Hello, and welcome to the Hub Group Third Quarter 2020 Earnings Conference Call. Dave Yeager, Hub's CEO Phil Joerger, Hub's President and Chief Operating Officer and Jeff De Martino, Hub's CFO 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. 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 the 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 ks and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager.
You may begin.
Good afternoon, and thank you for participating in Hub Group's 3rd quarter earnings call. I'm joined today by Phil Yeager, Hub's President and Chief Operating Officer and Jeff DiMartino, Hub's Chief Financial Officer. I'd like to begin by acknowledging the men and women of Hub Group. During this pandemic, they have continued to provide great service to our valued clients, while protecting their health and that of their families. Today, we announced that our Q3 volume and earnings grew significantly versus Q2.
We've gone from a market that was extraordinarily surplus, which resulted in reduced pricing to a highly constrained market with capacity at a premium and spot truck pricing at elevated levels. Our rail partners have been very resilient and have managed the significant sequential increases in intermodal volume extremely well. Anytime you have massive increases in volume, issues do arise. But our rail partners, being the Union Pacific and the Norfolk Southern, have responded quickly to mitigate issues, thereby avoiding any significant impact to our network or our customer service levels. Our clients inventory levels continue to be constrained, while the demand for truckload and intermodal capacity remains strong.
As a result of these market forces, going forward, we believe pricing has reached a trough and the prices will continue to rise as demand is strong and capacity tight.
With that, I'll turn it over
to Phil to review our business lines.
Thank you, Dave. I would also like to start by thanking our team for their relentless focus supporting our clients and each other in this dynamic environment. We have participated in a rapidly changing market since the trough in April, and we've continued to provide great service to our customers. We have done this while keeping a strong focus on our costs and continuing to invest in our business to drive
long term growth.
For the quarter, intermodal volumes increased 9% and revenue increased 4% as wins with strategic customers and the strengthening demand environment are driving our growth. Transcon volumes increased 18%, local west was up 17% and local east volumes declined 3% as we experienced significant tightness in the West Coast, leading to an earlier than anticipated peak season. Gross margin as a percentage of sales declined 3.90 basis points year over year. Our volume growth and improvements in our trucking operations could not offset headwinds from lower prices, rail cost increases, elevated equipment repositioning costs and increased outsourcing of our drayage to support our volume growth. As the market has tightened, we invested in expanding our fleet, and we have continued to meet our customer commitments while providing a great service product.
Strong rail service and continued tightness in inventory levels is positioning us for a strong 2021 bid season. Logistics revenue declined 7% and gross margin as a percentage of sales declined 100 basis points year over year. We experienced strong growth in CaseStack and have continued to onboard new customer wins, given our excellent value proposition in our outsourced logistics solutions. This was offset by customer losses that were driven by the pandemic as well as increased supplier costs. We've improved our productivity and continue to have a strong pipeline of on boardings.
We anticipate excellent demand for our services will continue to accelerate given the need of our customers to find more creative solutions to their supply chain challenges. Brokerage volume declined 10%, while revenue increased 10% and gross margin as a percentage of sales declined 3.90 basis points year over year. We performed well as we moved into the spot market to support our clients who are experiencing lower primary tender acceptance rates, while managing yield on committed business, meeting our customer commitments and maintaining excellent service. We experienced margin compression as capacity costs increased more quickly than spot volumes early in the quarter. We also had a negative mix impact as LTL and project volumes declined during the quarter.
We are seeing strong demand from our clients and are continuing to focus on supporting them during peak season and beyond. Dedicated revenue for the quarter declined 8% and gross margin as a percentage of sales declined 110 basis points year over year. We have continued to support our clients as their demand surges, while shedding unprofitable business and onboarding new customer wins. We are continuing to see improvement in our returns in the business and have a strong pipeline for growth. I will now hand it over to Jeff to discuss our financial performance.
Thank you, Phil, and hello, everyone. We are pleased that our business returned to growth in the 3rd quarter with revenue up 1% led by our intermodal and truck brokerage businesses. As expected, intermodal volumes grew high single digits in the quarter, benefiting from strong demand from our strategic customers. While gross margin as a percent of revenue declined to 11.7%, Q3 gross margin of $108,000,000 was the highest level achieved this year. We continue to exhibit strong cost control with quarterly costs and expenses equal to 8% of revenue as compared to 10.7% last year.
