Q3 2019 Earnings Call
Hello, and welcome to the hub group third quarter 2019 earnings Conference call.
Dave Yeager hubs see no.
Oh, Yeager hubs, President and Chief operating Officer, and Terry Pazuto hubs CFO are joining me on the call.
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A brief question answer session will follow the formal presentation.
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Any forward looking statements made during the course of the call or contained in the release.
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Statements that are forward looking can be identified by the use of words, such as believe expect anticipate and project and variations of these works.
Please review the cautionary statement in the release.
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It's now my pleasure to turn the call over to your host Dave Yeager, you may now begin.
Good afternoon. Thank you for participating in hub group's third quarter earnings call.
Today I have with May fill yeager hubs, president and Chief operating officer, and Terry Pazuto, Our Chief Financial Officer.
At the close today hope reported a record third quarter.
Thats quite an achievement when you consider that we had a 2% revenue decline.
Our diversified service offerings contributed to these strong results as hopes adjusted EPS was 97 cents per share.
The Capex acquisition continues to perform well as we continue to see sales and operational synergies there were adding value to our clients and enhancing our profitability.
And with that I'll turn the call over to fill to review our business lines.
Thanks, Dave I will now discuss our service line performance, excluding legal settlement costs.
Motor volume declined 9% as we saw softer demand from last year and increased intermodal and truckload competition.
Despite the volume decline, we improved gross margin as a percentage of revenue by 60 basis points.
We were able to offset decreased volume with improved tractor utilization procurement of outside capacity and revenue management.
Our team is providing record service levels and we believe this enhances our value proposition and the soft market.
Truck brokerage had another strong quarter had difficult environment and we're seeing the benefits of our improved operating model pricing in technology.
Truck brokerage delivered an increase in volume, a 14% and a 510 basis point improvement in gross margin as a percentage of revenue.
We continue to provide record service levels. So the benefits of our LTL growth UK stack and improved our customer a carrier value proposition all of which drove the solid results.
We have a significant opportunity to grow the service line and our investment in our sales organization to support the opportunity.
Well, just six delivered strong results and profitability and revenue growth as we integrate a case stack improved our operating model and Onboarding New business, we talked 680 basis point improvement in gross margin as a percentage of sales and a 27% increase in revenue.
We won several new customer engagements during the quarter and a strong pipeline progress.
We are beginning to see improvement in our cross selling the case stack, which included several wins during the quarter, one of which is the largest customer engagement of cased accessory.
We continue to see significant growth opportunity in our logistics business as we complete the rollout of our new technology platform organizational structure and additional service offerings.
Dedicated had a strong quarter offsetting a 5% decline in revenue with 790 basis point increase in gross margin as a percentage of sales.
The margin expansion was driven by better operational discipline and improved revenue management.
We remain focused on additional opportunities to improve our returns through more efficient operations.
We also won new contracts in the quarter, while maintaining a strong pipeline for growth.
Overall, we had a strong quarter and we'd like to thank our talented team at hub for the great teamwork and results. We feel that we have ample opportunity to continue to grow and operate more efficiently regardless of market conditions I will now handed over to Terry to discuss our financial performance.
Hello, everyone. As you can see from our press release net income for the quarter, but $26.1 million and earnings per share with 70%.
Like the highlight three point for the third quarter from all the numbers that either back to the Scott for the third quarter exclude a total of eight half million dollars of cost approximately 19 cents per share.
Steve excluded cost increased $4.8 million related to settlement of legal claims.
Made in 2013 parallax Smith classification of drivers $3 million related to a legal settlement at the 2016, our liability claim.
$700000 spec consulting project.
Second we're excited about relentless execution of our profit improvement initiatives, resulting in a strong 5% operating margin.
Eric Hagen before interest taxes, depreciation and amortization with $75 million or an increased 35% over 2018 $55.5 million.
Now, let's take a more in depth at our performance in the third quarter hub group's revenue decreased 2% to $913 million driven by increased the logistics revenue offset by declines in our other service lines.
Gross margin as a percentage of sales, but 15.1% the highest and have it straight.
