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Edited Transcript of HUBG earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Hub Group Inc Earnings Call

DOWNERS GROVE Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Hub Group Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Yeager

Hub Group, Inc. - Chairman and CEO

* Donald G. Maltby

Hub Group, Inc. - President, COO and Director

* Terri A. Pizzuto

Hub Group, Inc. - CFO, EVP and Treasurer

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Conference Call Participants

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* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - Research Analyst

* Kevin Wallace Sterling

Seaport Global Securities LLC, Research Division - MD of Airfreight and Logistics and Maritime and Senior Analyst

* Scott H. Group

Wolfe Research, LLC - MD and Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Hub Group's First Quarter 2017 Earnings Conference Call. Dave Yeager, Hub's CEO; Don Maltby, Hub's President and Chief Operating Officer; and Terri Pizzuto, Hub's CFO are joining me on the call. (Operator Instructions) 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 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-K 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, David Yeager. You may now begin.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [2]

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Good afternoon, and thank you for participating in Hub Group's First Quarter Earnings Call. With me today are Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our Chief Financial Officer.

As we reported on April 10, the first quarter financial results were disappointing. The primary factor affecting earnings lies within our intermodal business. We continue to experience a soft pricing environment due to excess truck capacity and aggressive intermodal pricing. This environment has placed significant pressure on our margins despite a 2% growth in intermodal volume for the quarter. Another pressure point on our intermodal margins is that despite the soft market, rail cost increases continue. This is not unexpected as the rails have significant capital needs. As a result, rail increases persist in all market environments, including those with soft demand and excess capacity. But in a market such as this, we are not able to pass on these cost increases to our customers, thereby putting additional pressure on our margins.

The intermodal market continues to be very competitive. Although we hope to see improved pricing in the second half of the year, we're positioning ourselves for an ongoing soft pricing environment by intensifying our cost-containment efforts while substantially reducing our capital expenditure budget in 2017.

Over the longer term, we believe that the strong economic advantage of intermodal coupled with the solid service we're providing, will allow for upward pricing which should improve our intermodal margins.

On a more positive note, both our truck brokerage and Unyson businesses performed very well in the first quarter. Unyson revenue increased by 22%, primarily from growth with new customers. The Unyson pipeline is robust, and we believe that 2017 should be a strong year. Truck brokerage revenue increased by 31%. This growth was from both new and existing customers. We believe that our truck brokerage business is very well positioned for growth in 2017.

And finally, we continue to evaluate organic and acquisition-led expansion of our service offerings, which will allow us to offer a more complete solution to our clients.

And with that, I'll turn it over to Don.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [3]

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Thank you, Dave. Despite the pressure on the intermodal business, our truck brokerage and logistics business continued their upward trend. In the quarter, as Dave mentioned, truck brokerage grew volume by 19%. Top line growth occurred in both logistics and Mode, logistics at 22% and Mode at 16%. These business lines have demonstrated excellent results while facing a very challenging market. As you've heard me mention previously, our focus remains on providing our customers multimodal solutions. This strategy has allowed us to diversify our service offerings while providing solid financial results. To support this strategy, we continue to invest in our people and technology to provide these value-added solutions to our customers.

While we expect intermodal pricing will continue to see headwinds throughout the year, we are very confident in our ability to grow both our truck brokerage and logistics business in 2017.

I would now like to talk about the business lines. Highway, truck brokerage. Truck brokerage grew 19% in the quarter in a very soft marketplace. This correlates to the emphasis on our multimodal account strategy in addition to supporting our targeted accounts. On the capacity side, our focus remains on filling the needs of our strategic carriers to drive their networks for improved efficiencies and reduced costs. We believe 2017 will continue to be a very competitive market and our truck brokerage organization is positioned well for continued growth.

Logistics. Our logistics business demonstrated strong top line growth of 22%, while also improving contributions to the bottom line. The growth is attributed to new customer onboardings, as well as organic growth from existing customers. The new accounts secured and onboarded throughout 2016 are producing strong volumes and tailwinds as we go through 2017. Our pipeline remains strong with several Q2 and Q3 onboardings already planned. In addition, our continuous improvement efforts have produced renewals of several multiyear agreements. We continue to develop our logistics solutions to benefit our customers, and we remain confident in our ability to continue to grow this business line.

