Hub Group Inc (HUBG) 2017 Q2 法說會逐字稿

Hello, and welcome to the Hub Group Second Quarter 2017 Earnings Conference Call. Dave Yeager, Hub's CEO; Don Maltby, Hub's President; and Terri Pizzuto, Hub's CFO are joining me on the call. (Operator Instructions)

Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as 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 quarterly earnings call.

With me today are Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our Chief Financial Officer.

For the second quarter, Hub had revenue growth of 8%. The Hub segment reflected a 9% growth in revenue, with Mode growing at 5%. All of Hub's business lines contributed to the revenue growth. Intermodal revenue grew 3%; truck brokerage revenue was up 26%; and logistics revenue grew 17%.

We did, however, see a significant margin decline in all lines of business that more than offset the positive revenue growth. We're somewhat encouraged that we did begin to see some flattening in the downward pricing pressure on intermodal at the end of the quarter.

In addition, there've been recent signs of truckload capacity tightening in certain geographies, as it appears demand is picking up. In response to the tightening, we're looking to increase intermodal prices in select geographies in anticipation of a normalized peak season. Going forward, we expect overall pricing to be flat in the second half of 2017 with intermodal prices increasing in 2018 as capacity continues to tighten.

During the quarter, we did take actions to streamline and realign Hub's structure to more closely reflect the current business environment. This resulted in an annualized savings of approximately $8 million.

Finally, ending on a positive note, we did close on the Estenson Logistics dedicated trucking transaction on July 1. The Estenson acquisition provides Hub a strong foundation for growth in the dedicated trucking space that is much in demand by our clients. Estenson is a quality carrier that is focused on safety first, customer service second, followed by profitability. They're a talented management team, and we welcome them to Hub Group.

With that, I'll turn the call over to Don to go into more depth on the specifics of our business segments.

Thank you, David. Now as the bid season is just about complete, we continue to see pricing pressure across all our lines of business. With that said, over the past month, we have seen some tightening in the market and believe we may be seeing that intermodal pricing has bottomed along with the signs of truck market doing the same. To offset margin pressure, we also looked at our organization to streamline workflows and flatten the structure to reduce costs and provide seamless service to our clients. We made those reductions and changes during the second quarter and believe we are positioned well for recovery in growth.

While margins remain compressed, we continue upon our strategy of pricing to targeted customers, type of services, market and our network. We have also made significant strides in positioning our network needs with a targeted marketing approach, along with emphasizing network needs across our sales organization and clients.

Now let's talk about the businesses. Truck brokerage continued to show strong growth, posting a 14% increase in volume. This is the fourth consecutive quarter we have seen double-digit volume growth. This growth is attributed to our continued focus on targeting clients along with specific markets and services. Our margin compressed 390 basis points during the quarter due to less value-added services and a capacity-constrained market at the end of the quarter. For the second half of 2017, we will continue to focus on key customer initiatives and expanding our reach with these clients to include our value-added services.

In addition, we remain focused on developing our core carrier relationships in strategic markets to better serve our customers. Our belief is that the remainder of 2017 will be mixed with areas of soft capacity along with pockets of very limited capacity, putting our truck brokerage division in a strong position with overall diversified service offerings.

As anticipated, logistics had a strong top line contribution with a strong quarter of new on-boardings. Logistics revenue grew 17%. Our growth has been met with margin compression, primarily driven by new business implementations, a slower ramp-up period and tighter than expected capacity in the latter part of the second quarter.

Our pipeline remains strong, and we have several new on-boardings scheduled to launch this quarter. In addition to the new on-boardings, our solutions with existing customers continue to expand, fostering organic growth and contract renewals.

Mode produced top line growth of 5% in the quarter. Overall, top line revenue remains positive year-to-date in the face of an extremely aggressive pricing environment in all of our service lines. We continue to leverage our technology platform with new customer wins to drive network efficiencies and increase our position in managed solutions.

