Pacer International Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: Pacer International, (PACR)

Pacer International (NASDAQ:PACR)

Q3 2013 Earnings Call

October 24, 2013 8:30 am ET

Executives

John J. Hafferty - Chief Financial Officer and Executive Vice President

Daniel W. Avramovich - Chairman, Chief Executive Officer and President

Paul C. Svindland - Chief Operating Officer

Robert W. Noonan - Executive Vice President of International Logistics

Analysts

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Scott H. Group - Wolfe Research, LLC

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Thank you, ladies and gentlemen, for standing by. Welcome to the Pacer International Third Quarter Earnings Call. [Operator Instructions] As a reminder this conference is being recorded. I will now turn the conference over to our Chief Financial Officer, John Hafferty. Please go ahead.

John J. Hafferty

Thanks, Karen, and good morning, everyone. Thank you for joining Pacer International's Third Quarter 2013 Earnings Call. After my introduction, Pacer's Chairman and CEO, Dan Avramovich, will give an overview of our third quarter results, then I'll provide more details on our financial results. Paul Svindland, Pacer's Chief Operating Officer, will then summarize our intermodal segment; and Bob Noonan, Pacer's Executive Vice President for International Logistics, will comment on our logistics segment. We will then open up the call for questions.

As we begin our call, we remind everyone of our normal disclosures regarding forward-looking statements and predictions of future operations, which we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's beliefs and interpretations of currently available information. Such statements and assumptions involve certain risks and uncertainties, which are described in our SEC filings. Actual events may differ materially from those forward-looking statements and except as required by applicable law, we assume no duty to update these statements as of any future date.

As a reminder, starting in January of this year, we now act as Union Pacific's network manager for our U.S.-Mexico cross-border intermodal shipment. Under this arrangement, we are now compensated on a net fee basis, and we no longer collect and pass through the rail transportation cost to intermediaries servicing our U.S-Mexico automotive business. For comparability, we included a schedule in our release today, which excludes these rail transportation costs from our comparable 2012 revenue and purchased transportation expenses. And our comments on today's call will be comparing our 2013 results against those adjusted 2012 figures. As information, a replay of this earnings release conference call will be made available through November 24, in the Investors section of the company's website, www.pacer.com.

I'll now turn over the call to Dan Avramovich. Dan?

Daniel W. Avramovich

Thanks, John. Our third quarter results demonstrate incremental progress in both segments of our company. Operating income for the quarter was $5 million, which is more than double last year. Intermodal led that income growth, with segment operating income up 30%. Importantly, results also improved in our logistics segment, with our negative position decreasing sequentially from last quarter by more than $1 million. We also continue to generate good cash flow and ended the quarter with almost $40 million in cash on hand.

Intermodal segment results were once again driven by our efforts in recent quarters to achieve acceptable returns for our services. While at the same time, improving our efficiency on the street and through capacity utilization in our network. Paul will give more technicolor as it relates to those 2 items. Those efforts resulted in intermodal gross margins improving by 150 basis points over last year. We continue to make good progress in the areas critical to improving margins, that is, our mix of business and managing our cost of dray equipment, network flows, which all contributed to improving margins. As expected, and as we discussed in our last call, domestic intermodal volume was up mid-single digits over last year, as we began to lap last year's paring of lower margin freight.

I'd like to highlight 2 other developments in the intermodal segment that occurred during the quarter: First, we continued to enhance our Mexico capabilities through expansion of our sales team with extensive cross-border auto and FAK experience; second, we received our first major award of auto business converting from wholesale to retail. That was the first opportunity of significant size to become available. Actually, we drove that through creative developments with our customer there. And we are pleased that we won it through this collaborative effort development with our customers, rail providers, as well as third-party logistics specialist.

Our logistics segment results were definitely an improvement over prior quarters, with the segment loss decreasing significantly, both over last year and sequentially. Quarterly revenues for this segment were down 2% from the last quarter. However, we gained momentum through the quarter with September international forwarding revenues up double digits over last year, with this trend continuing into October.

So again, overall, a good quarter. Results more than double last year and both segments contributing to that improvement.

I'll now turn it back to John to walk you through more details on the financial results.

