David P. Yeager - Hub Group, Inc. Donald G. Maltby - Hub Group, Inc. Terri A. Pizzuto - Hub Group, Inc..

Ryan Greenwald - Wolfe Research LLC Ben J. Hartford - Robert W. Baird & Co., Inc. Justin Long - Stephens, Inc. Todd C. Fowler - KeyBanc Capital Markets, Inc. David G. Ross - Stifel, Nicolaus & Co., Inc. Brian P. Ossenbeck - JPMorgan Securities LLC Diane Huang - Morgan Stanley & Co.

LLC Jason Seidl - Cowen Securities Matthew Brooklier - The Buckingham Research Group, Inc..

Hello, and welcome to the Hub Group Third Quarter 2018 Earnings Conference Call. Dave Yeager, Hub's CEO, Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto are joining me on the call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. 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 in-sourcing. 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 two accounts that were on boarded 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 a 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, focus on safety and value to our customers. We did, however, experience higher cost due to start-up 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 in 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 three points for the quarter. First, we sold Mode for approximately $238.5 million on August 31st. 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's diluted earnings per share was $0.77. This is compared to an adjusted 2017 diluted earnings per share, up $0.34 that excludes one-time costs 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 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 as the quarter progressed.

Third quarter average rail transits were up 8/10 of 1 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 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..

The first question in the queue comes from Scott Group with Wolfe Research. Your line is open, sir..

Good afternoon, everyone. This is Ryan on for Scott..

Hi, Ryan..

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 of both of – our western partner, the UP, as well as our eastern partner, the Norfolk Southern, is not a radical slash costs. As an example, the UP's Unified 2020 Plan (sic) [Unified Plan 2020] (00:12:21) is from a bottom-up with the operators.

And they'll be looking to, in fact, reduce costs in the longer term but also to enhance the service levels. So 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 have..

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. It's if we think this is a market that you can grow 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-digits. And then we would expect our volumes growth to be consistent with the market..

Right.

So kind of a more balanced approach?.

Very much so..

Yeah..

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. As far as the timing, I think I've 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 would.

But I would 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 it's not just what we're buying today and the earnings we're buying today. It's what we can make of it long term with the management team of the acquired company..

Great. Appreciate the time, guys..

Thanks, Ryan..

Thank you..

Thank you. The next question in the queue comes from Ben Hartford of Baird. Your line is open, sir..

Hey good evening, everyone. Dave, maybe back to your point about seeing a strong peak, I think 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..

Yeah. As far as peak this season, it has been a very robust. As you may recall, in fact on July 30th, the Union Pacific declared a constrained environment. That has continued to-date to – 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..

Right..

I do want to emphasize that. We have seen the truck industry, the over the road, that has softened a little bit, but the Intermodal's been extraordinarily strong. So are some people going to pull forward some product? I think that's a possibility.

I think that some of our clients may have even have 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 two calls, the questions about this 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 to 13% gross margin, maybe 4% EBIT margin.

First, are those still guideposts to think about in the present model? And is the pricing environment, has it been strong enough in 2018.

Is the outlook in 2019 enough to be able to put those targets in play for 2019?.

Yeah. 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, Intermodal's excellent execution.

We think that with – and 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, and so although it's peak season right now and that certainly impacts the numbers, we think that we've got strong tailwinds for next year with the pricing environment, with how strong peak has been.

So we'll get those mid- to high single-digit prices, grow our volume and grow our Truck Brokerage business. We think we have a lot of opportunity there. That's one of our highest margin businesses and we think that we're still on target to hit 4%, if not higher next year..

Okay. That's helpful. And last one just, Dave, 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 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 three or four years that we may want to have some add-ons, but these are non-asset based what we're looking at..

Okay. That's helpful. Thank you..

Thanks, Ben..

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

Thanks and good afternoon. So maybe to start with the 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're several reasons. Number one is just capacity. I do think that that's going to continue to be an issue. The other is costs.

During this period as fuel continues to rise, really despite the fact that we've been able to take significant increases this year in the high-single-digit low-double-digit, we're still – 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 as far as from a cost perspective with rail cost increases as our rail partners are investing a tremendous amount of capital and also critically 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 a third 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 us as well over the longer-term as they've 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..