Gross margin as a percentage of sales increased 280 basis points and as Bill discussed after his service, while it's up compared to last year.
Operating margin, excluding the $4 billion of acquisition related compensation and amortization expense.
5.4%.
Good diluted earnings per share with a record at 97 cents. This is compared to 2018 diluted earnings per share from continuing operations up 77 cents.
An increase of 26%.
Looking at our cash flow cash from operations for the first nine months totaled $129 million.
Free cash flow totaled $82 million.
Earnings before interest taxes, depreciation and amortization during nine months with $200 million compared to $135 million last year.
48%.
Our cash balance at the end of September was $89.6 million.
That's lower than expected because we pay vendors early at the ended the month.
We did that because we went live on ERP on October 1st our accounts payable balance was also unusually low at the end to temper.
Our current cash balance is about $155 million.
Turning now to guidance.
We believe that our fourth quarter earnings per share will range from 81 cents to 85 cents, which brings our 2019 expected adjusted earnings per share range from $3.36 to $3.40.
We project a mid single digit to high single digit revenue declined for the fourth quarter, we expect growth margin that the percentage of sales to range from 13.9% to 14.2% in the fourth quarter, we believed that our fourth quarter cost and expenses will range between $89 million 91.
Million dollars.
We projected our effective tax rate will be about 25.7% in the fourth quarter.
We plan to spend between $35 million and $40 million on capital expenditures in the fourth quarter and to fund these purchases with the combination of cash and debt.
That wraps up our financial performance opening date for closing remarks.
Thank you Terry.
We believe that our strategy of providing excellent service to our clients, while focusing on profit improvement initiatives will continue to generate strong returns.
As we previously stated our goal is to achieve $6 billion and revenue by 2023, while continuing to expand our profitability and return on invested capital.
We intend to accomplish that goal through a combination of organic and acquisition driven growth.
We have a robust pipeline of acquisition targets that would strengthen our existing service lines or will represent an extension of our card offerings. At this time, we'll open up the lines to any questions.
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Our first question comes from Scott Group of Wolfe Research.
Hey, Thanks afternoon guys.
So I wanted to ask about the fourth quarter guidance, typically fourth quarters higher than third quarter.
I get the mid to high single digit revenue decline, but still implies fourth quarter revenue higher than third quarter.
So why such a steep drop in earnings and third rail to force.
Basically because we're not seeing the peak season like we did last year and when we talked about have project since back in July we thought we would see a peak season similar to 2017, and we really havent seen that either both on the intermodal service line or in truck brokerage for that matter. So.
And we had thought that are our volumes would be down slightly and instead.
They're going to probably to be down mid to high single mid to high single digits in intermodal. So the environment now is a bit different than it was back in July .
Not all of our forecast we've gone from our customers really kind of reflective that we would see a relatively strong peak again much like 2017.
And we are now just in the last couple of weeks beginning to see some tightness in L.A.'s, Seattle, nor Cal Chicago.
But it's just not as robust as so anybody had forecast for what we thought will take was.
Okay.
Can you give us the monthly intermodal volume trends and then what you're seeing in October .
We can share July was down 4% August was down 13% September was down 11% and through yesterday October was down 10%.
Okay and then.
Do you have any what can you say about rail cost inflation at this point do you have.
Visibility to his 2020 higher cost inflation rate lower cost inflation similar cost inflation with 2019 on the rail side.
Yes got that Phil we were anticipating and have good visibility a lower cost inflation next year.
Okay, and then I wanted to just make sure I understand the in the press release, the 60 million of run rate savings on the other incremental 40 million how much of that have we seen.
Year to date in the of the 60 million and when does the 40 million job Im just im wondering if I'm understanding all these numbers sure yes. So.
What I will tell you is what we've done already about half of that is related to.
Efficiency gains through technology investments, our ability to reduce headcount, there and reducing outside services spend.
The majority of that took place in the latter half of the year.
The other half is related to operational improvements that we've also seen over the last few months, mainly utilizing our driver attractive capacity more effectively we've really enhanced our procurement program have done a great job there and I also think are being much more effective in our revenue management as.
