Hello and welcome to the Hub Group Third Quarter 2022 Earnings Conference Call. Dave Yeager, Hub’s CEO; Phil Yeager, Hub’s President and Chief Operating Officer; and Geoff DeMartino, Hub’s CFO, are joining me on this call. At this time, all participants are in a listen-only mode. Any forward-looking statements made during the course of the call or contained in the release represent the company’s best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company’s Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin.

Good afternoon and thank you for participating in Hub Group's third quarter earnings call. Joining me today are Phil Yeager, Hub's President and Chief Operating Officer; and Geoff DeMartino, Hub's Chief Financial Officer. We had a strong third quarter, which resulted in doubling our year-over-year operating income. The results for the third quarter reflect our strategy of diversification, which allows Hub to be more resilient during all economic environments and helps us to mitigate the cyclical nature of the transportation market. The fourth quarter is generally the peak of the holiday shipping season. However, judging by the feedback from our clients, this peak will be muted compared to historic norms. Beyond 2022, we do acknowledge the potential for a continued softening economy, but we believe that we are positioned for success as we've taken several important steps to improve our resiliency in a down market. With our recent acquisitions and organic growth, our non-asset based businesses represent a growing part of the overall results and will generate significant free cash flow while deepening our value to our customers. This diversification into non-asset based services, along with enhancements to our intermodal agreements, allow us to be more flexible and market-based. We've also aggressively begun to insource a higher percentage of our drainage, which enhances our competitive positioning in intermodal. We expect to continue to benefit from these business model adjustments as well as continuing our relentless focus on operating efficiencies. And with that, I'll now turn the call over to Phil to review our performance.

Thank you, Dave. I wanted to start by congratulating the entire Hub Group organization on their strong performance, which continues to be driven by their focus on supporting our customers and team members. I will now discuss our service line performance. ITS revenue increased 22% in the quarter, driven by a 31% increase in revenue per load in intermodal on 6% lower volume as well as a return to strong growth in dedicated. Volume was impacted due to the averted rail strike, as well as slower turn times and increased competitiveness within shorter haul segments. Local West volume increased 1% while Transcon declined 1% and Local East declined 18%. We had a sequential deterioration in utilization, but an improvement in rail service while we dramatically enhanced our on-time performance to our customers. Gross margin as a percentage of sales increased 180 basis points year-over-year, driven by yield management initiatives and dedicated in intermodal and enhanced purchase transportation costs through increasing our insource storage percentage, which was offset by higher rail costs. We have opportunities to improve our network and capture incremental volume growth through our enhanced service and our compelling intermodal value proposition. We believe that with our improved street economics and rail partnerships, we'll be in a strong position in this dynamic environment. Logistics revenue increased 12% as we onboarded new clients, completed the TAGG acquisition, and drove organic growth with our existing customers through our focus on supply chain savings and continuous improvement. Gross margin as a percentage of sales increased 370 basis points as our continued focus on profitable growth was offset by increased purchase transportation and warehousing costs. With the addition of TAGG, we are continuing our development of the premier third-party logistics solution, which we believe will enable long-term growth and bring significant value to our customers. Brokerage revenue increased 63% year-over-year, driven by a 54% increase in volume and a 6% increase in revenue per load. Our growth is due to the addition of Choptank as well as organic growth in our LTL and drive and offering. Our service levels continue to improve year-over-year and will help us differentiate ourselves along with our diversified capacity offerings. Gross margin as a percentage of sales declined 60 basis points year-over-year, as we saw more aggressive competition for a smaller amount of spot market shipments. However, we believe we'll see improvement year-over-year in the fourth quarter and into next year as our mix shifts from 52% spot to a larger percentage of contractual volumes throughout bid season. We are continuing to focus on growing in this important service line and are investing in talent and technology to assist in propelling our growth. With that, I will hand it over to Geoff to discuss our financial performance.