John J. Hafferty

Thanks, Dan. In the quarter, Pacer earned $0.08 per share, which is a substantial improvement over last year's earnings per share of $0.03. Our operating income more than doubled and came in at $5 million. Our intermodal segment had an operating income of $11.3 million and was up by 30% year-over-year. Our logistics segment, which had an operating loss of $1.7 million, improved sequentially by $1.1 million and improved over the last year by $600,000 or 26%.

Total company revenue was $250 million, which was down by 1% from last year. In our intermodal segment, revenue of $193.3 million was down by 1% from last year. Our logistics segment revenue was $57 million and was down by 2% from last year. Both Paul and Bob will cover the revenue results in more detail later on in the call.

The company's gross profit improved by 9% over last year, primarily as a result of higher margins in both segments. Our company gross margin percentage of 13.8% was up 130 basis points from last year. Intermodal drove this increase with gross profit up 11% over last year to $27.3 million, coming from the 150 basis point increase in gross margin percentage to 14.1%. Like in our previous quarters, our efforts to optimize our mix of freight and to improve our street and equipment efficiency drove this margin increase.

In our logistics segment, the gross profit, which includes other income, improved by $300,000 over last year and was up by $700,000 sequentially. The logistics gross margin rate was 12.8%, which was up by 60 basis points from last year and up 40 basis points sequentially, due to better mix of business within the segment.

Our selling, general and administrative expenses remained well controlled in the quarter and came in at $29.9 million, which was up 1% over last year. Intermodal SG&A was essentially flat with the last year, while logistics SG&A declined by $300,000 or 3%, mostly as a result of controlling our staffing levels. Corporate SG&A was up $500,000 over 2012. That was the result of increased incentive compensation, which is due to achieving our targeted operating results, and a favorable insurance refund that the company received in last year's third quarter, which has not reoccurred this year. We had a very good quarter in terms of our cash flow results. In the quarter, we generated $15 million in operating cash flow, with $3 million to $5 million coming from the timing of some large receipts that negatively impacted our second quarter results, and with the remainder due to our strong financial performance and our proved days sales outstanding. We ended September with almost $40 million of cash on hand, debt free, and with a borrowing capacity of approximately $64 million.

Now turning to our guidance for the year. We are tightening our earnings per share guidance for the year to range between $0.26 and $0.33, which is more than double our last year's earnings per share result of $0.12. We continue to expect our intermodal volumes to increase in the mid-single digits in the fourth quarter, as a result of this year's bid season and automotive related growth. And we expect that intermodal margins will be up slightly as a result of peak activity and our ongoing margin improvement initiatives. We expect logistics revenues to grow in the fourth quarter in the mid-single-digit range as a result of our new sales team and our Asia expansion, with margin also increasing slightly as a result of the mix of business.

SG&A costs should remain relatively flat with the current levels. Overall, we also continue to expect our revenues to range between $1 billion and $1.1 billion, which would represent a flat to mid-single-digit growth over 2012.

I'll now turn the call over to Paul Svindland, who will provide more information on our intermodal results and plans. Paul?

Paul C. Svindland

Thanks, John, and good morning. Our intermodal results this quarter continue to show the impact of our ongoing focus on profitable growth with the segment's operating income up 30% over last year. Intermodal revenues remained somewhat muted and were essentially flat with last year, as a result of our efforts in the second half of last year to pare lower margin freight that we had won in the first half of 2012, but later became unattractive due to the large unexpected rail cost increases in transcon lanes. As has been our theme this year, we continue to focus on achieving acceptable margins and maintain discipline in our pricing during bid season. Domestic intermodal volumes, however, did rebound and turned positive this quarter, up by 5% over last year, as expected and discuss on our last call.

Transcon lanes were again affected the most by our actions in the previous year, and were down mid-single digits from last year. This decline was more than offset by double-digit growth in north/south lanes. The combination of price, fuel and business mix negatively affected domestic revenue by 6 percentage points. Resulting in revenue being down 1% on the 5% higher volumes, with mix being the most important factor. Our international intermodal revenues were down year-over-year by 2%. The decline was primarily a result of tighter inland ISO container capacity due to a strong export market, resulting in reduction in our business that uses those containers for domestic freight purposes. As Dan and John both mentioned, our intermodal margins, again, this quarter improved significantly on a year-over-year basis, increasing by 150 basis points. We continue to see results from our intermodal margin enhancement initiatives. In the quarter, our improving mix of freight, street efficiency, management of equipment and network costs all contributed to the improving margins. As an example, we continue to focus on reducing our empty street miles and expect to continue focusing aggressively on this in similar street and network efficiencies in the coming quarters.

