Q3 2020 Hub Group Inc Earnings Call
[music].
Question and answer session will follow the formal presentation in order for everyone to have an opportunity to participate. Please submit your increase to one primary and one follow up question anyway.
Any forward looking statements made during the course of the call or contained in the release or in the release represent the Companys best good faith judgment as to what may happen in the future.
Fitments that are forward looking can be identified by the use of the words, such as believe expect anticipate and project and variations of these words. Please.
We shouldn't you be cautionary statements in the release. In addition, if you refer to the disclosure in the company's form 10-K, and other S. E. C filings regarding factors that could cause actual results to differ materially from those projected in these forward looking statements.
As a reminder, this conference is being recorded it is now my pleasure to turn the call over to your host Deger you may begin.
Good afternoon, and thank you for participating in hub group's third quarter earnings call I'm.
Joined today by Phil Yeager hubs, President and Chief operating Officer.
Geoff Demartino, Chief Financial Officer.
I'd like to begin by acknowledging the men and women of Hopper.
During this pandemic they've continued to provide great service to our valued clients, while protecting their health and that with their family.
Today, we announced that our third quarter volume and earnings grew significantly versus Q2.
We've gone from a market that was extraordinarily surplus which resulted in reduced pricing.
To a highly constrained market with capacity at a premium and spot truck pricing at elevated levels.
Our rail partners have been very resilient and have managed the significant sequential increases in intermodal volume extremely well.
Anytime you have massive increases in volume issues to arise.
What our rail partners being the Union Pacific and the Norfolk Southern have responded quickly to mitigate issues, thereby avoiding any significant impact to our network or our customer service levels.
Our clients inventory levels continue to be constrained, while the demand for truckload and intermodal capacity remains strong.
As a result of these market forces going forward. We believe pricing has reached a trough and the prices will continue to rise as demand is strong and capacity tight.
With that I'll turn it over to Phil to review our business lines.
Thank you Dave.
I would also like to start by thanking our team for their relentless focus on supporting our clients and each other in this dynamic environment.
We have participated in a rapidly changing market since the trough in April and we've continued to provide great service to our customers.
We have done this while keeping a strong focus on our costs and continuing to invest in our business to drive long term growth.
For the quarter intermodal volumes increased 9% and revenue increased 4% as wins with strategic customers and the strengthening demand environment are driving our growth.
Transcon volumes increased 18% local west was up 17% and local east volumes declined 3% as we experienced significant tightness in the west coast, leading to an earlier than anticipated peak season.
Gross margin as a percentage of sales declined 390 basis points year over year.
Our volume growth and improvements in our trucking operations could not offset headwinds from lower prices rail cost increases elevated equipment repositioning costs and.
An increased outsourcing of our drayage to support our volume growth.
As the market has tightened we invested in expanding our fleet and we have continued to meet our customer commitments, while providing a great service product. So.
Strong rail service and continued tightness in inventory levels is positioning us for a strong 2021 bid season.
With just six revenue declined 7% and gross margin as a percentage of sales declined 100 basis points year over year.
Everyone.
We are pleased that our business returned to growth in the third quarter with revenue up 1% led by our intermodal and truck brokerage businesses.
As expected intermodal volumes grew high single digits in the quarter benefiting from strong demand from our strategic customers.
While gross margin as a percent of revenue declined to 11.7% Q3 gross margin of $108 million.
Was the highest level achieved this year.
We continue to exhibit strong cost control with quarterly costs and expenses equal to 8% of revenue as compared to 10.7% last year.
Our non driver headcount is down by over 10% due to our efficiency and technology initiatives.
We have achieved our 2020 goal of $40 million of run rate savings for our profit improvement initiatives and we remain committed to operating efficiently.
We continue to improve our trucking operations driving higher utilization also reducing our operating expenses.
Salaries and benefits expense for the quarter was down by over $14 million as compared to the prior year Jeff.
General and administrative costs declined by over $10 million.
Excluding the impact of legal settlement and consulting expense last year DNA costs declined by approximately $5 million.
As we reduced our spending in several areas, including travel and professional services.
Hub group's diluted earnings per share for the quarter was 74 cents.