During the quarter, Mode added to the IBOs and sales network by adding 3 new IBOs along with 9 new sales people. In this very challenging market, we are proud that each line of business continues to show growth. Again, as the market recovers, we are positioned very well.

Now I will turn it over to Terri to review the numbers.

Thanks, Don, and hello, everyone.

I'd like to highlight 3 points. First, the 8% growth in our top line demonstrates our success in providing multimodal solutions to our customers. Second, challenging market conditions, together with startup costs associated with bringing on new logistics customers, resulted in yield compression of 240 basis points. Third, our results include one-time costs of $4 million or $0.07 a share. Severance costs were $2.8 million, and expenses related to the Estenson acquisition totaled $1.2 million.

Here are the key numbers for the second quarter. Hub Group's revenue increased 8% to $925 million. Hub Group's diluted earnings per share was $0.29 compared to $0.61 last year.

Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $705 million, which is a 9% increase compared to last year.

Taking a closer look at our business lines, intermodal revenue was up 3% due to a 1% increase in loads, an increase in fuel revenue and more favorable mix. Declines in freight rates partially offset these increases. The volume growth was driven by an 8% increase in loads with consumer products customers and a 5% increase in loads with retail customers, partially offset by a 55% decrease in loads with Mode.

Truck brokerage revenue was up 26%. Truck brokerage handled 14% more loads. Fuel price and mix combined were up 12%.

Logistics revenue increased 17%, due primarily to growth with new customers on-boarded in the second half of last year and in the first half of this year.

Hub's gross margin decreased by $10.5 million or 13% due to a decline in margin in all 3 service lines. In order of magnitude, intermodal gross margin was down the most, followed by logistics and then truck brokerage.

Gross margin, as a percentage of sales, was 10.3% or 250 basis points lower than last year. Intermodal gross margin decreased primarily because of rail cost increases and lower customer prices than last year. We offset part of the decline by improving loaded miles and with more favorable mix. These same factors drove a 250 basis point decline in intermodal gross margin as a percentage of sales.

Truck brokerage gross margin decreased because of higher purchase transportation cost due to tight capacity and changes in customer mix. Truck brokerage gross margin as a percentage of sales decreased 390 basis points because of these same factors.

Logistics gross margin declined primarily due to startup costs related to new business on-boarded this quarter. This was the main reason for the 210 basis point decline in gross margin as a percentage of sales.

Sequentially, compared to the first quarter, the Hub segment gross margin as a percentage of sales decreased 30 basis points. Logistics gross margin decreased 60 basis points; truck brokerage decreased 30 basis points; and intermodal was down 10 basis points.

Cost and expenses increased $6.3 million to $62.2 million in the second quarter of 2017 compared to $55.9 million in the second quarter of 2016. The increase relates to a $4.1 million increase in general and administrative expense and a $1.8 million increase in salaries and benefits. The increase in general and administrative cost is driven by an increase in IT costs, including costs for our transportation management system, as well as a $1.2 million increase in professional fees for the Estenson acquisition. Salaries and benefits increased as a result of $2.8 million of severance costs, employee raises and higher headcount, partially offset by a decrease in bonus expense.

Finally, operating margin for the Hub segment was 1.5%, which was 270 basis points lower than last year.

Now I'll discuss results for our Mode segment. Mode's revenue was $243 million, which was up 5% from last year. Revenue breaks down as $112 million in intermodal, which was down 4%; $83 million in truck brokerage, which was up 2%; and $48 million in logistics, which was up 43%.

Mode's gross margin decreased $2.7 million year-over-year due to a decrease in truck brokerage and intermodal margin, partially offset by an increase in logistics gross margin.

Gross margin as a percentage of sales was 11.8% compared to 13.5% last year due to a 300 basis point decline in logistics yields, a 280 basis point decline in truck brokerage yields and 100 basis point decline in intermodal yields.