Container turns in the quarter were at 1.75, which was up from 1.7 last year. With a shorter and smaller auto shutdown this summer compared to last year, allowing us to turn the boxes somewhat faster.

For the rest of 2013, we expect our domestic intermodal volumes to continue growing over last year in the mid-single-digit range. As a result of bid season wins and as we lap last year's second half repricing activity. We anticipate auto volumes continuing strong, growing in the high-single-digit range, with normal plant shutdowns at year end.

I will now turn the call over to Bob Noonan, who will discuss our logistics segment.

Robert W. Noonan

Thanks, Paul, and good morning, everyone. Our logistics segment results improved over last quarter, with its operating loss decreasing by $1.1 million sequentially to $1.7 million. Improvement came as a result of an improved mix of business, which led to gross margins being up 60 basis points over last year and up 40 basis points over last quarter. Revenues remained softer than we expected, like they were for many companies in the market. And we were down 2% from last year, which lagged our expectations for a return to double-digit revenue growth in the second half. However, within the quarter, we built momentum, and September revenue and net revenue for this segment were up mid-single digits and were up double digits for the international business within the segment. The 2% revenue decline in the quarter is considerably better than the double-digit declines of prior quarters and as a result from gaining traction in our Asia freight forwarding and highway brokerage businesses, even while our wholesale NVOCC business continue to see difficult margin pressure. Outside of numbers, we saw several positive developments in the third quarter. With regard to Asia, we expanded our network footprint in China, with offices in Shenzhen and Ningbo to complement existing offices in Shanghai and Qingdao. Thereby enabling us to move a greater mix of volume within our network and enhance profitability. We also continue developing our relationship with CTS International Logistics, who has dedicated numerous sales resources to establish a growing pipeline and are starting to produce some early wins of new business. In Hong Kong, we obtained a HAFFA license in July, which allows us to control our air freight through control towers to generate its own master airway bills and air freight consolidations, enhancing control visibility and profitability. Our plans for the region include establishing representative offices in key cities in the emerging markets that are important to our customers so they can capitalize in the integrated service offering door-to-door to assist them in improving their supply chain services. We also made great progress in implementing our new global operating system, which is now 75% complete and remains on track to be fully implemented by year end. The system will provide global transparency and enable us to drive significant improvements in productivity as we manage and measure performance of key metrics already in place.

Our Asia distribution service and highway brokerage businesses also had positive quarters, with operating results up slightly over last year and contributing to the segment's improvement. Both businesses continued their positive trend with building pipeline and revenue and leveraging those into profitable growth. Although to date our logistics segment hasn't crossed the line to profitability as a result of slower-than-anticipated revenue growth, we are nonetheless seeing positive trends that give us confidence that our actions to transition the segment to profitable growth are the proper strategic direction for Pacer. Looking forward, we expect to continue to make steady progress and to generate improving sequential results.

And with that, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Michael Weinz, JPMorgan.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

I guess the first question I have is on your guidance. Looking at the revenue of $1 billion to $1.1 billion, it looks to me like you have to see a 10% sequential increase in gross revenue to get to the low end of that range. Am I missing something? Or does that seem like it's pretty reasonable to get there?

John J. Hafferty

I think we feel very confident of what we're seeing. And as we talked about, on the international side of the business. So yes, I mean, it will take about 10%, but we feel comfortable we're going to hit that.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Is it primarily going to be on the logistics side? Or is it in the intermodal side? Or pretty much an even mix of both?

John J. Hafferty

It's going to be an even mix of both, Michael.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Okay. And then in intermodal, you had mentioned that pricing, along with fuel and mix, was down 6%, with mix being the most important factor. Was price up in the quarter for intermodal?