This compares to 78 cents of diluted EPS in the third quarter of 2019, which included 19 cents for legal settlements and consulting.
Our tax rate for the quarter was 21.5% as we benefited from a state tax credit and the reversal of a federal tax reserve.
For the full year, we expect the tax rate to be around 24.5%, which implies a rate of 26.6% in Q4.
Our results continue to demonstrate the resilience of our operating model as we generated $64 million of EBITDA in the quarter ended with over 185 million of cash.
We continue to have solid liquidity and low levels of net debt.
We view our capital structure as an asset and our priority continues to be reinvested in the business through capital expenditures and strategic acquisitions.
For the fourth quarter, we expect continued high single digit intermodal volume growth based on customer demand and our recent and upcoming container deliveries.
We anticipate revenue will decline sequentially in our non intermodal business units due to the impact of business lost earlier in the year, which has not yet being fully offset by our new business wins.
We expect gross margin dollars will decline somewhat from Q3 levels due to rising cost in Q4, including for insurance costs in our trucking operation.
That are not fully offset by our revenue enhancements in our profit improvement initiatives.
For the remainder of the year, we expect to spend between 70 and $75 million on capital expenditures to support growth in the business.
For the year, we will be purchasing over 3300 intermodal containers and over 300 tractors to refresh and grow our fleet, while continuing to invest in technology.
Dave back to you for closing remarks.
Great. Thank you Jeff.
Despite the fact that the pandemic remains with US we are encouraged by the strong freight economy that is being driven by demand for capacity, creating a positive pricing environment. We expect this strong demand to continue through the end of the year and into 2021.
With that we'll open the line to any questions.
Thank you we will now begin the question and answer session.
You have a question. Please press Star then one on new Touchtone phone, if you wish to be removed from the queue. Please press upon signing or the Heskey. If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on you touched on the phone.
In terms of headcount could you provide an update on on what headcount was in the third quarter. Just curious what type of year over year change, we saw and as you think about revenue starting to come back here sequentially and hopefully that continues into next year.
How sustainable are the head count reductions that you've recently made.
Sure. Yes September 30, EBITDA, we were at about 1800 50 that was down.
About 11% year over year.
We do have a pretty rigorous process for any head count as we were looking to drive efficiency in your organization. So revenue returns, we're going to we're going to hold the line to the extent, we can on head count and managed by through efficiency metric.
The only this is bill the only thing I'd add is that there are a few strategic areas. We want to continue to invest in being or maintenance network, where we think theres a cost reduction opportunity by the addition of head count as well as continuing to develop our inside sales organization in the brokerage to help us drive volume and margin growth there.
Okay, Jeff and I know you said in the fourth quarter gross margin dollars should be down sequentially, but.
Because of what's happening with head count and it sounds like your focus on holding the line. There do you think that operating income will be down sequentially or can it be flat to up with some of the cost reductions.
It should yes, we should be able to leverage some of those costs.
Q3 number is a pretty good run rate.
Cost and expenses.
Okay, Great I'll leave it at that I appreciate the time thank.
Thank you.
Okay.
We do have our next question from Scott Group from Wolfe Research.
Hey, Thanks afternoon guys.
So I'm I'm.
When I when I think about fourth quarter, when there's typically a good peak like it feels like we're having and there's some.
Peak season pricing opportunities, we typically see fourth quarter.
Net revenue.
Higher in some years meaningfully higher than third quarter why is it not the case this year.
Yeah sure.
Thanks for the question I think sequentially. This year, we do have some cost headwinds coming in.
One area.
Our drayage spend is one that we're working to mitigate that with our with our tractor adds this year, but we do think there's some sequential cost pressure. We also have an rising insurance costs that maybe not not seasonally that we may not have had to that extent in the past if you're comparing it to prior years.
Those are the two big driver I think the other pieces that I would highlight is we did take a rail cost increase in September that wasn't fully baked into the third quarter result, and we obviously would pricing that was a somewhat challenging so we aren't doing I think a much better job.
But reducing our repositioning cost as the quarter is coming on to continue to support our volume growth opportunity, but but reduce expenses and then as Jeff mentioned, we have outsourced more of our drayage. We are anticipating the growth is going to continue to be very strong, but given that insurance and.
