Hub Group Inc (HUBG) 2018 Q3 法說會逐字稿

Hello, and welcome to Hub Group's Third Quarter 2018 Earnings Conference Call. Dave Yeager, Hub's CEO; Don Maltby, Hub's President and Chief Operating Officer; and Terri Pizzuto, Hub's CFO, are joining me on the call. (Operator Instructions)

Any forward-looking statements made during the course of the call or contained in the release represent the company's 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 and variations of these words. Please review the cautionary statements in the release.

In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in the 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. Sir, you may begin.

Good afternoon, and thank you for participating in Hub Group's Third Quarter Earnings Call. Our third quarter results are the culmination of a great deal of work and effort to increase our margins while reducing expenses in our Intermodal network.

Our Intermodal volume was up 3% for the quarter, as we benefited from a very strong pricing environment and excellent operational execution. We continue to see a strong peak while experiencing capacity constraints across our network. We believe that this tight capacity environment will continue through the end of the year. The strength of the Intermodal market, coupled with the cost advantage versus trucks, will contribute toward a positive pricing environment in 2019. We are forecasting mid- to high single-digit price increases in 2019, along with continued volume growth.

And with that, I'll turn the call over to Don to talk about the performance of our other business units.

Thanks, Dave. We had a strong quarter as we continue to price our products and services to reflect the market and provide the solutions that our customers have come to expect. Our targeted approach has allowed us to grow both revenue and yield, while we also focus on process, workflow engineering, network improvements and execution. We believe we are well positioned to drive further yield improvement and growth in the fourth quarter and 2019. Our pipeline for all of our service lines is robust as we further deploy our go-to-market strategy.

Now let's talk about the businesses. Logistics revenue for the quarter declined 11%, as we continue to feel the impact of lost customers from earlier this year due to bankruptcy and insourcing. However, we were able to increase yield with our existing customers by taking contractual price increases, reducing our costs and providing our customers additional solutions to drive results. We are focused on yield and process improvements with our existing customers and future growth with new ones. We expect growth in logistics from 2 accounts that were onboarded late in the third quarter as well as a strong pipeline for 2019. During the third quarter, we were successful in renewing several customer contracts that will provide incremental margin contribution in the fourth quarter and for the duration of those contracts. We continue to advance and standardize our TMS technology as our logistics offering remains quite strong.

Dedicated revenue increased 36% as we continue to onboard new customers. We have a very robust sales pipeline due to our great service, focused on safety and value to our customers. We did, however, experience higher cost due to startup expenses, driver wage increases and greater use of outside carriers. We are focused on ensuring we have strong returns in this rapidly growing service line.

Truck brokerage grew both revenue and margin due largely to our targeted customer approach and positioning our value-added services. We are focused on growing our contract business by leveraging our transactional and value-added services and better aligning the team with our go-to-market strategy. In addition, we are reengineering our pricing and operational process, investing in talent, building deeper relationships with our carriers and developing technology that will enhance our ability to align capacity and demand. We expect the first wave of technology enhancements to be in place in the first quarter. We believe we have a long runway of growth in our truck brokerage segment as we focus on contract business while continuing to grow our transactional and value-added service lines. We are well positioned and are industry leaders in this dynamic high service space.

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

Thanks, Don, and hello, everyone. I'd like to highlight 3 points for the quarter: First, we sold Mode for approximately $238.5 million on August 31. Mode is reported as a discontinued operation in our financial statements; second, Intermodal beat our expectations because of higher pricing, improved accessorial recovery and excellent execution in spite of rail service; third, we continue to explore acquisitions that will enhance our integrated supply chain management solutions. We spent about $0.5 million this quarter for due diligence, and we had $267.5 million in cash at the end of September.

Now let's take a more in-depth look at our performance in the third quarter. All the numbers that I'll be talking about exclude Mode since we sold it. Hub Group's third quarter revenue increased 13% to $933 million. Hub Group diluted earnings per share was $0.77. This is compared to an adjusted 2017 diluted earnings per share of $0.34 that excludes onetime cost of $1.5 million and uses a 25% effective tax rate. That's an impressive 126% increase.