And look out on the 40 million.
The majority of that that's going to be 2020, we're going to get those on an ongoing basis, but the majority will be operationally driven we think there is a significant opportunity to reduce cost and improve efficiency in our drayage and dedicated network and we're going to go after that very aggressively we're going to continue to invest in technology.
But our goal is to be growing and leverage the head count that we have while also continuing to perform on our revenue management.
And continuing to procure well in the open market.
I just want to make some understanding that so the 60 million that you said how much have you actually.
How much will actually show up in the.
2019 numbers of the 60 million.
Like Bill said I mean, we saw a lot of that headcount savings in the latter half of the year, specifically if you look to Q2 very good.
Q3, our headcount is down about 5% just in that period of time in that happened.
Mid mid Q3.
We'll see that for a full quarter in.
Fourth quarter, obviously, and then we have more to go on on top of that as Phil mentioned with the anticipated savings that will have no did we havent, we hadn't really garnered the majority of that until very recently at rate. So you should see it going forward.
Okay. So we got less than half of the 60 it sounds like this year and we'll get some portion of the so we'll get the full 60 next year and then some portion of the 40.
Next years, Yes, correct correct right.
Okay, Alright, thank you for the time guys.
Our next question from Ben Hartford from Baird.
Hey, good evening guys.
David maybe just your perspective on how.
In the context of lack of a peak.
Good results are trending now and what.
Baseline expectations might be from.
Right.
So the question.
Theres, a little bit of paper sharply there have been but.
The question again was how do we perceive the bid season, right now and how will it impact in 2020.
As we've often said.
The a long term the how the bid season may turn out.
As reflected in the prior peak so it's relatively flat right now.
We do believe that early on that again, we'll probably be relatively flat or maybe slight upticks in pricing in the beginning of the year and that as it goes along the will become be able to raise price more and more we think is capacity will become a bit more constrained.
So thats kind of where we're at right now.
Yes, Bill as bad it's really early we're just getting into bid season.
I think probably a little early to tell exactly how it's going to go but.
We're keeping a very watchful eye on that and I think from a.
An area, where we've just been increased competition is on the truckload side right and we continue to stay focused on maintaining our share as well.
Okay.
In the context of what you're describing from a cost saving the perspective, what's been done today, what's going to come next year.
In the organization to leverage that headcount.
Can you talk a little bit about how the model should reactive if we are in kind of a downturn type.
Nario given your progress to date and what you see.
It's just difficult we don't have a whole lot of historical frame of reference that we think is terrible relevant. So if we're in if we're in a more difficult environment as you've got these cost savings that are coming.
Is there, but the potential to be able to maintain flat EBIT margins in that environment or.
If we do have decremental margins is there any way to be able to describe what it may look like just trying to get a sense for.
For this this whipsaw that we have threeq versus Fourq do in the back half of the year and how to think about 2020.
Yes, I would say that we are going to work extremely diligently to make sure we get all of these cost opportunities.
Thank you if you look at its tough to exactly date.
What what the magnitude of those recessionary.
Markets might look like.
But we do feel that we're in a position to hold up while we think we have a really good plan and a lot of opportunity as I mentioned before.
The dedicated in Drayage side, we still think there's significant opportunity to operate more efficiently and it has been a large source of capital for us.
But also just a large opportunity for us to improve our operations reduced cost improve efficiency.
So we're very focused on that and think that there's a lot of opportunity. So I would say given these opportunities in the way that we're going after it I feel confident in our ability to continue to deliver even a recessionary environment.
Okay, and then terrific one in just in terms of how to think about 2020 is capex I know you've got the building earmarked but.
Maintenance Capex still 125 130, what do you think it for 2020.
We believe 2020 will be similar to 2019, which we think will be around $90 million to $95 million.
Does that include the building yes.
Okay, great. Thank you.
Our next question.
From Justin long of Stephens.
Thanks, and good afternoon.
