at there.

Our first use of cash for this year and next year would be acquisitions. And that's what we and our Board think is best. We'll also talk to our Board about share repurchases at our meeting in November if for some reason we don't come up with an acquisition. But we are confident that we'll be able to find something, hopefully within the next year.

And in terms of what our capital expenditures are, we are planning that now for next year. And so we'll give you more color on that during our fourth-quarter earnings call.

From an acquisition perspective, we have been -- as you know, Geoff DeMartino came on as our Vice President of Corporate Development. We've been very active in looking at a variety of acquisition opportunities that would allow us to continue to diversify our product mix.

We haven't landed on anything yet, but in all candor, I think when we started this process in February, I didn't think we'd have anything done by now. I think that we have been successful inasmuch we've looked at a variety of different businesses, and it's enabled us to talk even more thoroughly about what is the best fit for Hub going forward.

So we are moving forward. As Terri said, that's going to be our number one choice for use of cash in the coming years. But also we'll certainly consider stock repurchases and discuss that with the Board.

Okay. Thanks for the time.

(Operator Instructions) Ben Hartford, Baird.

Just a quick follow-up. Terri, maybe some perspective on 2017 EPS. I mean, not asking for guidance, but maybe your level of confidence that you can see growth at all.

Obviously, with the fourth quarter with the revised guidance for 2016, the implied fourth-quarter number and the run rate suggests a contraction that probably carries forward into the early part of next year. And the bid season is uncertain.

But are there any potential offsets that you see that could provide for earnings growth next year? Some perspective there I think would be helpful.

As Don mentioned, the logistics pipeline is pretty strong. So that would be potential upside for next year because hopefully we would onboard accounts near the end of this year and that would flow into next year. So that will certainly help.

And the recent logistics accounts that we are onboarding in the third quarter and that we onboarded in the second quarter will be good to have in 2017 since we've had pretty strong growth in logistics.

And truck brokerage has really done an amazing job of growing margin and growing with new customers and existing customers and providing the value-added services. So that, too, is more upside. Because of our diversified business model, we think we'll be able to offset some of the compression in intermodal.

Okay. Is it fair to say you've got tough comps in the first half of the year. But based on everything that you said with regard to some of the wins in logistics and brokerage, you've got some opportunity to grow certainly in the back half of the year. Is that a fair way to think about next year?

It is.

It is, yes.

Okay, great. Thank you.

(Operator Instructions) Jason Seidl, Cowen.

It's Matt Frankel on for Jason. Real quick here, you guys talk about a dedicated business in the past and how that would be of interest to you. It seems to be the standout performer or the standout segment from several of your competitors this earnings season, being that it's steady visibility.

I'm curious if this market at all over the last several months has changed the way you view an acquisition. Are you more or less inclined to look at assets than you have been in the past? I'm curious what your thoughts are on that.

That's a really good question, Matt. We are not asset adverse, obviously. We have 32,000 containers. We've got 1,200 Company truck drivers. And so we do believe that in certain cases, asset ownership is required to participate in the business.

As we've talked in the past with our customer surveys show, that has been the number one area that our clients would like for Hub to provide additional services. So we find it very attractive. We find some of the demographics as far as being able to supply truck drivers on constant routes is very attractive.

And as you had said, there's several of our large competitors that in fact, their dedicated was really the highlight of their quarter. And we think that dedicated trucking will continue to grow. And so we are -- we remain very interested in that.

We are also very interested in our non-asset-based businesses. If you look at our truck brokerage business and the way that that has been able to grow, it really is a very bright spot for us. And there could be certain acquisitions within that market which would be quite attractive for us and allow us to continue to leverage that growth through 2017 and beyond.

And the same holds true for our outsourced logistics business, Unyson, which again is experiencing double-digit growth. We see the demand being there and there's a lot of room for that business to grow. So it could be different industry verticals that could be interesting acquisition targets. There's really a variety.

So we are not necessarily biased against anyone. It's depending upon the assets we need to deploy. We like dedicated, but we also like the non-asset-based businesses as well. So we've got a broad swatch of industries to look at and individual companies as well.

Thanks. And one final question. I'm just trying to get a better understand (sic) of the timing issue. If and when we see the spot market in truckload pick up over the next few months, just given capacity issues, the prospect of ELDs, when can we expect to see a pickup in intermodal pricing?

I know there tends to be a lag there. But in your experience, at what point after pricing and truckload picks up do you start getting more phone calls from customers showing an interest in bringing back freight to the rails?

You know, I think that we'll see it quicker than normal. We are always a little bit slower, but I don't think it's going to be quarters. I think it will be months that once we begin to see the pricing change -- we never price as high during the peak markets and we never price as low during the markets such as we are in today.

But I do think that we'll be very quick on it. I think that the other intermodal providers are also very focused. I'm hoping they are very focused on price increases and what we may be able to do if in fact we see some type of tightening in capacity.

Yes, if I could add to that, I think you'll see it. Because the length of haul in that local east market, you'll see that quickly. And that will be the growth vehicle to get the prices.

Thank you, guys.

Thank you. This concludes the question-and-answer session. I will now turn the call back to Dave Yeager for closing remarks.

Again, thank you for joining us for our third-quarter earnings call. As always, Terri, Don, and I are available if in fact you have further questions. Thank you again.

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