Thank you, Phil. Our business continued to perform well in today's environment with strong growth across all lines of business, leading to a 26% increase in total revenue. Our yield management, cost recovery efforts, and focus on operating efficiency led to a gross margin of 16.5% of revenue and an operating income margin of 8.7%. We continue to leverage our gross margin performance against our operating expenses, with costs and expenses equal to 7.8% of revenue, down from 9.1% last year. Operating expense dollars increased from last year due to incremental expenses from Choptank and TAGG, higher legal and use tax expenses, and costs for consolidating one of our office locations, offset by gains from the sale of transportation equipment. Our diluted earnings per share for the quarter was $2.61, which is more than double the prior year. We generated $157 million of EBITDA in the quarter and spent $103 million on the acquisition of TAGG Logistics and $110 million on share purchases. We continue to have low levels of net indebtedness, which provides us with flexibility to invest in our business through capital expenditures and strategic acquisitions. As part of our commitment to returning capital to shareholders, our Board recently authorized the repurchase of $200 million of our Class A common stock. For 2022, we expect diluted EPS of between $10.40 and $10.60 per share. We expect to grow revenue to approximately $5.5 billion. We expect intermodal volumes will decline low single digits for 2022. We forecast gross margin as a percentage of revenue of 16.5% to 16.7% for the year, as our rate increases, surcharges, and asset sales offset higher costs for rail transportation, third-party drainage, and driver wages. For the year, we expect costs and expenses of $420 million to $425 million. Our capital expenditure forecast is unchanged at $240 million to $250 million. Finally, our entire business is supported by our pristine balance sheet and strong free cash flow generation. In 2021, we introduced our long-term revenue and margin target. Our recent acquisitions and our purchases of intermodal equipment are illustrative of the types of strategic investments we will make in our business, adding scale while also introducing new service offerings with strong cross-sell potential. With that, I'll turn it over to the operator to open the line to any questions.

Thank you. Our first question comes from Todd Fowler with KeyBanc. Please go ahead with your question.

Great. Thanks and good evening. Maybe for my first question, just a shorter-term question on the guidance for the fourth quarter, the implied guidance for the fourth quarter. It's still a pretty wide range, and obviously there's a lot of cross currents in the macro, but I don't know Dave, Geoff, or Phil who wants to take it. But if we think about the difference between the high end and the low end, just to finish out the year, what are some of the variables between what gets you to the high end versus what puts you at the low end right now?

Sure. Todd, this is Geoff. So, our pricing is primarily set at this point. The real swing factors for us would be volume, volume growth or volume decline, surcharges, which we are expecting to decline sequentially, and then gain on sale would be the third factor.

And Geoff, just as far as maybe the volume trends, we can see what the third quarter was, and you talked about most single-digit decline for the full year, but maybe a little bit of color on 3Q and what you're seeing right now in the 4Q.

Sure. In the third quarter, our volume was down 6%, around 200 basis points of that we estimate had to do with activity around the averted rail strike. Year-to-date or months today rather in October, we are down about 8% year-over-year, but it is a sequential improvement from September on a business day basis.

Got it. For my follow-up, Dave, you mentioned the improved resiliency in the model and the changes in the portfolio. Can you provide some insight on this? I'm not looking for detailed numbers, but is it correct to think that now 40% of your business is more asset light and considered less cyclical? Is that the right perspective? Additionally, how can we understand what still has cyclical exposure based on past experiences and what you have diversified into? Any comments on other strategies you can implement? Thanks.

About 40% to 45% of our revenue is now generated from asset-light operations. We have several new levers to pull that we didn't have previously. Our rail contracts offer greater flexibility, allowing them to adjust with market trends. Additionally, we've increased our insourcing of drainage services. In the third quarter, in markets where we control our own capacity, we've seen a notable increase of over 60%, which is about a 500 basis points improvement year-over-year. This trend not only enhances our service but also provides significant property advantages. We plan to maintain this momentum. We applied our cost-saving strategies in 2019 and 2020, and we've already started implementing similar measures now in preparation for a potential downturn. Lastly, it's worth noting that during the last decline in 2019, we experienced a 35% drop in earnings per share from the highest to the lowest point, which is an important consideration for the future.