Mode's cost and expenses went down $1.8 million compared to last year, primarily due to a decrease in agent commission. Operating margin for Mode declined to 2.5% compared to 3.1% last year.

Turning now to headcount for Hub Group. We had 1,726 employees, excluding drivers, at the end of the quarter. That's down 30 people compared to the end of March.

Now I'll discuss what we expect for 2017. Projected results for Estenson are included in our guidance. Estenson will be included in the Hub segment as a service line. We believe that our 2017 diluted earnings per share will range from $1.45 to $1.55. This guidance includes severance costs and the expenses related to the acquisitions in the first half of the year. We estimate high single to low double-digit revenue growth at Hub and mid to high single-digit revenue growth for the Mode segment. We expect gross margin as a percentage of sales for the year to range from 10.9% to 11.3%.We project that intermodal prices would stabilize in the last half of the year. We estimate consolidated big box intermodal growth will range from 2% to 4% for the year. We believe that our quarterly costs and expenses will range from $93 million to $94 million. Included in these costs are projected Estenson costs and expenses of between $8.2 million and $8.7 million. We believe that our effective tax rate for the year will range from 38.8% to 39.3%.

Turning now to the balance sheet and how we used our cash. We ended the quarter with $152 million in cash and $166 million in debt, including capitalized leases. We spent $23 million on capital expenditures this quarter, mostly related to container purchases. That brings total year-to-date capital expenditures to $27 million.

Capital expenditures are expected to range from $85 million to $95 million in 2017. This estimate includes approximately $16 million for Estenson.

To wrap it up on a bright note, as Dave said, we closed on the purchase of Estenson on July 1. The purchase price was approximately $286 million, including a $6 million contingent earn out. We assumed $114 million of Estenson debt, paid $111 million in cash and borrowed $55 million on our new $350 million revolver. We're very excited about this great acquisition.

Dave, over to you for questions.

Thank you, Terri. With that, why don't we open up the lines to any questions.

(Operator Instructions) And our first question comes from Kevin Sterling from Seaport Global Securities.

Dave, you talked about intermodal pricing improving or at least stabilizing in the back half of the year, then improving in 2018. And you talk -- we see the truck market tightening and lease spot rates moving higher, also the contract rates. How should we think about kind of -- as you think about intermodal pricing, is it mainly the truck market that's going to drive it? Or is it some of the other IMCs out there that's been aggressively pricing maybe not being so aggressive, maybe a combination of both?

Yes, I think, as you know, that we have seen a lot of intra- / intermodal competition, if you will. And I think what we've seen is that capacity within intermodal has grown enough that, in fact, we're starting to see people look at the pricing and to increase prices. We, ourselves, are currently looking at a variety of clients and a variety of corridors to increase the pricing right now prior to peak as we do believe that this is an opportunistic time.

From a truck market perspective, I do think that what we're seeing is a tightening, although this week, honestly, has been a little bit looser. But you can't really go -- it's kind of anecdotal just for a few days. But we did see a fair amount of pricing for an extended period of time late in the quarter and the beginning of July. And I think this is indicative of what we'll see beginning in the second week in August through peak. And so since truck is a primary competitor, particularly for us in the local East, we take that to be very positive. And I think if you look at the 12% growth we have in the local East and the great service that Norfolk Southern is giving us right now that we can be quite competitive there and grow in that marketplace.

Great. And along those lines, Dave, historically when pricing has been this competitive and this low for some time, we get a snapback. Do we get a quick snapback? Or is it more of a gradual increase in intermodal pricing?

The trucking industry has always reacted quicker to both upturns as well as downturns. And intermodal traditionally has been a lag of 3 to 6 months. We intend not to let that happen this time. We believe that prices are poised to increase. We are going to be going forward on that assumption and believe that we're correct in that. So I'm not saying we're going to see 3%, 4%, 5% increases this year, but I do think that we've bottomed. I think that intermodal pricing will respond much quicker than normal to the tightening within the truckload market. And that we will see some -- at least flattening and hopefully some positive upswing during the second half of this year.