Taking a closer look at a few of our key metrics. Hub's gross margin increased $28.7 million or 33% due to growth in Intermodal and truck brokerage, partially offset by declines in Dedicated and Logistics. Gross margin as a percentage of sales was 12.3% or 180 basis points higher than last year. This is the highest third quarter gross margin percentage we've seen since 2009.

Intermodal gross margin as a percentage of sales was 420 basis points higher than last year and was the largest contributor to the yield improvement. The year-over-year Intermodal price increase was higher each month at the quarter progressed. Third quarter average rail transits were up 0.8 day, which negatively impacted our results.

Truck brokerage gross margin as a percentage of sales was up 70 basis points because of an increase in contractual rates. We focused on the right lanes for the right customers at the right price.

Logistics gross margin as a percentage of sales was up 50 basis points due to price increases and changes in customer mix.

Dedicated gross margin as a percentage of sales declined significantly because of start-up costs for new contracts, changes in customer mix and the challenging driver market. We're taking several actions to overcome these headwinds. Those actions center on increasing driver productivity and improving recruiting and retention. This will reduce our reliance on third-party carriers. We're also aligning the dedicated pricing team with our business solutions group to ensure we have the appropriate returns on our existing deals.

Operating margin was 3.7% or a solid 180 basis points higher than last year.

Now I'll discuss what we expect for the fourth quarter of 2018. We believe that our diluted earnings per share will range from $0.85 to $0.95. By service lines, we expect 10% to 15% revenue growth in Intermodal, a 5% to 10% decline in truck brokerage revenue, and a 10% to 15% decline in Logistics revenue. We expect dedicated sales in the fourth quarter will range from $75 million to $85 million. We expect gross margin as a percentage of sales in the fourth quarter will range from 12.8% to 13.4%. We believe that our quarterly costs and expenses will be between $85 million and $87 million. We project that our effective income tax rate will range from 22% to 22.4% in the fourth quarter and that our tax rate for the year will be around 23.5%.

That wraps up our financial performance. Dave, over to you for closing remarks.

Thank you, Terri. We're very pleased with the third quarter earnings. They're the result of focused process changes in Intermodal, coupled with the positive pricing environment across all of our service lines. We're bullish on the remainder of 2018 and believe that 2019 has significant upside due to the strong freight market and the opportunity to deploy our Intermodal process enhancements across all of our business lines.

Another positive third quarter note was the sale of Mode. While Mode is a good business due to its agent-based model, it was not a strategic asset for Hub. We intend to use the cash we received from the sale of Mode for strategic acquisitions that will add value to our network. We are focused on acquisitions that allow us to diversify our service offerings as we build a strong platform for continued growth and the creation of significant value for our shareholders.

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

(Operator Instructions) The first question in the queue comes from Scott Group with Wolfe Research.

This is Ryan on for Scott. How are you guys thinking about implications of precision railroading at UNP and NSC? And is this good or bad for you guys?

Well, I think that the approach both of our Western partner, the UP, as well as our Eastern partner, the Norfolk Southern, is not a radical slashing of costs. As an example, the UP's Unified 2020 Plan is from the bottom up with the operators. They will be looking to, in fact, reduce cost in the longer term but also to enhance the service levels. We are very confident service is stabilized. We're very confident that it will continue to get better over the near and long term. So we're very much in favor of the moves they made.

It makes sense. And what kind of visibility do you guys have to rail cost increases in 2019? And are you expecting bigger or smaller rail cost increases relative to this year?

We have good visibility into 2019, and they'll be similar to 2018.

Got it. And can you guys provide a little more color on 2019 pricing? And do you plan to focus more on volume or pricing over the next 12 months?

We plan on both. We think this is a market that you can grow with your business, with your targeted customers and take price. So we plan on taking price in 2019.

As Dave said in his prepared remarks, we expect mid- to high single digit pricing growth. We would expect our volume growth to be consistent with the market.

Right. So kind of more balanced approach.

Very much so.

Yes.

And then just lastly from us. Do you have any additional color on timing for the next acquisition? And how are you guys kind of thinking about your ability to fully replace the dilution from the Mode deal?