The tax rate change I think as well, obviously, that's not a gross margin impact, but but an impact as well. So those are really the main factors there that are at play.
How much can you just can you quantify those headwinds I'm still just struggling a little bit because when I look at like 17 and 18.
Good peaks, we had $20 million uplift in in net revenue and maybe it's maybe is something different or are you not doing peak season surcharges or the rail costs doing something different this time around I think the difference might be that the Q3 numbers are probably higher going in this year than they were in the past.
Because.
The market tightness started earlier, so there's probably not as much of a sequential.
Prove meant that you may have seen earlier years, yes. It certainly is given the strength in import.
Volumes that it was certainly a quicker peak than I think we would have anticipated and we locked in a lot of those peak plans really before the those volumes increase so.
It is somewhat of a lower surcharge than we have typically been able to garner but at the same time, it's a contractual commitment on the spot side. When we are getting spot volumes, obviously were able to garner very strong incremental surcharges to to help cover that cost, but I think the other side of it is that we do have that increase.
<unk> cost of repositioning offsetting some of those those returns on the surcharge.
Okay and then just just last question.
Can you just talk about your visibility on rail cost increases for next year and just do you think you've given up I think two point, so give or take of.
Gross margin. This year can can you get that back next year does it take a couple of years to get that back.
Hi, Scott this is Dave.
As far as are the two points I do think that during this upcoming bid season, particularly providing if demand remains very strong, which we anticipate it will but yes, we can get that back.
Very quickly.
So I think that that can be accomplished.
Within the next year.
Yes.
Going into bid season, we see a really good opportunity the discussions that we're having with our customers or the you know given the.
Transition they've seen in truckload capacity and rates they want to lock in capacity and ensure that their supply chains are going to stay fluid next year and that's a really good setup for core intermodal and for intermodal pricing I think the other good sign is that we are seeing shorter haul more local east volumes start to transition.
And back to intermodal, which generates a higher gross margin percentage in higher margin per load day for us because we're able to spin the assets in a more balanced manner and reduce our repositioning cost. So we feel as though there is a both an operational and balance yield opportunity as well as in our in our pricing and the entry.
Your first question too as far as the visibility was railed price increases we have very clear visibility on that for next year.
Okay, great. Thank you guys. Thank.
Thank you.
And our next question comes from David Ross from Stifel.
Yes, good afternoon gentlemen.
I want to start Jeff a little.
A couple of minutes on the Capex side can.
Can you the Capex number you gave some of these things I mean is that for the fourth quarter or for the full year that is for the fourth quarter. So we spend about 55 million.
Year to date, we gave guidance on the second half.
When we announced Q2 earnings and that's just based on the timing of the deliveries of containers and tractors. Most that ended up going into Q4, we didn't spend much in Q3.
And any thoughts you had on 2021, Directionally where that should go.
Yes, we're working on budgeting right now so it will have more to say when we announced before.
All right and then you for Dave and Phil.
Maybe just what have you learned about the business through the last seven months.
With all the ups and downs are there any.
Things you found out that so.
Surprised you and you may be helped.
Ultimately coming out of this year to run leaner and meaner.
You know thats such a hurry. This is David so that's a very interesting question because I've never seen that touched the fluctuations that we've experienced this year before in my career.
I do think that some of the things I did learn as of the.
The resiliency and that you have to be very nimble to be able to react quickly to these types of changes I think the pandemic is rather extreme but it's certainly we have been able to adjust very quickly with our leaner staff.
To price changes.
Whether it be from April one we were down significantly overall to where September were up substantially so I think that.
With the restructuring of the company with the smaller head count, but we're very capable managers and people working with the company that we've been able to sustain.
Sustain ourselves pretty well during a very unusual time I think it's a testament to the team in.
In our brokerage.
Productivity was up 24% in the quarter on a year over year basis, and logistics. It was double digits, our driver productivity improved by 6% on a year over year basis of the fact that our folks are able to.
Continue to deliver those sorts of results given all the fluctuations is a real testament to their work Capex. So we're very proud of what they've accomplished and in but I think it positions us really well with our customers because we were able to step up and support them and I think our customers see that value and deepening our partnerships with a company like ours.
