Hello, and welcome to the Hub Group Third Quarter 2019 Earnings Conference Call. Dave Yeager, Hub's CEO Phil Yeager, Hub's President and Chief Operating Officer and Terry Pizzuto, Hubbs' 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. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question.
Any forward looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statement in the release. In addition, you should refer to the disclosures to 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. Also 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 now begin.
Good afternoon, and thank you for participating in Hub Group's 3rd quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer and Terry Pizzuto, our Chief Financial Officer. At the close today, Hub reported a record Q3. That's quite an achievement when you consider that we had a 2% revenue decline. Our diversified service offerings contributed to these strong results as Hub's adjusted EPS was $0.97 per share.
The CaseStack acquisition continues to perform well as we continue to see sales and operational synergies that are adding value to our clients and enhancing our profitability. And with that, I'll turn the call over to Phil to review our business lines.
Thanks, Dave. I will now discuss our service line performance, excluding legal settlement costs. Intermodal volume declined 9% as we saw softer demand than last year and increased intermodal and truckload competition. Despite the volume decline, we improved gross margin as a percentage of revenue by 60 basis points. We were able to offset decreased volume with improved tractor utilization, procurement of outside capacity and revenue management.
Our team is providing record service levels and we believe this enhances our value proposition in the soft market. Truck Brokerage had another strong quarter in a difficult environment and we are seeing the benefits of our improved operating model, pricing and technology. Truck brokerage delivered an increase in volume of 14% and a 510 basis point improvement in gross margin as a percentage of revenue. We continue to provide record service levels, saw the benefits of our LTL growth via CaseStack and improved our customer and carrier value propositions, all of which drove the solid results. Have a significant opportunity to grow this service line and are investing in our sales organization to support the opportunity.
Logistics delivered strong results and profitability and revenue growth as we integrated CaseStack, improved our operating model and onboarded new business. We saw a 6 80 basis point improvement in gross margin as a percentage of sales and a 27% increase in revenue. We won several new customer engagements during the quarter and have a strong pipeline for growth. We are beginning to see improvement in our cross selling with CapesTech, which included several wins during the quarter, one of which is the largest customer engagement in CaseStack's history. We continue to see significant growth opportunity in our logistics business as we complete the rollout of our new technology platform, organizational structure and additional service offerings.
Dedicated had a strong quarter offsetting a 5% decline in revenue with 7.90 basis point increase in gross margin as a percentage of sales. The margin expansion was driven by better operational discipline and improved revenue management. We remain focused on additional opportunities to improve our returns through more efficient operations. We also won new contracts in the quarter while maintaining a strong pipeline for growth. Overall, we had a strong quarter and we would like to thank our talented team at Hub for their great teamwork and results.
We feel as though we have ample opportunity to continue to grow and operate more efficiently regardless of market conditions. I will now hand it over to Terri to discuss our financial performance.
Thanks, Phil, and hello, everyone. As you can see from our press release, net income for the quarter was $26,100,000 and earnings per share was $0.78 I'd like to highlight 3 points for the Q3. First, all the numbers that I'm about to discuss for the 3rd quarter exclude a total of $8,500,000 of costs or approximately $0.19 a share. These excluded costs include $4,800,000 related to settlement of legal claims first made in 2013 for alleged misclassification of drivers, dollars 3,000,000 related to a legal settlement of a 2016 auto liability claim and $700,000 for a consulting project. 2nd, we're excited about the relentless execution of our profit improvement initiatives resulting in a strong 5% operating margin.
3rd, earnings before interest, taxes, depreciation and amortization was $75,000,000 or an increase of 35% over 2018 $55,500,000 Now let's take a more in-depth look at our performance in the 3rd quarter. Hub Group's revenue decreased 2% to $913,000,000 driven by an increase revenue offset by declines in our other service lines. Gross margin as a percentage of sales was 15.1%, the highest in Hub's history. Gross margin as a percentage of sales increased 280 basis points and as Bill discussed, every service line was up compared to last year. Operating margin excluding the $4,000,000 of acquisition related compensation expense was 5.4%.