Mode. During the quarter, Mode also produced strong top line growth increasing revenue by 16%. Moreover, Mode grew the IBO and sales network by adding 3 new IBOs along with 10 new salespeople. The pipeline remains strong for new recruits in 2017.

All of our business lines grew their revenue in the quarter, a very strong accomplishment considering the competitive marketplace. Cross-selling, providing world-class service and leveraging our technology remain important ways to deliver value to our customers and differentiate us beyond price.

Now I will turn it over to Terri.

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [4]

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Thanks, Don, and hello everyone. I'd like to highlight 3 points: first, the combined Hub segment, logistics and truck brokerage revenue growth of 25% and margin growth of 11% demonstrates our success in providing multimodal solutions to our customers. Second, lower intermodal customer rates coupled with rail cost increases resulted in intermodal yield compression of 280 basis points. Third, our results include $1.5 million of one-time costs. Due diligence costs for potential acquisitions totaled $1 million and severance costs were $500,000.

Here are the key numbers for the first quarter: Hub Group's revenue increased 11% to $893 million. Hub Group's diluted earnings per share was $0.31 compared to $0.51 last year.

Now I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $677 million, which is a 10% increase compared to last year.

Taking a closer look at our business lines, intermodal revenue was up 3% due to a 1% increase in load and an increase in fuel revenue. Declines in freight rates and unfavorable mix partially offset these increases. The volume growth was driven by a 21% increase in loads with automotive customers and a 3% increase in loads with consumer products' customers, partially offset by a 30% decrease in loads with Mode.

Truck brokerage revenue was up 31%. Truck brokerage handled 19% more loads. Fuel price and mix combined were up 12%.

Logistics revenue increased 22%, due primarily to growth with new customers' onboarded last year and in the first quarter of this year.

Hub's gross margin decreased by $7.3 million or 9%. The decline in intermodal gross margin was partially offset by truck brokerage and logistics margin growth. Gross margin as a percentage of sales was 10.6% or 230 basis points lower than last year. Intermodal gross margin decreased primarily because of lower customer prices than last year and rail cost increases. These same factors drove a 280 basis point decline in intermodal gross margin as a percentage of sales. Truck brokerage gross margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales decreased 320 basis points due to lower customer contract rates, a change in customer mix and a decrease in value-added services. Logistics gross margin was up due to growth with new and existing customers. Logistics gross margin as a percentage of sales decreased 50 basis points, due primarily to a change in customer mix.

Sequentially, compared to the fourth quarter, the Hub segment gross margin as a percentage of sales decreased 120 basis points. Intermodal gross margin decreased 140 basis points, truck brokerage decreased 170 basis points and logistics was flat.

Costs and expenses increased $3.6 million to $60.2 million in the first quarter of 2017, compared to $56.6 million in the first quarter of 2016. This increase relates to a $3.8 million increase in general and administrative expense. This is driven by an increase in IT costs, including costs for our transportation management system and human resources system and an increase in professional fees related to due diligence for several potential acquisitions.

Finally, operating margin for the Hub segment was 1.7%, which was 200 basis points lower than last year.

Now I'll discuss results for our Mode segment. Mode's revenue was $242 million, which was up 16% from last year. Revenue breaks down as $122 million in intermodal, which was up 9%; $78 million in truck brokerage, which was up 16%; and $42 million in logistics, which was up 43%.

Mode's gross margin increased $547,000 year-over-year, due primarily to an increase in logistics gross margin, resulting from new business. Gross margin as a percentage of sales was 12.3% compared to 14% last year, due to a 200 basis point decline in intermodal yields, a 160 basis point decline in truck brokerage yields and 180 basis point decline in logistics yields.

Mode's costs and expenses increased $1.3 million compared to last year, primarily due to an increase in agent commission. Operating margin from Mode declined to 2.3% compared to 3% last year.

Turning now to headcount for Hub Group. We had 1,756 employees, excluding drivers at the end of the quarter. That's down 28 people compared to the end of December.