So Terry you gave an updated intermodal volume expectation for the full year, but what's your expectation for intermodal volumes in the fourth quarter, specifically and then thinking about some of the pricing commentary.
For intermodal next year do we need to see intermodal pricing up in 2020 in order to improve the intermodal Lar or do you think the intermodal low art can improve even if we see flat Ted let's call it down low single digit intermodal pricing.
Sure.
When I had said that we had previously thought that our volume in the fourth quarter, we'd be down lightly I wish that mentioning the fourth quarter, we think that will be down mid to high single digit now put fourth quarter for full year.
It could be down.
Probably high mid to high single digit that well.
Similar that particularly here, we believe will be down less than we are in the fourth quarter.
And this is Phil just from a pricing perspective on your second question at work when our budgeting process right now, but our anticipation would be start to see a tightening in the second half and with that we would be in a very good position as a strong year I think we given these cost offsets.
And the ability for us to continue to improve there and get more velocity back in the network I think the opportunities very strong growth next year, we're confident in our ability to continue to perform well in the intermodal portion of our business.
Yes, I think in particular, it's kind of a hub specific story in as much as of the cost initiatives $60 billion run rate do something that's very real and I know that Phil and Jerry and their teams of review the 40 million and what we think is achievable for next year and it is so I think that.
We expect the economy as Phil said to be getting stronger through the second half, but even without that we certainly have a lot of cost. So we've taken out and a lot of opportunity left.
Yes, Bill talked specifically significant opportunity on the operational side of the house in dedicated Andrei Jeanette Drayage.
Simply impacts our intermodal margin and we just recently seen a little bit of improvement in tractor and driver utilization, we really haven't seen as much of that yet as we capacity coming down the pike.
Okay. That's helpful.
Secondly, you know theres a lot of uncertainty out there around brokerage based on both the market dynamics and the role of of technology and how that could disrupting can you just take a step back and walk through how you feel your brokerage business is positioned going forward and how we should be thinking about.
Both the topline in margin trends relative to the broader brokerage market.
Sure, we'll add so I think you've heard us talk a lot about the work that we've done to improve our brokerage we really started.
That focus I think Latin.
Late last year and has seen a tremendous amount of improvement in we started with a focus on our service and our purchasing.
Setting up the right organizational structure and incentives and since then weve enhanced our technology, we enhance.
Our pricing capabilities and that's really starting to show up I think in the results as you saw really strong gross margin improvement from us during the quarter. So we feel very good about our model and where it is.
We also added the LTL portion of our brokerage through the case DAC acquisition, which has been extremely strong as well, we're adding new service lines and capabilities. We're building trust with our clients and we're much more competitive player at this point.
So we think with a full bid season. This year that we're going to be in a really good position and would anticipate continued top and bottom line growth.
Through through 2020, so that's our anticipation I certainly think it in the competitive market and we need to continue to invest in technology to keep up.
And to be real player, but we are very determined to do that and very focused on it.
Okay, Great and then one last quick one to sneak and you mentioned dedicated and the opportunity for improvement. There. If you think about your operating margin for dedicated today versus what you would view as more normalized what does that gap look like.
I would say significant we are not where we want to be or near that and we think that there is a clear pathway could do that to get to where we should be and where we want to be which is.
Double digit operating margins and we think that that's doable within the service line and we.
Our working diligently to to make sure that we get that business tradition that way.
Okay, Great I'll leave it at that thanks for the time.
Our next question from David Raso Stifel.
Yes, good afternoon team.
First question on the intermodal container fleet given the drop in volume this year and.
Somewhat muted expectations for next year do you plan on removing any containers or do you plan on adding to the container fleet next year, where do you expect to container fleet to fall out in 2020.
Well ill.
We will probably added housing container is our best guess right now, but we're also retiring containers. So we don't think it'll grow much in 2020 that should be about new yes, exactly and for this year, David will probably be up 300 containers that not growing this year, either because again were terminating this year.
Okay. So the thousand for next year, just replacements, yes correct.
Okay and then.
A follow up on the truck brokerage side of things.