Our non driver headcount is down by over 10% due to our efficiency and technology initiatives. We have achieved our 2020 goal of $40,000,000 of run rate savings from our profit improvement initiatives, and we remain committed to operating efficiently. We continue to improve our trucking operations, driving higher utilization while also reducing our operating expenses. Salaries and benefits expense for the quarter was down by over $14,000,000 as compared to the prior year. General and administrative costs declined by over $10,000,000 Excluding the impact of legal settlement and consulting expense last year, G and A costs declined by approximately $5,000,000 as we reduced our spending in several areas, including travel and professional services.
Hub Group's diluted earnings per share for the quarter was $0.74 This compares to $0.78 of diluted EPS in the Q3 of 2019, which included $0.19 for legal settlements and consulting. Our tax rate for the quarter was 21.5% as we benefited from a state tax credit and the reversal of a federal tax reserve. For the full year, we expect the tax rate to be around 24.5%, which implies a rate of 26.6 percent in Q4. Our results continue to demonstrate the resilience of our operating model as we generated $64,000,000 of EBITDA in the quarter and ended with over $185,000,000 of cash. We continue to have solid liquidity and low levels of net debt.
We view our capital structure as an asset and our priority continues to be reinvestment in the business through capital expenditures and strategic acquisitions. For the Q4, we expect continued high single digit intermodal volume growth based on customer demand
and our
recent and upcoming container deliveries. We anticipate revenue will decline sequentially in our non intermodal business units due to the impact of business loss earlier in the year, which is not yet being fully offset by our new business wins. We expect gross margin dollars will decline somewhat from Q3 levels due to rising costs in Q4, including for insurance costs in our trucking operation that are not fully offset by our revenue enhancements and our profit improvement initiatives. For the remainder of the year, we expect to spend between $70,000,000 $75,000,000 on capital expenditures to support growth in the business. For the year, we will be purchasing over 3,300 intermodal containers and over 300 tractors to refresh and grow our fleet, while continuing to invest in technology.
Dave, back to you for closing remarks.
Great. Thank you, Jeff. Despite the fact that the pandemic remains with us, we are encouraged by the strong freight economy that is being driven by demand for capacity, creating a positive pricing environment. We expect this strong demand to continue through the end of the year and into 2021. And with that, we'll open the line to any questions.
Thank you. We will now begin the question and answer session. We do have our first question from Justin Long from Stephens.
Thanks and good afternoon.
Thanks, Jonathan.
So maybe to start with intermodal, I was wondering if you could provide some color on how you're expecting to reprice your business in terms of just the quarterly cadence going forward, going into this next bid season? And then any initial thoughts around contractual rate increases for this bid season as well?
Sure. Yes, this is Phil. Happy to do that. I would start with I think it's a little early to make a call on exactly where bid season will be going. We're repricing about 5% of our business here in the Q4 and we'll reprice about 45% in the Q1 of next year.
So we'll have a whole lot more detail to provide, I think, on our Q4 call. However, I think given the backdrop with very strong demand, low inventory levels, tight truckload and intermodal capacity, Class 8 truck orders are staying at replacement levels. And I think we've done a very nice job of servicing our customers. I think all of that paints a backdrop where we'll be in a position to improve pricing and also continue to grow as an organization. So feeling very strongly that it will be a positive pricing year, just don't know the magnitude of that at this point.
Okay, thanks. And in terms of headcount, could you provide an update on what headcount was in the 3rd quarter? Just curious what type of year over year change we saw. And as you think about revenue starting to come back here sequentially and hopefully that continues into next year, how sustainable are the headcount reductions that you've recently made?
Sure. Yes. So September 30, we were at about 18.50. That was down about 11% year over year. We do have a pretty rigorous process for any headcount as we're looking to drive efficiency in the organization.
So as revenue returns, we're going to hold the line to the extent we can on headcount and manage by through efficiency metrics.
The only this is Phil. The only thing I'd add is that there are a few strategic areas we want to continue to invest in being our maintenance network where we think there's a cost reduction opportunity by the addition of headcount as well as continuing to develop our inside sales organization in the brokerage to help us drive volume and margin growth there.