Hubgood's diluted earnings per share was a record at $0.97 This is compared to 2018 diluted earnings per share from continuing operations of $0.77 an increase of 26%. Looking at our cash flow, cash flow from operations for the 1st 9 months totaled $129,000,000 Free cash flow totaled $82,000,000 Earnings before interest, taxes, depreciation and amortization for 9 months was $200,000,000 compared to $135,000,000 last year or an increase of 48%. Our cash balance at the end of September was $89,600,000 That's lower than expected because we paid vendors early at the end of the month. We did this because we went live on ERP on October 1. Our accounts payable balance was also unusually low at the end of September.
Our current cash balance is about $155,000,000 Turning now to guidance. We believe that our 4th quarter earnings per share will range from $0.81 to $0.85 which brings our 2019 expected adjusted earnings per share range from $3.36 to $3.40 We project a mid single digit to high single digit revenue decline for the Q4. We expect gross margin as a percentage of sales to range from 13.9% to 14.2% in the 4th quarter. We believe that our 4th quarter costs and expenses will range between $89,000,000 $91,000,000 We project that our effective tax rate will be about 25.7% in the Q4. We plan to spend between $35,000,000 $40,000,000 on capital expenditures in the 4th quarter and to fund these purchases with a combination of cash and debt.
That wraps up our financial performance. Over to you, Dave, for closing remarks.
Thank you, Terry. We believe that our strategy of providing excellent service to our clients, while focusing on profit improvement initiatives will continue to generate strong returns. As we previously stated, our goal is to achieve $6,000,000,000 in revenue by 2023, while continuing to expand our profitability and return on uninvested capital. We intend to accomplish that goal through a combination of organic and acquisition driven growth. We have a robust pipeline of acquisition targets that would strengthen our existing service lines or will represent an extension of our current offerings.
At this time, we'll open up the lines to any questions.
Thank you. We can now begin the question and answer session. Our first question comes from Scott Group of Wolfe Research. Hey, thanks. Afternoon, guys.
Hi, Scott.
So I wanted to ask about the 4th quarter guidance. Typically, 4th quarter is higher than 3rd quarter. I get the mid to high single digit revenue decline, but still implies 4th quarter revenue higher than 3rd quarter. So why such a steep drop in earnings in 3rd relative to 4th?
Basically, because we're not seeing a peak season like we did last year. And when we talked about our projections back in July, we thought we would see a peak season similar to 20 17 and we really haven't seen that either both on the intermodal service line or in truck brokerage for that matter. So and we had thought that our volumes would be down slightly and instead they're going to probably be down mid to high single digits in intermodal. So, the environment now is a bit different than it was back in July.
Yes, Scott. All the forecast we've gotten from our customers really kind of reflected that we would see a relatively strong peak again much like 2017. And we are now just in the last couple of weeks beginning to see some tightness in LA, Seattle, NorCal, Chicago, but it's just not as robust as anybody had forecasted for what we thought would take place.
Okay. Can you give us the monthly intermodal volume trends and then what you're seeing in October?
We can, sure. July was down 4%, August was down 13%, September was down 11% and through yesterday, October was down 10%.
Okay. And then do you have any what can you say about rail cost inflation at this point? Do you have visibility to is 2020 higher cost inflation, lower cost inflation, similar cost inflation with 2019 on the rail side?
Yes, Scott, this is Phil. We are anticipating and have good visibility of lower cost inflation next year.
Okay. And then I wanted to just make sure I understand in the press release, the $60,000,000 of run rate savings and the other incremental $40,000,000 How much of that have we seen year to date of the $60,000,000 And when does the 40 $1,000,000 show up? I want to make sure I'm
understanding all these numbers. Sure. Yes. So what I'll tell you is what we've done already about half of that is related to efficiency gains through technology investments, our ability to reduce headcount there and reducing outside services spend. The majority of that took place in the latter half of the year.