Yes. So as far as the timing, I think I said on other calls, I would be very disappointed if, in fact, we don't have an acquisition accomplished by the end of this year. That being said, I think that any acquisition would not immediately be to the accretion level that Mode was. But I will suggest to you that what we have been looking at to acquire is something that is very strategic for us, that we'll be able to grow. So the earnings that we're buying today is what we can make of it over long term with the management team of the acquired company.

The next question in the queue comes from Ben Hartford of Baird.

Dave, maybe back to your point about seeing a strong peak. Having the data points have been a little mixed. But from your standpoint, how has peak been trending relative to normal seasonality? I guess, that's point one. Point two, the topic about the looming January 1 tariff and whether there's going to be any pull forward into December. I'd be interested in your perspective on that point as well.

Yes, as far as peak this season, it has been very robust. As you may recall, in fact, on July 30, the Union Pacific declared a constrained environment. That has continued to date to where we're still seeing a lot of constrained markets, Los Angeles, Seattle, Chicago, Atlanta. Most of the major cities, in fact, are very tight on capacity for Intermodal. I do want to emphasize that we have seen the truck industry, has softened a little bit, but Intermodal has been extraordinarily strong. Are some people going to pull forward some product? I think that's a possibility. I think that some of our clients maybe even pulled forward early which caused the early peak in late July and early August. So we may see some of that. But we haven't had a lot of discussion on it with our customer base. So thus far, I can't say that we're going to see a great deal of it, Ben.

Right.

Okay. Terri, maybe back to the point of the past 2 calls, the questions about this core Mode business -- or should it be core Hub business, now that Mode is gone, and what the margin profile should look like. I think you guys have said in the past that a couple healthy pricing cycles, you can get the 13% gross margin, maybe 4% EBIT margin. First, is that -- are those still guideposts to think about in the present model? And is the pricing environment, has it been strong enough in '18? Is the outlook in '19 enough to be able to put those targets in play for '19?

Yes, we forecast that for the fourth quarter, our gross margin as a percent of sales will range from 12.8% to 13.4%, so certainly higher than it was any other quarter this year due to pricing environment and excellent execution. Our operating margin was 3.7% this quarter, which was 180 basis points higher than last year in the third quarter. We are projecting that our fourth quarter operating margin will be 4% or maybe a little bit higher. It's peak season right now and that certainly impacts the numbers. We think that we've got a strong tailwind for next year, with the pricing environment, with how strong peak has been. We expect we'll get those mid- to high single-digit prices next year, grow our volumes and grow our truck brokerage business. We think we have a lot of opportunity there in truck brokerage. That's one of our highest margin businesses. We think that we're still on target to hit 4% next year.

Okay. That's helpful. And last one, just to circle back on the acquisition. As you look at these targets, do you have a sense as to what the capital intensity is or what you want them to be? In the context of the present book of business, do you expect them to be more asset-light or more asset-based? Or does it matter and you're focused more on strategic fit and other factors?

I think over for the longer term, we're definitely looking at strategic fit, but as far as the ones we're looking at on an immediate basis, it's definitely non-asset-based. So that's the direction I think you'll see us going at least over the next several years. And there could be some asset intensity later on in 3 or 4 years, that we may want to have some add-ons. But those are non-asset-based, that we're looking at it.

The next question in the queue comes from Justin Long with Stephens.

So maybe to start with a question on Intermodal pricing. I think last quarter, you talked about mid-single-digit increases in 2019. Now you're saying mid- to high single-digit increases in 2019. You mentioned the spot or the truckload market has softened a little bit. We've seen that in the spot rates. So what gives you confidence in that increased outlook for pricing next year?

Well, Justin, I think there are several reasons. Number one is just capacity. I do think that's going to continue to be an issue. The other is cost. During this period, as fuel continues to rise, despite the fact that we've been able to take significant increases this year in the high single digit to low double digit range, the spread between Intermodal and truck has expanded over that time period. And so we feel very comfortable. There is a long runway here with which we can continue to increase pricing. That being said, of course, we are going to have some offsets from a cost perspective, with rail cost increases, as our rail partners are investing a tremendous amount of capital. And also, driver wages will continue to escalate over the longer term. One thing I didn't put in the prepared remarks was that about a little less than 1/3 of our overall enhancement in gross margin in Intermodal was because the Intermodal team went out aggressively and eliminated a lot of unnecessary costs that were not recoverable such as accessorials. And so that will stick with this us over the longer term as they changed a lot of bad contractual arrangements that we had with clients and made it so that it's much more revenue-neutral to us versus actually a negative on our gross margin.