It's growing nicely and you talked in your comments about investing in a sales organization given a little bit more color. There I guess how are you investing in that are they regionally based centrally base inside sales field sales.
How do you think about the truck brokerage growth in the sales organization sure. Yes. This is Phil so it's a combination rate I think one area, where we recognize that we are not where we need to be or inside salesforce in particular, we are putting.
A good amount of effort into that and feel feel really good about our ability to access the spot market on a more consistent basis through that and leverage the really great relationships, we have become a larger customers and support them with that.
We also need to bringing more talent.
From a truck brokerage perspective for our outside sales organization, whether that's in more of a specialized role or in one of our regional or Hunter type positions, we think.
That our salesforce, although we've made a lot of really good changes do we need to continue to train our focus to to be able to position that product and we but the opportunities. There we're seeing signs that we can execute to that.
And so we're going to continue to to invest in both but the the biggest opportunity that's right in front of us would be within the inside sales organization.
Excellent. Thank you.
Our next question Todd Fowler of Keybanc.
Great Thanks, and good evening.
Just on your comments on the volumes and the lack of peak season is that really is that solely related to what you're seeing from a bit compliance standpoint.
Or do you think that there are some share shifts going on in the market right now.
I think the definitely been compliance is still not up to where it was last year, it's still a lot less it's improved slightly but.
It's still much less than the prior year.
But I do think that intermodal has in fact lost some share and it's it's not just in the 750 to 1000 mile type of line haul since its even up when the 2000 downloads hill as become very competitive market. So.
A lot of it is the truck competition I think that they're doing anything just to keep their tractors and their drivers moving.
But thats not a long term strategy, that's going to be viable.
Right, yes, okay that makes sense. That's helpful. And then just on the net revenue guidance for the fourth quarter that.
Declined from where you're at in the third quarter I'm, assuming that a lot of thats a function of youre not seeing the peak season, but is there anything else that's going on with net revenue sequentially into the fourth quarter and then with all the things that you've laid out on the cost side.
It sounds like we should expect net revenue margins to improve as you move through 2020, but is there any reason why there would be kind of puts and takes given kind of all the opportunity. It seems like you have particularly with rage and some of the costs and on that part of the PT.
And you're right Todd beds.
Most of the impact on.
Margins in Q4 as compared to Q3 would be due to no no rail peak and then we also had.
Only one month of our western rail partner increase in.
In the third quarter in the fourth quarter that increases in for all three months and then we're expecting that utilization might be a half a day wears in that fourth quarter and it was in the third quarter, we would expect truck brokerage margins, which as bill mentioned on the earlier in his prepared remarks were up 510 basis.
If we were thrilled now the want to get more volume of course, but.
I would expect truck brokerage margins to be down maybe 50 to 70 basis point, because it'd be challenging market and then we project logistic to decline from Q3, maybe 100 basis points, just because of changes in customer mix between Q3 in Q4, but.
Right that in 2020, we have a lot of opportunity to include those might be profit improvement initiative that they'll talk about early.
Great. Okay, and then just the last one from me what the topline shaking out to be flattish this year.
It sounds like there's just a tremendous amount of opportunity on the cost side going forward, but how do you think about both organics growth and inorganic growth both into 2020 and kind of that pathway to get you to the 6 billion dollar topline. Thanks.
Okay Todd.
Hey, we obviously, we've been talking about there being getting to $26 million by 2023, and it will be a combination of both organic growth.
As well as through acquisitions, we have a very robust.
Acquisition pipeline right now, but we're we're we're looking at and doing a lot of diligence work.
And all these companies for the most part or asset light.
And in fact would either be complimentary to our current service lines or put us into new lines of business. So.
We're encouraged with that we think that this is just a part of the cycle as far as you have a bit of a free slowdown.
But it's not going to last.
Certainly forever and it does it does appear as though the overall leased the consumer economy is quite strong and as we continue to burn off inventory there will be greater demand for transportation, yet I would just to add to this until the we've really built a lot of capabilities I think to utilize the brokers or profit enhancement.