And this is Phil. I just add, I think with our model now we're going to continue to kick off and the diversification piece of it really comes into play. We're going to kick off a significant amount of free cash flow that's going to allow us to be opportunistic in investing in the business, but also continuing to look for creative acquisitions. That's going to continue to be a focus of ours. And I think we have a really good playbook that we've run there and have a great reputation as an acquirer. I think if you look at our most recent acquisitions with TAGG and Choptank and NSD, all of those are much more resilient models, both from a margin profile as well as the stickiness of the business, particularly in warehousing consolidation and final mile home delivery. So, feel very good about the adjustments we've made to the suite of services because it's also helping to make our business stickier on the intermodal and brokerage side, which can be much more volatile historically. So, I think a lot of good changes that we've put into place and we are seeing them play out, which is great.

Yeah, good. And just to put that 35% decline in 2019, but that was also before you had the changes in the rail contracts and then some of …

Yeah.

Okay. Good.

Without the continued diversification through the acquisition. That's right.

Yeah. Understood. I just wanted to make sure we got that frame of reference correct. So thanks for the time tonight.

Thanks Todd.

Thank you. And our next question comes from the line of Jon Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good afternoon. Geoff, you kind of referenced this as you related to the fourth quarter. You said that the pricing is effectively fixed. At the time of the last call in July, you said you were through the peak, the bid season as well. So as we think about weakness and other segments of transport, maybe some of the demand concerns that I think they've insinuated, is the pricing really baked now through the first half of next year? Or do you start to get some significant renewals in the early part where we could see some step down if other factors start to weigh on intermodal pricing?

Yeah. About 35% to 40% of our volume will reprice in Q1. The bulk of that is probably in the March timeframe. So we certainly have a tailwind carrying us through the first part of next year. But by the middle of the year 80% is repriced.

I would also highlight a lot of our larger customers come in the third quarter timeframe, and so those are pretty well in place. I think it's a little early to tell exactly how the season's going to play out, but I think historically intermodal has not moved quite as significantly vertically as truckload. Our focus is going to be really on maximizing our margin per load day. That's how we generate the highest return within the intermodal segment. And that's going to continue to be the focus for us. So, I think an opportunity we have is to create more balance in the network. Our empty repositioning costs have increased on a year-over-year basis, and that's an opportunity we're looking at as we enter bid season, and that'll also help with volume and turn time. But we're really out right now with our customers focusing on the improved service products that we have, as well as the savings that we have versus truck to offer as folks look at converting freight from truck to intermodal.

And I would just add too, even in today's market intermodal long haul, Local West and Transcon, you're looking at a 20% to 30% lower rate relative to truckload still.

Okay, that makes sense. Phil, what you mentioned about the balance leads me to my follow-up question. If we examine the last few quarters, the difference between the West and East has been significant. The East is even slowing down, with a decline of 14% in the second quarter and an 18% drop, and this was before the truckload market began to soften, particularly in truckload contracts. When considering your capital, equipment commitments, and resource allocation, do you still need to maintain the same level of investment in that lagging region? Is that part of the overall network balance? Or can you reduce focus on an underperforming segment of the network and prioritize your equipment to areas that yield the best results?

