Hub Group - Q3 2013
October 17, 2013
Transcript
Operator (participant)
Hello, and welcome to the Hub Group Incorporated Third Quarter 2013 Earnings Conference 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 represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project. Actual results could differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Yeager, CEO for Hub Group. You may now begin.
David Yeager (CEO)
Welcome, and thank you for joining us today. Earlier, we released earnings of $0.50 per share, which is the same as last year's third quarter. During the quarter, we faced some significant headwinds in both our intermodal and brokerage lines of business. On the intermodal side, it's no secret that it's been a challenging pricing environment. While we were able to secure some modest increases, they were lower than budgeting. In addition, we experienced a late start for peak with unfavorable geographic mix, including soft demand off the West Coast. On the truck brokerage side, we saw less new business than expected due to the soft market and intense competition from asset-based carriers. Additionally, we faced unfavorable business mix due to a decline in demand for high value-added services. Our other lines of business performed well this quarter.
Unyson posted outstanding growth of 42% as we onboarded several new customers. Additionally, Mode grew 9% while continuing to expand its agent network. With that, I'd like to turn it over to Mark to discuss the details of our quarter by business line.
Mark A. Yeager (President and COO)
Thanks, and good afternoon, everyone. As Dave mentioned, we faced some challenges in the intermodal and truck, truck brokerage divisions this quarter, where we struggled with positive, yet less than anticipated intermodal price increases and brokerage volume deceleration. We saw a re-acceleration of intermodal volume with mid-single-digit growth against very tough comparables. Mode Transportation performed above expectations, growing intermodal, truck brokerage, and logistics. Unyson posted yet another quarter of exceptional growth. Comtrack also continued to expand, adding more drivers and terminals and handling more loads than ever. Focusing on each business line in more detail, Hub intermodal volume grew 5%. Once again, Local West was our fastest-growing region, with volume up 11% for the quarter. Local East volume bounced back into positive territory, increasing 6%, while the TransCon business declined 1%. Volume out of Southern California has been slightly positive but slower than anticipated.
Hub's Big Box Direct volume was up 7%. Overall, combined Hub and Mode intermodal volume was up 8%, matching growth trends in the domestic intermodal industry. Thus far, we have received 3,000 of the 4,029 containers that we ordered this year. The remainder will be delivered in the next few weeks. We expect to have a fleet of 26,000 containers by year-end. Despite an influx of additional capacity during the quarter and a slight decline in rail service, fleet utilization improved to 13.6 days from 13.7 days last year. Comtrak added 9 drivers for the quarter, bringing our total driver count to 2,695. Since the beginning of the year, we have added 221 drivers.
As planned, we opened 2 new Comtrak terminals this quarter in Portland, Oregon, and Kalamazoo, Michigan, and plan to open Salt Lake City by the end of the year. Comtrak handled 66% of Hub's intermodal freight. They handled 18% more loads for Mode Transportation and 42% more regional highway moves this quarter. Although higher-than-normal attrition produced relatively modest driver growth, Comtrak grew overall volume by 11% for the quarter. Our truck brokerage division grew volume 4% this quarter, with revenue up slightly on a year-over-year basis. Consumer products grew 8% and retail, retail grew 3%, while durables declined 6%. The bid environment has been highly competitive as asset-based carriers continue to price aggressively. We also saw a decline in average length of haul, a slowdown in demand for high-value added services, and very little load board activity.
On a brighter note, Unyson Logistics revenue grew an outstanding 42% year-over-year. Fueling this growth was the successful implementation of accounts that were onboarded during the second quarter. We also maintain a healthy pipeline and expect the growth to continue. Unyson is well on its way to becoming a $500 million 3PL in 2014. Mode Transportation produced top-line growth of 9% in the third quarter and delivered operating income growth of $900,000. All services offered by Mode Transportation exhibited growth in the quarter, led by LTL with 19% revenue growth and intermodal with 16% volume growth. This is the third quarter in a row of double-digit intermodal volume growth for Mode. During the quarter, Mode added two new IBOs and four new sales agents to the network, reflecting increased strength in the recruiting pipeline.
This wraps up my section. I'm now going to turn the call over to Terri for financial highlights.
Terri Pizzuto (CFO)
Thanks, Mark, and hello, everyone. As usual, I'd like to highlight three points. First, because of the challenging intermodal pricing environment, we weren't able to increase intermodal prices as much as we expected. Second, logistics was our bright spot, with 42% revenue growth. And third, operating income increased $1 million over last year, led by 18% growth at Mode. Here are the key numbers for the third quarter. Hub Group's revenue increased 10% to $883 million. Hub Group's diluted earnings per share was $0.50 this year, which is the same as last year. Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $679 million, which is a 10% increase over last year. Let's take a closer look at Hub's business lines.
Intermodal revenue increased 5%. This change includes a 5% increase in loads. Price was up, but was offset by the impact of lower fuel and unfavorable mix. Each of our three largest customer segments grew this quarter. Loads from retail customers were up 11%, loads from durable customers were up 6%, and loads from consumer products customers were up 4%. Truck brokerage revenue was up slightly. Truck brokerage handled 4% more loads. However, price, fuel, and mix combined were down. The average length of haul for a truck brokerage shipment decreased 5% to 599 miles. Logistics revenue growth accelerated to 32% due to the continued growth with customers that we onboarded in the second quarter. Hub's gross margin was flat. Logistics gross margin grew the most, but was offset by a decline in truck brokerage gross margin.
Intermodal gross margin was flat. Logistics gross margin is up due to new customer growth. Truck brokerage gross margin is down because of unfavorable traffic mix, including growth in short-haul lanes. Intermodal margin was flat as volume and modest price increases were offset by higher transportation costs and unfavorable mix. Hub's gross margin as a percentage of sales was 9.9%, or 100 basis points lower than the third quarter of 2012. The largest decline was in truck brokerage, which was down 200 basis points due to unfavorable mix, including less high value-added business, as well as a very tough market. Logistics gross margin as a percentage of sales was down 150 basis points because of the fee structure of our new business. Intermodal gross margin was down 50 basis points, due mostly to a change in traffic mix.
For example, the customer mix of outbound West Coast business was unfavorable. Hub's costs and expenses were $42 million in 2013 and 2012. An increase in salaries was offset by a reduction in bonus expense. Finally, operating margin for the Hub segment was 3.7%, which was 40 basis points lower than last year's 4.1%. Now I'll talk about results for our Mode segment. Mode had a strong quarter with revenue of $217 million, which is up 9% over last year. The revenue breaks down as $102 million in intermodal, which was up 10%, $82 million in truck brokerage, which was up 2%, and $33 million in logistics, which was up 22%.
