Hello and welcome to the Hub Group Third Quarter 2020 Earnings Conference Call. Dave Yeager, Hub's CEO; Phil Yeager, Hub's President and Chief Operating Officer; and Geofff DeMartino, Hub's CFO, are joining me on the call. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one followup question. Any forward-looking statements made during the course of the call or contained in the release represents the company's best good faith judgment as to what may happen in the future. Statements that are forward looking can be identified by the use of the words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-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 begin.

Good afternoon and thank you for participating in Hub Group's third quarter earnings call. I am joined today by Phil Yeager, Hub's President and Chief Operating Officer; and Geoff DeMartino, Hub's Chief Financial Officer. I would like to begin by acknowledging the men and women of Hub Group. During this pandemic, they have continued to provide great service to our valued clients while protecting their health and that of their families. Today, we announced that our third quarter volume and earnings grew significantly versus Q2. We've gone from a market that was extraordinarily surplus, which resulted in reduced pricing to a highly constrained market with capacity at a premium and spot truck pricing at elevated levels. Our rail partners have been very resilient and have managed the significant sequential increases in intermodal volume extremely well. Anytime you have massive increases in volume, issues do arise. But our rail partners, being the Union Pacific and the Norfolk Southern, have responded quickly to mitigate issues, thereby avoiding any significant impact to our network or our customer service levels. Our clients' inventory levels continue to be constrained, while the demand for truckload and intermodal capacity remains strong. As a result of these market forces, going forward, we believe pricing has reached a trough and the prices will continue to rise as demand is strong and capacity tight. With that, I will turn it over to Phil to review our business lines.

Thank you, Dave. I would also like to start by thanking our team for their relentless focus on supporting our clients and each other in this dynamic environment. We have participated in a rapidly changing market since the trough in April and we have continued to provide great service to our customers. We have done this while keeping a strong focus on our costs and continuing to invest in our business to drive long-term growth. For the quarter, intermodal volumes increased 9% and revenue increased 4% as wins with strategic customers and the strengthening demand environment for driving our growth. Transcon volumes increased 18%, local west was up 17%, and local east volumes declined 3%, as we experienced significant tightness in the West Coast, leading to an earlier-than-anticipated peak season. Gross margin as a percentage of sales declined 390 basis points year-over-year. Our volume growth and improvements in our trucking operations could not offset headwinds from lower prices, rail cost increases, elevated equipment repositioning costs and increased outsourcing of our drayage to support our volume growth. As the market has tightened, we invested in expanding our fleet, and we have continued to meet our customer commitments, while providing a great service product. Strong rail service and continued tightness in inventory levels is positioning us for a strong 2021 mid-season. Logistics revenue declined 7% and gross margin as a percentage of sales declined 100 basis points year-over-year. We experienced strong growth in CaseStack and have continued to on-board new customer wins given our excellent value proposition in our outsource logistics solutions. This was offset by customer losses that were driven by the pandemic as well as increased supplier costs. We have improved our productivity and continue to have a strong pipeline of onboardings. We anticipate excellent demand for our services will…

Thank you Phil and hello everyone. We are pleased that our business returned to growth in the third quarter with revenue up 1% led by our intermodal and truck brokerage businesses. As expected, intermodal volumes grew high single digits in the quarter, benefiting from strong demand from our strategic customers. While gross margin as a percent of revenue declined to 11.7%, Q3 gross margin of $108 million was the highest level achieved this year. We continue to exhibit strong cost control with quarterly costs and expenses equal to 8% of revenue as compared to 10.7% last year. Our non-driver headcount is down by over 10% due to our efficiency and technology initiatives. We have achieved our 2020 goal of $40 million of run rate savings for our profit improvement initiatives and we remain committed to operating efficiently. We continue to improve our trucking operations, driving higher utilization while also reducing our operating expenses. Salaries and benefits expense for the quarter was down by over $14 million as compared to the prior year. General and administrative costs declined by over $10 million. Excluding the impact of legal settlement and consulting expense last year, G&A cost declined by approximately $5 million, as we reduced our spending in several areas including travel and professional services. Hub Group's diluted earnings per share for the quarter was $0.74. This compares to $0.78 of diluted EPS in the third quarter of 2019, which included $0.19 for legal settlements and consulting. Our tax rate for the quarter was 21.5% as we benefited from a state tax credit and the reversal of a federal tax reserve. For the full year, we expect the tax rate to be around 24.5%, which implies a rate of 26.6% in Q4. Our results continue to demonstrate the resilience of our operating model,…