Yeah. 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 get in the market..

Yeah Justin, I think the biggest process is how we go to market. Our go to market strategy, the targeting of accounts, how we price the lane and the market in 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 all 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, less than let's say, 800 miles. It's probably in the 15%, 20%, maybe 25% range, the differential.

It's in the longer haul, the 1000-mile the transcontinental moves ,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 startup costs potentially moderating as we get into next year, what kind of operating margin improvement could we see in that Dedicated business next year?.

Yeah. We think it'll go up significantly from where it is now. We've got some new processes in place where we are focused on a couple things. One, improving our daily operational execution, and secondly implementing some of the pricing processes that we have in intermodal to Dedicated.

That's why we aligned the Dedicated pricing team with our business process today..

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?.

Oh and how much higher it'll go?.

Correct..

Yeah. I would think at least 200 basis points to 300 basis points. (00:24:12).

Okay. Great. All right. Thank you very much. I'll leave it at that. Appreciate the time..

Thanks, Justin..

We have our next question from Todd Fowler with KeyBanc..

Great. Good evening, everyone..

Hey, Todd..

Hi, Todd..

Hey, Dave. Hi, Don. Hi, Terri.

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's 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 of our bids, there's 10% which are lagging that have yet to take effect into the fourth quarter.

And then if you looked at it sequentially through 2018, each quarter we progressively were able to get more and more price. So there's going to be a catch-up effect of the first quarter bids that we did in the second quarter. So yes, I think that that is very achievable.

And we're very focused on continuing to increase those prices, again, partially to offset the costs 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 nine months ago is below where the market would be today.

So as you reset those to the first half of 2019, that's part of the pricing opportunity?.

Far more eloquent than I there, Todd. But that's exactly correct..

Just wanted to make sure. Okay. Okay. Good. And then just for 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 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?.

Yeah.

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

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

Yeah..

Yeah, I mean – yeah, go ahead. Sorry..

Yeah, no. I would say this is peak season now. So we are able to garner more price during peak sometimes than we would in the first and second quarters next year when it's slower than peak. So 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 that we project go up next year from where they're at right now. Because we won't have the start-up costs, we won't use hopefully as many third-party carriers and we're also taking our pricing disciplines that have in Intermodal, putting them at Dedicated.

So net-net, at the margin line, maybe just a little lower. And then the cost and expenses, we every quarter had the bonus, $7.5 million higher than the prior year, because we're doing very well this year. And last year we didn't get any bonus for EPS component of the bonus.

So next year, that resets, and so that would probably – it generally resets at where we landed 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. Yeah. I would just suggest to you that the 2017 lack of bonus proves that our bonus plan works. We didn't deserve it..

Some motivation there..

At any rate, I would also say that there's upside with the Unyson Logistics, because that's another area where some of the pricing strategies that were incorporated by our Intermodal team were incorporated with them. And so 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 is, and so in that division as well we should see improvement in the margins. Plus, we hope to be able to capitalize on some of the great relationships we have with our customer and grow our business in Truck Brokerage..

Right. We could grow our contracted business in Truck Brokerage..

Absolutely..

Okay. Good. That's a lot of things for us to work off of. I appreciate the time and very nice quarter here. Thanks..

Thanks, Todd..

The next question in the queue comes from David Ross with Stifel. Your line is open, sir. Please begin..

Yes. Good afternoon, everyone..

Hi, David..

Just following up on the comment 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 costs.

So, I guess what is it about Intermodal pricing that should help Dedicated?.

Well, I think number one is with the existing clients, and admittedly, this is self-inflicted but we didn't take some of the price increases that we should have with our clients as our costs. Of course driver wages going up substantially, fuel. And so that's specifically where 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 clauses that will allow us to offset future increases as we do believe, and certainly through 2019 we're going to continue to see inflation from a wage perspective..

Yeah. And then on capital intensive business, so the other thing that we'd look at in the 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.

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 start with the last one first. It doesn't really – the railroads are seeing some record quarters from volume and revenue. And a direct result of that is that we do have some service delays. And there's been other environmental issues that have impacted it; wildfires, hurricanes.