The other half is related to operational improvements that we've also seen over the last few months, mainly utilizing our driver and tractor capacity more effectively. We've really enhanced our procurement program and done a great job there. And I also think are being much more effective in our revenue management. As I look out on the $40,000,000 the majority of that, that's going to be 2020. We're going to get those on an ongoing basis, But the majority will be operationally driven.
We think there is a significant opportunity to reduce cost and improve efficiency in our drayage and dedicated networks and we're going to go after that very aggressively. We're going to continue to invest in technology, but our goal is to be growing and leverage the headcount that we have while also continuing to perform on our revenue management and continuing to procure well in the open market.
I just want to make sure I'm understanding. So the $60,000,000 that you said, how much of you actually how much will actually show up in the 2019 numbers of the 60,000,000
dollars Like Phil said, I mean, we saw a lot of that headcount savings in the latter half of the year, specifically if you look to Q2 versus Q3, our headcount is down about 5% just in that period of time and that happened mid Q3. So we'll see that for a full quarter and Q4, obviously. And then we have more to go on top of that, as Phil mentioned, with the anticipated savings that we'll have.
No, we haven't really garnered the majority of that until very recently, right? So you should see it going forward.
Exactly.
Okay. So we got less than half of the 60, it sounds like this year and we'll get some portion of the so we'll get the full 60 next year and then some portion of the 40 next year as well.
Yes, correct.
Correct, right.
Okay. All right. Thank you for the time, guys.
Our next question is from Ben Hartford from Baird.
Hi. Good evening, guys. Dave, maybe just your perspective on how in the context of a lack of a peak, how bid results are trending now and what some baseline expectations might be from a sort of pricing perspective as you look towards the start of 2020?
There's a little bit of paper shuffling there, Ben. But the question again was, how do we perceive the bid season right now and how will it impact in 2020. As we've often said, a lot of how the bid season may turn out is reflected in the prior peak. So it's relatively flat right now. We do believe that early on that again will probably be relatively flat or maybe slight upticks in pricing in the beginning of the year and that as it goes along that it will become be able to raise price more and more, we think, as capacity will become a bit more constrained.
So that's kind of where we're at right now.
Yes, this is Bill. I would just add, it's really early. We're just getting into bid season. I think probably a little early to tell exactly how it's going to go, but we're keeping a very watchful eye on it. And I think from an area where we've just seen increased competition is on the truckload side, right, and we continue to stay focused on maintaining our share as
well. Okay.
In the context of what you were describing from a cost savings perspective, what's been done today, what's going to come next year, positioning the organization to leverage that headcount. Can you talk a little bit about how the model should react if we are in kind of a downturn type scenario given your progress to date and what you see? It's just difficult. We don't have a whole lot of historical frame of reference that we think is terribly relevant. So if we're in a more difficult environment, you've got these cost savings that are coming.
I mean, is there the potential to be able to maintain flat EBIT margins in that environment? Or if we do have decremental margins, is there any way to be able to describe what it may look like? Just trying to get a sense for this whipsaw that we have 3Q versus 4Q in the back half of the year and how to think about 2020?
Sure. Yes, I would say that we are going to work extremely diligently to make sure we get all of these cost opportunities. I think if you look at it's tough to exactly state what the magnitude of those recessionary markets might look like. But we do feel that we're in a position to hold up well. We think we have a really good plan and a lot of opportunity.
As I mentioned before, on the dedicated and drayage side, we still think there is significant opportunity to operate more efficiently. And it has been a large source of capital for us, but also just a large opportunity for us to improve our operations, reduce cost, improve efficiency. So we are very focused on that and think that there's a lot of opportunity. So I would say, given these opportunities and the way that we're going after it, I feel confident in our ability to continue to deliver even in a recessionary environment.
Okay. And then, Terry, if I could get one in, just in terms of how to think about 2020's CapEx. I know you got the building year marked, but maintenance CapEx still $125,000,000 $130,000,000 What are you thinking for 20
20? We believe 2020 will be similar to 2019, which we think will be around $90,000,000 to $95,000,000
Does that include the building?
Yes, it does.