Okay. Jeff, and I know you said in the Q4 gross margin dollars should be down sequentially, but because of what's happening with headcount and it sounds like you're focused on holding the line there, do you think that operating income will be down sequentially or can it be flat to up with some of the cost reductions?
It should yes, we should be able to leverage some of those costs. And Q3 number is a pretty good run rate on the cost and expense side.
Okay, great. I'll leave it at that. I appreciate the time.
Thank you. Thanks.
And we do have our next question from Scott Group from Wolfe Research.
Hey, thanks. Good afternoon, guys.
Good afternoon.
So I'm when I think about Q4, when there's typically a good peak, like it feels like we're having and there's some peak season pricing opportunities, we typically see 4th quarter net revenue higher and some years meaningfully higher than Q3. Why is it not the case this year?
Yes, sure. Thanks for the question. I think sequentially this year, we do have some cost headwinds coming in certain areas. Our drayage spend is 1. We're working to mitigate that with our tractor adds this year, but we do think there's some sequential cost pressure.
We also have a rising insurance cost that maybe not seasonally that we may not have had to that extent in the past if you're comparing us to prior years. And those would be the 2 big drivers.
Yes, I think the other pieces that I would highlight is we did take rail cost increase in September that wasn't fully baked into the Q3 results. And we obviously with pricing that was somewhat challenging. So we are doing I think a much better job of reducing our repositioning costs as the quarter is coming on to continue to support our volume growth opportunity, but reduce expense. And then as Jeff mentioned, we have outsourced more of our drayage. We are anticipating the growth is going to continue to be very strong.
But given that insurance and the tax rate change, I think as well. Obviously, that's not a gross margin impact, but an impact as well. So those are really the main factors that are applied.
How much are can you just can you quantify those headwinds a little bit? Because when I look at like 2017 2018, good peaks, we had $20,000,000 uplift in net revenue. And maybe it's something different. Are you not doing peak season surcharges or are the rail costs doing something different this time around?
Yes, I think the difference might be the Q3 numbers are probably higher going in this year than they were in the past just because the market tightness started earlier. So there's probably not as much of a sequential improvement that you may have seen
in earlier years. Yes, certainly given the strength in import volumes, that it was certainly a quicker peak than I think we would have anticipated. And we locked in a lot of those peak plans really before those volumes increased. So it is somewhat of a lower surcharge than we have typically been able to garner, but at the same time, it's a contractual commitment. On the spot side, when we are getting spot volumes, obviously, we're able to garner very strong incremental surcharges to help cover that cost.
But I think the other side of it is that we do have that increased cost of repositioning offsetting some of those returns on the surcharge.
Okay. And then just last question. Can you just talk about your visibility on rail cost increases for next year? And just do you think you've given up, I think, 2 points, give or take, of gross margin this year. Can you get that back next year?
Does it take a couple of years to get that back?
Hi, Scott. This is Dave. As far as the two points, I do think that during this upcoming bid season, particularly providing if demand remains very strong, which we anticipate it will, that yes, we can get that back very quickly. So I think that that can be accomplished within the next year.
Yes, I think going into bid season, we see a really good opportunity. The discussions that we're having with our customers are the given the transition they've seen in truckload capacity and rates, they want to lock in capacity and ensure that their supply chains are going to stay fluid next year. And that's a really good setup for intermodal and for intermodal pricing. I think the other good sign is that we are seeing shorter haul, more local East volumes start to transition back to intermodal, which generates a higher gross margin percentage and higher margin per load day for us because we're able to spin the assets in a more balanced manner and reduce our repositioning costs. So we feel as though there is both an operational and balanced yield opportunity as well as in our pricing.
And to answer your first question too as far as the visibility with rail price increases, we have very clear visibility on that for next year.
Okay, great. Thank you, guys.
Thank you.
And our next question comes from David Ross from Stifel.
Yes. Good afternoon, gentlemen.
I want
to start, Jeff, a little couple of nits on the CapEx side. Yes. Did you that CapEx number you gave, dollars 70,000,000 to 75,000,000, is that for the Q4 or for the full year?
That is for the Q4. So we spent about $55,000,000 year to date. We gave guidance on the second half when we announced Q2 earnings and just based on the timing of the deliveries of containers and tractors, most of that ends up into Q4. We didn't spend much in Q3.