Mode's gross margin increased $1.6 million year-over-year, due mostly to growth in intermodal gross margin. Gross margin as a percentage of sales was 11.9%, compared to 12.2% last year. Mode's total costs and expenses increased $700,000 compared to last year due to an increase in agent commission. Operating margin for Mode was 2.7%, or 20 basis points higher than last year's 2.5%. Turning to headcount for Hub Group, we had 1,413 employees, excluding drivers, at the end of September. That's down 7 people compared to the end of June. Now I will discuss what we expect for this year. We estimate that our 2013 diluted earnings per share will be between $1.85 and $1.95.
We think we'll have 37 million weighted average diluted shares outstanding. Our costs and expenses will probably range between $64 million and $66 million in the fourth quarter. We'll spend about $1 million on a strategy project in the fourth quarter. The project will continue into the first half of 2014. We're not certain how long or how strong peak season will be. As a result, our gross margin as a percentage of sales at the Hub segment in the fourth quarter could range between 10% and 10.5%. Our effective tax rate went up to 40% because of a change in the Pennsylvania income tax law. The effective tax rate in the fourth quarter will be about 38.5%. Turning now to our balance sheet and how we used our cash.
We ended the quarter with $92 million in cash. For the first nine months of this year, we spent $66 million on capital expenditure. We'll probably spend between $40 million and $50 million on capital expenditures in the fourth quarter, primarily for containers, our new headquarters, and technology projects. $13 million remains on our current share buyback authorization. To wrap it up for the financial section, we held our own and believe that we'll benefit from the opportunities that we've identified for improvement. Dave, over to you for closing remarks.
David Yeager (CEO)
Thank you, Terri. In conclusion, this has been a quarter with some strong headwinds. However, all of our business lines are consistently growing, and we continue to provide the high level of service that our customers have come to expect. With that, we'll turn the call back over to the operator to take your questions.
Operator (participant)
Ladies and gentlemen, if you would like to ask a question, please press star one on your phone. If your question has been answered or you would like to withdraw your question, please press star two. All questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Ben Hartford with Baird. Please proceed, sir.
Ben Hartford (Senior Research Analyst)
Hey, good evening, guys. Could maybe just a little bit of context to what went on within Intermodal during the quarter? There's a lot of discussion about mix. I'm trying to get an understanding of maybe some of the dynamics through the third quarter. It sounds like pricing was more challenging than expected, which is consistent with what we have been hearing. There's been some noise in terms of how strong or weak the third quarter was and what the fourth quarter looks like, and then even some chatter recently about some transloading activity that sounds like it has picked up. I'm just wondering if you can provide a little bit of context to what's going on, what really was the pressure during the quarter within the Intermodal segment?
If you could, if you could just touch on that, that'd be helpful.
Mark A. Yeager (President and COO)
Sure, Ben. Yeah, this is Mark. Yeah, there's no question that it was a challenging environment out there in the third quarter. You know, we spend a lot of time trying to position our network for strong demand out of Southern California, in particular. And we did not see the kind of uptick, the kind of spiky uptick that we would traditionally see, particularly in the second half of the third quarter. So when we're thinking about our mix, you know, we ended up handling a lot of freight that is not as compensatory as other types of freight. You know, not all freight is created equal, even within the same customer and sometimes even within the same geography.
So what we ended up seeing, I think, was softer demand than we had anticipated out of Southern California and some other markets that are generally better opportunities to produce adequate margins. And so that really continued throughout the third quarter. We saw some weeks that were solid and some weeks that were not nearly as solid. Aggregate demand was pretty good. As you saw, our overall volume was up 5%, but the composition of that volume was just not as favorable. As we've gone into the fourth quarter, we've seen some good weeks with upticks in demand off of the West Coast. One of those weeks, in fact, was a record volume week for intermodal.
At the same time, nobody is really quite sure just how long that uptick in demand will last. So that's really the big variable as we think about how Intermodal will perform in the fourth quarter.
Ben Hartford (Senior Research Analyst)
Okay. So if we think about gross margins within Intermodal, the pressure seems more to stem from the imbalance in the network because of the mismatching of freight, as opposed to, kind of quote-unquote, "Intermodal pricing dynamics." Is that fair?
Well, I think certainly the pricing dynamics were challenging, there's no question, but we did get, we think, positive price. I know others have reported flat price. We think that our price in the aggregate was positive. You know, we had some cost increases at the same time, but they were what we had anticipated. You know, what we didn't anticipate, I think, was that we just wouldn't see the kind of uptick in demand out of some key markets.
Okay. The pressures to the brokerage growth in the segment, I know in the release you had cited asset-based competition, and we know the brokerage dynamics generally are competitive, and there wasn't a lot of load board activity. I guess, given the growth, the strong growth you're getting out of logistics and the assumption that some of that freight was going to make its way into the brokerage network, can you talk a little bit about what the disconnect was there? And if we, you know, as you guys march toward a $500 million 3PL in logistics in 2014, can we see some of that freight funnel into brokerage and we can see accelerating growth within that truck brokerage segment in upcoming quarters as a result?
David Yeager (CEO)
Yep. Ben, this is Dave. Yeah, I don't know that it was really a disconnect. As a logistics provider, we look to get the optimal price for our clients. So, at times, our brokerage operation can manage that, at times it cannot. In today's environment, there is a plentiful supply of equipment by the asset-based carriers, and it's just very difficult. It's not constrained, there's not a surplus. It's once again, it's that Goldilocks economy that is very difficult for a truck broker. So, I don't think there was any real disconnect between our truck brokerage operation and logistics. It's just a question of logistics being able to buy better for their clients.
Mark A. Yeager (President and COO)
Well, I think that's right. You know, a lot, in a lot of circumstances, the freight that comes to highway comes as a result of core carriers within the logistics program not covering that freight. In this type of environment, and it's another reason why you don't see much activity on the load board, you just don't see that kind of, you know, what we would call spillover freight, coming to our logistics arm. You know, in some ways, that's a good thing because the customer is getting what they negotiated for, and we're actually producing a better savings for them, but it's not producing volume for the brokerage arm.
Ben Hartford (Senior Research Analyst)
Okay, that's helpful. Thanks. I'll turn it over to someone else.