Yeah. So, I think it's a great question. And when we run our network model, once again, we're focusing on maximizing that margin per load. I think you can see that showing up in our revenue per load, which I think tells a story of how we've been trying to maintain pricing discipline, focusing on the bright lanes for our network. I think when we look at volume, there's some controllable factors and some non-controllable ones. When I look at the non-controllable factors, we mentioned the 200 basis point impact from the averted rail strike, we're certainly hoping that's all resolved in the upcoming discussions. But when I look at controllable ones, I think our end markets have slowed down a little bit. We are very retail and e-commerce centric. Inventories have moved up obviously, and so we've seen a slowdown in overall demand from those customers. So, we're focusing on getting deeper with those clients, but also diversifying our client base and adding to that long tail. We have deliberately focused over time on growing in long-haul segments. I think you've seen that perhaps play out probably over the last couple of years where our Transcon Local West business has really outgrown our Local East mainly because of the stickiness that's associated with it and the gap that it has versus truck. We don't see that flip nearly as much between intermodal providers or really flip back and forth between truck and intermodal around rate and transit sensitivity. And then I think lastly, we saw price in the East move more quickly in intermodal and in truck than we were moving, or have moved. And so, I think for us, we look at it as running a network where we need to maximize that return, maximize margin for load day, and we're going to allocate our equipment and capacity to do that. I do think we have latent capacity in the network. We can improve our turn times. But part of that is creating balance and getting that velocity back as well.

Super helpful. Thanks, Phil. Thanks, Geoff.

Thank you. And our next question comes from the line of Elliot Alper with Cowen. Please proceed with your questions.

Great. Thanks for the question. So maybe on the increased guidance, can you quantify or speak at a high level to any of the rail disruption assumptions holding back volumes in the fourth quarter? Some new headlines have come across on a potential rail strike. I guess is any part of the guidance range based on whether or not there are significant impacts of volumes?

Yeah. We've factored in the range of potential outcomes on volume within the 10.40 to 10.60. But we have seen an improvement on a per-day basis sequentially from September into October. So it doesn't seem like there's any impact to that news as of yet.

Okay. Understood. And then maybe for the follow-up, you guys have had some clear success with some recent acquisitions. Can you talk about recent trends within the M&A market? Maybe what's crossing your desk, how multiples have come down at all, or any color there would be helpful. Thank you.

Yeah. We actually have seen a slowdown probably the last six or seven weeks on new opportunities that come across our desk. So I think that either a combination of the financing markets or economic conditions are probably leading to a little bit of a slowdown. But frankly, we've had much more success on outbounds on companies that we get to know and spend time with and make sure they're a good cultural fit and really have been able to have success in doing acquisitions on kind of bilateral negotiations with sellers. So, I think there is going to be a slowdown. I think private equity is probably going to pull back from their interest in the sector for some period of time. But we don't think that's going to impact our ability to continue to grow through acquisition.

We think it is good timing for us though. And with our balance sheet, we're going to be out in the market very actively continuing to run the same playbook that we have, diversifying our service offerings, getting deeper with our customers, and adding really great companies that can benefit from additional investment and cross-selling opportunities.

Okay. Great. I appreciate it. Thank you.

Thank you. And our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

Hey, thanks. Afternoon guys.

Hey, Scott.

So, when you talk about less earnings variability, is it more about gross revenue, less gross margin variability, more OpEx variability? What's going to ultimately be the driver of less earnings volatility?

Well I think we have levers that we're going to pull, we've had those in the past and we've executed on those in prior downturns, and we have this time, I think the rail contract features around price up, price down is a really key factor that we didn't have in the past. That's obviously the biggest cost factor in our biggest line of business. And so, with the ability to flex up and flex down based on market conditions, we think that is going to lead to less volatility in earnings.

I would like to ask Scott about both the gross margin perspective and what lies beneath it. In the past, we've shown discipline in our cost structure, and we plan to maintain that. With these additional strategies and by incorporating more contractual and reliable services, we believe we can sustain our gross margin at levels higher than what we've experienced historically.

Is there any way to discuss what the historical range of intermodal gross margin was and what you anticipate the new range will be with these rail contracts that fluctuate?

Sure. I mean, I think, obviously we're in a pretty strong price environment right now. You can see in our guide and where we're going to exit this year, where we've come down off the Q2 levels. But certainly much higher than we were back 2, 3, 4 years ago. Where we're kind of in the low 12% to 13% gross margin. I think it's at least probably 150 or 200 basis points north of that is where we think we're going to be longer term. We're just starting our 2023 budget process right now, so I don't have a more concrete number to give you for next year. We'll obviously come back to with that on our next call. But I think that's a good frame of reference to start with.