Daniel W. Avramovich

If you look at the pure piece, the pure pricing side as it relates to what you see with some of our other mainline competition there, we were able to secure 1%, a little over 1% in pricing, which allowed us, and again, as part of us managing our mix of business, allowed us to cover our rail cost increases given the mix component. Unlike what you saw with other potential issues, we actually have been working on this type of scenario for, geez, 3 or 4 quarters now. So we are -- we've got line of sight in terms of what our rates are, and again, from our underlying rail partners in that, and we price accordingly.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

And how much visibility do you have to rail rates going forward?

Daniel W. Avramovich

To cover any and all commitments we make with customers.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Is that like through the end of the year or into 2014?

Daniel W. Avramovich

It's for however long the commitment is.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Okay. Okay. And I guess the last question, and I'll pass it on. You've had a number of new executive appointments over the past quarter. Are there any other areas that you're looking to kind of fill in some gaps that you might have? Or you're pretty comfortable with your current positioning?

Daniel W. Avramovich

I think most of the appointments that we've had, really, is in kind of solidifying and enhancing our sales and development practices, and we -- in the quarter, we basically shored that up even further, specifically as it relates to enhancements in our Mexico and automotive experience-related hires, as well as on the international side. So it's really around -- our agenda is growth, all right? And it's our focusing -- our focus is on hiring experienced and talented people where we need those capabilities.

Operator

Scott Group, Wolfe Research.

Scott H. Group - Wolfe Research, LLC

So I just had to step out for a second. I'm not sure if Michael covered this. Did you give any more color on the new auto contract? Can you talk about the size of that, the length of that, and how we should think about kind of the profitability of that relative to maybe any fees you may start to lose next year from [indiscernible]?

Daniel W. Avramovich

Well, here again, it's -- we won't talk about the name of the customer and everything, but it -- I would actually presented itself, and we'd been working on it for a number of months is a reconfiguration of this customer's supply chain movements by and between the U.S. and Mexico. We've been involved with this customer for a number of months. And we worked with all the railroads in both north and south of the border to look at what the optimum mix and flows are for that customer. And we basically came up with a different type of solution for them. And that basically had -- it's a sizable customer again. It wasn't necessarily an opportunity that was really available if you look at that as it relates to kind of a contract term, all right? It's really kind of a reconfiguration of their network that allowed us to facilitate this change for them. They're real pleased with that. And quite frankly, it's not anything new for us. I mean, we do this transcontinentally with a number of automotive-related customers, but we're actively and aggressively looking at the north/south opportunities similar to this to convert that traffic, and to our ancillary Tier 1 and Tier 2 type of traffic.

Scott H. Group - Wolfe Research, LLC

Can you give us any color just on the size of it? And maybe can you say, was this with another IMC previously or not?

Daniel W. Avramovich

Part of it was, okay? Part of it's new production. So it's both sides of the equation there.

Scott H. Group - Wolfe Research, LLC

Okay. Just in terms of the earnings guidance. So you've got, I think, like a $0.07 range or something like that for the -- implied for the fourth quarter, which is a pretty big range considering you did $0.06 a year ago. So how do we think about what it's going to take to get to the low end? How about the high end? Or should we be thinking about the midpoint as kind of a realistic outcome?

John J. Hafferty

Look, the way I'd look at it, Scott, is, go look at last year and where were at on the logistics segment. And we are seeing some positive growth. And against -- the range -- and also -- and on some of those things that happens with [indiscernible]. I mean, we're confident within the range of where we're going. I'm not going to give you exactly how we're looking at it. I think you're going to have to look at that yourself and come up with that. But we're confident we're going to be well within that range. We're trending nicely as we exited the third quarter as well.

Scott H. Group - Wolfe Research, LLC

Okay. Good to hear. And then just lastly on the logistics side. So is it -- should we no longer expect breakeven in fourth quarter and kind of does this in any way change your thoughts on logistics and maybe is there some new timeframe you think that you can now get logistics to breakeven or profitability?

Robert W. Noonan

I think if we look at it, basically, going forward, that is a change. We don't foresee that in the fourth quarter. We'll go into 2014 based upon the traction that we have. And 214 is the -- 2014 is the target that we've set. We're making a major migration within the organization, obviously, from the wholesale to retail with very positive traction, filling a gap that's created in the wholesale market across the industry, not only within our organization. So we see positive traction and results, and that will be our target.