Operator (participant)
Your next question comes from the line of Michael Wynn with J.P. Morgan. Please proceed.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Hey, good afternoon, everybody. My first question, just I want to make sure I understand this, because in the second quarter call, you indicated that you had 70% of your pricing locked in for your customers. Did anything change with respect to how you were getting pricing for you, not necessarily the rail costs, but direct pricing with customers? Did anything change after July, or was that still intact and it really just was isolated to the type of traffic you were moving?
Mark A. Yeager (President and COO)
Yeah, I don't think anything really changed. I can't say that we saw the pricing environment improve. You know, things remained competitive throughout the quarter as they had been in the first half of the year. But really what did change was the difference between what had been awarded and what actually to date has moved, and that mix has just not been as favorable.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay.
Terri Pizzuto (CFO)
Right. What changed the most compared to our expectations was the customer mix, more than anything.
Mark A. Yeager (President and COO)
Right. The mix within the customer.
Terri Pizzuto (CFO)
Mm-hmm.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
The mix within the customers?
Terri Pizzuto (CFO)
Mm-hmm. Mm-hmm.
Mark A. Yeager (President and COO)
Yes. So we did see a fair amount of churn within our business. So a lot of business, same customers, different types of business.
Terri Pizzuto (CFO)
Right.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay, that makes sense. On the brokerage side, I was wondering if you can describe some of these, the high-value services that were lost. Like, are these gone temporarily, or are they permanently gone, or is this... How should we view that?
Mark A. Yeager (President and COO)
Well, you know, think about them as marshaling capacity when it's needed most, right? So, for some of those things, yes. You know, some of those things are things like work to help with disaster recovery. You know, that's clearly a specialty that we have, and our highway group is very good at it. And that is something that when you don't have a lot of disasters, which is a good thing for everyone but our highway group, you don't tend to recognize the rewards. It's also things that are more repetitive and maybe a little bit more predictable, like special projects. But, you know, what we have seen, which is a little concerning, is that while we're getting special project opportunities, they are not as large as they were.
So holiday preparation work and special promotional work, those kinds of things just don't tend to be right now in our world, at the same scale. And so, we're hopeful that will, as the economy firms up and consumer confidence continues to build, we're hopeful that we'll see those, you know, get back to the kind of size that we saw a few years ago. But our experience right now is there aren't as many, and they aren't as big.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
So since you mentioned disaster recovery, did you have any benefit from some of the projects that might have been available from Hurricane Sandy last year in the Northeast?
Terri Pizzuto (CFO)
We did.
Mark A. Yeager (President and COO)
Yes, we definitely did, and I think we talked about that. So that's a headwind that the brokerage group definitely faces.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay, that's fair. And just on the cost side, I want to make sure I think about this correctly. Salaries and benefits was down sequentially because you had the bonus true up. Is it fair to think that you're not going to have as big an impact in the fourth quarter?
Terri Pizzuto (CFO)
Yeah, that's exactly right, Michael.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay.
Terri Pizzuto (CFO)
We had about $2 million that you could say was kind of out of period related to the first half of the year. That was a bonus reversal, so we won't have that recur in the fourth quarter.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay. And just one more question, actually, on Unyson. You've had such very strong growth throughout the year. How should we think about framing where fourth quarter could be? You're adding a lot of new customer contracts in there. Maybe, you know, some expire or go away or, or reduce, but how should we think about how to anchor that?
Terri Pizzuto (CFO)
It should be similar growth to what we saw this quarter. It's, it's doing pretty well, and the comp actually gets, it's not as bad in the fourth quarter as it was in the third quarter. So, so we, we probably can keep it, keep the, keep on a roll.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Sure. Well, I, I guess just looking at a 40%, roughly, you know, growth year-on-year, you get to like a hundred and... a little around, around $105 million, which is a material step down from $124 million in third quarter?
Terri Pizzuto (CFO)
Mm-hmm.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
So it's just... Does that seem reasonable? Like, can you have that kind of seasonality?
Terri Pizzuto (CFO)
We can, yeah. That's-
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay.
Terri Pizzuto (CFO)
Looks like that.
Michael Wynn (Executive Director, CIB IS APAC & EMEA Regional Head of FX Sales and Client Management)
Okay. That's very helpful. Thank you.
Terri Pizzuto (CFO)
Some seasonality, yeah. Mm-hmm.
Operator (participant)
Your next question comes from the line of Kevin Sterling with BB&T Capital Markets. Please proceed.
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
Good afternoon.
Mark A. Yeager (President and COO)
Hey, Kevin.
Terri Pizzuto (CFO)
Hey.
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
Hey, just going, you know, touching on intermodal here, do you think there's excess industry intermodal box capacity? How do you look at industry capacity, kind of given some of the challenges you're seeing?
David Yeager (CEO)
Well, if you look at the number of boxes, there's certainly this year or and last year, there was no constraints whatsoever. You'd see some geographic pockets that would intermittently have some constraints, but for the most part, the overall amount of boxes in the system is greater than what demand is. So yes, it's a very plentiful box supply at this point in time.
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
... Okay. Thanks, Dave. And then I'll just kind of sticking with intermodal. When we think about the challenges for pricing, what do you need to see to kind of get that turned around? Is it a matter of truckload pricing getting better or your competition, you know, finding religion, or, or maybe both? How should we think about that?
Mark A. Yeager (President and COO)
It's probably both. I mean, I think what you really, you know, you need to see truckload pricing getting its feet under it, you know. They really have not been able to maintain any type of pricing discipline in the truckload sector because they're trying to protect their business and protect their drivers and keep them busy. So, you know, when a customer has 80% truckload volume and they're not seeing increases, it's difficult for them to understand why their intermodal pricing should be going up. And they really haven't had to worry about capacity the last few years. So, they've been able to really focus on price and done a good job, you know, keeping the lid on pricing in both modes. There's no question.
So I think you probably need the truckload market to firm up. That probably is gonna require an uptick in demand in order for that to happen. And then certainly it would be helpful if some of the larger players in the industry were not as focused on share growth and were more focused on pricing discipline, but obviously, that's not our decision.
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
Right. Right. And I guess, too, with oil prices not being too wacky, that doesn't help either. Is that fair?
Mark A. Yeager (President and COO)
Well, I think that's right. I think that's certainly right. Folks are less alarmed, right?
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
Right.
Mark A. Yeager (President and COO)
Probably, you know, less eager to do whatever it takes to make the conversion move over to intermodal, as long as oil prices look relatively stable. But, you know, I will say that I think intermodal domestic demand has continued to be solid despite the relative sanity in the oil markets.