Yes, the other thing is we've completed basically our bid season, and that's behind us now, mostly behind us. And those prices we just established for some of our contract customers are just going in. So we're going to be opportunistic when we can.

Got you, okay. And one last question on the acquisition front. Estenson was a great acquisition, I know you guys are excited about it. What else are you seeing out there? Are you seeing additional opportunities on the M&A front? Are valuations kind of within your wheelhouse? Do you -- can we see some more M&A opportunities out of you guys now that you got one under your belt?

We certainly are very happy with the Estenson acquisition. And obviously, it's very early, but just as we got to know the people at Estenson, the cultures are extremely well aligned. They're a great dedicated trucking company. And so it will be a very good fit, what we can bring to them, the synergies of us bringing our customer base to them. There are definitely other acquisition opportunities that are out there. We are looking. Nothing is pending at this point in time, but we certainly are looking for additional opportunities.

And our next question comes from Ben Hartford from Baird.

Dave, I think the pricing aggression during the first half of the year is well understood. But how would you describe network balance, one? And then two, some of the progress that you guys have been attempting to make, technology investments, et cetera, to improve the fluidity on the intermodal network, how does that stand in the -- kind of setting aside all the noise on the pricing front for the moment?

Yes, from a balance perspective, the amount of empty repos that we're doing is relatively the same. It's slightly greater than last year. So we have seen some imbalances, particularly as we grow in the local East. And as you know, Ben, if you go eastbound, the likelihood of getting a backhaul is not as great as it would be going out of California. So that's just an accepted part of growing local East. We are very focused from a technology perspective. We're working on the conceptual part of the Oracle transportation management system, which will help us out a great deal with reducing our empty miles for our trucking operation, identification of container locations and, therefore, with the balance. So you'll see our IT investments continue ongoing at a much more rapid pace than we had been historically. We are not going to be building any new software. We will be buying packages and adapting our processes to fit those packages.

Ben, I'll add to that, is that we've deployed Oracle transportation into our logistics space. And every new customer that comes on, we are on-boarding them in OTM, as we call it. And on the intermodal side of it, we're in the planning process. We're doing our due diligence, we're getting our processes down, as we have a lot of legacy operations that we've done over the years. So we're now easing into that. And you will start to see that efficiencies probably in the first quarter of next year.

Yes, we're just starting the design phase for intermodal and truck brokerage with OTM, and we'll probably begin our implementation with managing all equipment in OTM in the first quarter of 2018, which will give us accurate equipment inventory and allow us to integrate with other programs to have full visibility of all our assets. And the second phase will be implementing drayage, and then we'll have a phased approach to rollout after that.

Okay, so the first half of '18 we should start to see some of the benefits from Phase I?

Yes.

Correct.

Terri, when you gave the guidance, the gross margin guidance of 10.9% to 11.3%, was that for the full year 2017?

That was for the full year.

And the same for the tax rate of 38.8% to 39.3%, that -- was that full year or was that back half '17?

Full year.

Full year, okay. So with that gross margin guidance, it does suggest we're probably at the trough here. But the "cut the reduction in the back half outlook" it sounds like it's a function of gross margin compression across the 3 primary service offerings, and it's probably a combination of the ongoing competitiveness in intermodal and some of the tightness in capacity late in the quarter. Is that what you would ascribe to the reduced outlook on the margin for the back half of the year?

Yes -- oh, I'm sorry, Terri, you go ahead.

It is. We reduced our guidance in intermodal because of the pricing environment being a little worse than anticipated and to factor in costs related to network imbalances. We reduced our guidance slightly for truck brokerage to factor in higher purchase transportation cost because of tight capacity.

Okay.

And then we reduced our guidance a bit for logistics as well to factor in startup costs for new customer on-boardings and higher purchase transportation cost from tight capacity.