Opportunity as well, whether it's we're managing our revenue better we're operating more efficiently we're pricing more effectively I think we're putting in better technology. So all of those when we do see the growth on an organic basis really return in the market come back in our favor we feel very good about our ability to scale.
Great. Thanks, again for the time Tonight.
Our next question, Brian Ossenbeck JP Morgan.
Hey, good evening, thanks for taking the question.
So.
Terry maybe you can just couple of housekeeping ones start maybe can you just give us and EBITDA guidance, which you've been giving the last couple of quarters to go with the rest of the outlook you provide.
Sure.
We we project that.
For the fourth quarter, which is the only quarter you don't have our EBITDA could range between.
The by then.
$32 million.
Okay. Thank you and then when you look at the.
Amortization.
From the acquisitions and the comp expense.
If you think that those are expected to go down and in 20 and be a little bit into the tailwind and some disclosures in the 10-K will go down a little bit but not much Brian .
Okay very similar to what 91.
Okay.
And then going back to the initiatives, especially on.
The.
Great side.
What what specific if you've got these sounds like you've already got some of them started are they going to require.
Capital investments is that all internal self help maybe provide a little bit more.
Text behind.
That is exactly to the biggest buckets of opportunity and some of the steps need to take two to realize.
Monetized.
Yes.
So I would tell you the biggest opportunity is.
Getting our processes in the right place and really leveraging those across the network utilizing best practices.
We have some areas, where we're performing we upside from terminals were performing very well and then we have others, where there is massive opportunity. This could range from how purchasing two how we're utilizing our drivers in our tractors were reorganizing our load planning function to better support our drivers anarchist.
Immersion provide that higher service level enhanced efficiency, where I would say there is some capital would be really just on the technology side as we continue to roll out our single platform.
With OTM, we're going to be able to leverage our drivers even better.
Through the optimization tools that OTM AD, so that would really be the only capital area I don't see anything else besides that.
From a capital requirements perspective, the rest is just making sure we block and tackle and execute.
Actually should help us with our Capex because.
Being more efficient as the result, when we look at our business and how we.
Detractors when the drivers that we have so that to bring our capex down.
Okay, and then on that last question on that topic on capital deployment.
We'll see.
The buyback kind of continuing at the rate that you've been executing in 2018 do you feel like Theres a real.
Reason potentially to step back or increase maybe if you get some maybe from the capex side into place there. So just thoughts on.
The rest of the balance sheet deployed.
Yes, we bought about $18 million worth its stock unit during this quarter and I. Appreciate the cash it's really acquisition. So we have a board meeting coming up in mid November we talk about at every board meeting that we'll reevaluate them.
Okay. Appreciate it thanks for that.
Right.
Our next question Bascome majors Susquehanna financial.
Yes.
Thanks for taking my questions I wanted to follow up.
A question about Big compliance I believe you said last quarter that you weren't expecting much of an uptick in it.
Im a little surprised by the magnitude of the lack of peak season volume and the intermodal business.
Against that I was wondering if you could could could break it out a little more are you seeing freight rebid and intermodal and actually gained by truck or is this just.
Your current customers not bringing the volumes you hope for or is there something else going on rail the real competition or I actually Darcy competition. Thank you.
So I would state combination right. So there are some some customers that are trying to take advantage of the market in the short term, which.
It is something that we've come to deal with there is some increase intermodal competition as I said in my prepared remarks, and then I would say the truckload pricing has really been.
Some of the comparable as we see sometimes there are.
Dumbfounded, but we.
Our continuing to focus on on staying disciplined.
And continuing to improve our yield I think thats certainly part of the challenging volume that we've seen.
And we plan to continue to stay focused on yield and continue and I think there are opportunities as the truckload market tightens.
For us to get a lot of that Boeing back.
And continue to utilize our network going yeah, the whole industry with down 7% in the third quarter Bascome and we were down nine now couple percentage points of that for us with customer that went bankrupt.
Last year and the last year.
We don't think we left the whole lot of market share in terms of per cent per whether it exactly.
Thank you for that clarification.