David Yeager (CEO)
I do think, well, a lot of it is just when a lot of large progressive companies look at the overall driver demographics, the regulations, CSA, they see that in fact, it's going to become more and more difficult to get trucks over time. They're not experiencing that right now, have not in the immediate past. So again, pricing remains the focus, but I think a lot of our clients, a lot of the conversion we saw in local lease this past quarter was directly related to clients thinking over the long term and knowing that intermodal is the proper course of action in order for them to secure the capacity.
Kevin Sterling (Managing Director and Senior Equity Research Analyst)
Right. Well, that's all I had. Thanks so much for your time this afternoon.
Mark A. Yeager (President and COO)
Thanks, Kevin.
David Yeager (CEO)
Thanks, Kevin.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.
Speaker 16
Hi, everyone. This is Ryan on for Todd. Good evening.
Mark A. Yeager (President and COO)
Evening.
Terri Pizzuto (CFO)
Hello.
Speaker 16
I guess first, I just wanted to go back to the gross margin guidance that, that you gave for the fourth quarter, and it looks like there's a sequential improvement from where it was in the third quarter. I just wanted to maybe dive a little bit in, into the detail of what exactly, you know, would be driving that, that sequential improvement.
Terri Pizzuto (CFO)
It would be, historically, we've gotten a little more price in the fourth quarter than we have in the third quarter, so it would be that historical pattern due to seasonal adjustments.
Speaker 16
So primarily, Terry, it's seasonal more than anything?
Terri Pizzuto (CFO)
Yeah, that's right.
Speaker 16
Okay. And then that's sort of my next question is sort of how... When you look at the quarter and how the gross margins played out sequentially in the third quarter, you know, just directionally, did you see them, you know, stabilize at all, or was the mix, you know, greater towards the latter part of the quarter? Just trying to get a sense of the sequential progression of margins, excluding any seasonality within that.
Terri Pizzuto (CFO)
They stayed fairly consistent, I would say, throughout the whole quarter.
Mark A. Yeager (President and COO)
Yeah. Whereas I think what we would have hoped for was an uptick as you get into more of the holiday-related-
Terri Pizzuto (CFO)
Right
Mark A. Yeager (President and COO)
type of activity, and we did not see that.
Terri Pizzuto (CFO)
Right.
Speaker 16
Okay. And then, Mark, you know, the comments about the West, the transcon volumes being weak, I just wanted to try to make sure I understand. It sounds like it's more of a function of just the overall market being soft than the competitive nature within that market. Is that correct?
Mark A. Yeager (President and COO)
I think that's right. I don't, I don't think we were losing share or, you know, obviously, our retail growth was solid. It just wasn't retail growth off of the West Coast. So the folks that normally would be shipping quite a bit off of the West Coast just, just weren't quite as active. So I think this is just more of a broader industry reflection than a company-specific issue.
Speaker 16
Okay.
Mark A. Yeager (President and COO)
Although we certainly did see a pretty aggressive transcon pricing market as well. So undoubtedly, we turned away from some opportunities that might have otherwise turned that into a positive number.
Speaker 16
Okay. Yeah, that's helpful. And then on mode, you know, a really nice quarter for you guys there. I just, you know, that the margins were ahead of our expectations, you know, in getting closer to the mid to the high end of that 2% type mark on the operating margins. You know, going into next year, I think you guys have, you know, at least near term, a target of that 2% level. Is, you know, closer to 3% a good way to be thinking about the operating margins in mode, or are we still sort of maybe a little bit longer off from that?
Terri Pizzuto (CFO)
It would probably be a little bit longer off from that 3%. You know, you're right, we did really well this quarter, and, you know, the 2.7%, which was higher than we expected, to be honest. And, you know, in the fourth quarter, it'll probably be similar to what it was for fourth quarter last year at Mode. So maybe for the year, we ended up at, you know, 2%-3% for the year. So to jump all the way from 2%-3% to 3% in 2014 would be pretty quick, but probably in a couple of years we can get there.
Speaker 16
Okay. And the last one I had, and I'll let someone else have it, on the buyback, the share buybacks, just trying to get a sense of, you know, where you guys are or what you guys are thinking, at these levels and, you know, in terms of use of cash here going forward, you know, with what you have left on the authorization, is that something that, you know, certainly you guys would be thinking about, utilizing here going forward?
David Yeager (CEO)
This is Dave. We continue to look at the share buybacks. We do think that the best use of cash for us is to either through acquisitions or reinvest it in ourselves. So we're gonna continue to look at those. We have this discussion at each and every board meeting. We'll continue to do so. So, we'll be discussing it later on this month, and we'll let you know at that point which way, which direction we're going in.
Speaker 16
All right. Thanks, guys.
David Yeager (CEO)
Thanks.
Operator (participant)
Your next question comes from the line of Kelly Dougherty with Macquarie. Please proceed.
Kelly Dougherty (Senior Analyst)
Hi, thanks for taking the question. I just wanted to touch on intermodal mix a little bit more for fourth quarter and going forward. You know, do you think what happened in the third quarter was any kind of isolated event, or is it something that might persist going forward? There's just been changes with what your customers are doing, so she would start to think about this as maybe the base case?
Mark A. Yeager (President and COO)
You know, it's hard for us to say, really, Kelly, you know? I mean, certainly, we hope that we see a more normalized, peak season pattern as the fourth quarter develops. There's some reason to think that that's, that's the case, but there's also some reason to be concerned given, you know, some of the feedback, particularly we've heard from, you know, some of the big box retailers and, and, and some folks like that. I don't think that this is anything that's permanent. I don't think this is a shift, for example, away from transloading or anything along those lines. If anything, we would anticipate that the longer-term trend favors transloading and, and that we'll see more, normalized patterns, in the future as we have a healthier economy.
So, as for this year, you know, I don't know that we're on the brink of any type of significant economic recovery, so I'm not as optimistic as I am over long-term patterns. But, the big question for fourth quarter is just how long demand continues at peak type levels. And then, you know, we'll probably go back into a more typical demand pattern after the holiday season winds down. So I don't think there's a fundamental shift, though, that's occurring here. I think this is just more a little bit of a factor of some caution out of the consumer products and retail sectors.
David Yeager (CEO)
I think if you look over the last five years, that we may have had one normalized peak.
Mark A. Yeager (President and COO)
Mm-hmm.
David Yeager (CEO)
I mean, they've all been just a little quirky, a little off center. Again, I think the economy just is not fully adjusted yet. It certainly is not growing at any rapid pace that we're seeing. So I, I'd suggest that it will get back to a more normalized peak when you do see a substantial amount of imports coming in at a pretty predictable time period. It's just 2013 did not play out to be that way, and hopefully, 2014 can fall back into the normal patterns.