Yes. And I would say the other thing is we're much more nimble in pricing now than we ever have been with the leadership we've got. And we've got terrific processes to make sure we're getting the right price, and it's what we should be getting in the market.

Yes, Justin. I think the biggest process is how we go to market, our go-to-market strategy, the targeted of accounts, how we price the lane in the market and defining our network have all been improved over the last year, and you're seeing the results of that, besides, of course, the market helping. But I think internally, we've done a good job of structuring that.

That's helpful. And, Dave, to your point on the spread between Intermodal and truckload pricing, what does that look like in your network today if you look at pricing on a contractual basis?

On a contractual basis, and again, these are rough numbers, but I think what we're looking at is, on the shorter haul business, let's say, 800 miles, the differential is probably in the 15%, 20%, maybe 25% range. In the longer haul the 1,000-mile, the transcon business, where you can get up as high as a 40% variance between over-the-road and Intermodal.

Okay, that's helpful. And then secondly, I wanted to ask about Dedicated and specifically Dedicated margins in 2019. If I just think about the growth you're onboarding in the back half of this year and the start-up costs potentially moderating as we get into next year, what kind of operating margin improvement could we see in that Dedicated business next year?

We think it will go up significantly from where it is now. We've got some new processes in place, where we are focused on a couple of things: one, improving our daily operational execution; and secondly, implementing some of the same pricing processes that we have in Intermodal to Dedicated. That's why we aligned the Dedicated pricing team with our business solutions team.

Okay. But if you were to put numbers on it, do you think it's 300 basis points, 500 basis points? Do you have any ballpark?

On how much higher it will go?

Correct.

Yes, I would think at least 300 -- 200 to 300 basis points, higher than it is now.

We have our next question from Todd Fowler with KeyBanc.

Dave, just on your pricing commentary, to follow up on that line of questioning. The mid- to high single digits, do you think that, that's where the Intermodal market is going to be in 2019? Or do you think that your opportunity set is different, given some of the things that you're doing with accessorials or maybe focusing on some certain lanes? So is that more of a Hub Group-type number? Or do you think that, that's really where the industry can be going into next year?

I think a lot of the efficient operators that, in fact, that's where they can be. I can't speak for the entire industry, but I think that the opportunity set is certainly there. And despite the fact we're through about roughly 90-plus percent of our bids, there is 10% which are lagging that have yet to take effect into the fourth quarter. And then if you look at it sequentially through 2018, each quarter, we progressively were able to get more and more price. So there's going to be a catchup effect on the first quarter bids that we did in the second quarter. So yes, I think that is very achievable, and we're very focused on continuing to increase those prices, again, partially to offset the cost that we anticipate. But in addition to that, just trying to get our return on invested capital to a reasonable level.

Sure. That makes sense. And just so I understand that point, what you're basically saying is that a contract that renewed maybe 9 months ago is below where the market would be today, so as you reset those for the first half of '19, that's part of the pricing opportunity?

More and more eloquent than me, Todd. But that's exactly correct.

Just wanted to make sure. Okay.

That's right. More eloquent.

Okay, good. And then just from my follow-up. Thinking about the fourth quarter guidance, is there any reason why we shouldn't use that as a run rate as we move into 2019, so if we think about what normal sequential patterns would be off of the fourth quarter into the first quarter? And not looking for a specific guidance, but, I guess, is there anything unusual as to why we couldn't take 4Q and run rate that into 2019? And obviously understanding that there may or may not be acquisitions or something like that but just using that as a base for a starting point going into next year.

Are you talking about the gross margin line or the costs and expenses or both?

Well, I was really talking about the EPS. I mean, so if we took the $0.90 at the midpoint or -- and back into an EBIT number off of that and just the sequential trends, I'm just trying to think about, is there... .

Yes, I think...

Yes, go ahead. Sorry.