No. I mean, I guess what I was trying to ask is like, meaning historically the margins peak and trough there's a 400 basis point difference in gross margin now with the variability of rail contracts, we think it'll be more like 200 basis points.

Yeah. That's probably half of the variability we've seen in the past. We'd be able to cut half through that feature.

Okay. And then just last thing, if we do have a year of sort of down earnings next year, how do we think about what the incentive comp as a potential offset?

Sure. That's probably the biggest single driver of the operating expense line. That could be as much as a $40 million swing year-to-year.

Our goal would be to not have that happen.

I'm sure. Okay. Thank you guys. Appreciate it.

Thanks Scott.

Thank you. And our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hey, good afternoon. Thanks for taking the question. Wanted to see if you could go into a little more detail on the TAGG acquisition. It's only been a couple of months now, I guess since you had that in-house. You can maybe elaborate on the strategic goals and how those are progressing. How does it fit in the portfolio? What's the initial feedback, cross-selling, all those things would be helpful to kind of get a sense as to what you see here and how it's progressing so far.

There were two main reasons for the acquisition, which we've been considering for some time. Acquiring TAGG provides us with e-commerce fulfillment capabilities that we previously lacked. Since acquiring CaseStack in 2018, we've operated in the consolidation and warehousing sector. While CaseStack serves small and midsize consumer goods companies effectively, it did not offer e-commerce fulfillment, limiting our ability to expand our business. Now, we can provide this capability to our existing customers and also approach potential customers who were seeking such services, thus opening new business opportunities. Additionally, prior to the TAGG acquisition, we had about 5 million square feet of non-asset based warehousing due to CaseStack. With TAGG, we gain an extra 4 million square feet of asset-based space, bringing our total to approximately 9 million square feet, nearly evenly split between asset-based and non-asset-based. This expansion allows us to scale more rapidly for new opportunities and enhances our negotiating leverage with non-asset based partners by improving our understanding of market costs.

And I would just add, I think we're seeing that play out now. Since the acquisition, the receptivity from our customer base has been phenomenal, and we're far exceeding anything that I thought we would do from a cross-selling perspective; it's been much quicker. But with our balanced asset, non-asset model, we're actually able to not only take on that demand, but also optimize it from a margin perspective by insourcing the right customers and growing with our third-party partners in the right business. So, that has really been exceeding my expectations and it's a great team. They have a great reputation, and so, it's worked very well. And I think the other piece that we're bringing to them that the TAGG team didn't have before was the expertise that we have in transportation. And by tying that together for legacy TAGG customers, we're seeing them want to get deeper in with TAGG, give us more business and outsource their entire supply chain to us versus just a component. So, I think it has really been just a phenomenal acquisition thus far. And I’m excited to see what we can continue to do.

And on the actual fulfillment side, is that done by third-party contractors as well?

No. We've got about 18 warehouses across the country. And those are primarily company employees. We do use contractors for seasonal spikes, but primarily it's done by employees.

Okay. Then just a quick follow up on drayage and the insourcing. What was that percentage, when you look at sequentially versus the second quarter? Where do you expect to be exiting this year and sort of rough goal for the next year, given some of the constraints that we see on drivers and equipment, and to the extent you have or want to offer any sort of sensitivity on margin in terms of what a percent point increase would mean for the bottom line, also be helpful?

Sure. In markets in which we had our own drivers, we were at 52% insourced in the quarter, that's up about 200 basis points sequentially and up about 500 basis points year-over-year. We recognize about a million and a half of incremental profitability for every hundred basis points. Our long-term goal is to get to 80%. I think we're working through our budget. I think we're going to probably be targeting around 70% for the end of next year. That will require some capital for new trackers. But the bulk of that is actually coming through productivity. So, running more drivers per truck through slip seating and running. Each driver is going to run more loads per day. We've become more efficient in how we plan those driver days. And we're seeing the benefits of that from an efficiency perspective.