Great. Thank you, Geoff. Despite the fact that the pandemic remains with us, we are encouraged by the strong freight economy that is being driven by demand for capacity, creating a positive pricing environment. We expect this strong demand to continue through the end of the year and into 2021. And with that, we will open the line to any questions.

[Operator Instructions]. And we do have our first question from Justin Long from Stephens.

Thanks and good afternoon. So, maybe to start with intermodal, I was wondering if you could provide some color on how you are expecting to reprice your business in terms of just the quarterly cadence going forward, going into this next bid season. And then any initial thoughts around contractual rate increases for this bid season as well.

Sure. Yes. This is Phil. Happy to do that. I think it is a little early to make a call on exactly where bid season will be going. We are repricing about 5% of our business here in the fourth quarter and will reprice about 45% in the first quarter of next year. So we will have a whole lot more detail to provide, I think, on our Q4 call. However, I think, given the backdrop, with very strong demand, low inventory levels, tight truckload and intermodal capacity, class A truck orders are staying at replacement levels and I think we have done a very nice job of servicing our customers. I think all of that paint the backdrop where we will be in a position to improve pricing and also continue to grow as an organization. So feeling very strongly that it will be a positive pricing year, just don not know the magnitude of that at this point.

Okay, thanks. And in terms of head count, could you provide an update on what headcount was in the third quarter. Just curious what type of year-over-year change we saw and as you think about revenue starting to come back here sequentially and hopefully that continues into next year, how sustainable are the headcount reductions that you have recently made?

Sure. Yes. Until September 30th, we were at about 1,850, that was down about 11% year-over-year. We do have a pretty rigorous process for any head count as we're looking to drive efficiency in the organization for revenue return. We're going to hold the line to the extent we can on head count and manage through efficiency metrics.

This is Phil. The only thing I'd add is that there are few strategic areas we want to continue to invest in being our maintenance network where we think there is a cost reduction opportunity by the addition of headcount as well as continuing to develop our inside sales organization in the brokerage to help us drive volume and margin growth.

Okay. Geoff, and I know you said in the fourth quarter, gross margin dollars should be down sequentially. But, because of what's happening with head count and it sounds like your focus on holding the line there, do you think that operating income will be down sequentially, or can it be flat to up with some of the cost reductions?

Yes, we should be able to leverage some of those costs. The Q3 number is a pretty good run rate on the cost and expense side.

Okay, great. I'll leave it at that. I appreciate the time. Thank you.

And we do have our next question from Scott Group from Wolfe Research.

Hey, thanks. Afternoon guys. When I think about fourth quarter, when there is typically a good peak, like it feels like we're having, and there is some peak season pricing opportunities, we typically see fourth quarter net revenue higher, in some years meaningfully higher than third quarter, why is it not the case this year?

Yes. Sure. Thanks for the question. I think sequentially this year, we do have some cost headwinds coming in certain areas. Our drayage spend is one. We're working to mitigate that with our tractor add this year. But we do think there's some sequential cost pressure. We also have rising insurance costs that may be not seasonally, that we may not have had to that extent in the past if you're comparing us to prior years. And those would be the two big drivers.

Yes, I think the other pieces that are highlighted, we did take rail cost increase in September that wasn't fully baked into the third quarter results and obviously with pricing that was somewhat challenging. So we are doing, I think, a much better job of reducing our repositioning costs as the quarter is coming on to continue to support our volume growth opportunity but reduce expense. And then as Geoff mentioned, we have outsourced more of our drayage. We are anticipating that growth is going to continue to be very strong. But given that insurance and the tax rate change, I think as well obviously, that's not a gross margin impact, but it impacts as well. So those are really the main factors there that are at play.