This is peak season now, so we are able to garner more price during peak sometimes. And we wouldn't be able to garner as much price during the first and second quarters next year. It is slower then than during peak. That could weigh on margins a little bit in Intermodal. But to offset that, I think we have a lot of room for improvement in Dedicated margins and we project dedicated margin will go up next year from where they're at right now. That's because we won't have start-up costs and we won't use as many third-party carriers. We're also taking our pricing disciplines that we have in Intermodal and putting them in Dedicated. So net-net at the margin line, maybe a little lower. And then for costs and expenses, every quarter we had the bonus which was $7.5 million higher than the prior year, because we're doing very well this year. Last year, we didn't get any bonus, for the EPS component of the bonus. So next year, that EPS resets. It generally resets at where we were for the prior year. So that would be a benefit that you'd see next year that you wouldn't have in the fourth quarter of this year.

Right. Yes. I would suggest to you that the 2017 lack of bonus proves that our bonus plan works. We didn't deserve any bonus.

(inaudible) motivation there.

I would also say that there's upside with Unyson Logistics, because that's another area where some of the pricing strategies that were incorporated by our Intermodal team were incorporated with logistics. We'll see improvement in their contribution as well.

And also, truck brokerage since truck brokerage now is under the same pricing umbrella as Intermodal. In that service line we should also see improvement in the margins. We hope to be able to capitalize on some of the great relationships we have with our customers and grow our truck brokerage business.

We could grow our contracted business from truck brokerage, absolutely.

The next question in the queue comes from David Ross with Stifel.

Just following up on the comments you made about looking to price in Dedicated more like Intermodal. Could you elaborate on that? Just because as I think about it, Dedicated tends to be a longer-term contract than Intermodal with different aspects to the pricing in terms of cost. So, I guess, what is it about Intermodal pricing that you should help Dedicated?

Well, I think number one is with the existing clients. And in some cases this is self-inflicted. But we didn't take some of the price increases that we should have with our clients, as our costs, including driver wages, were going up substantially as was fuel. And so that's specifically what we're talking about. It's also just the science and the methodology of how we go about it and making sure that, in fact, we price it at a level that we're going to like. And that we incorporate in our contracts, escalation causes that will allow us to offset future increases as we do believe we're going to continue to see inflation from a wage perspective.

Yes. And then in this capital-intensive business, the other metric that we look at in connection with the price is the ROIC.

Right.

That's very important. Good to hear you say that. Rail service, been a drag, been an issue. Again, I guess, what comments can you offer about how that's unfolded through the quarter and how you see it going into next year and whether or not that allows for any benefit in your pricing discussions with the railroads?

I'll tackle the last one first. The railroads have seen some record quarters from volume and revenue. And as a direct result of that is we do have some service delays. And there's been other environmental issues that have impacted it, wildfires, hurricanes. The service is, in large part, in my mind, due to the increases in volume. I do believe that they're investing effectively. We have seen overall service stable. It's not where we want it, but it's stable and is actually probably contributing to part of the capacity constraints that we're seeing within the rail industries. Our fleet is 37,000 containers, probably really only 36,000 right now because of the slower transit time. To answer your question, we're not going to see any power towards us to reduce what our rail costs will be as a result of the service, but we do expect that with the UP's Unified 2020 Plan and with some of the changes that Norfolk Southern is undertaking, that we will see more accelerated improvement in service as we get into the first quarter and into 2019.

It sounds like in the meantime, you can pass on that price to customers due to capacity constraints, and once the service improves, that would allow you to pick up volume and grow that way as well?

That is very true, David.

The next question comes from Brian Ossenbeck with JPMorgan.

I was wondering if you can expand on the commentary about reengineering, operational and pricing process in truck brokerage.

Sure. This is Don. Yes, we've looked at our business. We've got a great franchise in the brokerage side. We've done very well in our value-added services and transactional fees that we've added. And we think there's some large upside on the contractual side of our business. So what we've done is looked at how we go-to-market across all of our business lines, of course, over the last few years and how we deliver that. So when we do bids, which, as you know, most of our Intermodal business is bid, we want to take a targeted approach of how we're going to go-to-market, price that business to win it, service it and then grow into our other services from that. So it's really taking the targeted approach and looking at specific business, especially on the contracted side of it, and see how we can grow that.