Okay, great. Thank you.
Our next question from Justin Long of Stephens.
Thanks and good afternoon. So Terry, you gave an updated intermodal volume expectation for the full year, but what's your expectation for intermodal volumes in the Q4 specifically? And then thinking about some of the pricing commentary for intermodal next year, Do we need to see intermodal pricing up in 2020 in order to improve the intermodal OR? Or do you think the intermodal OR can improve even if we see flat to, let's call it, down low single digit intermodal pricing?
Sure. When I had said that we had previously thought that our volume in the 4th quarter would be down slightly, I was mentioning the 4th quarter, we think that will be down mid to high single digits now for the Q4. For full year, it could be down probably mid to high single digits as well, so similar. But for full year, we believe we'll be down less than we are in the 4th quarter.
And this is Phil. Just from a a pricing perspective on your second question, we're in our budgeting process right now, but our anticipation would be start to see a tightening in the second half. And with that, we would be in a very good position to have a strong year. I think we given these cost offsets and the ability for us to continue to improve there and get more velocity back in the network, I think the opportunity is very strong for us next year. We're confident in our ability to continue to perform well in the intermodal portion of our business.
Yes, I think in particular, it's kind of a hub specific story in as much as the cost initiatives. The $60,000,000 run rate is something that's very real. And I know that Phil and Terry and their teams have reviewed the $40,000,000 and what we think is achievable for next year, and it is. So I think that we expect the economy, as Phil said, to be getting stronger through the second half. But even without that, we certainly have a lot of costs that we've taken out and a lot of opportunity left.
Yes. And Phil talked specifically, it's a significant opportunity on the operational side of the house in dedicated and drayage, and that drayage obviously impacts our intermodal margin. And we've just recently seen a little bit of improvement in tractor and driver utilization. We really haven't seen as much of that yet as we expect to see coming down the pike.
Okay. That's all helpful. Secondly, there's a lot of uncertainty out there around brokerage based on both the market dynamics and the role of technology and how that could disrupt things. Can you just take a step back and walk through how you feel your brokerage business is positioned going forward and how we should be thinking about both the top line and margin trends relative to the broader brokerage market?
Sure. Well, Ed, this is Phil. I think you've heard us talk a lot about the work that we've done to improve our brokerage. We really started that focus. I think late last year and have seen a tremendous amount of improvement in we started with a focus on our service and our purchasing, setting up the right organizational structure and incentives.
And since then, we've enhanced our technology, we've enhanced our pricing capabilities and that's really starting to show up I think in the results as you saw really strong gross margin improvement from us during the quarter. So we feel very good about our model and where it is. We also added the LTL portion of our brokerage through the CaseStack acquisition, which has been extremely strong as well. We're adding new service lines and capabilities. We're building trust with our clients and we're a much more competitive player at this point.
And so we think with a full bid season this year that we're going to be in a really good position and would anticipate continued top and bottom line growth through 2020. So that's our anticipation. I certainly think it is a competitive market and we need to continue to invest in technology to keep up and to be a real player, but we are very determined to do that and very focused on it.
Okay, great. And then one last quick one to sneak in. You mentioned dedicated and the opportunity for improvement there. If you think about your operating margins for dedicated today versus what you would view as more normalized, what does that gap look like?
I would say significant. We are not where we want to be or near that. And we think that there is a clear pathway to do that to get to where we should be and where we want to be, which is double digit operating margins. And we think that that's doable within the service line and we are working diligently to make sure that we get that business positioned that way.
Okay, great. I'll leave it at that. Thanks for the time.
Our next question is from David Ross of Stifel.
Yes. Good afternoon, team. First question on the intermodal container fleet. Given the drop in volume this year and somewhat have muted expectations for next year, do you plan on removing any containers? Or do you plan on adding to the container fleet next year?
Where do you expect the container fleet to fall out in 2020?
Well, it will we'll probably add 1,000 containers is our best guess right now, but we're also retiring containers. So we don't think it will grow much in 2020.
Net net should be about moving.