So 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 services stable. It's not where we want it, but it's stable.

And it is actually probably contributing to part of the capacity constraints that we're seeing within the rail industry as we're probably – our fleet of 37,000 containers is probably really only 36,000 right now because of the slower transit times.

So 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 (sic) [Unified Plan 2020] (00:32:51) 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..

So 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..

Cool. Thank you..

Okay..

Thank you. The next question comes from Brian Ossenbeck with JPMorgan. Your line is open..

Hey, good evening. Thanks for taking the question. I was wondering if you can expand on the comments earlier about reengineering the operational and pricing process in Truck Brokerage..

Sure. This is Don. Yeah, 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 piece 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 then just as a follow-up to the point on capacity.

How do you think about the container purchase and the fleet for next year? Is that something you would see expanding a little bit from here or are you counting 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 three or four 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..

Okay. Great. Thanks for your time..

Thanks, Brian..

Thank you. The next question comes from Ravi Shanker with Morgan Stanley. Please proceed..

Hi. 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 in between Intermodal and Truck pricing and that seemed to have occurred 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. Well, I think that basically we've changed our processes. Our Intermodal team changed the processes. We've reacted much more quickly. I agree, traditionally Intermodal providers were anywhere from six to nine 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 lock step 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 able to take advantage of those opportunities in the market..

Great.

Has Hub in the past on the Intermodal front exceeded truck pricing?.

That's a really good question. And 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, just like the fact we've seen it loosen 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 got a very good opportunity to do so..

Okay. 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 by a business day basis. And so July was down 1.5%, August was up 4.9% and September up 5%. So part of the reason for that, there was one more business day in July and one less business day in September. That equates to our volume growth for the quarter of the 3%..

And through October..

And through October, we are up 3.7%, through October 23rd on a like business day basis..

To be specific..

Yeah..

Okay. Great. Thank you. Appreciate that. Just one more on Truck Brokerage. The new initiatives that you guys are embarking on, is this an offensive or a defensive move, maybe just given the competition in the space..

Yeah. 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..

Great. Thank you..

Thanks..

Thank you. The next question comes from Jason Seidl with Cowen & Company. Please proceed with your question..

Thank you, operator. Hey, Dave. Hey, Don. Hey, Terri. Want to circle back on some of the comments you made on Logistics. You mentioned that you got several new contracts that you re-upped 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 – yeah, so with Logistics, maybe to define it 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..

Yeah. And we started most – I mean most of that started materializing in – the price increases in the third quarter. It wasn't in the first half of the year as we changed processes. So we've gotten through most of the price increases for the existing customers though now. And the new business that Don referred to was for a couple customers.

And we think that'll bring on maybe $5 million to $7 million of revenue in the fourth quarter..

Okay.

So it's more likely to have an impact on 4Q than it did on 3Q?.

Correct..

And, yeah, and in 2019 because as we take....

Right, exactly. Exactly..

Yeah..

My next question, I want to tackle the rail side a little bit differently than some of the other analysts. You mentioned, I think, in the quarter that you lost 8/10 of 1 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 – it's roughly 1,700 boxes 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 and....

Times two, because they turn twice a month..

And I understand they turn twice a month, so..

3,400..

3,400 units..

Okay. That's helpful.

And I'm assuming that as rail service improves and as, let's call it, the second half of 2019 for two of 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'll free up, particularly in some of the very constrained cities that I'd 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..

Okay. Those are my questions. Thank you for the time as always, everyone..

Thanks, Jason..

Thanks, Jason..

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

Hey, thanks and good evening. 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?.

Yeah. 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 crate to 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 wage..

Okay. Very robust answer there, Terri. And if we think about the driver market's, 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 the 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 we tried to lessen some of that tight capacity. But 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 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..

Okay. That's all I got. Appreciate the time..

Thanks, Matt..

Thank you. . The next question in the queue comes from Ben Hartford from Baird. Your line is open, sir. Please proceed..

Hey just a follow-up here.

Terri, any initial thoughts on CapEx for 2019?.

Yeah. 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 HGT and HDT, 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%..

Okay. That's great. Thank you..

Okay. 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..