Okay, sounds good.

Then we correspondingly reduced it for Mode for those very same reasons.

Right. Okay, that makes sense. So Dave, again, just kind of thinking strategically about the portfolio. You've got Estenson, success in brokerage and logistics, intermodal's pressured this year, load growth is below what you had initially budgeted. Again, understanding the challenges this year, what gives you confidence that, one, long term intermodal volume growth can be mid to upper single digits perhaps taking share from truck, and whatever that market growth is that the business as it is constituted can grow at or above whatever that market baseline growth rate is?

I think the intermodal market, in particular, you're seeing consolidation. If you look at the market share that we and our largest competitor have, it's growing substantially. And we think that's going to continue, that we'll see ongoing consolidation within the intermodal space. I think that, in addition, it's just the underlying economics of intermodal. As long as the service product is there, it's so compelling, particularly on the longer lengths of haul, that, in fact, we will see intermodal continue to grow, and we believe that we, as the #2 player, are well positioned to continue to grow with that market.

And our next question comes from Scott Group from Wolfe Research.

So I was wondering in hearing more about service issues at CSX and I know you're on with Norfolk, are you hearing anything from customers looking to move from one rail to Norfolk that maybe could be an opportunity for you? Any signs of that happening?

We read what you're reading and some of the publications about some question marks. I think that, thus far, that Hunter and team have been focusing primarily on the commodity trains, on the merchandise trains. And so we haven't really heard of a lot of deterioration in the intermodal trains as of yet. So if, in fact, we would, I think that, obviously, there would be a lot of opportunities for us to grow because the Norfolk Southern service has been as good as I can remember it. It's running very fluidly.

And Scott, Jim Damman who runs Mode would tell you that they use CSX, and he has seen some customers go from CSX to NS because of the service.

Okay. Terri, I jumped on the call late. So I don't know if you went through this, but how are you going to be reporting Estenson going forward? Is it going to be as its own operating income segment like we've seen with Mode? Or does it get lumped with the segment? And your guidance that you just gave on gross margin, I'm guessing that's excluding Estenson, is that right?

I'll try to answer those in the order that you gave them. First of all, Estenson will be included in the Hub segment as a separate service line called dedicated. Just like we have intermodal, truck brokerage and logistics, will report dedicated. And the guidance that we gave of $1.45 to $1.55 for the whole year does include Estenson projected results for the last half of the year when we own them.

And the gross margin guidance includes Estenson or not?

It does, yes.

Is that -- I'm guessing, that's a much higher gross margin business for you?

It's higher than our other lines of business, yes.

So is there a way potentially, just so we can think about kind of the 10.3% Hub segment gross margin kind of how you're thinking that's going to be in the back half of the year excluding Estenson, just sort of like on an apples-to-apples basis. Is there any way to help us with that?

Excluding dedicated for the back half of the year, you'd have to take out revenue in the third quarter for dedicated of between $60 million and $65 million and take out gross margin for dedicated of between $10 million and $11 million are my numbers.

Okay, that's helpful. And then lastly, just for Dave. So we've got a market that's -- looks like it's tightening, but it's still pretty low fuel environment. In your history, what's more important? What are you -- obviously, both is what you root for, but if you can only have one, which is it?

And that's either truck load tightening or...

Or rising fuel?

Truckload tightening would definitely be the choice. The fuel, it does have an impact. But as you know, the economics of the trucking fuel is a large component. But a tightening of the market is what we would root for more so than anything else. The tightening capacity just creates a lot of opportunity. People begin to realize that they should be converting more to intermodal. And that's the major driver for us to be able to increase volumes as well as increase prices.

That's right, yes.

And are you seeing it stay kind of tighter than normal so far in July?

I think, overall, it's probably a normalized tightening. We have this week seen it be a little bit looser, but we do believe that it's going to be a normalized peak shipping period. We do believe that there's going to be tightness in the market in specific areas. So we feel confident because, candidly, for a bit in the earlier part of the second quarter, I think we were a little bit concerned that, in fact, it might be below -- subpar for as far as being a normalized peak. So we feel good about the increase in demand that we've seen.