Yes, exactly. And for this year, Dave, it will probably be up 300 containers. So not growing this year either because again we're terminating this year.
Okay. So those 1,000 for next year are just replacements?
Yes, correct.
Okay. And then follow-up on the truck brokerage side of things. It's growing nicely and you talked in your comments about investing in the sales organization. Can you add a little bit more color there? I guess, how are you investing in that?
Are they regionally based, centrally based, inside sales, field sales? How do you think about the truck brokerage growth in the sales organization?
Sure. Yes, this is Phil. It's a combination, right. I think one area where we recognize that we are not where we need to be is our inside sales force in particular. We are putting a good amount of effort into that and feel really good about our ability to access the spot market on a more consistent basis through that and leverage the really great relationships we have with our larger customers and support them with that.
We also need to bring in more talent from a truck brokerage perspective for our outside sales organization, whether that's in more of a specialized role or in one of our regional or hunter type positions. We think that our sales force, although we've made a lot of really good changes to it, we need to continue to train our folks to be able to position that product. But the opportunity is there. We're seeing the signs that we can execute to that. And so we're going to continue to invest in both.
But the biggest opportunity that's right in front of us would be within the inside sales organization.
Excellent. Thank you.
Our next question is from Todd Fowler of KeyBanc.
Great. Thanks and good evening. Dave, just on your comments on the volumes and the lack of peak season, is that solely related to what you're seeing from a bid compliance standpoint? Or do you think that there's some share shift that's going on in the market right now?
I think that definitely bid compliance is still not up to where it was last year. It's still a lot less. It's improved slightly, but it's still much less than the prior year. But I do think that intermodal has, in fact, lost some share. And it's not just in the 750 to 1000 mile type of line hauls.
It's even up in the 2000. Dallas L. A. Has become a very competitive market. So a lot of it is the truck competition.
I think that they're doing anything just to keep their tractors and their drivers moving. But that's not a long term strategy that's going to be viable.
Right. Yes. Okay. That makes sense. That's helpful.
And then just on the net revenue guidance for the Q4, the decline from where you're at in the Q3, I'm assuming that a lot of that's a function of not seeing the peak season, but is there anything else that's going on with net revenue sequentially into the Q4? And then with all the things that you've laid out on the cost side, it sounds like we should expect net revenue margins to improve as you move through 2020. But is there any reason why there would be kind of puts and takes given kind of all the opportunity it seems like you have, particularly with drayage and some of the costs on that part of the PT?
You're right, Todd, that most of the impact on margins in Q4 as compared to Q3 would be due to no real peak. And then we also had only 1 month of our Western Rail partner increase in the Q3. In the Q4, that increase is in for all 3 months. And then we're expecting that utilization might be a half a day worse in the 4th quarter than it was in the Q3. We would expect truck brokerage margins, which Phil mentioned on the earlier in his prepared remarks, were up 510 basis points, which we were thrilled.
Now we want to get more volume, of course, but we'd expect truck brokerage margins to be down maybe 50 to 70 basis points because of the challenging market. And then we project logistics to decline from Q3, maybe 100 basis points just because of changes in customer mix between Q3 and Q4. But you're right that in 2020, we have a lot of opportunity to improve those margins with the profit improvement initiatives that Phil talked about earlier.
Great. Okay. And then just the last one for me. With the top line shaking out to be flattish this year, it sounds like there's just a tremendous amount of the
Okay, Todd. Yes, I would a, we obviously we've been talking about being getting to $6,000,000,000 by 2023. And it will be a combination of both organic growth as well as through acquisitions. We have a very robust acquisition pipeline right now that we're looking at and doing a lot of diligence work. And these companies, for the most part, are asset light, and in fact, would either be complementary to our current service lines or put us into new lines of business.
So we're encouraged with that. We think that this is just a part of the cycle as far as you have a bit of a freight slowdown, but it's not going to last certainly forever. And it does appear as though the overall, at least the consumer economy, is quite strong. And as we continue to burn out the inventory, there will be greater demand for transportation.