Yeah. We're significantly improving our recruiting. We've been able to get more slip seating in our fleet. We went from about a 1.05 driver to tractor ratio a couple of years ago. We're not where we want to be, but we're near 1.4 now, and we still have opportunities to become more efficient. We're adding drivers at a really nice clip in some very important markets for us and insourcing that higher share and continue to see progress as we've enhanced our recruiting capabilities. So, I think we've got a great offering to drivers where they can be home every night, get paid at the high end of the market, and be in the newest invest equipment. The average age of our fleet is nearing 2.3 years, and it's just a great asset to be able to go to drivers and show them that value. So, I think we're a destination at this point for drivers, and we're seeing that show up in our turnover numbers as well.

All right. Great. Thanks for the detail.

Thank you. And our next question comes from the line of Tom Wadewitz with UBS. Please proceed with your question.

Good afternoon. I wanted to ask about your views on the competitive landscape in the intermodal sector for 2023. It seems there is considerable interest among various players in expanding. I'm curious about your focus on volume growth. You've implemented more flexible rail pricing, which allows for more aggressive strategies if desired. How do you perceive the competitive environment? Do you expect it to remain stable, or are there risks of increased competition as companies aim to boost their volume?

Yeah. This is Dave. I would suggest to you that at this point in time that the market is very stable as stable as I've seen it, particularly as we're beginning to see a little bit of a softening and more competition from over the road. I do think we are all focused on growth, but at this point in time, just speaking for Hub, we're also very focused on margin. We're very focused on pulling some of the levers that Phil and Geoff have been talking about that are within our control, to control our costs and in fact reduce our costs. So, I don't believe that it's going to be impossible to not only grow the overall volumes, but also continue to maintain reasonable margins that'll allow us to continue to invest in intermodal.

Do you think your focus is going to persist just in terms of more focus maybe on price and profitability in a bit less on volume, Is that you're going to stay the course with that, or do you think that may change?

I think, again, we'll do both. I think that we'll be focusing on growing volume in particular lanes. We feel as though we have a competitive advantage. And at the same time, we'll be focused on continuing to deliver solid financial results for our shareholders.

Yeah. And I think Tom, it really goes to the strategy that we've executed on over the last several years, continuing to grow those long haul sticky segments that really stay in intermodal as long as you're providing a really good service. But also creating more balance in the network to drive more volume and velocity. So, it has to be both. And I think we have the opportunity to do both.

Right. Okay. That makes sense. Just one more quick one, you've talked a bit about the flexibility on the rail cost. What's the timing on that and how do we think about what drives the adjustment? Is that like a kind of a one quarter lag or is it longer? And is it driven by the pricing you realize? Or is it some type of a market metric for, I don't know, truckload contract rates or intermodal contract rates?

Yeah. Tom, this is Dave. We really don't talk about our contracts. And so, that's something we just can't delve into.

Okay. All right. Fair enough. Thanks for the time.

Thanks Tom.

Thank you. And our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.

Thanks for taking my questions. Just high level to kind of follow up on the last question. If we were to feel peak pricing pressure in intermodal sometime call it the third quarter of next year, as the cyclical reverses and counts peak. How long would it take, just is it a quarter or a few months to get that reaction in the rail pricing that you're getting on the PT side?

Yeah. So, I think, it would be moving as in some way as the market shifts, but not at a linear rate. And we would see it over a period of a year probably fully manifest itself, would be my just kind of assertion on that. I don't want to go delve too far into the detail, but I tell you, it works itself out relatively evenly over a calendar year period, factoring in both our east and west contracts which differ on mechanics.

So if intermodal contract pricing were to trough sometime in the second half of next year, your rail PT would probably trough between the second half of next year and the first half of 2024.

I think that's probably accurate. Yeah.

And to your hypothetical comments earlier about, there's some differences in the business and we don't expect to call it one-third EPS decline in the next downturn here. I mean, that gets you to call it $7 in earnings power at that 35% that you don't expect to hit in the downturn. Can you talk any about what the free cash flow profile of the business might look like in a downturn? Just would that fall more or less? Any thoughts on the cash generation power and its resiliency downturn. Thank you.