Kelly Dougherty (Senior Analyst)
But you would say kind of the shift that you saw is more an industry issue. It's not necessarily your customers maybe moving different products with you and, you know, the higher value or the more profitable products with someone else.
Mark A. Yeager (President and COO)
No, I don't think that's the case at all. I think we kept share, certainly with our customers. And I don't feel like they're adopting a supply chain strategy that's any different, other than the fact that they're very concerned about maintaining inventory levels and not getting caught with a lot of excess inventory. That continues to be a major theme that we hear from a lot of our customers.
Kelly Dougherty (Senior Analyst)
Great. And there's one more for me. You know, going back to the question about capacity within the industry, and I think on the second quarter, you guys announced that you're adding an incremental 1,000 containers. How should we think about your expected utilization, given that, you know, maybe the demand hasn't been exactly as expected and, you know, kind of unclear of what it may be for the fourth quarter? Is there any kind of headwind or way to quantify how underutilization may or may not impact you, you know, in this coming quarter?
David Yeager (CEO)
I think if you look at our adds over time, and I think this is a good example, is what we did in the third quarter. We actually did improve by 10 basis points despite the fact that we have a larger fleet. And so we are very conservative in the amount of box adds we have. We feel very certain we're gonna have enough business to, in fact, fill them and keep them moving so that we don't have idle assets. And again, I think that the best predictor of that is what we've done in the past.
Kelly Dougherty (Senior Analyst)
Great. Thanks very much, guys.
Mark A. Yeager (President and COO)
Thanks, Kelly.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research. Please proceed.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good afternoon, everyone. So, just in terms of the guidance again, so it's a really wide range, and I understand some of the uncertainty around peak season, but I feel like we never know when peak season's gonna end each year. Can you maybe give some thoughts on what's it gonna take to get to the high end of the range? What's it gonna take to get to the low end of the range? And if you have any feel based on what you know about peak right now, directionally, which way you're tracking or trending within the quarter?
Terri Pizzuto (CFO)
... So kind of like Mark said, Scott, it's hard to predict exactly which of our customers are going to be up and down this quarter. And, you know, peak's been slower than we expected. It didn't start as early as we thought it would. Demand hasn't been. We haven't seen the surges that we've seen in previous years. So that's why we have a wider range there from 10% to 10.5% at the hub segment. You know, how we get to the top end of that range is more surges and more seasonal pricing adjustments.
David Yeager (CEO)
If we would continue with, I mean, the volumes have been pretty good-
Terri Pizzuto (CFO)
They have.
David Yeager (CEO)
For these first 2 weeks, but it's 2 weeks.
Terri Pizzuto (CFO)
Yeah.
David Yeager (CEO)
Two weeks does not make a quarter, unfortunately. I wish it did.
Scott Group (Managing Director and Senior Analyst)
Right.
Mark A. Yeager (President and COO)
So that's the big variable, right? It's just how long peak lasts, and I wish we had a better crystal ball. We just don't.
Scott Group (Managing Director and Senior Analyst)
Yeah. So, Mark, just in terms of the pricing, I understand, you know, it's tough to know what the rails are going to do or what your competitors are going to do. I guess you don't have control over what your competitors are doing on pricing. What do you think, what could—what are you guys thinking about doing internally to get a little bit more control over pricing? You know, it strikes me that in the first half of the year, you didn't have great volume growth, but you actually had pretty good pricing and gross yields in intermodal and pretty nice earnings growth. Do you think about maybe a little less volume and a little bit more focus internally on price? Or I guess, how do you think about balancing that?
Mark A. Yeager (President and COO)
Yeah, it's definitely a fine line, right? It's one that we try to walk all the time. You know, in the first half of the year, I think we did a very good job with pricing discipline. At the same time, there was a lot of folks that were unhappy with 2% volume growth. So what we're trying to do is balance, balance that out, make sure that we're on top of it, and make sure that we are, you know, doing the best job that we can, understanding the market. So we've done some things to get better feedback from bids, to get better feedback from our salesmen, to understand the market better, and to make sure that we're pricing in the optimal fashion that strikes that balance between price and volume.
You know, in this market, unfortunately, it was very challenging to get price. I do think that we've done better than some others in terms of getting at least some level of positive price. At the same time, we do have cost increases that we're faced with, you know, that we need to more than offset. So, you know, what we try to do is get visibility with our costs, and then build a strategy around how we're going to go to market with a plan to get price increases. And I don't think we executed on that perfectly this quarter. I think we will improve, but it is something that's a constant challenge for us.
You know, I think that as we go forward in this environment, we have to continue to push our sales team hard and make sure that our pricing really understands the dynamics in the marketplace.
Scott Group (Managing Director and Senior Analyst)
That, that's helpful, Mark. Just last thing, the million-dollar strategy project, can you give some color on what that is and what you hope to accomplish with it?
David Yeager (CEO)
Sure. Every five or six years, we do an overall, a broad strategy project. We are very, very active as a management team, all of our Section 16 and even the next level down on creating it. And basically, we're looking at the market, how we operate within the market. Some of the assumptions that, Scott, you would alluded to with pricing, with market flows, and, I think the good news about this is, this type of investment, the last time we did it was six years ago, and from this investment, many of the things you see today, contract at 66% of our overall volume, a container fleet that's substantially larger. These were all outpourings of that strategy that, in fact, we successfully implemented.
Overall, it's not a project that we take, have somebody create, throw it over the wall, and then we put it in a drawer. We actually, this is how we conduct our business and grow our business.
Scott Group (Managing Director and Senior Analyst)
Okay, great. Thank you, guys.
Terri Pizzuto (CFO)
Your next question comes from the line of Justin Long with Stephens. Please proceed.
Justin Long (Financial Analyst)
Thanks. Good afternoon. I was wondering if you could talk about the amount of drayage you do in-house with Comtrak in your Eastern network versus what that number is in the Western network. You always provide, you know, that, I guess, that number on a consolidated basis. But just curious if there's a significant difference in that metric between the two geographies and how that could be impacting, you know, both margins and mix.
Mark A. Yeager (President and COO)
Yeah, I don't have those numbers handy. We can certainly get those for you. We do track it. Really, it's more by rather than sort of Eastern versus Western. It's more about individual markets. We're actually very strong in the Southeast. We have an extensive network. We are strong in the Midwest. We have a solid operation in both NorCal and SoCal, a growing operation in the PNW, fairly new presence there. So we're a little bit less penetrated in that market. Looking to grow in the Texas markets and been fairly successful doing that. So if we look at the markets that we participate in, our percentage of drayage is around 70%-
Terri Pizzuto (CFO)
Oh.