Yes. And I would just add, this is Sylvia, we've really built a lot of capabilities, I think, to utilize the growth as a profit enhancement opportunity as well, whether it's we're managing our revenue better, we're operating more efficiently, we're pricing more effectively. I think we're putting in better technology. So all of those, when we do see the growth on an organic basis really return and the market come back in our favor, we feel very good about our ability to scale.
Great. Thanks again for the time tonight.
Our next question is from Brian Ossenbeck of JPMorgan.
So, Terry, maybe if you can just a couple of housekeeping ones to start. Maybe if you can just give us the updated EBITDA guidance, which you've been giving the last couple of quarters to go with the rest of the outlook you provided?
Sure. So we would project that for the Q4, which is the only quarter you don't have, our EBITDA could range between $65,000,000 $72,000,000
Okay. Thank you. And then when you look at the amortization from the acquisitions and the comp expense, excuse me, do you think that those are expected to go down in 'twenty and be a little bit of a tailwind? And I guess some disclosures in the 10 ks.
They'll go down a little bit, but not much.
Right? Okay.
Very similar to what 2019 was.
Okay. And then going back to the initiatives, especially on the Gray side, what specific have you got these sounds like you've already got some of started, are they going to acquire capital investments, is it all internal self help, maybe you can just provide a little bit more context behind what it is exactly to see the biggest buckets of opportunity and some of the steps you need to take to realize and monetize some of that?
Yes. This is Phil. I would tell you the biggest opportunity is getting our processes in the right place and really leveraging those across the network, utilizing best practices. We have some areas where we're performing we have sites and terminals where we're performing very well. And then we have others where there is massive opportunity.
This could range from how we're purchasing to how we're utilizing our drivers and our tractors. We're reorganizing our load planning function to better support our drivers and our customers and provide that higher service level and enhanced efficiency. Where I would say there is some capital would be really just on the technology side as we continue to roll out our single platform with OTM, we're going to be able to leverage our drivers even better through the optimization tools that OTM has. So that would really be the only capital area. I don't see anything else besides that from a capital requirements perspective.
The rest is just making sure we block and tackle and execute.
Actually, it should help us with our CapEx because we'll be more efficient as a result of the way we look at our business and how we use the tractors and the drivers that we have. That should bring our CapEx down.
Okay. And then on that last question on that topic on capital deployment, do you still see the buyback kind of continuing at the rate that you've been executing in 2019? Do you feel like there's a reason potentially to step back or increase? And maybe if you get some relief from the CapEx side, you can deploy it there. So just thoughts on the rest of the balance sheet deployment.
Yes, we bought about $18,000,000 worth of stock during this quarter, and our first use of cash is really acquisition. So, we have a Board meeting coming up in mid November. We talk about it every Board meeting, so we'll reevaluate then.
Our next question is from Baskin Majors of Susquehanna Financial.
I wanted to follow-up on the question about bit compliance. I believe you said last quarter that you weren't expecting much of an uptick in it. And I'm a little surprised by the magnitude of the lack of peak season volume in the intermodal business against that. I was wondering if you could break it out a little more. Are you seeing freight rebid in intermodal and actually gained by truck or is this just your current customers not bringing the volumes you hoped for or is there something else going on be it rail to rail IMC competition?
Thank you.
So I would say it's a combination, right. So there are some customers that are trying to take advantage of the market in the short term, which is something that we've come to deal with. There is some increased intermodal competition, as I said in my prepared remarks. And then I would say the truckload pricing has really been some of the comparables we see sometimes are dumbfounding. But we are continuing to focus on staying disciplined and continuing to improve our yields.
I think that's certainly part of the challenging volume that we've seen. And we plan to continue to stay focused on yield and I think there are opportunities as the truckload market tightens for us to get a lot of that volume back and continue to utilize our network fully.
Yes, the whole industry was down 7% in the Q3 of FASCAM and we were down 9%. Now a couple of percentage points of that for us was a customer that went bankrupt last year, end of last year. So we don't think we lost a whole lot of market share.