Any thoughts yet on 2021 directionally where that should go?
Yes, we're working on budgeting right now. So it's we'll have more to say when we announce Q4.
All right. And then for Dave and Phil, maybe just what have you learned about the business through the last 7 months with all the ups and downs? Are there any things you found out that surprised you and maybe helped ultimately coming out of this to run leaner and meaner?
That's Kurt, this is Dave. That's a very interesting question because I've never seen the types of fluctuations that we've experienced this year before in my career. I do think that some of the things I did learn is the resiliency and that you have to be very nimble and be able to react quickly to these types of changes. I mean, a pandemic is rather extreme, but it's certainly we have been able to adjust very quickly with our leaner staff to price changes, whether it be from April when we were down significantly overall to where September were up substantially. So I think that with the restructuring of the company, with the smaller headcount, but with very capable managers and people working at the company that we've been able to sustain ourselves pretty well during a very unusual time.
I think it's a testament to the T and A in our brokerage. Productivity was up 24% in the quarter on a year over year basis. In logistics, it was double digits. Our driver productivity improved by 6% on a year over year basis. So the fact that our folks are able to continue to deliver those sorts of results given all the fluctuations is a real testament to their work ethic.
So we're very proud of what they've accomplished. And but I think it positions us really well with our customers because we were able to step up and support them. And I think our customers see that value in deepening their partnerships with a company like ours because of that.
And last question on the drayage side. You mentioned it's a little bit out of kilter in terms of increased 3rd party dray. What's the percentage now of in house versus 3rd party and where do you want that to be?
Yes, we were at 54% during the quarter. That's down 4 percentage points on a year over year basis. So and that's actually with a lower driver count in our drayage operations. We had earlier in the year gone through and identified that we had opportunities to bring on higher performing drivers into our fleet and we've been able to reduce the driver count, get more productivity out of that. So actually doing more volume with fewer drivers.
So we are going to focus on getting to long term that 80 percent goal, but invest in the fleet. We think to get to around and continue to grow to get around 60% next year. So that will be the target that we'll have in our CapEx plan as we look ahead.
Excellent. Thank you.
And we have our next question from Todd Fowler from KeyBanc.
Great. Thanks and good evening. Dave, I just wanted to follow-up on your comments in the prepared remarks about rail service. It sounds like that you didn't experience any significant here in the quarter, but I just wanted to make sure that was the case and have you expand on that a little bit. And then as you think about intermodal and the competitiveness versus truck, I mean, are you seeing anything from a service standpoint that given how tight the truck market is, would prohibit more share coming to the intermodal market in a really constrained truck market?
Just kind of what you're seeing from a service standpoint and customer interest at this point?
Sure. Thanks for the question, Todd. Yes, rail service, I mean, anytime sequentially that you have the type of growth that we've experienced, you will have some amount of issues. But our rail partners have been able to remediate those very, very quickly so that we really have not negatively impacted our clients' overall service. So the service has been good.
I think that the major thing that our clients always want is consistency of service, whether it's a 3 day transit or a 4 day transit. That's the most critical issue for them. And so there's all again, there's always going to be issues when you have that type of sequential increase. But how quickly you can, in fact, solve them and fix them is the key. And the railroads, our partners, the Union Pacific and Norfolk Southern, have been very nimble and able accomplish those goals very quickly.
Okay, good, great. And then just a follow-up, Jeff, on the F and A expenses, the $74,000,000 for the total for the Q3, is that a good run rate for the Q4? And as we get into 'twenty one, are there anything that we need to think about as far as costs coming back, if it's incentive compensation or anything that would change that significantly from the run rate where you're at right now?
Sure. Yes. So for Q3, the number is I'd say it's a good run rate number to use. There was nothing kind of to call out that would be unusual in that number in the quarter. And then to your point, we with the current trend this year, we've not been we don't expect to pay incentive compensation.
We will budget typically, we budget for that next year, any year. So we'll have that as a headwind.
And just, Jeff, what's kind of a ballpark number that you would think? I mean, not looking for maybe, but what would be a range that we should think about that could be coming back in 'twenty one?
Probably $5,000,000 per quarter is the right number to think about.