Can you quantify those headwinds? I'm so just struggling a little bit because when I look at like 17 and 18 good peaks, we had $20 million uplift in net revenue and maybe it's something different, are you not doing peak season surcharges or are the rail costs doing something different this time around?

Yes, I think the difference might be the Q3 numbers are probably higher going in this year than they were in the past just because the market tightening had started earlier. So, there is probably not as much of a sequential improvement that you may have seen in earlier years.

Yes, this certainly given the strength and the import volumes that it was certainly a quicker peak than I think we would have anticipated and we locked in a lot of those peak plans really before those volumes increased. So, it is somewhat of a lower surcharge than we have typically had been able to garner but at the same time it's a contractual commitment. On the spot side, when we are getting spot volumes, obviously we're able to garner very strong incremental surcharges to help cover that cost. But I think the other side of it is that, we do have that increased cost of repositioning offsetting some of those returns on the surcharge.

Okay and then just a last question, can you just talk about your visibility on rail cost increases for next year? And just, do you think you've given up, I think two points or give or take of gross margin this year. Can you get that back next year? Does it take a couple of years to get that back?

Hi, Scott. This is Dave. As far as of the two points, I do think that during this upcoming bid season, particularly providing if demand remains very strong, which we anticipate it will, but yes, we can get that back very quickly. So I think that that can be accomplished within the next year.

Yes, I think going into the bid season, we see a really good opportunity to discussions that we're having with our customers, given the transition they've seen in truckload capacity and rates, they want to lock in capacity and ensure that their supply chains are going to stay fluid next year and that's a really good setup for intermodal and for inter-modal pricing. I think the other good sign is that we are seeing shorter haul, more local east volumes start to transition back to intermodal, which generates a higher gross margin percentage and higher margin per load day for us because we're able to spin the assets in a more balanced manner and reduce our repositioning costs. So, we feel as though there is both an operational and balance yield opportunity as well in our pricing.

And to answer your first question too. As far as the visibility with real price increases, we have very clear visibility on that for next year.

Okay, great, thank you guys.

And our next question comes from David Ross from Stifel.

Yes, good afternoon gentlemen. I want to start, Geoff, a couple of minutes on the CapEx side. The CapEx number you gave $70-75 million, was that for the fourth quarter or for the full year?

That is for the fourth quarter. So we spent about 55 million year-to-date. We gave guidance on the second half when we had Q2 earnings, and just based on the timing of the deliveries of containers and tractors, most of that ended upto Q4. We didn't spend much in Q3.

And any thoughts yet on 2021, directionally, where that should go?

Yes. We're working on budgeting right now. So we will have more to say when we announce Q4.

All right. And then, for David. And Phil, maybe just, what have you learned about the business through the last 7 months with all the ups and downs. Are there any things you found out that surprised you, maybe helped ultimately coming out of this to run leaner and meaner?

This is Dave. That's a very interesting question, because I've never seen the types of fluctuations that we've experienced this year before in my career. I do think that some of the things I did learn is the resiliency and that you have to be very nimble, be able to react quickly to these types of changes. I mean a pandemic is rather extreme, but it's certainly we have been able to adjust very quickly with our leaner staff, to price changes, whether it be from April when we were down significantly overall to where September we were up substantially. So I think that with the restructuring of the company, with the smaller headcount but with very capable managers and people working at the company, that we've been able to sustain ourselves pretty well during a very unusual time.

I think it's a testament to the team in our brokerage, the productivity was up 24% in the quarter on a year-over-year basis and we'll just stick to double-digits, our driver productivity improved by 6% on a year-over-year basis. The fact that our folks are able to continue to deliver those sorts of results given all the fluctuation, it's a real testament to their work ethics. So we're very proud of what they've accomplished. And I think it positions us really well with our customers because we were able to step up and support them and I think our customers see that value in deepening their partnerships with a company like ours because of that.