Mark A. Yeager (President and COO)
It's got to be around-
Terri Pizzuto (CFO)
Seventy.
Mark A. Yeager (President and COO)
72 or 73%-
Terri Pizzuto (CFO)
Yeah
Mark A. Yeager (President and COO)
... which is how some of our competition looks at it. We choose to look at the broader pie, and it's 66%. But you know, generally speaking, we're probably the most proportionately penetrated in the Southeast with some big opportunities to expand, particularly in the Chicago area, is probably our biggest opportunity to expand the percentage of dray handled in markets that we're already present. Those are long-haul drays, so the opportunity to really improve your margins obviously increases as the length of haul increases. So you know, there really aren't any markets, though, where I would say we're fully penetrated, and our goal remains to get up to 85%. We had hoped that we could get there in the next couple of years.
It may take a little bit longer with the current hiring environment. But nonetheless, we continue to make progress and move it up in some pretty challenging recruitment conditions.
Justin Long (Financial Analyst)
Got it. That's helpful. You mentioned length of haul. Could you give some color on what length of haul did in Intermodal on a year-over-year basis and also sequentially?
Terri Pizzuto (CFO)
It didn't change much.
Mark A. Yeager (President and COO)
Might have come down slightly.
Terri Pizzuto (CFO)
Yeah, that's right.
Mark A. Yeager (President and COO)
Right. As, as with local lease upticking, it came down just slightly, but Terry's got the exact number, I think.
Terri Pizzuto (CFO)
Yeah, it's like 1,608mi.
Mark A. Yeager (President and COO)
Yeah, so obviously, we saw a decline in TransCon, which clearly lowers your average miles, and then we did see local lease get back into positive territory.
Justin Long (Financial Analyst)
Okay, great. And one more from me. I know it may be a little bit early for this, but could you provide any insight on CapEx expectations for 2014? I know the new headquarters is getting wrapped up, so I imagine that number probably comes down relative to what we've seen in 2013, but just wanted to get your thoughts.
Terri Pizzuto (CFO)
Yeah, next year will probably be a little bit higher, you know, although not as high necessarily as this year, you know, because some of the containers that we have are coming off lease, and we're going to buy those. That's about $7 million, for example. But on a normalized basis, it might be between, you know, $50 million and $70 million.
Justin Long (Financial Analyst)
Okay, great. I appreciate the time today.
Terri Pizzuto (CFO)
Mm-hmm.
Mark A. Yeager (President and COO)
Sure.
Operator (participant)
Your next question comes from the line of William Greene with Morgan Stanley. Please proceed.
William Greene (Senior Executive)
Hi, good afternoon. You know, Terri, can I just ask for a little bit of clarification on this, on the cost of the strategy- the strategic review? Does it all fall in the fourth quarter? I think you said it goes into next year. How does the cost sort of work on that?
Terri Pizzuto (CFO)
Sure, Bill. Yeah, there's about $1 million in the fourth quarter. The total cost for the initial project, about $2.5 million. So call it, another $1.5 million will be in 2014. And then we may expand the scope of the project, and if we do, then we'll let you know about that next year.
William Greene (Senior Executive)
Okay. So this is implicit in your guidance, right? Because the guidance at the low end of the range actually has earnings down, I think, in the fourth quarter, which would be the first time since 2009 that happened. So I'm just curious, like, should we get a lot more aggressive on cost or something? Because it seems like - it doesn't seem like the economy is that bad, so I'm, I sort of get puzzled a bit why earnings would actually be down.
Terri Pizzuto (CFO)
Well, I don't think we said earnings will be down. We just gave a range of costs and expenses from $64 million to $66 million. And to answer your question, that does include the Bain project.
William Greene (Senior Executive)
Okay.
Terri Pizzuto (CFO)
Strategy project, I'm sorry. And so, we really didn't give any guidance for what exactly earnings per share would be for the quarter.
William Greene (Senior Executive)
No, no, but if you give the range for the year, we can figure out fourth quarter. That's all, right?
Terri Pizzuto (CFO)
Mm-hmm.
William Greene (Senior Executive)
And so at the low end of the range, you would have less than last year's earnings, was the point, I think.
Terri Pizzuto (CFO)
Mm-hmm.
William Greene (Senior Executive)
So, I was just to me, it was sort of like, wow, that down earnings would be a pretty big departure from some of the growth you've been showing in recent years. So, it sort of felt like that, you know, maybe, maybe we should delay the strategic review if that's the direction you're going in.
Mark A. Yeager (President and COO)
Well, you know, I think, you know, that's the major thing is what we need to do is reinvest in our business and continue to look for areas to drive margin and expand. I think that retrenching just because something may not look good for one quarter is just an overall bad long-term strategy.
William Greene (Senior Executive)
Yeah. No, I hear you. I hear you. It's just, it's just the optics of it. But, can I ask you another question on, Hours of Service? Do you feel like that had any impact on the quarter? And as you look back in the past at different trucking regulations that came in, how soon should it be before Intermodal would see some reaction in terms of demand change?
Mark A. Yeager (President and COO)
Well, you know, I mean, to me, I don't know that there was an immediate, you know, acceleration in conversion because of Hours of Service or any of the other, you know, regulatory issues that are out there. It kind of affects us in two ways, right? Because we have, you know, we're a significant employer of drivers, and clearly, it affects them. And we did see attrition in this quarter greater than we have seen in previous quarters. Now, some of that's got to be related to folks looking in the mirror and asking whether they really want to be a truck driver or not. So I think there is some element of that.
At the same time, I think as shippers look at Hours of Service and CSA and all the other regulatory burdens and costs that the trucking industry is faced with, I think that they become more convinced that intermodal is certainly part of the, you know, solution to what's otherwise gonna be a pretty sharp cost curve over the long term. So, I do believe that there's a contributor to intermodal demand that's coming from these concerns over costs. How much of it? It's almost impossible to say.
But clearly, you know, with the domestic intermodal industry growing about 7%-8%, you have to believe that that share shift is, is at least in part occurring because folks are concerned that things like hours of service are going to drive trucking costs in the, you know, wrong direction from their perspective.
William Greene (Senior Executive)
Mm-hmm. All right, thank you so much for the time.
Operator (participant)
Your next question comes from the line of David Tamberrino with Stifel. Please proceed.