And the next question comes from Justin Long from Stephens.

So Terri, you gave a couple of numbers that are helpful on Estenson in the back half of the year. But thinking about the 2017 guidance, could you give any color on the EPS impact you're assuming from Estenson in the back half of the year? And then also, just curious if your expectations for the accretion in 2018 have changed at all since your call earlier in the quarter?

Sure. Estenson is accretive even when factoring in the additional interest expense that we'll have related to the debt. It's likely accretive, I would tell you. So maybe between $0.02 and $0.04.

Okay, over the entire back half of the year?

Correct.

Okay. That's really helpful. And then maybe to get a sense for -- a better sense for how intermodal trended throughout the quarter, could you share monthly intermodal volumes for the Hub segment during 2Q? And then if you have that number for July, that would be helpful as well.

We do. April was down 4%; May was up 6%; June was up 2%; and July was flat.

It's flat, although last week, it was up about 5%. So one week does not make a trend. That used to be a Cubs winning streak, but that's encouraging.

Well, I guess just kind of circling back to some of the commentary you had in response to Scott. I mean, what do you think is really kind of driving the pickup in demand that we've seen? And do you have a view on whether you feel this is just a near-term pop due to seasonality or the beginning of a cyclical recovery?

Certainly there's some seasonality involved anytime you're in a quarter such as that and around July 4th weekend you're going to see some tightening in the truckload market. But it does seem -- again, and this is very anecdotal, but it does seem as though the industrial economy is getting a bit stronger. And as a result of that, demand is increasing. So we're hopeful that's something that continues. We believe it is something that is going to be ongoing.

Right. And we've also picked up some share in this year's bid process that's helped us, too, to support the network.

Okay, great. And then maybe one last numbers question. I think, Terri, you may have mentioned or Dave that local East volumes were up 12% in the quarter. Do you have what the change in local West and transcon volumes were as well?

We do. And you're right, Dave said 12% for local East, down 6% local West and flat transcon. That's all Hub segment.

Right.

And our next question comes from Tom Wadewitz from UBS.

I wanted to ask you a bit about your position in drayage right now. I think there've been over the last couple of years some changes in strategy in terms of how much you want to do in-house dray and how much you want to do with outside providers. Just I guess a sense of where you're at right now and how you think that positions you in terms of driver challenges, maybe tightness in truck. I know it's a little different market than [broad] intercity truckload, but just wonder if you could give us some thoughts on dray and whether that's point of some potential pressure as the driver market seems pretty tight?

There's still a question the driver market is tight right now. We're actually down at around 55% as far as Hub trucking handling of Hub business. And again, that's about where we anticipated that we would be. We're not so much optimizing for Hub trucking, but we're optimizing for our clients. And often that just entails outsourcing the origin or destination drayage. So our turnover rate is slightly higher than it was. In fact significantly higher, I would actually suggest, than what it had been versus last year. It's above 50% at this point in time. So that's probably as high as it's been in quite some time. So to your point, there's no question that it's a very competitive market for truck drivers.

But the beautiful thing about Estenson acquisition is we'll be able to share drivers with Estenson, and so that will help from an efficiency standpoint for us. And they bring on over, let's see, about 1,273 drivers they have right now.

And the turnover is very low. Of course, because in dedicated, you're able to keep them at a very low basis.

So you can actually use some of the dedicated drivers for dray moves?

We do think if, in fact, it is their client is one that ebbs and flows, we would be able to utilize those drivers when, in fact, the customer has a use for them.

Okay, great.

I would suggest it's very early. That's an assumption we're making. We've looked at the data. We believe it's true. We don't know how big of an impact that will have as of yet. But we do think that there's definitely potential there.