Now I'll discuss what we expect for 2017. We believe that our 2017 diluted earnings per share will range from $1.60 to $1.80. This guidance includes the due diligence and severance costs in the first quarter. We estimate mid- to high single-digit revenue growth for the Hub and Mode segments. We expect gross margin as a percentage of sales for the year to range from 11% to 11.5%. We project that intermodal prices will continue to decline in the second quarter and then stabilize in the last half of the year. We estimate intermodal volume growth will range from 2% to 5%. We believe that our quarterly costs and expenses will range from $84 million to $86 million.

Turning now to the balance sheet and how we used our cash. We ended the quarter with $154 million in cash and $161 million in debt, including capitalized leases. We spent $6 million on capital expenditures this quarter, mostly related to IT projects. Capital expenditures are expected to range from $90 million to $100 million in 2017, which is down from our prior estimate of $155 million to $165 million. We're working with our container supplier on deferring a portion of this year's production to next year if market conditions remain soft. We are no longer planning on purchasing any chassis this year. We're also delaying the construction of our corporate headquarters' expansion.

Dave, over to you for closing remarks.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [5]

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Thank you, Terri. With that, we'll open up the line to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question. Our first question comes from Ben Hartford of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Dave, interested obviously in perspective on -- in the intermodal environment here. To begin the year, what stands out is Mode's strength, the growth in intermodal which is good. We understand what you had talked about a couple of weeks ago within core Hub and those challenges and the weakness in the environment. But can you perhaps explain the divergence between some of the pressures that are evident in the core Hub intermodal segment? And then the relative strength in intermodal growth that you're seeing in the Mode segment?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [3]

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Sure, Ben. I think we really are in 2 very different markets. -- Although Mode does have some larger accounts, the vast majority are more midsize and small accounts. If you look at our business for the most part, it is larger clients. And I think as a result of that, at least from a margin perspective and all, it's a slightly different market. We are dealing with large, sophisticated multinationals, which on an annual basis, for many of them, do in fact bid their traffic. We certainly have a percentage of business which we just renegotiate each year that doesn't go to bid, but Mode has a much larger percentage and I think that's part of what brings us apart there.

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [4]

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Yes, and I would tell you, Ben, that Mode's intermodal gross margin as a percentage of sales was down 200 basis points year-over-year. So it's still down quite a bit. And that's because it was very difficult for Mode to get price in the market as well. And then the Hub segment intermodal gross margin as a percentage of sales was down 280 basis points. So certainly more, but both segments really suffered because of the pricing environment.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [5]

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Absolutely. And I think you can see this with some of the other companies that are reporting at this time. I guess, misery loves company, but certainly, it is a market condition at this point.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Yes, okay, that makes sense. But...

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [7]

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And to Dave's point, over 70% of our businesses is bid and we're in that bid season right now.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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Okay. Don, I guess, if you can forecast the remaining 30% or so. How do you assess the risk that to finish out the bid season generally but then also on the intermodal side in particular, that the lingering excess capacity produces even more aggressive behavior from a pricing standpoint as you finalize what's left here in 2017 bid season. What was the likelihood that you see increased aggression?

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [9]

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I don't know -- I can't see it getting more aggressive than it is now. I think it's going to continue, the pricing pressure, through the second quarter. Hopefully, then it will stabilize. But the first quarter was more aggressive than I think the market thought.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [10]

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Yes. I would agree with that. I think that what you saw was a very aggressive first quarter. We have not seen it really declining, if you will. We're hopeful that the second half of the year that we'll begin to, in fact, see a little bit greater shipper demand, which should in fact then drive prices to flat or slightly up.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Okay, sounds good. And If I could ask a quick follow-up and then I'll jump back in the queue. But I think, Terri, you had mentioned the due diligence associated with several potential acquisition opportunities. What is the likelihood that you will hit on at least one here during the second quarter?

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [12]

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We're hopeful that we will hit on one sometime this year, hopefully sooner rather than later. We're working very diligently on potential acquisitions.