Can you just share where you are add on big compliance from intermodal business today, and what a more normal peak might look like.
Sure. We think it's very similar to where we were in the second quarter in that 70 ish percent range and we.
We've seen it uptick a little bit, but it hasn't been too to where we expect.
And I would say our customers it's been interesting with peak season to see some have.
Very large forecasts and they've been brought down so I think it's also a demand function right, where you just we havent seen the import volumes at the level that we would have anticipated which is certainly disappointing but.
Also a understandable given some where the inventory level there.
Thank you and last one.
Your full year is coming in at or above I think where you originally guided the year, even though the cadence I think as it is a little differently you may have thought.
Where are you recruit on incentive comp for the year right now and should next year proved to be more challenging on the bottom line is is there some cushion in variable comp along with the cost initiatives that that you've talked about the good to help the easement blow. Thanks.
Yeah, our incentive comp tax right, along with our EPS and how we grow our EPS that determined by the board beginning of the year. So I can't tell you typically where we're at both tell you that in the proxy when we file it but we're accruing where we need to accrue based on how we think we're going to turn out for the year and.
It it.
And next year, depending on how that turns out.
It could be a headwind it could be a tailwind I mean, we we only get compensated if we grow and estimated.
Right that's right.
That's a decision by the outside directors, who it is performed on an annual basis and it's based partially on our budget partially on the prior year, but obviously, if we don't grow from the prior year, our EPS, we get zero, which is what we were deserve so.
It's a very effective compensation, yeah, we tree that up every quarter based on forecast the way, we think that's not going to come out right.
And thank you for that I do appreciate the clarity on the you need to grow to earn eight and I wasn't asking for dollar number I was just roughly or.
Kind of target level above below anything directionally can share and where we are tracking for this year.
What we're talking about.
Yes.
About.
Thank you very much okay. Thanks.
Our next question Rubbery Schenker of Morgan Stanley .
Hi, This is mukesh vendor on for Rob maybe just a quick one from me.
Can you run through what you're seeing from a volume perspective, and the different regions and as a follow up have you seen any truck first intermodal price spread inversions lot claims, particularly in the east.
Sure I'll take that volume by region local West was down 11, local east was down 11, and transcon with down three.
And are we seeing comp competition in the east, Yes, that's why our.
That's where we run into truck competition to mode, and we are seeing in some cases track rate.
Track rate lower than intermodal rates in the very competitive there.
Got it thanks for the color.
And once again as reminder.
If you have a question press star one.
Our next question from.
Tom Wadewitz, yes.
Hey, this is my trend and one for Tom.
So I wanted to just ask about competition within intermodal.
So you are starting to see some of that pick up but.
When we look forward to next year as the bid start to ramp up I mean, do you think that becomes more pronounced or is there something that you. You think you could see that could just make all the players short little little discipline.
No I think we have shown discipline at times in the past and there's no reason to believe again.
Despite the fact that we've had some significant increases in our gross margin percentage in our operating income.
We still are really not at an acceptable return on invested capital I think kind of like any of the players really are at this point, so we need to.
Continue to focus on the yielding up of course, that's we see part of that one of those levers of course price with customers.
The other lever, which fill and his team have been exploring is on our cost side because the go all can add towards our earnings and our operating income so with those two levers I think we've been quite aggressive and I believe that we've been very disciplined in our pricing and idle that we've ever had the focus.
On the cost improvements that we have at this point and.
Those which are are they are very attainable. The all the numbers that we've been laid out here today.
Yeah, and our competitors did say I think on their call that they expected didn't orderly bid season, and we're hopeful that that's the way it will be.
Certainly hope right now.
Then just.
On that point about about efficiency in intermodal. Thanks, Phil you mentioned last quarter that you were seeing you saw us what you saw growth and loaded miles while volumes were down.
And you I think you know length of haul is probably a factor there just with trans con being less worse, but could you just talk about what you've really done to improve efficiencies within intermodal or just in terms of box turns or reducing empty miles is that really technology driven or are.
Are there other factors driving it.