That was a percent for weather and light. Exactly.
Thank you for that clarification. Can you just share where you are at on big compliance in the Intermodal business today and what a more normal peak might look like?
Sure. We think it's very similar to where we were in the second quarter in that 70 ish percent range and we've seen it uptick a little bit, but it hasn't been to where we expect. And I would say our customers, it's been interesting with peak season to see some have very large forecasts and they've been brought down. So I think it's also a demand function, right, where you just we haven't seen the import volumes at the level that we would have anticipated, which is certainly disappointing, but also understandable given some where the inventory levels are.
Thank you. And last one, your full year is coming in at or above I think where you originally guided the year even though the cadence I think is little different than you may have thought. Where are you accrued on incentive comp for the year right now? And should next year prove to be more challenging on the bottom line? Is there some cushion in variable comp along with the cost initiatives that you've talked about to help ease that blow?
Thanks.
Yes. Our incentive comp tracks right along with our EPS and how we grow our EPS that's determined by the Board at the beginning of the year. So I can't tell you specifically where we're at. We'll tell you that in the proxy when we file it. But we're accruing where we need to accrue based on how we think we're going to turn out for the year.
And it's next year, depending on how that turns out, it could be a headwind, it could be a tailwind. I mean, we only get compensated if we grow, and that's the way it should be.
Right. That's a decision by the outside directors. And it is performed on an annual basis and it's based partially on our budget, partially on the prior year. But obviously, if we don't grow from the prior year, our EPS, we get 0, which is what we would deserve. So it's a very effective compensation.
Yes. We treat that up every quarter based on forecast of where we think we're supposed to going to come out.
And thank you for that. I do appreciate the clarity on the you need to grow to earn it. And I wasn't asking for a dollar number. I was just roughly kind of target level, above, below, anything directionally you can share on where we're tracking for this year?
We're tracking above.
Our next question is from Ravi Shanker of Morgan Stanley.
Hi. This is Mika Shendar on for Ravi. Maybe just a quick one for me. Can you run through what you're seeing from a volume perspective in the different regions? And as a follow-up, have you seen any truck versus intermodal price spread inversion in select lanes, particularly in the East?
Sure. I'll take the volume by region. Local West was down 11, local East was down 11 and TransCon was down 3. And are we seeing competition in the East? Yes, that's why our that's where we run into truck competition the most.
And we are seeing, in some cases, truck rates, spot truck rates lower than intermodal rates in the East, so very competitive there.
Got it. Thanks for the color.
Our next question is from Tom Wadewitz of UBS.
Hey, this is Mike Traianna on for Tom. So I wanted to just ask about competition within intermodal. I mean, obviously, you're starting to see some of that pick up. But when we look forward to next year as the bids start to ramp up, I mean, do you think that becomes more pronounced? Or is there something that you think you could see that could just make all the players show a little discipline?
So I think we have shown discipline I think
we have shown discipline
at times in the past, and there's no
reason to believe. Again, despite the fact that
we've had some significant increases in our gross margin percentage and our operating income, we still are really not at an acceptable return on invested capital. And I think I don't think any of the players really are at this point. So we need to continue to focus on yielding up. Of course, that's we see part of that one of those levers is, of course, price with customers. The other lever, which Phil and his team have been exploring, is on our cost side because they all can add towards our earnings and our operating income.
So with those two levers, I think we've been quite aggressive, and I believe that we've been very disciplined in our pricing. And I don't think we've ever had the focus on cost improvements that we have at this point and those which are they're very attainable, all of the numbers that we've been laying out here today.
Yes. And our competitors did say, I think, on their call that they expected an orderly bid season. So we're hopeful that that's the way it will
be. Certainly hopeful.
Right.
Then just on that point about efficiency in intermodal. I think Phil, you mentioned last quarter that you were seeing you saw some you saw growth in loaded miles while volumes were down. And I think length of haul is probably a factor there just with Transcom being less worse. But could you just talk about what you've really done to improve the efficiencies within intermodal, just in terms of box turns or reducing the empty miles? Is that really technology driven or are there other factors driving it?