And we think their recruiting efforts and recruiting programs will help us as well in their on-boarding for their drivers.

Right. Sure, that's some leveraging of their capability. That makes a lot of sense.

Yes.

That's right.

What about, I think last year, you had a lot of optimism that, I think, was realized in terms of growth with the e-commerce customers. And I'm just wondering how you're thinking about the relationship with customers that are significant in e-commerce and that could -- the volumes in peak season would be meaningful. Is that -- do you expect to gain some more share and have a lot of business there? And -- or how do you think about that, if that would affect your business in maybe fourth quarter?

This is Don. We've really targeted the e-commerce space with our existing customers that have e-commerce arms along with Amazon. But at the end of the day, we think we're set up very well for the remainder of the year with e-commerce.

So obviously, it's a portion that a lot of our current brick-and-mortar clients have, e-commerce subsidiaries, if you will, for lack of a better term, more focus. And so we see a lot of opportunity there as well as just the e-commerce players.

And that's offering our suite of services to them.

So I mean if you parsed it out, would you say that across the year, I mean, obviously, in peak, you're going to have more leverage then. But are they becoming a bigger percent of the total mix you have at Hub with just e-commerce activity?

We haven't broken it out by customer that has done e-commerce, meaning the big box retailers that are going that way. But I would say, overall, if you took it apart, it would certainly be a higher percentage.

Yes.

Right, okay. And maybe 1 last one, Terri, the change in the guidance, what would the -- how much are the one-time items that are affecting the new guidance, the $1.45 to $1.55. If you added back the new -- I guess, like the charge in second quarter and other one-off items, and I'm not saying the accretion from Estenson, but just to understand what's different between the new guidance versus the old?

right. To answer your question there, the one-time cost of $0.07 this quarter would not have been baked in our guidance before, and now they are so that's worth $0.07. And then in order of magnitude, for the Hub segment, we reduced our guidance for logistics the most to factor in the startup cost for new customer on-boardings. We reduced our guidance for intermodal because of the pricing environment and then, third, we reduced our guidance for truck brokerage slightly because of the tight capacity and higher purchase transportation costs. And then in addition to that for Mode, we also reduced guidance for them because of the same factors.

Okay, so you'd add back the $0.07, but then beyond that, there are some pressures in the business that are factored into your guidance?

Exactly.

And our next question comes from Todd Fowler from KeyBanc Capital Markets.

Just a follow-up on the last comment about the change in the intermodal guidance. The pricing, commentary, Terri, that's the result of the bids and customer pricing? Or is that purchase transportation and rail rates that was the reduction in the second half?

It was the pricing environment being a little worse than we anticipated. And the other factor in there is we factored in some extra cost for network imbalances, but the majority of it was pricing.

Okay, got it. And then, Dave, to your comments earlier in the call about the pricing actions that you're targeting or that you're thinking about, if I heard the comments right, it sounds like you're expecting pricing to be flat in the back half of the year on the intermodal side. Would the pricing actions be in addition to that if you're successful in going out and maybe getting some peak season surcharges or something along those lines? Would that be incremental to flat pricing or are you assuming within your guidance that you're going to be successful in getting some additional pricing given the tightness of the market?

We do feel as though we'll get some pricing just because of the current tightness in the market. And that will contribute towards being slightly up. If, in fact, we aren't able to get the pricing, then we'll be in the flattish range.

That's right.

Okay, that helps. And then just on the volume expectation, the 2% to 4%, you've got more difficult comparisons in the back half of the year and volumes were a little bit below that during the first half. The volume expectation, is that based on what you've seen within the bids that you've been awarded? Or is that more an assumption that we're going to see to -- I know what it had been based on, just the last week here in July, they're up 5. But how much of that is predicated on a strong peak versus normal bid awards? I'm just trying to get a sense of how much a variability there could be from an underlying economic factor within the volume -- on the volume side?