Okay, good. All right, thanks for the help tonight.
And our next question comes from Bascome Majors from Susquehanna.
2016 was the last time that you bought back stock in size and looking at the price back then, it's $10 or $15 higher today than it was, but your stock is trading at the same PE multiple as it was back then and it's actually a lot cheaper on free cash flow. I mean the balance sheet, you talked about low leverage. It looks like you'll end the year under a half term net debt to EBITDA and you'll probably generate 100 of 1,000,000 of dollars in free cash flow over the next 2 years. So why not ramp up the buyback now?
Sure. Yes, Noah, this is Jeff. Our priority for reinvestment is always to invest in the business through either capital expenditures or acquisitions. We have been able to fund most of the CapEx through pretty attractively rated interest rate debt. We have been and continue to look for acquisitions.
It's been about almost 2 years since we made the last acquisition of CaseStack. I'll tell you, we've been looking ever since. We've been active and anticipate doing something in the short term here. So that will continue to be a priority when it comes to the way we use our capital. But we do evaluate exactly the point you raised.
We discuss with our Board every quarter on return of capital to the shareholders. But at this point, priority continues to be to grow and reinvest in the business.
So it sounds like if things go well, you would expect to have a decent sized acquisition sometime before the end of next year?
Yes. We're certainly the pipeline would suggest that that's the case, yes.
Thank you.
You're welcome.
And our next question comes from Brian Ossenbeck from JPMorgan.
Hey, good evening. Thanks for taking the question. Just going back to the rail side of things for a second. On the conference call last week, your main rail partner in the West mentioned going end to end with one point of contact for the customers. They weren't talking about going retail, but they did make it a point to say that there needs to be a better visibility and coordination throughout the supply chain end to end for shippers.
So what can you add on to that? How far long is that process? Is it too early to see some benefits? And I guess, bottom line, what does it really mean that's happening here?
Hi, Brian. This is Dave. I would suggest to you that Hub is very fortunate that we have very strong relationships with both the Union Pacific and the Norfolk Southern. And in fact, I would say that these relationships have never been stronger. And a major reason for that, the strength of that relationship is that we work very diligently on bringing value to the rails, in fact, probably as much as we focus on bringing value to our clients.
So we invest our capital, 100 of 1,000,000 of dollars in containers and tractors in technology. We're exclusive to these rails. And so as a result of that, our the networks that we build are in fact very complementary to either the Union Pacific and or the Norfolk Southern. So we work with them very closely from an operations perspective in as much as we always target ourselves to get loads off the ramps the quickest of any IMC at every single terminal on these railroads, And we also never bring an empty back to the rail to the ramp. Thereby, what that allows is for a relatively reducing the dwell time and also allowing their ramps to be very fluid.
So we feel as though the value that we bring to them in addition to being a large low cost to serve customer puts us in very good shape with both our rail partners and that as long as we bring value to both our customers and our rails, we believe we have a very strong seat at the table.
Okay. I guess maybe more generally, what can you add about trying to put more visibility through the supply chain when it comes to shipping because you're with trucks. So do you see anything on the horizon in that regard?
I think to a large extent, we've worked diligently on that and invested in a lot of technology to just do that, enhance the visibility. As an example, I think we're still the only intermodal fleet that is 100% GPS tracking. So that's the whole thing with visibility. Where the blind spot was, was not on the rail because they have good systems. You kind of identify exactly where containers and shipments are.
It was at either end of the drag cycle. With our technology, we know not only where the container is on any given moment, we know if it has freight in it because we have a sonar type device, which will check to see if there's any freight in the box, as well as we know when the doors are open. So we offer that visibility to our clients so that they can see at any point in time where the container is. We can push that notice to them. They can go on an app that allows them to look at it and to determine when it's going to be delivered.
So the visibility is something that we have right now and that we work with our rail partners on very consistently.
And I would just add that there continue to be opportunities to improve the experience and the handoffs that we have between our rail partners to create a more fluid operation. We work very closely with them on that, but it could be anything from making sure that the highest priority shipments are always getting loaded even though it might be last minute, improving our driver cycle times through the terminals. Those are things that reduce costs, that improve the intermodal products, that on top of our great technology are going to make us even more competitive, I think, to continue to compete with truck and we're working very close with our partners on continuing to make it a truck competitive or truck better or better than truck product.