David Tamberrino (Analyst)
Good evening, and thank you for taking my question. I believe I might have heard this during the prepared remarks on intermodal, but did you say that service levels from the rails declined during the quarter?
Mark A. Yeager (President and COO)
Yeah, there was a slight downtick in on-time performance and what we call LOGs, or left on ground, which is two ways that we measure rail service. They were not so significant that they impacted the ultimate service to the customer. But they, yeah, they were a bit of a headwind.
David Tamberrino (Analyst)
Was that weather related, or what can you kind of tie that back to?
Mark A. Yeager (President and COO)
By and large, most of the on-time performance issues would have been weather related. There were a couple of pockets of excessive demand creating issues that led to more boxes being left on the ground. But for the most part, they would have been weather related. And we're talking low single digit declines here, not anything material.
David Tamberrino (Analyst)
Okay. And then maybe this is just a broader question that you can speak to. The changing chassis environment here in the U.S. with the shipping lines exiting and the pools of chassis showing up and maybe how that affects the terminal operations and the ground operations. How does that affect your drayage operations coming into and getting out of those terminals in a timely fashion? And do you have any, you know, maybe preferred setup with your intermodal with the intermodal terminals, where your trucks have a dedicated area where your box is always landing, so you can get them out quicker? Maybe just speak to that kind of changing shift-
Mark A. Yeager (President and COO)
Sure
David Tamberrino (Analyst)
... that we're seeing out there in operations.
Mark A. Yeager (President and COO)
You know, in the chassis world, in the domestic industry, the rails have continued to maintain control of the chassis. So you haven't seen a shift in chassis ownership or chassis management responsibility in the domestic side, as you have seen in the international side. We are a contributor to the neutral chassis pool and an equity owner in the neutral chassis pool, and we'd love to, you know, continue to invest in the chassis product, just to make sure there's enough chassis to support domestic intermodal. But we haven't seen a problem with chassis. We also haven't really experienced an issue with terminal congestion. It's been a strategy of the rails over the course of the last several years to separate out international operations from domestic operations.
So in most major markets, those two are really segregated from each other, so we haven't seen any type of congestion impact as a result of the shift in the international chassis programs.
David Tamberrino (Analyst)
Okay. And then maybe if you could quantify the kind of increased driver turnover that you saw in the quarter, maybe just give us a little insight as to where you think your normal driver turnover was and then maybe what it was for the quarter, what it ticked up to. I mean, we're talking obviously much lower than the large truckload industry average of 100%, but maybe on average, you're turning over 30%, maybe it ticked up to 50% for the quarter. Is that fair to say?
Terri Pizzuto (CFO)
David, our driver turnover was 39% in the quarter. It was 38% in the first quarter, I'm sorry, and then it was 44% in Q2 of 2013. So actually, it was better at the 39%.
Mark A. Yeager (President and COO)
Right, as a percentage. Pure numbers, though, we, we ended up losing, I think, what? 300 and-
Terri Pizzuto (CFO)
Yeah
Mark A. Yeager (President and COO)
... 12 drivers.
Speaker 15
Twelve.
Mark A. Yeager (President and COO)
And the normal for that period was in the mid-twos.
Terri Pizzuto (CFO)
Yep.
Speaker 15
Right. But it is the summer, and it's just more difficult to recruit, and-
Mark A. Yeager (President and COO)
Yeah
Speaker 15
... you seem to have a tendency to lose some as well.
Mark A. Yeager (President and COO)
Yeah. It's certainly way too early to call it a trend.
Speaker 15
Yes.
David Tamberrino (Analyst)
Okay. All right, well, thank you for your time.
Speaker 15
Sure.
Operator (participant)
Your next question comes from the line of Matt Brooklier with Longbow Research. Please proceed.
Matt Brooklier (Senior Equity Research Analyst)
Hey, thanks. Good afternoon. So just a question here. Mark, I think you mentioned that the first couple of weeks of fourth quarter is feeling a little bit better here on the intermodal side. Just curious to hear if you think with that improvement in the market, that potentially at intermodal you also see a little bit of improvement in terms of mix as we move through fourth quarter.
Mark A. Yeager (President and COO)
Well, we're certainly hoping to see a better demand out of, you know, out of Southern California. That would be the normal pattern in the fourth quarter, particularly in the early part of the quarter. Obviously, as you're positioning for for the holidays. So yes, we are hopeful that that would happen. We saw that happen last year. We would be surprised if we saw it to the extent that we saw it last year, based on just what we know about concerns with inventory levels within the retail sector. So, we would, we would certainly like to see that. That would be normal. It's just a matter of whether we're dealing with normal or not.
Matt Brooklier (Senior Equity Research Analyst)
... Okay, but I guess my question being with the pickup out of Southern California, if we see, you know, that continuation, should we assume that it's gonna improve your intermodal mix sequentially?
Mark A. Yeager (President and COO)
Normally, it would.
Matt Brooklier (Senior Equity Research Analyst)
Okay.
Mark A. Yeager (President and COO)
But it has to be of a certain magnitude in order for us to really get the benefits of that. So a muted version doesn't really produce the kind of opportunities that we have to realize additional margin.
Matt Brooklier (Senior Equity Research Analyst)
Okay. So I guess the all-in Hub margin guidance, gross margin guidance of 10%-10.5%. Terry spoke to it earlier, part of that is some seasonal price improvement. Are we assuming we get a little tailwind from mix, or is that not baked into the range?
Terri Pizzuto (CFO)
It would if you were at the higher end of the range.
Matt Brooklier (Senior Equity Research Analyst)
Right.
Mark A. Yeager (President and COO)
That would probably be the determinant between the middle and lower part and the higher end of the range.
Matt Brooklier (Senior Equity Research Analyst)
Oh, okay, fair enough. And then, again, intermodal, the market picking up in fourth quarter, hopefully, that holds. You guys are adding 1,000 incremental boxes. You did 5% volume growth, all in for third quarter. Not a bad number. You talked to in the second half, you know, earlier this year, being at a mid- to upper-single-digit, you know, volume growth number. I guess the question being, how comfortable are you with, I guess, hitting that range in fourth quarter?
Mark A. Yeager (President and COO)
You know, I think we're comfortable with that range. We still feel like we're gonna be in the mid to upper single digits for the second half of the year. You know, keep in mind, our big box number was 7%, right? So, that was even a little bit better than the aggregate number of 5%, which also includes our wholesale effort and our ISO boxes as well, which were down from a volume perspective, but performed well otherwise. So yeah, we remain confident that intermodal demand will enable us to produce mid to high single digits.