Scott H. Group - Wolfe Research, LLC

Sorry, what's the target for '14?

John J. Hafferty

Scott, getting back there. As Bob talked about, we will see significant sequential improvement and continue to enhance that as we move into '14. And we're not going to give a projection of where we need to be. But my point would be is that, we are on the track, and we're going to continue to improve and grow and be better each quarter as we're -- into '14.

Daniel W. Avramovich

And obviously, there's 2 pieces as we've said on this. There's really a building out of new capabilities and an integration of a solution offering, which is absolutely critical for us. We see -- and as we chatted, nobody is basically integrating -- many of the forwarders integrating any form of intermodal service offering on the domestic side with their international side. We're going to be the first one to do it, all right? We're doing it in spot basis right now. We're expanding our coverage, as Bob had indicated with CTS and other forwarder-related agencies in Asia, and that's basically what our focus is while improving our profitability on a sequential basis like John had talked about.

Operator

Todd Fowler, KeyBanc Capital Markets.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I guess going back to the automotive contract, I wasn't clear the timing of when that starts. Is that something we'll see in the fourth quarter? Is that into 2014? And then John, maybe if you can talk about the impact on the external reporting. Would that increase the gross intermodal revenues? And does it have a favorable impact on the gross margins as well?

John J. Hafferty

To answer your question, we will start to see some of that in the fourth quarter of this year. And it will have a favorable impact on the gross revenues. And relatively on the margin side, just about where we're at now. So I mean, it's pretty comparable to our existing business.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. And then, Dan, when you look at the marketplace, I mean, how many more opportunities are there like this? And as you think about going into '14, I mean, is the intermodal margin in the business dependent on seeing more transactions like this? Or this incremental to what you can do internally with your position in the marketplace?

Daniel W. Avramovich

We're seeing a lot more opportunity specifically as it relates to -- because a lot of the wholesale piece is just pure production parts per se rolling through into facilities here again to and from Mexico. We're seeing incremental activity as it relates to both on the Tier side as well as the aftermarket part side of the equation. So what we're able to do is, is basically start to get traction with customers in different phases of their business and really expand it. So as we look at next year, we are working on one of the providers that we see that is open for a conversion going forward. Looking at how we expand our relationship with them, very similar to what we did with this customer. And so there will be some as we approach into 2014. Not necessarily planning to actually do that. To the extent that it happens similar to this one, it will be an upside to us. But most of the activity from an incremental perspective next year will be on very similar type of transactional bid activity that we experienced this year.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

So these opportunities are something -- I'm sorry John, go ahead.

John J. Hafferty

No, I was going to say -- and remember as Dan talked about, this one was earlier. Again, we think we're in a very good position. And we continue to enhance our capabilities. I mean, as we talked -- as Dan talked about, with the sales. And we're in a very good spot. We feel confident of how we're going to market and how we're going to be able to do this from going direct with a lot of the auto providers. So we're pretty confident with where we're going.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

But this is something that we should see maybe 1 or 2 of these a year, not a wave of these come through.

Daniel W. Avramovich

Yes.

John J. Hafferty

Yes.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. Maybe this one's for Paul. The opportunity within the intermodal network and some of the things that you're doing on the box turns and the street operations, where do you feel that the network's at and how much opportunity do you see to show continued improvement into '14?

Paul C. Svindland

I think overall, we've made good progress throughout the year. We believe that there's still some additional opportunities to run a more efficient network and to drive cost out on the street to get our empty miles down. Again, I think we made great progress. But we continue to expect, to continue to make progress through into 2014.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

And is most of that on the street operations or the box turns or?

Paul C. Svindland

A combination of both, right? I mean, it's a matter of running a good, solid, efficient network, right? Trying to reduce the amount of repositionings -- empty repositionings we need to do. But also really staying focused on driving density in key markets where we can get street turns and drive down empty miles.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. The 2 last ones I had, just on logistics. Can you remind us what percent of the logistics revenue at this point is freight forwarding? What's warehousing? And what's distribution or trucking-related, I guess, at this point?

John J. Hafferty

We generally, Todd, we don't really give a breakdown of that. But as we talked about, the lion's share -- there's a large share of logistics which is freight forwarding. We don't give a breakdown of the components of the logistics revenue.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Have you given a breakout of how many freight forwarding customers are using the intermodal product at this point? Or would you?