And last question on the drayage side, you mentioned it's a little bit out-of-kilter in terms of increased third-party Dray. What's the percentage now of in-house versus third party and where do you want that to be?

Yes, we were at 54% during the quarter, that's down four percentage points on a year-over-year basis. And that's actually with a lower driver count in our drayage operations. We had earlier in the year gone through and identified that we had opportunities to bring on higher performing drivers into our fleet and we've been able to reduce the driver count, get more productivity out of that. So we're actually doing more volume with fewer drivers. So we are going to focus on getting into long-term that 80% goal but invest in the fleet. We think to get to and continue to grow to get around 60% next year. So that will be the target that we'll have in our CapEx plan as we look ahead.

Excellent. Thank you.

We have our next question from Todd Fowler from KeyBanc.

Great, thanks and good evening. Dave, I just wanted to follow up on your comments in the prepared remarks about rail service. It sounds like that you didn't experience any significant issues here in the quarter, but I just wanted to make sure that was the case and can you expand on that a little bit. And then as you think about intermodal and the competitiveness versus truck. I mean are you seeing anything from a service standpoint that given how tight the truck market is would prohibit more share coming to the intermodal market in a really constrained truck market. just kind of what you're seeing from a service standpoint and customer interest at this point.

Sure. Thanks for the question Todd. Yes. Rail service. I mean, anytime sequentially that you have the type of growth that we've experienced, you will have some momentum issues. But our rail partners have been able to remediate those very, very quickly, so that we really have not negatively impacted our clients or overall service. So the service has been good. I think that the major thing that our clients always want is consistency of service, whether it's a 3-day transit or a 4-day transit, that's the most critical issue for them. And so there is always going to be issues when you have that type of sequential increase, but how quickly you can fact solve them and fix them is the key, and the railroads, our partners, the Union Pacific and Norfolk Southern have been very nimble and able to accomplish those goals very quickly.

Okay. Good. Great. And then just a followup. Geoff on the operating expenses, the $74 million for the total for the third quarter, is that a good run rate for the fourth quarter. And then as we get into '21, are there anything that we need to think about as far as cost coming back, if it's incentive compensation or anything that would change that significantly from the run rate where you're at right now.

Sure. Yes, so for Q3, the number as I said is a good run rate number to use. There was nothing kind of to call out that would be unusual in that number in the quarter. And then to your point, with the current trend this year, we don't expect to pay incentive compensation. Typically, we budget for that next year and then a year. So we'll have that as a headwind.

And just, Geoff. What's kind of a ballpark number that you would think, I mean, not looking for me. But what would be a range that we should think about that could be coming back '21?

Probably $5 million per quarter. Is a right number to think about.

Okay, good. All right, thanks for the help tonight.

Our next question comes from Bascome Majors from Susquehanna.

Yes. 2016 was the last time that you bought back stock in size and looking at the price back then, it was 10 or 15 bucks higher today than it was. But your stock's trading at the same P/E multiple as it was back then and it's actually a lot cheaper on free cash flow. I mean, the balance sheet, you talked about low leverage, it looks like you in the year under a half turn net debt to EBITDA, and you'll probably generate hundreds of millions of dollars in free cash flow over the next two years. So why not ramp up the buyback now.

Sure. Yes, This is Geoff. You know our priority for reinvestment is always to invest in the business through capital expenditures or acquisitions. We have been able to fund most of the Capex through pretty attractively rated interest rate debt. We have been and continue to look for acquisitions. It's been about almost two years since we made the last acquisition of CaseStack. I'll tell you, we've been looking ever since. We've been active and anticipate doing something in the short term here. So that will continue to be a priority when it comes to the way we use our capital. But we do evaluate exactly the point you raised. We discuss with our Board every quarter on the return of capital to the shareholders. But at this point, priority continues to be to grow and reinvest in the business.