Okay. And will this be in place and ready to go for the next bid season? Or will it take a little bit longer?

No, it should be in place by the bid season, for sure.

Got it. And this is a follow-up to the point on capacity. How do you think about the container purchased in the fleet for next year? Is that something you would see expanding a little bit from here? Or are you coming on a bit more improvement in rail service and transit time to free up some of that capacity?

We do think we will see some incremental improvement in the rail transits, but we're thinking a smaller build than we've had over the last 3 or 4 years, maybe 1,500 units. So it will be a smaller build. As to your point, we do believe that we'll see some enhancement within the rail service that will allow us to essentially, equivalently grow the fleet.

The next question comes from Ravi Shanker with Morgan Stanley.

This is Diane from Morgan Stanley. So my first question is, a lot of other Intermodal carriers have talked about a gap and a lag between Intermodal and truck pricing, and that seemed to have recurred with some of the carriers this year. So what gives you confidence that you can achieve the mid- to high single-digit Intermodal pricing next year, which would be in line with what some TL carriers are expecting?

Sure. We'll, I think that, basically, we've changed our processes. Our Intermodal team changed the processes. We reacted much more quickly. I agree. Traditionally, Intermodal providers were anywhere from 6 to 9 months behind a market cycle. We are right on top of it. We keep testing the highs. And so I believe that we will be right in lockstep with the trucking increases in 2019 and possibly even exceed them. As rail Intermodal, the capacity is constrained right now and very likely will be into 2019. So I see a lot of opportunity there. I think that Hub structurally, our Intermodal team is in a position to be able to take advantage of those opportunities in the market.

Great. Has -- have in the past on the Intermodal front exceeded truck pricing?

That's a really good question. In my experience, we have not seen that. But I do think that this is rather an extraordinary time now where we are seeing a lot of driver capacity constraints, despite the fact we've loosened up a little bit in the over-the-road market. And with the escalation that the trucking industry has seen in costs, Intermodal is just that much more of a bargain right now. And so we believe that there's a lot more upside. And I would agree with you that, historically, that has not been the case, that, historically, Intermodal has priced at a slower rate and a lower level than truck, but that may change in 2019. I think it's a very good opportunity to do so.

Okay. Well, that will be exciting to see. And my second question is, can you give us just detail on how your Intermodal volumes growth trended throughout the quarter and what you're seeing thus far in October?

Sure. We look at it on a business day basis. July was down 1.5%, August was up 4.9% and September up 5%. Part of the reason for that fluctuation was there was 1 more business day in July and 1 less business day in September. That equates to our volume growth for the quarter of up to 3%.

And through October?

We are up a 3.7% through October 23 on a like business day basis.

To be specific.

Yes.

Okay. Great. I appreciate that. Just one more on truck brokerage. The new initiatives that you guys are embarking on, is this a offensive or a defensive move, maybe just given the competition in the space?

Yes. I mean, the space, as you know, is very fragmented. There's new entries with regards to technology. And we feel we've got a very strong franchise. And what we're doing is deploying technology and business resources and processes to support the business. So at the end of the day, we're going to deploy technology that matches capacity and demand and enable our folks to be able to do a better job with that. So I would not say it's defensive as much, as it's an effort to grow market share with existing business and get new business with a product that delivers service.

The next question comes from Jason Seidl with Cowen and Company.

I want to circle back on some of the comments you made on Logistics. You mentioned that you're -- you got several new contracts that you [reupped] and got better pricing on. Can you tell us what percent of the business those contracts account for, for Logistics?

I'll let Terri answer the percentage. I don't -- yes. So with Logistics, maybe Defined is better, we kind of lost some business due to bankruptcy and insourcing. So the mix of our business has changed. But we've also done -- as you know, the market changed, Jason, last year. So we were more disciplined in going to market and changing prices with our contracted customers to be able to start to grow the margin piece.

Yes. Most of that pricing started materializing in the third quarter. It wasn't in the first half of the year as we changed processes. We've been through most of the price increases for the existing customers. For the new business that Don referred to for a couple of customers- we think that will bring on maybe $5 million to $7 million of revenue in the fourth quarter.

Okay. So it's more like you have an impact on 4Q than on 3Q?

Correct.

Yes. And in 2019, because as we take...