Daniel W. Avramovich

We will. We're looking at going forward kind of a conversion -- kind of a giving you more technicolor around kind of our conversion to the forwarding side of the equation, as well as how much incremental revenue we're generating as a result of cross-selling between the intermodal product and our forwarding product. One of the things that Bob had indicated we're starting to get some traction on the CTS piece. But Bob and I are going to Asia next week, part of that walk is actually to developed -- continue to develop what the pipeline is and set targets with our partners in the Asian markets.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Is it like something better than that or worse than that?

Daniel W. Avramovich

On the CTS side, it's very small. Less than 10%. Okay?

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. All right. The last one...

Daniel W. Avramovich

We will provide more visibility on that as we firm up our plans there in terms of what we're expecting for next year.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay, fair enough. The last one I had just was on the balance sheet. And I guess given where your cash balance is and with your cash flow generation, at what point do you feel comfortable doing something more aggressive with the balance sheet, if it's either looking for opportunities? I understand that you're investing in the business, but at what point do you feel -- I mean, do you have to get to break even in the logistics segment before you would look to do something more aggressive? It feels like that revenue has been contracting. You're kind of shrinking to grow. The balance sheet's in good shape. How do you feel about becoming more aggressive going forward?

John J. Hafferty

We continue to look at our cash position and evaluate all our alternatives, including tuck-in acquisitions and returning cash to our shareholders. So -- I mean, there's no definitive date. And we continue to evaluate that and determine what makes sense for the right returns for our shareholders. To answer your question, we have not set a date.

Operator

Ben Hartford, Baird

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Paul, maybe a question for you. I'm curious about a couple of things as it relates to the north/south business. First, do you think that the pricing dynamics or the competitive dynamics on the north/south traffic, whether it's FAK or the auto business is meaningfully different than those competitive dynamics on the more traditional east-west domestic intermodal traffic?

Paul C. Svindland

What -- I mean, Dan...

Daniel W. Avramovich

Yes. I'll deal with some of that. There is different dynamics because you basically, on the transcon side of the equation, you have really 4 network players there on the rail side. To and from Mexico, you're dealing with a little different dynamic in terms of the existing intermodal network at least south of the border is really controlled and managed as it relates to KCS. And then obviously a big piece of the northern side is essentially driven by a major western railroad in that regard. So the dynamics are different. The ability to actually get at scale economies is different in terms of who is driving the traffic. The service is clearly different from the lanes that flow. Scale is a big consideration. We have a nice position in that market. And essentially our margins are essentially aligned with essentially those dynamics. So again, we feel good about the north/south volumes and market and are positioned with our underlying rail partners in that regard. So there is a different dynamic as it relates to that business versus kind of the east-west business.

Paul C. Svindland

I think to add to that, too. We feel very comfortable that there's a lot of good growth opportunity. Again, just given the trade between the U.S. and Mexico and northbound potential FAK volume. So it's one of the reasons, as Dan had mentioned earlier, we had a question about adding executives, and we're adding to beef up our commercial side because again we think that there's some good growth opportunity in and out of Mexico.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Yes, good. So you've made the investments on the commercial side, but we sometimes hear from some shippers about some concerns about the reliability of equipment generally in that market. Is that -- are those concerns credible? And if so, will over time, that market become more capital intensive from your standpoint, whether it's containers or chassis?

Paul C. Svindland

I think from our stand, that's noise. I mean, I think we feel comfortable that we have the equipment availability and the infrastructure in Mexico to support the appropriate growth.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Okay, good. And then the last question just on the 2013 CapEx, the trailing 9-month total is above the previously guided range for the full year. Can you explain the drivers of that? And maybe give us a sense on what 2014's CapEx might look like at this point in time?

John J. Hafferty

I believe the CapEx -- the increase that we have was primarily for some of the computer work that we had to do when we transformed to the network manager with UP. So that will be the amount over the guidance that we originally gave. We should have a very low quarter in Q4 on CapEx and relatively stay around -- I think it's about $7 million is our overall CapEx. So it should be about there. And for next year, I'd say about $8.5 million would be probably the CapEx for next year. And again, a lot of that is still our systems and our enhancements, and that's how we tend to look at our CapEx and our growth.