Okay. One quick one then on logistics. Can you just give us an update on CaseStack? We saw, I guess, the return of OTIF not too long ago. Vazenet is probably pretty good for that business, but you already mentioned trying to meet customers where they need it and where you can find capacity.
So maybe just an update on CaseStack, the growth opportunities and how that changed back to OTIF or the tightening of OTIF should benefit that business in the coming quarters?
Yes, this is Phil. Yes, the tightening of OTIF is certainly a tailwind for that business. I think the service sensitivity is extremely important and there just continues to be a proliferation of SKUs in different retailers that is going to drive growth.
We've done a nice job
of growing with a significant number of retailers and continuing to diversify the business, continues to grow at a double digit rate. And although we are seeing some short term challenges with some increased costs, we are working diligently to get that improved. So we think there's a great growth opportunity ahead. We are continuing to position the product, I think, extremely well and also tying it into all the solutions that we bring to our larger customers, which is going to drive even further scale outside of the typical smaller consumer product, small to midsize consumer products customer that they've had traditionally. And we've seen great really great success in cross selling to our existing client base.
So continue to be very pleased with how the acquisition has gone and what we have ahead of us.
Okay. Thanks for the time today. Thank you.
And we do have our next question from Tom Wadewitz from UBS.
Yes, good afternoon.
I think it's pretty notable if I look at the volume performance in intermodal that you're up at 9% in your 2 big intermodal competitors, CB Hunt and Schneider down around 2% for the quarter. So I just wondered if you could offer some thoughts on what some of the key drivers of that are. They both ride in the BN, you ride in the UP. Obviously, price could be a factor. But what do you think between those two things?
I mean, do you think there is a significant outperformance of how UP is running? And that that's some advantage that maybe can continue to accrue for you or is it kind of a more of a factor on how aggressive you were with rates? So just some thoughts on that competitive dynamic.
Yes, I think it's a combination. Our combined service with the UP is very strong and we continue to improve on it. As I was just mentioning, the operational partnership that we've developed with them to create a more seamless service is fantastic. So I certainly think that service product and the flexibility that we've had is differentiating. The other piece is certainly during bid season, we were able to get some wins with strategic customers of ours that drove growth.
And also during the initial fallout from the truckload market, we were very aligned with some of our larger customers to support them during that given the container adds that we also made. I think that has been a big differentiation where we have had capacity coming into the West Coast, not only in our empty repositionings, but in our import of new containers. And that has helped us significantly in supporting the demand in that portion of the market. So I think both set up a very nice picture though for us to be in a position where we can discuss with our clients the support we are able to provide during really a dislocation in the market. So I think it sets us up very well going forward.
Would you expect to add meaningfully more containers next year as well?
Yes, we are anticipating continuing to grow the fleet. We're as Jeff mentioned, we are in our budgeting process. We don't have a specific count, but we will be looking at our forecast and working with our customers to understand their needs and requirements based on what we know. The conversion of truckload freight back to intermodal should be very high and sets us up with an opportunity. We want to be balanced in our approach to grow above market, but also continue to improve our pricing.
Great. Just one other follow-up. I think you were asked a little bit about M and A. It seems that there are pretty good number of transports out there looking to at least interested in doing M and A. I mean, there is one that announced that special dividend today, which seemed to be at least an indication that, partial indication that maybe it's just tough to find the right companies to buy.
What are your thoughts on what's going on in the M and A market? Are sellers just looking for too high of a price? Is it kind of COVID related? Or what do you think it is that's maybe a number of people looking, but not necessarily a lot happening with actual deals?
Yes. On that front, we haven't seen a lot of companies actively launching sale processes. We've been active on searching and frankly knocking on doors, but the acquisitions we've been engaged in diligence on have been those types of situations where we found a company that either have worked with in the past or has a really high quality reputation and we knocked on the door and kind of kick things off that way. So I don't know if the other companies you're referring to just aren't seeing opportunities or not looking in the right places, but we've had some good success and are, I think, maturing along in the phase of diligence on some of these opportunities and we're hopeful to get something done in the short term here.
Okay. Yes, great. Thanks for the time.
Thanks, Tom. Thanks, Tom.