Yes, we've really put in a significant emphasis on process. We're going through all of our terminals and doing what we call clean sheeting, trying to identify opportunities to utilize our drivers more effectively and also make sure that we're utilizing all of our tractors and capacity as effectively as possible. The point is at the end of that we have an agreed upon playbook that we're going to utilize to operate as efficiently given the freight flows of that terminal as we possibly can. There is a portion that is possibly can. There is a portion that is technology related.
We are rolling out our OTM platform to all of our terminals and plan to be done by the middle of next year. But the main opportunity we have is process and focus and making sure that all of our team members understand and have the ability to really execute to our processes.
Okay, great. Thanks for the time.
Our next question is from Matt Brooklier of Buckingham Research.
Thanks. Good evening. Can you talk about the timing can you talk about the potential for incremental changes in their network, I. E. Are there further potential closures that we could see in Q4 going forward?
Sure. This is Phil. The impact was on both rails. The UP actually was a pretty small portion of the lane cancellations that impacted us. It was a little bit more in the East.
I would tell you that at this our rail partners have been great about communicating with us on changes to their network. At this time, I don't anticipate any further rationalizations of lanes. I certainly have they have changed their minds before, but I actually think you'll see reopening of lanes more than cancellation is our hope as well.
And as a follow-up, I'm guessing that the reopening of the lands would be a 2020 event?
I don't know for sure. I would just tell you that we're hoping to see lanes reopened. I think at this point given some of the volume challenges that the industry has had that would be a prudent move.
And I
think they are looking closely at that.
I'm sure that yes, they're assessing it on an ongoing basis, but that's certainly our hope.
Got it. And then just one more of the 1 percentage point of intermodal volume that was lost in that particular product line? Were you able to quarterback some of that volume and move it in your other modes, I. E, I would assume that you recaptured some of that on the truck brokerage side during the 3rd quarter?
Yes, that's exactly right. We like to go to our customers when there is a disruption in any mode and offer them a solution first. It might not always be cost neutral, but we want to make sure we're bringing them solutions. So as we saw weather impacts, particularly in Kansas City market, we were going to our customers proactively with solutions to continue to move the freight for them. And we have been able to garner the majority of that back.
So we don't anticipate the weather disruption being a long term impact.
Got it. Good to hear. Appreciate the time.
And our last question is from Scott Group of Wolfe Research.
Hey, thanks for the follow-up. Appreciate it. Any chance you can share how much in peak season surcharges in intermodal you did in Q4 last year and what you're expecting this year?
Probably about 8 times as much as we are doing right now.
It's significant for us. Yes.
I'm trying to think like so this is a it's a 4th quarter 2019 headwind, but as it relates to peak surcharges specifically, it wouldn't be an issue as a headwind in first half next year. But pricing is maybe at risk, but peak surcharges are specific risks Q4. Is that the right way to think about it?
Correct. Yes.
Okay.
CapEx, I thought it was supposed to be higher next year. Is this a are we deferring some capital? Is this a new normal new run rate around $100,000,000 a year in CapEx?
No. We talked about the initiatives, the profit improvement initiatives and looking at our operations and doing more with less that relates to capital expenditures as well and being more efficient. So that's why that number came down, Scott.
Okay.
And then just lastly, so I know we did 5% margin for the quarter, but not obviously not for the year. Do you think all these cost things are what you need to get to the 5% or do you think that potentially takes you above 5?
Percent? I think with a strong economy continuing to see some tightening in the truckload market and a stronger pricing environment that gets us to the 5 and then some that would be our read. And if the pricing environment doesn't cooperate, that creates a challenge for us to hit those numbers, but it's still our target and our goal.
Okay. All right. Thanks for the time, guys.
And that concludes our question and answer part of our meeting. We now turn the call back to Dave Yeager for closing remarks.
Great. Well, thank you again for joining us on our Q3 earnings call. As always, if there are any additional questions that come up, we're all available here in Oak Brook. Thank you again for joining us.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.