So it sounds like if things go well, you would expect to have a decent size acquisition sometime before the end of next year.

Yes. Certainly the pipeline would suggest that that's the case.

Thank you.

And our next question comes from Brian Ossenbeck from JP Morgan.

Hey, good evening. Thanks for taking the question. Going back to the rail side of things for a second. On the conference call last week, your main real partner in the West mentioned going end-to- end with one point of contact for the customers, you know they were talking about going retail, but they didn't make it a point to say that there needs to be better visibility and coordination throughout the supply chain, end-to-end, for shippers. So what can you add onto that, how far long is that process, is it too early to see any benefits, and I guess bottom line, what does it really mean that's happening here.

Hi, Brian. This is Dave. I would suggest to you that Hub is very fortunate that we have very strong relationships with both the Union Pacific and the Norfolk Southern and in fact I would say that these relationships have never been stronger and the major reason for the strength of that relationship is that we work very diligently on bringing value to the rails. In fact, probably as much as we focus on bringing value to our clients. So we invest our capital hundreds of millions of dollars of containers and tractors and technology, we're exclusive to these rails, and so as a result of that the networks that we build are in fact very complementary to either the Union Pacific and/or the Norfolk Southern. So we work with them very closely from a operations perspective and as much as we always target ourselves to get loads up the ramps, the quickest of any IMC at every single terminal on these railroads. And we also never bring an empty back to the ramp, thereby what that allows is we're reducing the dwell time and also allowing their ramps to be very fluid. So we feel as though the value that we bring to them, in addition to being a large low-cost-to-serve-customer, puts us in very good shape with both our rail partners. And as long as we bring value to both our customers and our rails, we believe we have a very strong seat at the table.

Okay. I guess maybe more generally, what can you add about trying to put more visibility through the supply chain when it comes to shipping because if we are trying to convert off of the highway, then shippers would really want one point of contact end-to-end and they don't want to deal with anymore touch points than they have to or anymore than they would with truck. So do you see anything on the horizon in that regard.

I think to a large extent, we work diligently on that and invested in a lot of technology to just do that, enhance the visibility. As an example, I think we're still the only intermodal fleet that is 100% GPS tracking so that the whole thing with visibility, where the blind spot was not on the rail, because they have good systems and you can identify exactly where containers and shipments are. It was at either end of the drayage cycle. With our technology we know not only where the container is on any given moment, we know if it has freight in it because we have our sonar-type device, which will check to see if there is any freight in the box, as well as we know when the doors are open. So we offer that visibility to our clients so that they can see at any point in time where the container is, we could push that notice to them, they can go on an app that allows them to look at it and to determine when it's going to be delivered. So the visible is something that we have right now and that we work with our rail partners on very consistently.

Yes. And I would just add that, there continue to be opportunities to improve the experience in the hand-off that we have between our rail partners to create a more fluid operation, where we work very closely with them on that but it could be anything from making sure that the highest priority shipments are always getting loaded, even though it might be last minute, improving our driver cycle times through the terminals. Those are things that reduce cost, that improve the intermodal product, that on top of our great technology are going to make us even more competitive, I think, to continue to compete with truck and we're working very closely with our partners and continuing to make it a truck-competitive or better-than-truck product.

Okay. One quick one then on logistics. Can you just give us an update on CaseStack. We saw I guess the return of OTIF not too long ago and I think that's probably pretty good for that business. But you already mentioned trying to meet the customers where they need it and then we can find capacity. So maybe just an update on CaseStack, the growth opportunities, and how that change back the tightening of OTIF should benefit that business in the coming quarters.