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Operator [13]

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And we have our next question. Our next question comes from Justin Long of Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [14]

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So last year when we saw a competitive pricing environment in intermodal, I felt like the strategy was to take a targeted approach of getting aggressive with key customers to grow market share. And I'm just curious, is that strategy of trying to grow market share how you're thinking about the remainder of this bid season as well? Or has this second leg down in the pricing environment changed your strategic approach?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [15]

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No, Justin, we have not changed that strategic approach. I think that we believe that the best way for us to continue to grow is with targeted customers in targeted lanes and delivering excellent service. And I think with some of the awards we've received from, to name a few, Kimberly-Clark and Walmart, Home Depot and Lowe's reflects that service. So no, that is very much continues to be our strategy. And I think, if anything, we're also being very, very focused on the lanes which are in fact, specific where we feel as though we have an either a service or some kind of a price advantage.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [16]

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Okay, that's helpful. And then maybe one for you, Terri. Sorry if I missed it, but...

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Operator [17]

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I do apologize for that. Justin, you're now back on the line.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [18]

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Okay, I think I'm back now. Terri, I had one for you and I'm sorry if I missed it, but do you have what Hub segment intermodal growth was in transcon, local East and local West in the quarter?

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [19]

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You didn't miss it because I didn't talk about it yet. So let me give you that. For the Hub segment by itself, local East was up 10%, local West was down 9% and transcon was up 1%.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [20]

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Okay, great. And then maybe one last one. And this is more of a bigger picture question on the long-term strategy for the business, because based on some of your recent commentary, it feels like there's a focus on de-emphasizing intermodal and putting more attention in capital towards growth in nonintermodal operation. So first, is that a fair assessment? And second, what's your view on the ideal mix between intermodal and nonintermodal as a percentage of the total business?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [21]

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Yes, Justin, this is Dave. I would say, first and foremost, we believe that intermodal will always be a very important component for Hub Group. It is what we were founded upon, it is 60% of our revenue today, and it will continue to be a major focus for us. We do believe that there is additional products which we should be able to offer to our clients, if you will, to further develop the relationship with those customers. The broader the array and the deeper, the stronger the relationship. And so that's why we are focused on diversification. We think that with some areas of diversification, such as dedicated trucking, there are some natural synergies with our own trucking operation as well as, obviously again, developing that relationship with our clients further and further. As far as the second part of your question, an ideal mix. I don't know that I have an ideal mix. If we are in a few years at $5 billion of revenue, I don't know that it would be unrealistic that intermodal is 5 50% or some number larger. But I don't think there is an ideal mix. I think that we want to be opportunistic with our acquisitions and with diversifying our product mix.

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Operator [22]

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And our next question comes from Thomas Wadewitz of UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [23]

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And I guess I apologize if I am asking something has been covered already, it's just we had a couple of overlapping calls this afternoon. But wanted to see if you could give, I guess, a bit more perspective on how the pricing impact came through so quickly. I tend to think of the bid season being something kind of first half of the year and then when you run over to new contracts and that's when you see the impact. But it seemed like, obviously coming through very quickly in the first quarter results. So was that a result of the bid season being poor in fourth quarter? Or is there just kind of flowing through more quickly into -- I guess. I'm just trying to understand. I don't think of you having a lot of spot business. So maybe if you can give some more color on that. And given the speed of that, is it possible that things kind of improve quickly in second half if the truck market tightens up and so forth? Or are you really looking at a 1-year period where it's just tough on contract rates and, you know, we'll just have to wait for a while?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [24]

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Yes, I think to answer your question, with the fourth quarter it did slow down a bit and we did see some amount of aggressiveness, maybe a little bit more so than normal. To start the bid season, it was like the Kentucky Derby. They open the gates and off we went with a very aggressive environment overall. So it was quicker than usual. 2016 had been quick as well, but this lapped it. And -- so I think that you are right. If we do see some tight truck capacity -- it was so quick out of the gate, that in fact we could see the tables turned and pricing becomes a little less aggressive. I think, and maybe this is hopeful thinking, but certainly, we got out of the gate very quickly, and it could change just as quickly I believe, with contractual pricing.