Right. Exactly. Exactly. My next question, I want to tackle the rail side a little bit differently than some of your analysts. You mentioned, I think, in the quarter, that you lost 0.8 day in rail transit times, and that hurt some of the results. Have you guys quantified on a dollar basis what the poor railroad services cost Hub this year? Just so what we're looking at, I'm going to assume next year is going to be a tailwind with improved service. And I'll knock on wood as I say that here.

We have not really calculated what the cost is. We do know that it's more of an opportunity cost than anything, because we do have roughly 1,700 more boxes on the rail with the slowdown in transit. So we could calculate that, but it has not been overly severe, and it's something that we have been able to manage with our clients. We haven't lost clients as a result of it because we're able to communicate realistic transit times to them. So it's an opportunity cost of 1,700 boxes.

Times 2, because they turn twice a month.

Yes, they turn twice a month, so...

3,400 loads.

Okay. That's helpful. I'm assuming that as rail service improves and as, let's call it, the second half of '19 for -- to your major partners, hopefully improves with putting in some precision railroading practices here, that you should have some opportunity to gain some additional freight as their network clears up. Is that correct?

I would suggest it will free up particularly in some of the very constrained cities that I'd kind of -- I had mentioned earlier in the call, such as Los Angeles, Seattle, Chicago. It would definitely assist us in supplying some amount of new equipment. But, I mean, it's not going to be transformational. It's maybe a 5% increase in the overall fleet. So it's not extremely impactful, but it certainly would be helpful.

The next question in the queue comes from Matt Brooklier from Buckingham Research.

You guys talked about some start-up costs at Dedicated. Just curious if you're able to quantify how much in the quarter. Do we have more start-up costs in the fourth quarter? How should we think about the margin headwind there?

Yes. To answer your first question, start-up costs were about $825,000 this quarter. Matt, most of the start-up costs related to a tight driver market and not having the drivers we needed. We incurred costs related to outsourcing third-party carriers, which is very expensive. We also had driver recruiting costs associated with bringing on new drivers for our new business. We have made significant progress in hiring new drivers. And then finally, we incurred travel costs for staffing, onboarding and training associated with the new contracts. And in terms of your question on what to expect in the fourth quarter, we expect start-up costs in the fourth quarter to range between $300,000 and $400,000. Our goal is to ensure that our existing business is running smoothly and that we have appropriate profitability in light of the ever-increasing driver wages.

Okay. Very robust answer there, Terri. And if we think about the driver markets still tight, we're also hearing that maybe there is a little bit more supply coming into portions of the spot market. Has the driver market and driver availability maybe gotten a little bit better in the second half of this year? Or do you still think it's about as tight as where we were in the first half when this market started to take off?

It does seem as though the amount of capacity that's available particularly in the spot market is higher. But attracting drivers is still just as difficult as it was in the first part of this year. I do think that it could be that a lot of the spot market pricing went over to be contractual throughout the year and so -- to lessen some of that tight capacity. But yes, it's very, very difficult to attract. It's very competitive. The driver wages continue to go up at near double-digit rates. So it has not gotten any easier.

Okay. And then your -- I guess, your thoughts on the driver pay side of things. It sounds like there hasn't really been a change there either.

We think in 2019, we're basically going to see an instant replay of 2018, that it will be at or near double-digit increases for driver wages.

(Operator Instructions) The next question in the queue comes from Ben Hartford from Baird.

Just a follow-up here, Terri. Any initial thoughts on CapEx for 2019?

Yes, we do. We think our CapEx will be about half of what it was this year, so maybe around $100 million. Dave mentioned earlier that we are in the preliminary phases right now of determining how many new containers we want to buy next year. Our best guess is 1,500 of them, but that's not a concrete number. And then we anticipate that our CapEx for Dedicated and trucking, tractors and trailers will be about $60 million to $70 million, and that our spend for IT will be approximately $30 million, which is similar to this year.

Okay. And then tax rate for 2019?

About 25%.

There are no further questions in the queue. I will turn the call over to Mr. Yeager for any final remarks.

Well, thank you, everyone, for joining us today. As always, Terri, Don and I would be available if you have additional questions. And once again, we appreciate your participation.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.