That.
And last question on the Drayage side, you mentioned, it's a little bit out of kilter in terms of increased third party dray, what's the percentage now of in house versus third party and where do you want that to be yes.
Yes, we we were at 54% during the quarter, that's down four percentage points on a on a year over year basis.
So and Thats actually with a lower driver count in our drayage operations, we had earlier in the year gone through and identified that we had opportunities to bring on higher performing drivers into our fleet and we've been able to to reduce the driver count get more productivity out of that.
So we're actually doing more volume with with fewer drivers so.
So we are going to focus on getting into a long term that 80% goal, but invest in the fleet, we think to get you around and continue to grow to get around 60%.
Next year, so that will be the targets that will happen our capex plan.
As we look ahead.
Excellent. Thank you.
And we have a next question from Todd Fowler from Keybanc.
Great Thanks, and good evening.
Dave I just wanted to follow up on your comments in the prepared remarks about rail service you know it sounds like that you didn't experience any significant issues here in the quarter, but I just wanted to.
Make sure that was the case and have you expand on that a little bit and then as you think about intermodal and.
And the competitiveness versus truck I mean are you seeing anything from a service standpoint that given how tight the truck market is.
Would prohibit more share coming to the intermodal market in a really constrain truck market I'm, just kind of what you're seeing from a service standpoint in customer interest at this point.
Sure.
Thanks for the question Todd, Yes rail service I mean anytime sequentially that you have the type of growth that we've experienced.
You will have some momentum of issues.
But our rail partners have been able to remediate those very very quickly. So that we would really have not negatively impacted our clients or overall service. So.
The service has been good I think that the major thing that our clients always want is consistency of service, whether it's a three day trends what are reporting tranches.
So those critical issue for them.
And so Theres also get Theres always going to be issues. When you have of that type of sequential increase but.
How quickly you can affect solve them and fix them.
Is the key and the railroads are partners the Union Pacific in Norfolk, Southern had been very nimble and able to.
Accomplish those goals very quickly.
Okay, Great and then just a follow up Jeff on the operating expenses the $74 million for the total for the third quarter is that a good run rate for the fourth quarter and then as we get into 21 are there anything that we need to think about as far as cost coming back if it's incentive compensation or anything that would change that significantly from.
The run rate, where you're at right now.
Sure, Yes, so for Q3, the the number is that a good run rate number to use there was nothing.
To call out that would be unusual in that number in the quarter and.
And then to your point we.
With the current trend this year, we've got Ben we don't expect to pay incentive compensation, we will budget typically we budget for that next year any year. So we'll have that as a headwind.
And just Jeff what's kind of a ballpark number that you would think I mean, not not looking for me, but what what would be like.
Range that we should think about that could be coming back in 21 problem.
Probably a 5 million per quarter there were no.
Yes.
Okay. Good all right. Thanks for the help Tonight.
And our next question comes from Bascome majors from Susquehanna.
Yes, 2016 was the last time that you bought back stock in size and you look at the price specs and its 10 or 15 Bucks higher today than it was but your stocks trading at the same PE multiple as it was back then and it's actually a lot cheaper on free cash flow.
Let me the balance sheet, you talked about low leverage it looks like you'll end the year under a half turn net debt to EBITDA and.
You'll probably generate hundreds of millions of dollars of free cash flow over the next two years. So so why not ramp up the buyback now.
Sure Yes.
Jeff.
Our priority for reinvestment as always to to invest in the business through your capital expenditures or acquisition.
We have been able to find most of the capex through pretty attractively rated interest rate debt.
We have been and continue to look for acquisitions its been about almost two years. Since we made the last acquisition of case that I'll tell you. We've been we've been looking ever said we've been.
Active and anticipate doing something in the short term here. So that will continue to be a priority when it comes to to the way we use our capital.
But you are saying that we do we do evaluate exactly the point you raise we discuss with our board every quarter on that return of capital to the shareholders, but at this point the priority continues to be to grow and reinvest in the business.
So it sounds like.
If things go well you would expect to have a decent size acquisition sometime before the end of next year.
Yeah, we're certainly the pipeline would suggest that that's the case.
Thank you.
Hello.