Yes, this is Phil. The tightening of OTIF is certainly a tailwind for that business. I think the service sensitivity is extremely important and there just continues to be a proliferation of skews in different retailers that is going to drive growth. We've done a nice job of growing with a significant number of retailers and continuing to diversify as business continues to grow at a double-digit rate. And although we are seeing some short-term margin challenges with some increased costs, we are working diligently to get that improved. So we think there is a great growth opportunity ahead. We are continuing to position the product, I think, extremely well and also tying it into all the solutions that we bring to our larger customers, which is going to drive even further scale outside of the typical smaller mid-sized consumer products customer that they've had traditionally, and we're seeing really great success in cross-selling to our existing client base. So continue to be very pleased with how the acquisition has gone and what we have ahead of us.

Okay, thanks for the time today.

[Operator Instructions]. And we do have our next question from Tom Wadewitz from UBS.

Yes, good afternoon. I think it's pretty notable if I look at the volume performance in intermodal that you are up at 9% and your 2 big intermodal competitors, J. B. Hunt and Schneider down around 2% for the quarter. So I just wondered if you could offer some thoughts on what some of the key drivers of that are -- they both ride in the BN and you ride in the UP, obviously price could be a factor, but what do you think between those 2 things, I mean do you think there is a significant outperformance of how UP is running, and if that's an advantage, then maybe it can continue to accrue for you or is it kind of more of a factor on how aggressive you were with rates. So just some thoughts on that competitive dynamic.

Yes. I think it's a combination. Our combined service with the UP is very strong and we continue to improve on it as I was just mentioning the operational partnership that we've developed with them, to create a more seamless service is fantastic. So, I certainly think that service product and the flexibility that we've had is differentiating. The other piece is certainly, during bid season, we were able to get some wins with strategic customers of ours that drove growth and also during the initial fallout from the truckload market, we were very aligned with some of our larger customers to support them during that given the container ad that we also made. I think that has been a big differentiation, where we have had capacity coming into the West Coast, not only in our empty repositionings but in our imported new containers and that has helped us significantly in supporting the demand in that portion of the market. So, they both set up a very nice picture though for us to be in a position where we can discuss with our clients the support we're able to provide during really a dislocation in the market. So I think it sets us up very well going forward.

Would you expect to add meaningfully more containers next year as well?

Yes. We are anticipating continuing to grow the fleet. As Geoff mentioned, we are in our budgeting process, so don't have a specific count, but we will be looking at our forecasts and working with our customers to understand their needs and requirements based on what we know. The conversion of truckload freight back to intermodal should be very high and set this up with an opportunity. We want to be balanced in our approach to grow above market but also continue to improve our pricing.

Great. Just one other followup, I think you were asked a little bit about M&A. It seems that there're a pretty good number of transports out there, looking to, at least interested in doing M&A, I mean there is one that announced the special dividend today, which seemed to be at least a partial indication that maybe it was tough to find the right companies to buy. What are your thoughts on what's going on in the M&A market, is our sellers just looking for too high of a price, is it kind of COVID related, or what do you think it is, that maybe a number of people looking but not necessarily a lot happening with actual deals?

Yes. On that front, we haven't seen a lot of companies kind of actively launching sale processes. We've been active on searching and frankly knocking on doors, that the acquisitions we've been engaged in diligence on have been those types of situations where we found a company that we either have worked with in the past or has really a high quality reputation and we knocked on the door and kind of kicked things off that way. So, I don't know if the other companies you're referring to just aren't seeing opportunities or not looking in the right places. But we've had some good success in our, I think maturing along in the phase of diligence and some of these opportunities. And we're hopeful to get something done in the short term.

Okay. Yes, great, thanks for the time.

Thanks, Tom.

And we do have our next question from Jason Seidl from Cowen and Company.

Hey gentlemen, I hope everything is well. I wanted to ask about the dedicated side, obviously you got hit by some higher costs on the insurance and repair side. Dedicated obviously is a lot different than sort of with the one-way truckload. How long is it going to take for you to sort of get those expenses back through pricing?