And we do have our next question from Jason Seidl from Cowen and Company.
Thank you, operator. Hey, gentlemen, I hope everything is well. I wanted to ask about the dedicated side. Obviously, you got hit by some higher costs on the insurance and repair side. Dedicated, obviously, is a lot different than sort of over the road, one way truckload.
How long is
it going to take for you
to sort of get those expenses back through pricing?
Yes. What I would tell you is that I think we're still middle innings in the evolution of that business. We've put in much better cost disciplines. And although we saw some gross margin compression, we're improving our returns in that business. We are continuing to get through the tail end of shedding of unprofitable business and bringing on some nice new wins there and implementing technology.
I think the opportunity that's out there is going to be to convert one way truckload or higher cost private fleets over to a dedicated configuration. And that is what is really driving our pipeline right now. As we look at renewals, I think given what is being stated about the truckload market there and what we're seeing with wage inflation and insurance costs, there is going to need to continue to be discussions and we're going to need to challenges. If we're not able to have a competitive wage and challenges. If we're not able to have a competitive wage and recruit drivers, we're not able to provide the service levels that our customers desire and that we demand of ourselves.
So it's a very open dialogue. It's very collaborative. And I think we'll see ourselves being able to continue to grow that business at a healthy profile going forward given the baseline that we've set, but still opportunities that are out there.
Okay. I appreciate the color on that. And I guess I want to hop to brokerage really quickly. Your percentage of contractual business declined and I'm assuming that's just because the amount of contract business the excuse me, transactional businesses out in the marketplace. How should we look at in terms of repricing in the brokerage business?
Like what percentage do you guys get to reprice in 4Q and what percentage of those contracts get to reprice in 1Q?
Yes, I would say it's a similar breakdown to our intermodal business where you'll see about 50% repriced through the Q1 of the year. So obviously, we've seen some contractual cost compression. We've seen inflation of our transportation costs. We're working very diligently to offset that. But given obviously the market changes anticipated that we would see that, I do think we'll be able to do a much better job in managing that through the latter portion of this year and into next year.
So the contractual volumes though should be relatively in line and really match our intermodal business and there's going to be an opportunity to reprice at a higher level. I think probably even a higher percentage potentially than intermodal just given what we're seeing in and hearing from our clients at this point in time. The only other piece that has been a little bit of an impact, and I know I addressed it in my prepared remarks is our project volumes, which just given the dislocation of inventory at this point has gone down significantly. That's typically a high margin profile for us. Based on the discussions we've had with our large customers, we anticipate that's going to come back in 2021 and should be a nice tailwind for us as well our LTL volume growth be as well.
So we're seeing positive signs in brokerage and I think very well positioned given the productivity enhancements we've made to that business.
Fair enough. Gentlemen, I appreciate the time as always.
Thanks, sir. Thanks.
And our next question comes from John Chappell from Evercore.
Thank you. Good afternoon, guys.
Good afternoon, Phil.
Phil, Jeff mentioned in the 4Q outlook that revenue will decline sequentially in the non intermodal categories from customer losses earlier in the year. That's exactly what you guys said for 3Q relative to 2Q yet in every category it was up sequentially and pretty meaningfully in logistics and brokerage. So how much of that 3Q to 2Q trend was kind of macro, the market just moved really aggressively in the last 2 months of the quarter versus your available capacity, some market share wins, customers that you brought online? And if it's the latter, how come that wouldn't be repeatable then as we look at 4Q versus 3Q?
Yes. The Q3 numbers actually did frankly surprise us. The revenue did beat our internal forecast. A lot of that was frankly in the the biggest piece was in brokerage where we had some higher revenue dollar spot business that again better than we expected not to the same degree that brokerage was. But we
do think there is going to
be a little bit of softness. There's some seasonality in the business as well that will impact revenue in Q4 as well.
And we did not recognize the full impact of some of the losses from some of those non essential retail clients that unfortunately were heavily impacted by COVID. In the Q3. We will recognize that in the Q4. However, I would say we're working hard every day to keep bringing on new wins. We are bringing on new wins in logistics and are going to continue to do that.