And our next question comes from Brian Ossenbeck from JP Morgan.
Yes.
Hi, good evening, thanks for taking the question.
That's going back to the the rail rail side of things for a second on.
On their conference call last week your main real partner in the West mentioned doing.
Then to end with one point of contact for the customers you know they were talking about going retail, but they did make it a point to say that they used to be a better visibility and coordination throughout the supply chain end to end.
For for shippers so.
What can you had on on to that how far as how far along is that that process is it too early to see some.
So any benefits from I guess bottom line what does it what does it really mean that's happening here.
Hi, Brian. This is this is Dave.
You know I would suggest to you that.
Hub is very fortunate that we have very strong relationships.
With both the Union Pacific ended or bookseller in and in fact, I would say that these relationships have never been stronger.
In a major reason for that.
The strength of that relationship is that all we work very diligently on bringing value to the rails and probably as much as we focus on bringing value to our clients.
So you.
We invest our capital hundreds of millions of dollars of containers and tractors and technology.
Were exclusive to these rails and so as a result of that are the.
The networks that we build.
Our in fact very complementary.
To either the union Pacific and or the Norfolk Southern.
So we work with them very closely and from a operations perspective.
In as much as.
We always target ourselves to get load off the ramps the quickest of any items see that every single terminal on these railroads and we also never bring an empty back to the rail to the ramp.
Thereby what that allows is for a relatively what reducing the dwell time and also allowing their branch to be very fluid. So we feel as though the value that we bring to them. In addition to being a large low cost to serve customer.
Puts us in very good shape with.
Both our rail partners and that as long as we bring value to both our customers and our rails. We believe we have a very strong seat at the table.
Okay.
I guess, maybe more generally what can you add about.
Trying to put more visibility through the supply chain when it comes to to shipping because here we are.
We're trying to convert off of the highway.
And then shippers are currently one one point of contact and to end and they don't want to deal with.
Any any more touch points and they have to wear anymore than they witnessed with trucks. So.
Do you see anything on the horizon.
In that regard what's in to a large extent we've worked diligently on that invested in a lot of technology.
To just do that enhance the visibility as.
As an example, I think we're still the only intermodal fleet that is 100% GPS tracking.
So that's the whole thing with visibility where the blind spot was was not on the rail because they have good systems, you'll kind of identify exactly where containers and shipments are it was at either end of the dray cycle.
With our technology, we know not only where the container is on any given low what we hope it has freight in it because we have a sooner type device.
Which will check to see if theres any free in the box.
As well as we know when the doors are open so we offer that visibility to our clients. So that they can see at any point in time, where the container is we can push that notice to them. They can go on an app that allows them to look at it and to determine when it's going to be delivered so the visibility is something that we have right now.
Alan that we work with our rail partners on the very consistently and I would just add that there continue to be opportunities to improve the experience in the hand offs that we have between our rail partners to create a more fluid operations.
Were we work very closely with them on that but.
It could be anything from making sure that the highest priority shipments are always getting loaded even though it might be last minute.
Improving our driver cycle times through the terminals. Those are those are things that reduce cost that improve the intermodal product that on top of our great technology.
We're going to make us even more competitive I think to continue to compete with truck and we're working very close with our partners and continuing to make it a two.
Truck competitive or truck better or better than truck product.
Mhm.
Okay.
One quick one then on logistics can you just give us an update on case tech. So I guess the return of Otis Matt.
Not too long ago.
And that's probably.
Pretty good for that business. There you mentioned trying to to meet the customers, where they where they need it and where you can find capacity. So maybe just an update on capex the growth opportunities.
And how is that.
Change back to okay for the tightening of Otis should.
Should benefit that business.
Of course, yes. This is cilia the tightening of Otis is certainly a tailwind for that business.
I think the service sensitivity is extremely important and they're just continues to be a proliferation of skus in different retailers that is going to drive growth. We've done a nice job of growing with a significant number of retailers and continuing to diversify the business continues to grow at a double digit rate.
And although we are seeing some short term margin challenges with some increased cost we are working diligently to get that improved. So so were we think theres a great growth opportunity ahead, we are continuing to position the product I think extremely well and also tying it into all the solutions that we bring to our.