Yes, what I would tell you is, I think we're still middle innings in the evolution of that business. We put in much better cost disciplines, and although we saw some gross margin compression, we're improving our returns in that business. We are continuing to get through the tail end of shedding of unprofitable business and bringing on some nice new wins there and implementing technology. I think the opportunity that's out there is going to be to convert one-way truckload or higher cost private fleets over to a dedicated configuration. And that is what is really driving our pipeline right now. As we look at renewals, I think given what has been stated about the truckload market and what we're seeing with wage inflation and insurance costs, there is going to need to continue to be discussions, and we're going to need to execute on rate increases to offset those challenges. And our customers are very understanding of that and see those same challenges. If we're not able to have a competitive wage and recruit drivers, we're not able to provide the service levels that our customers desire and that we demand of ourselves. So there is a very open dialog, it's very collaborative and I think we'll see ourselves being able to continue to grow that business at a healthy profile going forward given the baseline that we've set but still opportunities that are out there.

Okay. I appreciate the color on that. And I guess I want to hop to brokerage really quickly. Your percentage of contractual business declined and I'm assuming that's just because the amount of transactional businesses out in the marketplace. How should we look at in terms of repricing in the brokerage business, like what percentage do you guys get to reprice in 4Q and what percentage of those contracts get to reprice in 1Q?

Yes, I would say it is a similar break down to our intermodal business, where you will see about 50% repriced through the first quarter of the year. So, obviously, we've seen some contractual cost contraction. We have seen inflation of our purchased transportation costs. We are working very diligently to offset that. But given obviously the market changes, had we anticipated that we would see that, I do think we will be able to do a much better job in managing that through the latter portion of this year and into next year. So the contractual volumes, though, should be relatively in line and really match our intermodal business. And there is going to be an opportunity to reprice at a higher level, I think probably even a higher percentage potentially than intermodal, just given what we are seeing and hearing from our clients at this point in time. The only other piece that has been a little bit of an impact, and I know I addressed it in my prepared remarks is our project volumes, which just given the dislocation of inventory at this point has gone down significantly. That's typically a high margin profile for us. Based on the discussions we've had with our large customers, we anticipate that is going to come back in 2021 and should be a nice tailwind for us as well our LTL volume growth be as well. So we're seeing positive signs in brokerage and I think very well positioned given the productivity enhancements we've made to that business.

Fair enough. Gentlemen, I appreciate the time as always.

And our next question comes from Jon Chappell from Evercore.

Thank you. Good afternoon, guys. Phil just mentioned in the 4Q outlook that revenue will decline sequentially in the non-intermodal categories from customer losses early in the year, that's exactly what you guys said for 3Q relative to 2Q yet in every category, it was up sequentially and pretty meaningfully in logistics and brokerage. So how much of that 3Q to 2Q trend was kind of macro the market just moved really aggressively in the last 2 months of the quarter versus your available capacity, some market share wins, customers that you brought online; and if it's the latter, how come that wouldn't be repeatable then as we look at 4Q versus 3Q?.

Yes. The Q3 numbers actually did frankly surprise us. The revenue did beat our internal forecast. A lot of that was frankly, the biggest piece was in brokerage, where we had some higher revenue dollar spot business opportunities. I'd say generally the market surprised us on the other business line, logistics and brokerage were up again better than we expected, not to the same degree that that brokerage was. But we do think there is going to be a little bit of softness. There is some seasonality in the business as well that will impact revenue in Q4 as well. And we did not recognize the full impact of some of the losses from some of those non-essential retail clients that unfortunately were heavily impacted by COVID in the third quarter. We will recognize that in the fourth quarter. However, I would say, we're working hard every day to keep bringing on new wins. We are bringing on new wins in logistics and are going to continue to do that to have a better margin profile than the business that we lost to a much better margin profile. And in brokerage, we have the team every day that is focusing on supporting our customers, and if demand holds, there is certainly opportunities for us to expand our topline in that reference. So we're not certainly going to say we're throwing in the towel and not going to push ourselves to be better from third quarter to fourth quarter, but just trying to give you our best view of what that might be given what we know at this point.