They'll have a better margin profile than the business that we lost, a much better margin profile. And in brokerage, we have a team every day that is focusing on supporting our customers. And if demand holds, there's certainly opportunities for us to expand our top line and net revenue. So we're not certainly going to say, hey, we're throwing in the towel and not going to push ourselves to be better from Q3 to Q4, but just trying to give you our best view of what that might be given what we know at this point.
Okay. Thanks for that. And I did want to ask as my follow-up about the customers like the non essentials that have been shut down 2 weeks ago. This might have been a different conversation, but it does seem like broadly speaking things are opening up again. How much of your customer base that was shut down for a period of time has come back?
And I guess how is your capacity ability to take some of that on especially as you balance some of the new customers you brought on? And this can span intermodal to logistics to brokerages across the entire business?
Sure. So I would say with Intermodal, we have really focused on supporting our strategic customers who supported us during challenging times in COVID and we have brought on some new clients that we think are strategically important for us longer term in industry verticals that we would like to crack into, but have mainly focused on supporting our core group of clients. Brokerage, I would say as well, we have stuck to our commitments and continue to support our customers on the contract side despite some of the cost compression that we've seen there. And we've been rewarded for that in the past and plan to see that again. And we are able to participate in the spot opportunities that are much higher yield, although that doesn't completely offset just given the dislocation in the market.
And then in logistics, we have become much more productive and improved our onboarding process significantly. So we are able to scale our business, slot in new onboarding much more effectively. They aren't as high of revenue dollars, but the growth in operating margins of those new business wins are very strong. So we're continuing to focus on scaling the business, using what we have to continue to provide a great service and the investments that we've made in technology are really helping us continue to do that. As I mentioned, our productivity in brokerage is a fantastic result, 20 plus percent improvement there on
a year over year basis. So
we feel good about our ability to continue to scale and add new customers, but it's we're trying to be selective on who we work with as well, just given some of the impacts that we had from those non essential retailers who unfortunately weren't able to make it through given their financial position. So we are scrutinizing the financials of our customers. We want to continue to partner with the winners and that'll be our focus going forward.
Great. That makes sense. Thanks, Phil. Thanks, Jeff.
Thank you.
And we do have our next question from Todd Fowler from KeyBanc. Todd, your line is open.
Sorry about that. Can you guys hear me?
Yes, we can.
Okay, good. Thanks for taking the follow-up. I guess I just wanted to follow-up a little bit on the question about the brokerage growth during the quarter. Traditionally, I don't think about you as having a large transactional brokerage presence. So it sounds like that a lot of the increase in volume was helping out some existing customers.
Is that some business that you can convert to being more sticky business into the future? So how do you think about kind of the sustainability of some of the transactional volume that you saw here on the brokerage side this quarter?
No, that's exactly right. Yes, it's not only on a lane basis seeing spot transactions that are continually coming across to convert to a contracted carrier and to a contract win for Hub. But it's also we in the past had a difficult time cross selling our brokerage given the service that we were providing. I think we have completely improved our service products. We are and especially in the spot market and in our contractual business.
And that sets us up to have that dialogue and grow on an ongoing basis, as well as get the opportunities on the spot board to continue to grow as well. So we're anticipating that the support we're giving those strategic customers is going to lead to larger wins during their RFP events as well as continued opportunities to participate in the spot board and then convert that business over to contractual business as well. So hopefully, we're working to create really a strong cycle there with these customers That
sounds good That sounds good. And then just the last one for me. I think in the past, you've talked about the ability to hit 5% operating margins, which you've done on a quarterly basis. As you think about the progress that you've had on the cost you take out here and in the repricing of some of the business as you get into 2021. Is that something that's achievable maybe in the back half of next year?
Are there some other things that you need to see to get to that margin target that you talked about in the past?
Yes, it does continue
to be our longer term target. I think we're going to need a stronger pricing cycle to get there. So I'm not optimistic at the end of next year. We may be at that run rate, but it's probably going to be a little beyond that.
Okay. So not just maybe not something you pick up on one bid season, maybe another bid season after that?
I don't think so. We've certainly been focused on taking out operating costs, but gross margin driven by price is a very powerful lever in our business.
And we have no further questions at this time. I will now turn the call over to Doug Yeager for closing remarks.
Well, thank you for joining us for our Q3 earnings call. As always, Jeff, Phil and I are available for any additional questions that you may have. So again, thank you and have a good evening.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.