Yes, we've really put a significant emphasis on process, we're going through all of our terminals and doing what we call clean cheating trying to identify opportunities to utilize our drivers more effectively and also make sure that we're utilizing all of our tractors and capacity as effectively as possible. The point is at the end of that we have an agreed upon playbook.
There were going to utilize two operated sufficiently given the freight flows of that terminal as we possibly can.
Is there is a portion that its technology related we are rolling out our OTM platform to all of our terminals and plan to be done by the middle of next year.
But the the main opportunity we have is process and focus and making sure that all of our team members understand and have the ability to its really execute.
To our processes.
Okay, great. Thanks for the time.
Our next question from Matt Brooklier of Buckingham Research.
Thanks.
Good evening can can you talk about the timing around the I think to be intermodal.
Wayne closure I'm, assuming that was with which you P and and.
Can you talk about the potential for incremental.
Changes in their network I'd or there are there further potential closures that we could see in fourth quarter going forward.
Sure. This is Phil the the impact was on both rails.
The actually was a pretty small portion of the ethylene cancellations that impacted us as a little bit more in the east I would tell you that at this or rail partners have been great about communicating with us on changes to their network. At this time I don't anticipate any further rationalization of lanes.
Certainly.
They have changed their mind before but I actually think you'll see reopening of lanes more. The then cancellations is our hope as well.
And as a follow up I'm guessing the reopening of the lands would be.
2020 event.
I don't know for sure I would tell you that we're hoping to see lanes reopened I think at this point given some of the volume challenges that the industry has had the that would be a prudent move.
And I think there they are looking closely at that I'm sure that yes, there are assessing and on an ongoing basis, but that's certainly our hope.
Got it and then just one more of the you know the one percentage point of.
Intermodal volume that you know was was.
Loss in that particular.
Product line, we are able to quarter back some of the volume and move it and your other modes are you able to I would assume that.
Recaptured some of that on the truck brokerage side during yes, that's exactly right. We like to go to our customers. When there is the disruption in any mode and offer them solution first.
Might not always be cost neutral, but we want to make sure we're bringing them solutions as we saw weather impacts, particularly in Kansas City market, we were going to our customers proactively with solutions to continue to move the framework.
And we have been able to garner the majority of that back. So we don't anticipate the weather disruption being the long term impact.
Got a good to hear appreciate the time.
And our last questions from Scott Group of Wolfe Research.
Hey, Thanks for the fall appreciate it.
Any chance you can share how much in peak season surcharges in intermodal you did in fourth quarter last year, and what you're expecting this year.
Oh, probably about eight times as much as we are doing right now.
It significantly adverse yes.
I'm trying to think so this is a it's a fourth COVID-19 headwind but.
As it relates to peak surcharge specific lets it wouldn't be an issue as a headwind.
First half next year pricing protect pricing is maybe at risk, but peak surcharges are specific risks fortunate router.
Is that the right way to think about it correct, yes, okay.
Capex I thought it was supposed to be higher next year is this a or we deferring. Some capital is this a new normal new run rate ran 100 million year in Capex.
No we talked about the initiative to profit improvement initiative to looking at our operations then.
Looking more with less that relates to capital expenditures as well and being more efficient. So thats why that number came down Scott.
Okay, and then just lastly, so I know, we did 5% margin for the quarter, but not obviously not for the year.
Do you think all these costs things or would you need to get to the fiber do you think that potentially takes you above size.
But I think with a strong economy continuing to see some tightening in the truckload market in a stronger pricing environment that.
Gets us to the five and then some though would be our read and.
With the pricing environment doesn't cooperate that create the challenge for us to hit those numbers, but it's still our target and our goal.
Okay.
Alright, thanks for the 10 guys.
[noise] includes quick question and answer part of our media, we now I'll turn the call back to David eager for closing remarks, great well. Thank you again for joining us on our third quarter earnings call as always if there are any additional questions that come up we're all available.
Uh huh.
Thank you again for joining us.
Thank you ladies and gentlemen, this concludes todays conference. Thank you for participating you may now disconnect.
Okay.
Okay.