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [25]

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Yes, just to add a little more specifics on numbers. As the quarter progressed on a year-over-year basis, our pricing was down more each month. It started out not so great and then it didn't get any better.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [26]

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Right. I think the bid season started a little earlier and it was much more active this year than it has been in the past.

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [27]

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Yes, we had 10% more bids and about 18% more loads in the bids.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [28]

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Right. And I think we, like, I believe, most of the industry, we honestly felt that 2017 was going to be a good year for pricing just with the ELDs pending. - But there has been a lot less reaction from our clients towards that than we had anticipated.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [29]

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If I can ask one follow-on on that, I mean Dave you've -- well I guess all of you have seen multiple cycles and the competitive dynamic. When you have this intensive downward pressure on rates, does that make it tough for the competitive dynamic to kind of heal and recover, and then it just gets drawn out? Or how would you think about that because it just seems like you've got a couple of big players in intermodal and something seems to have gone wrong in seeing this much pressure on rates. Just hard to know if that can be fixed quickly or if that's going to last for a while in terms of the impact on competitive dynamics.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [30]

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The beautiful thing about having 70% of your business in annual contracts is that just that can occur, if in fact the market shifts. If there is more demand, that can shift very, very quickly. And we certainly have seen it shift quickly in the past. I believe -it, very likely, can occur in the near term.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [31]

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And as the market does pick up, if we're a secondary provider with the service levels we have, we think we're in good position to get that business at a higher price.

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Operator [32]

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And we have our next question. Our next question comes from Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [33]

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So the local East up a lot and local West down a lot. Can you give some perspective on why you think you're seeing such big disparity there? I would have thought that lower fuel and low truck rates would hurt the East more than the West. And as you think about that, is there any big difference in profitability for you in East versus West?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [34]

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Margins are relatively constant. Of course, there is more revenue in the West than there is in the East. So in a raw margin per unit, the West is larger. But the reason is that it has nothing to do with truck competition in the West, it's solely intra-intermodal competition has been much more aggressive into and out of California, as well as out of Mexico. And -- so that has been the real difference. We've found the Eastern market, again, with fuel prices going up a bit, I think the truck competition is a little less intense as well as just the intermodal competition is not as intense as we have seen, particularly last year.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [35]

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And some accounts are looking for that capacity for when things get tight. They are more strategic in their thought. We wish more were.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [36]

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And then in terms of the rail cost increases, Dave, and I think you talked about in the beginning of the call, are those -- are the increases similar with last year? More than last year or less than last year? And then given kind of the pressure in the -- your pricing, do you sense any kind of willingness from the rails to get back on some of those cost increases?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [37]

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Scott, in my dreams. That is just not going to happen. And it's natural that the railroads, I think, they have lot capital intensity as you well know. There is a certain rail inflation rate that we're going to see on a constant basis in good markets and bad. This just happens to be a soft market so we see the rail increases -- at any rate. The increases were in line with our forecasts this year. So it's just a fact of life it is, if you will -- it's kind of a creative tension that we've always had with the rails. This is nothing new, and it's not something that I foresee changing.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [38]

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Okay, fair enough. The -- you're obviously exposed to Norfolk in the East. Have you sensed anything from customers that say given the changes in management at CSX we're looking to kind of get more exposed to Norfolk and less exposed to CSX. And are you hearing that at all from customers? Do you think that's an opportunity for you?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [39]

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It could be. I think at this point in time, it's pretty well known that what Hunter's really focusing on is the boxcar network and some of their commodity train networks. And intermodal has been pretty much left aside. So I think everybody is in a wait-and-see mode. If service would deteriorate, I think that there would be an opportunity. But I haven't heard of anyone that's switching just as a result of what speculation there may be.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [40]

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Okay. And then just last one real quick. Dave, your comment about getting to a $5 billion of revenue. Was that an implication that deals you're looking at are kind of in that $1 billion in size from a revenue standpoint?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [41]

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No, I'm sorry. I just use that as an example. That certainly is an aspiration for us to continue to grow, get to that mark. But no, they are not in the $1 billion area.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [42]

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Any kind of just to help calibrate expectations like, what kind of size deals you're looking at right now?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [43]

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I'd prefer not to comment on that at this point in time. If you look at it from a revenue perspective in the $200 million to $400 million range.