Larger customers, which is going to drive even even further scale outside of the typical smaller consumer products small mid size consumer products customer that they have traditionally and we've seen very really great success in cross selling to our existing client base.
Continue to be very pleased with how the acquisition is gone and and what we have ahead of us.
Okay. Thanks for the time today.
Thank you.
And as a reminder, if you do have a question. Please press Star then one on your Touchtone phone.
Once again that is star one on your Touchtone phone.
And we do have a next question from Tom Wadewitz from BS.
Hi, Yes, good afternoon <unk>.
I think it's pretty notable if I look at the volume performance in intermodal.
The Europe at 9% and your two big intermodal competitors keep young Snyder down around 2% for the quarter.
So I just wondered if you could offer some thoughts on what some of the key drivers of that are.
They both right and to be and you write in U.P., obviously price could be a factor, but what what do you think.
Do you think between those two things I mean do you think there is a.
Significant outperformance of how you peas running and that that's an advantage that maybe you can continue to accrue for you or is that kind of a you know more of a factor on how aggressive you were with the rate.
Just some thoughts on that competitive dynamic, yes, I think that combination our combined service with the with the U.P. is is very strong and we continue to improve on it if that was just mentioning you know the operational.
Partnership that we've developed with them to create a more seamless service is fantastic. So I, certainly think that service product and the flexibility that we've had is differentiating.
The other piece is certainly.
During bid season, we were able to get some some wins with strategic customers of ours that drove growth.
And also during the initial fallout from the truckload market, we were very aligned with some of our larger customers to support them during that given the container adds that we also made I think that has been a big differentiation, where we have had capacity coming into the west coast not only.
In our empty repositioning, but in our import.
Important new containers and that has.
Helped us significantly in supporting the demand in that portion of the market.
Both both set up a very nice picture, though for us to be in a position, where we can discuss with our clients. The support we are able to provide during really a dislocation in the market. So I think it sets us up very well going forward.
Would you expect to add meaningfully more containers next year as well.
Yes, we are anticipating continuing to grow the fleet. We're as Jeff mentioned, we are in our budgeting process that they don't have a specific account, but we will be looking at our our forecasts and working with our customers to two inch understand their needs and requirements based on what we know.
The conversion of truckload freight back to intermodal should be very high and sets us up with a opportunity we want to be balanced in our approach to grow above market, but also continue to improve our pricing.
Great just one other follow up I think you are adding a little bit about M&A.
You know it seems that there are pretty good number of transports out there are looking to at least interested in doing M&A. I mean, there is there is one that announced the special dividend today would seem to be at least an indication that personal indication that maybe it's just tough to find the right company to buy.
What are your thoughts on what's going on in the M&A market is.
Our sellers just looking for Q high of a price.
Kind of co bid related or what do you think it is that it's maybe you know a number you know people looking but but not necessarily a lot happening with actual deals.
Yes on that product you know, we haven't seen a lot of companies.
Kind of actively launching sale processes.
We've been active on searching and not and frankly, knocking on doors that the acquisitions. We've been engaged in diligence on have been you know those have situations, where we've we've found a company that we either have worked with in the past or has a very high quality reputation and we knock on the door and in kind of kick things off that way so.
I don't know if the other companies you are referring to just aren't seeing opportunities are not looked in the right places that we've.
We've had some good success.
And are you know I think a maturing along in the in the phase of diligence on some of these opportunities and we're hopeful to get something done in the short term here.
Okay, great. Thanks for the time thanks.
Excellent. Thanks.
And we do have our next question from James.
Jason Seidl from Cowen and company.
Thank you operator, a gentlemen, I hope everything is well I wanted to ask about the dedicated side. Obviously, you got hit by some higher costs in the insurance and repair side dedicated obviously is a lot different than sort of over the road one way truckload how long is it going to take for you to sort of get those expenses back to pricing.
Yes, what I would tell you is that I think we're still middle innings in the evolution of that business, we've put in much better cost disciplines and although we saw some gross margin compression, we're improving our returns in that business.
We are continuing to get through the tail end of shedding of unprofitable business and bringing on some nice new wins, there and implementing technology.
I think the opportunity that's out there is going to be to convert a one way truckload or higher cost private fleets over to do it.