Matt Brooklier (Senior Equity Research Analyst)
Okay, good to hear. And just my last question, showing a continuation of nice growth at Mode, you indicated you added some sales agents and I think some IBOs as well. Do you need that, you know, to continue this higher-end single-digit growth? Or was, you know, more of the growth in the quarter organically driven?
Mark A. Yeager (President and COO)
Yeah, most of the growth in the quarter is being driven by our larger agents. The new additions, which I think now are 13 sales agents and 8 new IBOs for the year. You know, it is producing some revenue, but really not enough yet to move the needle. Most of that growth that you're seeing is coming out of, say, our top 25 IBOs.
Matt Brooklier (Senior Equity Research Analyst)
Okay, that, that does it for me. Thanks.
Operator (participant)
Your next question comes from the line of Ryan Bouchard with Avondale Partners. Please proceed.
Ryan Bouchard (Equity Research Associate)
Hey, guys. Thanks for squeezing me in. A quick clarification. Terry, earlier, you said truck brokerage margin was down 200 basis points year-over-year. Was that gross margin dollars down 2%, or was that gross margin percentage down 200 basis points?
Terri Pizzuto (CFO)
That was the percentage.
Ryan Bouchard (Equity Research Associate)
Okay. Can you tell us what that was in dollars?
Terri Pizzuto (CFO)
You know, ... We're not disclosing that. I can tell you that, the growth in logistics, gross margin was offset by a decline in truck brokerage gross margin dollars, and intermodal was flat-
Ryan Bouchard (Equity Research Associate)
Okay
Terri Pizzuto (CFO)
in terms of dollars.
Ryan Bouchard (Equity Research Associate)
Okay. And then lastly, would you say that the Unyson pipeline, you said that it was strong, is it as strong as it was coming into the third quarter? So kind of in other words, do you have the opportunity to increase revenue by another $10 million sequentially there, or has most of that already occurred?
Terri Pizzuto (CFO)
Oh, no, most of it's already in.
Ryan Bouchard (Equity Research Associate)
Right.
Terri Pizzuto (CFO)
Because we're not onboarding anything new in the fourth quarter to speak of. So-
Ryan Bouchard (Equity Research Associate)
Okay
Terri Pizzuto (CFO)
... you know, and you have to look seasonally, you know, too, at the number, because it does go down. It did go down last year in the fourth quarter.
Ryan Bouchard (Equity Research Associate)
Yeah. And so it looks like about half the time it goes up and half the time it comes down. So there's-
Terri Pizzuto (CFO)
Yes.
Ryan Bouchard (Equity Research Associate)
you know, seasonal
Terri Pizzuto (CFO)
Right.
Ryan Bouchard (Equity Research Associate)
We wouldn't expect it, we wouldn't necessarily expect another big jump or anything like that in the fourth quarter.
Terri Pizzuto (CFO)
Right. But, you know, I can tell you that, you know, we still think they're growing strong and that, you know, we had 42% growth in the third quarter. Wouldn't be surprised to see it between 40% and 45% in the fourth quarter.
Ryan Bouchard (Equity Research Associate)
Okay. Well, that's helpful. Thank you, guys.
Operator (participant)
This question comes from the line of Anthony Gallo with Wells Fargo. Please proceed.
Anthony Gallo (Managing Director)
Thank you. Good evening. I wanted to make sure I understood the logistics margins. You within Legacy Hub, you had about a $34 million sequential improvement in revenue, and yet operating income within Legacy Hub was flat sequentially, despite about a $2 million reversal in incentive comp. And so $34 million in additional revenue sequentially, no change in operating income. I just want to make sure I understand the profile of the logistics, the revenue, I'm sorry, the margin profile of the logistics business coming on.
Terri Pizzuto (CFO)
Yeah, it's, you know, it's our lowest margin. Gross margin is a % of sales, to answer your question, I guess. You know, logistics gross margin sequentially, what was up in terms of the dollars?
Anthony Gallo (Managing Director)
... Okay, but okay,
Terri Pizzuto (CFO)
It's and it's lower because, you know, we're managing a transportation spend for a customer, and so all that transportation revenue and cost goes through the P&L.
Anthony Gallo (Managing Director)
Okay, so a lot of that's pass-through revenue. So I should say, a good portion of that is pass-through revenue. Is that right?
Terri Pizzuto (CFO)
With a margin on it, yeah. Mm-hmm.
Anthony Gallo (Managing Director)
Okay.
Terri Pizzuto (CFO)
That's right.
Anthony Gallo (Managing Director)
And then, and then maybe could you give—because it's such a big number now, maybe could you give a little bit of color in terms of the length of the contracts? Is it how much of it is gain sharing? How much of it is just transportation managed with the margin tacked on? Maybe a little more color on what the logistics business looks like. Thank you.
Terri Pizzuto (CFO)
Generally, a three-year contract. A lot of times customers will renew because we're able to save them money, and oftentimes we share whatever we save with the customer. So that's kind of how they're structured. They look to us to save them money, and that's part of what we do. We share that information with them, you know, periodically, at least once a quarter, formally. That's kind of how they're structured.
Anthony Gallo (Managing Director)
Okay. Okay, thank you. That's helpful.
Terri Pizzuto (CFO)
Thank you.
Operator (participant)
We have a follow-up question from the line of Scott Group with Wolfe Research. Please proceed.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks for the follow-up. I'll just one thing. So in terms of some of the issues in third quarter, the guidance for fourth quarter implies kind of somewhat of a continuation of that. When do you think, either from a pricing perspective, that you'll have opportunities to fix that? Can we think about earnings growth again, starting in first quarter, or is it more realistic it's middle of second or third quarter, once you've had a chance to go through bid season again, where we can start to see earnings growth?
Terri Pizzuto (CFO)
You know, we, our book of business is pretty, pretty well set. It depends how it will fluctuate, what business is up and what business is down. So I guess we'll give you more guidance on 2014, you know, when we release our earnings, for fourth quarter of 2013. But,
Anthony Gallo (Managing Director)
We've not said we're not going to see earnings growth in the fourth quarter.
Terri Pizzuto (CFO)
Right.
Scott Group (Managing Director and Senior Analyst)
Okay. All right. Thank you, guys.
Operator (participant)
Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Dave Yeager for closing remarks.
Anthony Gallo (Managing Director)
Great. Well, again, thank you for joining us for our third quarter conference call. As always, if you do have additional questions, Terry, Mark, and I are always available. So, thank you, and have a good evening.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great evening.