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Operator [44]

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(Operator Instructions) We do have our next question from Todd Fowler from KeyBanc Capital.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [45]

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Dave, just a follow-up on the last caller's question about your relationship with the rails. At this point, I mean, is there anything -- is there any leverage that you have from a relationship standpoint where you think about potentially having conversations with some of the rails that you're not doing as much business with? I mean, you are a sizable customer for all the rails, you've got, you know, your box network in place it at this point. Is that something that you can look at and think about from a diversification standpoint to help you? Or do you think that it still makes sense to continue to partner with primary rails and that you really get the benefit from those relationships?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [46]

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We very, very much value the relationships that we have with our 2 partners, both our western partner, Union Pacific and our eastern partner, Norfolk Southern. And -- I understand that from the outside when you consider that rails are increasing prices despite the fact that the market is soft that seems as though it's -- it's obviously not market driven. At the same point, I really do believe that having our fleets on those railroads, aligning with them, growing with them is the best strategy. It's very, very difficult to manage 2 fleets. We had done that before in the West, and it's a very complicated structure. So something very serious would have to occur for us to really entertain that.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [47]

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Okay, that's helpful. Yes, it's always easy as anything else with a spreadsheet to make assumptions, but I know that the real world works a little bit differently.

So just as a follow-up, given the reduction in your CapEx plan for this year, does it make sense to have a share buyback in place given some of the softness in the market? And I understand you are entertaining acquisitions, but it feels like with the capital structure, you might be able to kind of walk and chew gum and do both at the same time. Or is that not something that you're contemplating at this point?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [48]

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That is on the agenda for our May 10 board meeting. But not to increase expectations or anything. But we do believe that acquisitions is the best way to use our shareholders money and to invest in the business to diversify our service offerings. So that in fact we can, in fact, expand our relationships with our existing clients. So that is what we foresee as the primary use of funds. But certainly, it's something that's going to be discussed at the board meeting on May 10.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [49]

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Okay, great. And then just one last one. It's been a while but, Terri, I think that you used to give some color about the gross margin profile between intermodal, brokerage and logistics in the legacy Hub segments. Is truck brokerage still the highest margin business there? And what's kind of the rank order for the margin profile as we think about the different growth rates between those business lines?

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [50]

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Yes, you're right, Todd. Truck brokerage is still the highest gross margin as a percent of sales business in the Hub segment. It's also high in the Mode segment. And second would be intermodal and then third would be logistics.

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Operator [51]

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And we have our next question from Ben Hartford from Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]

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Can you remind us what the time line is with regard to the systems, both the TMS and the human resource systems?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [53]

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The HR systems, we're already done with Stage 1 of it. And they are working on the second phase. And I believe that, that should be fully implemented by the end of the second quarter.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [54]

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That's correct.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [55]

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As far as the Unyson Logistics, Don, would do you want to comment on that?

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [56]

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Yes. The TMS for the logistics side is up and running. We're onboarding new customers. As new customers come on, we're using that new platform. And the challenge has been the transferring of our existing business over to that as the pipeline has been so strong and the onboardings have been strong. As far as the overall network, we are working towards the development piece of that and we expect a partial deployment sometime in 2018.

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Operator [57]

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And we now have Scott Group back on the line from Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [58]

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Just real quick, Terri. Sometimes, you give the volume breakout by end market. If you have that, that would be great.

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Terri A. Pizzuto, Hub Group, Inc. - CFO, EVP and Treasurer [59]

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Sure. Automotive was up 21%, consumer products was up 3%, Mode was down 30%, and those were the main drivers. Retail was up 1%.