Katy configuration and that is what is really driving our pipeline right now as we look at renewals I think you know given what has been stated about the truckload market there and what we're seeing with wage inflation and insurance costs. There is going to need to continue to be discussions and we're going to need to execute on on rate increases to offset that.
Challenges and our customers are very understanding of that and see those same challenges. It if we're not able to have a competitive wage and recruit drivers.
We're not able to provide the service levels that our customers desire and that we demand of ourselves. So there is a very open dialogue, it's very collaborative and I think.
We'll see ourselves being able to continue to grow that business at a healthy profile going forward given the baseline that we set but but still opportunities that are out there.
Okay I appreciate the color on that and I guess im going to hop to a brokerage really quickly.
Your percentage of contractual business declined and I'm, assuming that's just because the amount of contract business or the skinny transaction. This is out in the marketplace.
Should we look at in terms of repricing in the brokerage business what percentage do you guys get to reprice and in Fourq, you and what percentage of those contracts get to reprice in one Q.
Yes, I would say, it's a similar breakdown to our intermodal business, where you'll see about 50% repriced through the first quarter of the year. So obviously, we've seen some country.
Contractual cost cost compression, we've seen inflation of our purchase transportation costs were working very diligently to offset that.
But given obviously the market changes.
Anticipated that we would see that I do think we'll be able to do.
Do a much better job in managing that through the latter portion of this year and into into next year.
So the contractual volumes, though should be relatively in line and really match, our fundamental business and there's going to be an opportunity to reprice at a higher level I think probably even a higher percentage potentially than than intermodal just given what we're seeing in ER in and hearing from from our clients.
At this point in time.
The only other piece that has.
Been a little bit of an impact and I know I address it in my prepared remarks is our project volumes, which just given the.
Dislocation of inventory at this point has has gone down significantly that's typically a high margin profile for us.
Based on the discussions we've had with our large customers, we anticipate thats going to come back in 2021 and should be a nice tailwind for us.
As will our LTL volume growth be as well so.
We're seeing positive signs in brokerage and I think very well positioned given the productivity enhancements, we've made to that business.
Fair enough gentlemen, I appreciate the time as always thinking there. Thanks.
And our next question comes from Jon Chappell from Evercore.
Thank you good afternoon guys.
Okay.
Phil just mentioned in the Fourq you outlook that revenue will decline sequentially in the non intermodal categories. Some customer losses are in there. That's exactly what you guys said for Threeq relative to Twoq you yet in every category it was up sequentially in pretty meaningfully and in.
In logistics and brokerage so how much of that Threeq to Twoq you trend was kind of macro the market just moved really aggressively in the last two months of the quarter versus you know your available capacity some market share wins customers that you brought on line and if it's the latter how come that wouldn't be repeatable then as we look at Fourq versus Threeq.
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Yeah. They yeah, the kind of the Q3 numbers actually did frankly surprised us the revenue beat our internal forecast.
A lot of that was frankly in the <unk> the biggest pieces in brokerage where we had.
You know some some higher revenue dollar.
Spot business opportunities I'd say, just generally the market surprised us on the on the other business line logistics and brokerage were up again better than we expected not to the same degree.
That that brokers that brokerage was.
But we do think there is going to be a little bit softer theres some seasonality in the business as well that will impact revenue in Q4 as well.
And we did not recognize the full impact of some of the losses from some of the non essential retail clients that unfortunately were heavily impacted by cobot.
In the in the third quarter, we will recognize that in the fourth quarter. However.
However, in I would say that we're working hard every day to keep bringing on new wins, we are bringing on new wins in logistics and are going to continue to do that they will have a better margin profile than the business that that we lost a much better margin profile and in brokerage you know we have a team every day that is focusing on supporting our customers and if demand hold there.
Certainly opportunities for us to expand our topline and ER and net revenue. So so we're you know we're we're not certainly going to say were thrown in the talent not going to push ourselves to be better from third quarter to fourth quarter, but just trying to give you our best view of what that might be given.
Given what we know at this point.
Okay. Thanks for that and I did want to ask as my follow up about the the customers like the non essential that have been shut down two weeks ago. This might have been a different conversation, but it does seem like broadly speaking things are opening up again.