Absolutely. We anticipate having very strong free cash flow. We can adjust our capital expenditures as needed. This year, our projected range of 240 to 250 is quite significant, with a 13% growth in our container fleet. Over time, we would expect an average growth rate closer to 10%. Currently, as we finalize our 2023 budget, our assumption is that container growth will be in the mid to high single-digit percentage range, which would likely place our capital expenditures in the 150 to 175 range. We do have the flexibility to reduce our spending. This year's budget also includes approximately $25 million for the headquarters building, which is completed.

Thank you.

Thank you. Our next question comes from the line of Bruce Chan with Stifel. Please proceed with your question.

Hey everyone. Thanks for the question. Just maybe you want to start here with a big picture question. You talked a lot about how the portfolio is now, non-asset at this point or almost half the portfolio. Even if that's not getting reflected valuation, but when you think about M&A and when you think about the growth profiles in each of the various businesses, where do you see the mix being in, say the next three to five years?

Yeah. I think our mix will continue to shift in the direction that we've seen it over the past several years, where our non-asset segments become near to, if not the majority of our overall revenues, which we think will allow us to continue to invest in the asset side while continuing to focus on accretive acquisitions and growth in our non-asset segments. So, I would anticipate it's not because our asset based businesses are shrinking, but because we are continuing to grow the non-asset side at a faster clip because of the components of organic and inorganic growth.

Okay. Great. That's helpful. And then just a follow up here on the brokerage side, I think you mentioned that you were still 52% spot, which seems like it might be a little bit of a challenge in this market. And assuming that's not just an artifact of mode mix, what does the right ratio look like for you in this part of the cycle, and how fast do you think you can move there?

Yeah. So, I would highlight that when we purchase Choptank, that shifted our mix to about a 50-50 split to close to 60-40 spot to contract. So we're actually seeing that come back to a more normalized level. I think this is where the benefits of Hub and Choptank coming together are really going to show, because traditionally with the Choptank model, we would've seen a more difficult time because of the focus on spot. We're bringing a lot more contractual and bid business opportunities that that team is winning and the pricing expertise to support that while they're inside. Salesforce is really helping us continue to drive momentum on transactional wins and develop a better tactical relationship with a lot of our customers. So I think there's this mutual benefit here that's going to help us have a much more balanced model over the long-term. And I think you'll see us continue to toggle back and forth between, call it a 45 to 55 sort of spot to contract ratio. And that'll be the appropriate mix over time. But now that we're in bid season and that's starting to kick off, I think you'll see that mix shift even more broadly.

Okay. Great. Appreciate the color.

Thank you. Our next question comes from Justin Long with Stephens. Please proceed with your question.

Thanks. I wanted to start with the question on rail service. It sounds like utilization was under pressure in the third quarter, but I was wondering if you could put some numbers around that and then how you've seen utilization recover here recently and where you think we might normalize?

Yeah. So utilization did deteriorate for us on a sequential and year-over-year basis. But I think the good news is that we actually saw rail transits sequentially improve, both on a year-over-year basis as well. Where we are continuing to see the long transit times is really on our customer dwell. We need to continue to work with our customers to draw that down. I think as inventories are high, in many ways our containers are being used as a storage unit in some ways, and we're working very closely with our customers on changing that. I think as inventories are drawn down, we'll see that normalize, that's going to help us get more velocity back in the network as well, which is part of the longer streets well that we're seeing. And I think as we balance out the network a little bit more, we'll see improvement in that as well. I would also just highlight that rail service has improved both in the East and West, but not only has it gotten better on just a percentage basis, but we've seen it more of a stabilization in that overall service product. And that's really what we're going to our customers and presenting is improvement. But also a stabilization which allows us to appoint better, allows us to get better visibility to our customers, use our drivers more effectively, and really just give an overall better customer experience. So, we have been very pleased with that.