Operator

Mr. John Larkin, Stifel.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Just was wondering about your activities in local east markets where see a section of folks are [indiscernible] obviously are putting a lot of capital into the ground building out some capacity. Are you continuing to participate there sort of disproportionally? Didn't hear much detail on that during the formal remarks.

Paul C. Svindland

John, this is Paul. I think we still believe there's opportunity there on the east, but more of our focus is on north/south and also continuing to grow on the transcon.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Is that because you believe those markets are perhaps not as profitable as the other focus markets, the longer haul markets in the north/south?

Paul C. Svindland

I just think from a focus perspective, we believe there's more opportunity that it makes more sense for us to stay focused on the other areas.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Got it. Perhaps a longer-term question. Is there a point at which you all might be comfortable maybe sharing sort of a longer-term view of revenue margin sorts of targets over, say, a 3- to 5-year timeframe once the business has been stabilized, particularly on the logistics side? Is that something we can look forward to perhaps in 2014?

Daniel W. Avramovich

I think what we are considering here, John, is really, as I mentioned a little earlier, is really looking at kind of what our conversion is on the -- in the development of the forwarding side. So we're considering that, as well as kind of the mix of trade traffic, specifically on the forwarding side of the equation. Very similar to what we do on the intermodal side. So we'll start to probably give more technicolor -- color as it relates to flows and as well as conversion activity in '14.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

And then it's been publicly announced that there's a firm that has a pretty good size position in the company. I think the last press release said 9.2%. This firm has a reputation for occasionally being a little more active than some shareholders. Have they been in touch with you? And have they been sort of pushing you to achieve certain objectives? Has there been any change in your behavior as a result of this particular shareholder establishing their position?

Daniel W. Avramovich

Obviously, we don't comment on any and all shareholders that we have. They like -- most of our shareholders like kind of the dynamics and the positions that we have in the marketplace and the prospects going forward. Again, we don't really comment on individual shareholders.

Operator

We do have one follow-up from the line of Scott Group, Wolfe Research.

Scott H. Group - Wolfe Research, LLC

So I just want to maybe see if you can help us frame 2014 at all. So I think the thought or the understanding on the new Union Pacific relationship was that the fee-based system in there. Over time, you're going to need to get some auto contracts yourself to keep the, I guess, to get the profitability. And I just want to understand, if this one contract that you just announced, is that enough? Or do we need more? And then kind of directionally, I'm not even sure if earnings are up, down next year. How to think about that or -- I'm sorry, intermodal profitability is up, flat or down next year. Maybe directionally if you can give us any color there?

Daniel W. Avramovich

Sure. I think, again, we're really going to look at providing guidance maybe by -- towards the end of the year, this year or maybe in the first quarter or before first quarter, to help in that regard. But as we've said, a lot of these contracts don't necessarily become available, right, to make the change. In the case that we -- in this case, we were able to do it, quite frankly, early. So we'll look for opportunities so that we can do it early. And we're confident that we'll make those conversion activities going forward and, quite frankly, enhance it. And that was the case in point with this one. It was, if you look at the level of traffic that was kind of in the traditional wholesale side with this customer, there was incremental traffic that we will be experiencing due to new production activities that they're having in Mexico. So we're, obviously, happy with this one. We will need to convert others, as well as enhance the amount of volume that we're experiencing with a number of these customers.

John J. Hafferty

But Scott, getting into 2014, as Dan said, we are going to give out guidance by the end of the year. But to give you a little color, as Dan had illustrated, we're ahead of what we anticipated to be for '14. So I mean, that will give you at least a little comfort as to how we're looking at it. So you can look at it from that perspective.

Operator

There are no further questions at this time. Please continue.

John J. Hafferty

This concludes Pacer's Third Quarter 2013 Earnings Call. Thank you for your participation, and we look forward to your continued interest and support of Pacer International. Thank you.

Operator

Ladies and gentlemen, this conference will be available after 11 a.m. Eastern Time today through November 24, 2013. You may access the AT&T teleconference replay system anytime by dialing 1 (800) 475-6701 and entering the access code 303541. International participants may dial (320) 365-3844. That does conclude our conference for today. Thank you, for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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