Okay, thanks for that. And I did want to ask as my followup about the customers at the non-essentials that have been shut down, 2 weeks ago this might have been a different conversation, but it does seem like, broadly speaking, things are opening up again. How much of your customer base that was shut down for a period of time has come back and I guess how is your capacity ability to take some of that on, especially as you balance some of the new customers you brought on. And this can span intermodal to logistics to brokerages across the entire business.

Sure. So I would say with intermodal we have really focused on supporting our strategic customers who've supported us during challenging times in COVID. And we've brought on some new clients that we think are strategically important for us longer term and industry verticals that we would like to crack in Q, but have mainly focused on supporting our core group clients brokerage, I would say, as well we have stuck to our commitments and continue to support our customers on the contract side despite some of the cost compression that we've seen there. And we've been rewarded for that in the past and plan to see that again. And we also are able to participate in the spot opportunities that are much higher yield, although that doesn't completely offset just given the dislocation in the market. And in logistics, we have become much more productive and improved our onboarding process significantly, so we are able to scale our business, float in new on-boardings much more effectively. They aren't as high of revenue dollars, but the growth in operating margins of those new business wins are very strong. So we're continuing to focus on scaling the business using what we have to continue to provide a great service. And the investments that we've made in technology are really helping us continue to do that. As I mentioned, our productivity and brokerage is a fantastic result of 20 plus percent improvement there year-over-year basis. So we feel good about our ability to continue to scale and add new customers. But we're trying to be selective on who we work with as well, just given some of the impact that we had from those non-essential retailers who unfortunately weren't able to make it through given their financial position. So we are scrutinizing the financials of our customers. We want to continue to partner with the winners and that'll be our focus going forward.

Great. That makes sense. Thanks, Phil. Thanks, Geoff.

[Operator Instructions] And we do have our next question from Todd Fowler from KeyBanc. Todd, your line is open.

Sorry about that. Can you guys hear me. Okay, thanks for taking the followup. I guess I just wanted to follow up a little bit on the question about the brokerage growth during the quarter, traditionally I don't think about US having a large transactional brokerage presence. So it sounds like that a lot of the increase in volume was helping out some existing customers. Is that some business that you can convert to being more sticky business into the future. So how do you think about, kind of the sustainability of some of the transactional volume that you saw on the brokerage side this quarter?

No, that's exactly right. Yes, it is not only on a land basis seeing spot transactions that are continually coming across to convert to a contracted carrier to a contract win for Hub. But it's also, we in the past had a difficult time cross selling our brokerage given the service that we were providing. I think we have completely improved our service product and especially in the spot market and in our contractual business. And that sets us up to have that dialog and grow on an ongoing basis as well as get the opportunities on the spot board to continue to grow as well. So we're anticipating that the support we're giving those strategic customers is going to lead to larger wins during their RFP events as well as continued opportunities to participate in the spot board and then convert that business over to contractual business as well. So hopefully we're working to create really a strong cycle there with these customers, where they see us as a strong brokerage option that can support their needs.

Okay that helps Phil. It sounds good. And then just the last one from me. Yes, I think in the past you've talked about the ability to hit 5% operating margins, which you've done on a quarterly basis as you think about the progress that you've had on the cost you take out here and then the repricing of some of the business as you get into 2021. Is that something that's achievable maybe in the back half of next year. Are there some other things that you need to see to get to that margin target that you talked about in the past?

Yes. It does continue to be our longer-term target. I think we're going to need a stronger pricing cycle to get there, so I'm not optimistic. At the end of next year, we may be at that run rate, but it's probably going to be a little beyond that.

Okay, so maybe it would not be something you pick up on one bid season, maybe another bid season after that?

I don't think so. We've certainly been focused on saving the operating costs, but gross margin driven by price is a very powerful lever in our business.

Yes, understood. Okay, thanks for the time tonight.

And we have no further questions at this time. I will now turn the call over to Dave Yeager for closing remarks.

Well, thank you for joining us for our third quarter earnings call. As always, Geoff, Phil, and I are available for any additional questions that you may have. So again thank you and have a good evening.

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