How much of your customer base that was shut down for a period of time has come back and I guess, how does your capacity ability to take some of that especially as you about balance some of the new customers you brought on and this can span intermodal to logistics to brokerages across the entire business.
Sure. So I would say was intermodal we have really focused on supporting our strategic customers, who supported us during a challenging times in television and we have brought on some new clients that we think are strategically important for us longer term and industry verticals that we would like to cracking too but oh.
Have mainly focused on supporting our core group of clients.
Brokerage I would say is while we have stuck to our commitments and continue to support our customers on the contract side by some of the cost compression that we've seen there.
And we've been rewarded for that in the past and plan to plan and see that again. The we also are able to participate in the spot opportunities that are much higher yield although that doesn't completely off that just given the dislocation in the market and then you know and in logistics.
We have become much more productive and improved our on boarding process significantly. So we are able to scale our business slot in new on boarding much more effectively they are as high of revenue dollars, but the gross and operating margins of the business of the new business wins are very strong so.
We're continuing to focus on scaling the business using what we have to continue to provide a great service and the investments that we've made in technology are really helping us continue to do that as I mentioned, our productivity in brokerage is a fantastic result at 2020 plus percent improvement there on a year over year basis. So.
We feel good about our ability to continue to scale and a and add new customers, but you know it's a we're trying to be selective on who we work with as well just given some of the impact that we had from the non essential retailers, who unfortunately.
Weren't able to make it through given their financial position. So we're scrutinizing the financials of our customers. We want to continue to partner with the winners and and that'll be our focus going forward.
Great that makes sense. Thanks, Phil Thanks, Jeff Thank you.
And I Wonder if you do have a question. Please press Star then one on you touched on phone.
And we do have a next question from Todd Fowler from Keybanc.
Todd Your line is open.
Sorry about that can you guys hear me I guess, we got it okay. Thanks, Thanks for taking the follow up.
I guess I just wanted to follow up a little bit on the question about the brokerage growth during the quarter. You know traditionally I don't think about you as having a large transactional brokerage presence. So it sounds like that a lot of the increase in volume wise, helping out some existing customers is that some business that you can convert to being more sticky business you into the future. So how.
Do you think about kind of the sustainability of some of the the transactional volume that you cited on the brokerage side this quarter.
Exactly right, yes, no it's not only on a lane basis seeing spot transactions that are continually coming across to convert to a contractor carrier into to a contract win for hub, but it's also we in the past had a difficult time crew.
Cross selling our brokerage given the service that we were we were providing I think we have it completely improved our service product, we are and especially in the spot market and in our contractual business and that sets us up to have that dialogue and grow on an ongoing basis as.
As well as get the opportunities on the spot forward to continue to grow as well. So we're anticipating that the support we're giving those strategic customers is going to lead to larger wins during their RFP events as well as continued opportunities to participate in the spot board and then convert that business.
Over to contract contractual business as well so hopefully we're we're working to create really a strong cycle. There with these customers were where they see us as a strong brokerage options that can can support their needs.
Okay that helps fill it sounds good and then just the last one for me I think in the past you've talked about the ability to hit 5% operating margins what you've done you know on a quarterly basis as you think about the progress that you've had on the cost take out here and in the repricing of some of the business as you get into 2021, he is that something that.
It's achievable maybe in the back half of next year are there some other things that you need to see.
Tickets that margin target that you've talked about in the past.
Yeah. It does continue to be our longer term target I think we're going to need.
A stronger pricing cycle to get there so I'm not.
Optimistic at the end of next year, we may be at that run rate, but it's probably going to be.
It will be on that.
Okay. So it should not just maybe not something you pick up on one one bid season, maybe another bid season. After that I don't think so we've certainly been focused on taking out operating cost, but you know.
Gross margin driven by prices it is a very powerful lever in our business. So.
Yeah understood. Okay. Thanks for the time Tonight. Thanks, Todd.
And we have no further questions at this time.
I will now turn the call over to do either for closing remarks.
Well, thank you for joining us for our third quarter earnings call as always.
Yes, Phil and I are available for any additional questions that you may have so again, thank you and have a good evening.
[noise] [noise]. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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