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Operator [60]

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(Operator Instructions) We do have our next question. Our next question comes from Kevin Sterling from Seaport Global Securities.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD of Airfreight and Logistics and Maritime and Senior Analyst [61]

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Dave, what's the lag time -- in kind of all your years in the business, the lag time for intermodal pricing to really start moving higher as truck pricing moves higher. Now if we get in the back half of the year and things get crazy. Typically, how quickly can intermodal pricing move? I know there is a little bit of a lag, but maybe you could help kind of walk us through that, that lag time just based upon your experiences.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [62]

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Kevin, that's a really good question. Because there is no question, there is a lag. I'd say historically, we were anywhere from 3 to 6 months lagging behind the trucking industry with responding aggressively with the price increases or decreases. I would suggest to you that as strong as the bid season came out of the gate this year, I think that we will be much more responsive to market changes. That would be my hope. That if in fact it does tighten up, I know we will be very focused on increasing prices on those clients that we aren't necessarily locked into. And again, on our focus client list. So that's a really good point. I do think it's changed. I think that the timeframe is shortened quite a bit just like all commerce has in past years. So I would look forward to responding very quickly to any change in the marketplace.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [63]

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Kevin, this is Don. What we see is we're tracking that every week now, especially in the key corridors to see how spot trucking prices are adjusting to the market. So to Dave's point, I think if it does start to change, we'll be in better position now to look at our price.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD of Airfreight and Logistics and Maritime and Senior Analyst [64]

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Great. And I can imagine until fuel prices start rising that might speed up that lag or timeframe, is that true too?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [65]

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It will certainly make trucks less competitive and make intermodal, the value proposition that much better. So I would suggest you're absolutely on target.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD of Airfreight and Logistics and Maritime and Senior Analyst [66]

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Okay. And one last question here. Kind of as you talked about the changing landscape and obviously with the growth in e-commerce. How much of an impact is that having on like seasonality or business? And maybe touch base a little bit on what you're seeing from an e-commerce perspective and maybe looking to use intermodal a little bit more, particularly as rail service is definitely a lot more fluid than it was maybe a few years ago.

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Donald G. Maltby, Hub Group, Inc. - President, COO and Director [67]

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Sure. This is Don. Yes, we're seeing all of our retail accounts struggle with adapting to this new world of e-commerce, right? What we're seeing is speed to market, what we're seeing is fluidity and visibility. And if you look at peak seasons, I think the traditional peak season, if it's reflective of last year, start later and are more intense. An example also would be spring season, right? Spring peak. So far it has been pretty flat. So what you're seeing is more flattening of the supply chain with speed, but I can tell you based on our experience with our retailers, they are all rushing hard to try to get quicker, faster and to the customer with shorter lead times.

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Operator [68]

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(Operator Instructions) And our next question comes from Ben Hartford again of Baird.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [69]

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Sorry to jump back and forth here in the queue. The box congestion issues that's arising out of China. I know it's probably more of an iso box type issue. But wondering if that is having any impact to their currently in the domestic intermodal market. Or if you anticipate that creating bit of a surge as that congestion begins to unwind later in 2Q. And I guess on a related note, I mean I can understand why you'd want to defer some of the box purchases, but I'm wondering if you're having any issues with regard to some of the planned boxes giving that over -- so bottom line is, to what extent are you experiencing any sort of disruption currently or expecting any disruption associated with that congestion in China?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [70]

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Ben, I can honestly say that it's having no impact on us as far as potentially postponing some of our boxes coming over. Our box partner, the people that actually fabricate them, have been extraordinarily helpful and have worked with us very well. So we don't foresee any issues at this point in time.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [71]

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And then the deferral of the chassis purchases as well this year, was that simply a function of the weaker than planned volume? Or is there another component driving that -- the decision to defer the chassis purchases?

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [72]

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It actually is more just as we re-analyzed it, as we looked at all of our capital expenditures again after the year started out so soft. And when we looked at it, it was certainly above our weighted average cost of capital, but it wasn't that far above our WACC and so we decided that it just wasn't something that was going to make that much of a difference and to just postpone it, considering the environment that we're currently in.

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Operator [73]

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And I am showing no further questions at this time.

David, I turn the call back over to you.

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David P. Yeager, Hub Group, Inc. - Chairman and CEO [74]

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Okay, great. Thank you, Danielle. So again, thank you for joining us today on the call. As always, if you do have any additional questions, Terri, Don, and I would be available. So thank you very much. Have a good day.

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Operator [75]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.