And I think a good example of that is that we have reduced in a number of lanes the transit estimates by up to three days. So, we are definitely seeing some sequential improvement.

Okay. That's helpful. And secondly, I wanted to ask about intermodal volumes. I've heard the update on October, but do you have the monthly intermodal volumes for the third quarter? And then any thoughts on intermodal volumes in 2023?

Sure. In Q3, July was down 9%, which we talked about our last call. August was up about 1.5, and September down about 10, and obviously was impacted by the rail strike news.

But as we look at 2023, I think our goal is going to be growth, and maximizing that margin below day, but growth through enhanced balance, which will improve overall yields and margins.

Okay. So you're planning on growth even in a mild recession scenario?

Correct. Got it. Thanks for the time.

Thank you. And our next question comes from the line of David Zazula with Barclays. Please proceed with your question.

Real quick. You'd mentioned that you'd seen some acceleration in dedicated. Is that something you're planning to lean into in the event that there is some softening of demand next year? Is that somewhere you think you can grow in 2023?

Yes, David, this is Phil. We have invested significantly in enhancing our dedicated business, refining our contracts and customer base. We believe this is a growth opportunity, particularly with the right customers in regions where we have a strong presence. Our focus has been on maintaining discipline while favoring long-term contracts that include price escalators, which provide our drivers with a clearer understanding of their wages. It is advantageous for us, and we intend to continue expanding in this area. It's reassuring to witness a return to growth alongside margin improvements.

And then as a clean-up, do you have the employee count, Geoff?

I do. Please give me a moment. At the end of the quarter, we are at about 2150. This includes our drivers, as well as warehouse employees. So, that number reflects our office headcount.

Thanks. Appreciate the time.

Yeah.

Thank you. And our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your questions.

Hey everyone. Thanks for the follow-up. I have a couple of final quick points. You mentioned possibly reducing M&A activity. You've just reauthorized a buyback. What are your thoughts on buybacks moving forward?

Yeah. We're going to be opportunistic. We bought back stock in the quarter at a double-digit free cash flow yield. So, that's a pretty attractive investment for us. If we continue to trade at these kind of ridiculously low valuation levels, we're going to take advantage of that. So we don't have any set timeframe on the $200 million, but we'll make a financial decision around that investment. And again, where we were last quarter as well with our performance lately this year, our balance sheet is very under-levered. We're at 0.2 times debt to EBITDA. So as you know, our priorities for capital investment are CapEx and acquisitions. And in the current environment, we think, we certainly have a financial flexibility to also do a return of capital to shareholders.

Okay. You've seen some strong sales growth this year. How do we determine whether that is from tractors or containers? How do we approach this in a downturn? Is there a potential earnings risk this cycle that we haven't experienced before?

We have been experiencing strong market conditions for used equipment, particularly in tractors, but we are approaching the end of this period. This is due to both the remaining number of pieces of equipment we have to sell and the expectation that these favorable market conditions will not persist. We have never seen such significant gains before, so we lack a clear reference point for what lies ahead, but we believe this trend will come to a close.

I believe that, at least in the near term, we are continuing to see strong gains. This is due to improving the age of the fleet, which benefits our M&A expenses, along with better utilization. I previously mentioned the driver to tractor ratio. By implementing slip seating, we can take advantage of that, and we expect to reach a point of optimization in the next six months. Consequently, the number of equipment sales would decrease, even if market conditions deteriorate or remain stable. While I anticipate this will be a challenge, it should also help us manage our expenses.

Okay. And then last thing. So the rails have new labor contracts, I'm sure they would like to pass some of those costs through to their customers. Does that impact you in your rail costs?

No. We have contractual agreements and we do not anticipate or expect anything like that.

All right. Thank you guys.

Thank you. I would now like to turn the conference back to Dave Yeager for closing remarks.

Great. Well, again, thank you for joining us this afternoon. As always, if there's any questions, Phil, Geoff and I certainly would be available. Thank you for joining us and have a good evening.

This concludes today's conference call. Thank you for participating and you may now disconnect.