Yes, we are going with what we think what we won in the bid award and the (inaudible). So that's one. And then, two, is we baked in a normal peak season as we've seen in the last couple of years.

And that is consolidated big-box volume growth, Todd, which would include both Hub and Mode together.

That's correct.

Okay. And Don, just out of curiosity, at this point, when you talk about the traditional peak season, when are you really looking for that to kick off at this point? Where would you kind of gauge -- is that something at this point that should be September or is it even later than that at this point?

No, we see that inventories levels have dropped a little bit. Last year, we started if you think about it, mid-October in peak. We'll start earlier this year. We think we'll start in September. Our customers are indicating that, our retail customers.

Okay, good. That helps. And then, just lastly, just a detailed question. Terri, what is the interest expense run rate going to be on a quarterly basis with the borrowings for Estenson at this point?

Other expense consisted primarily of interest, and that was about $850,000 in the second quarter. And so we estimate, for the rest of the year, other expense will be about $2.5 million a quarter..

$2.5 million a quarter.

Yes. We assumed $114 million of debt with the Estenson deal, borrowed $55 million on our revolver, and we financed about $14 million worth of containers in the quarter.

And our next question comes from Brian Ossenbeck from JPMorgan.

So I just had a quick follow-up on the peak. You mentioned that you're basically expecting to follow the last couple of peak seasons. It seems like each one gets a little bit different and perhaps there's multiple smaller peaks. So maybe can you just talk about how you think that's evolving over the next couple of years and how you see the intermodal service offering changing with that? And if that's factored into your additional exposure to e-commerce, and is intermodal really the service you expect to grow the most with peak? Or is -- do you think it's going to be more multimodal in the next several years?

I would suggest to you that with the advent of e-commerce and not just with the e-retailers, but also the brick-and-mortar that also are involved in e-commerce as a way to get to their clients, that we're seeing an extended peak. Traditionally, peak by Thanksgiving was done. It's now extending into mid-December, and in some cases, because of returns, it actually goes into mid-January. We see some spikes in there. So I think that it does change it. It's lengthened the peak. We think our brick-and-mortar retail clients that are getting to their stores that those have been relatively unchanged. You'll sometimes see them move up their scheduling to get the inventory in if, in fact, they think that there could be any labor issues at the ports. But for the most part, they're very consistent. And we're, in fact, in the planning process right now with all of our retail clients as far as when they see the heaviest shipping will be to make sure that we can stagger ourselves to be able to cover them with the capacity that they require.

And Brian, this is Don. The other thing is that they're looking for more services. So even though peak may start with, say, in September, it's also more intense. And to David's point, it could last into January with returns. So what we're seeing is customers want more products and services from us, and then we have to commit on the capacity that we can deliver to them.

Right, okay. That's helpful. I guess that kind of gets to the follow-up question -- things are getting more intense from a customer expectation standpoint and your customers' customers, so we tend to think of that as shorter length of haul, more frequent delivery, smaller lot sizes, perhaps. So yes, just some thoughts on how intermodal as kind of the core of the business would be able to participate in that? Certainly lanes are going to stay open and it will be intermodal dominant for the most part, the longer length of haul, but how do you address that pressure when you look at the next several years if you think it's a pressure at all?

I'll be honest. I really don't believe it's a pressure. What happens more and more is that the fulfillment centers get very close to the ultimate customer. And there's a lot of expense in delivering directly to the home. And so the e-retailers and retailers -- as retailers, the brick-and-mortar have historically done, used intermodal to get to that long haul because of the economics and the service consistency. So instead of going into a distribution center now, they might deliver to stores or go into a fulfillment center that's delivering direct to the customer, very costly work and they save on that overall supply chain, it's on the long length of haul that intermodal can supply.

Okay, got it. So just a couple of follow-up housekeeping CapEx, obviously you started the year at a different spot. The market has changed, and you've made an acquisition. So it's come down a little bit here. But if you think of kind of normal maintenance level, where do you think that would trend? And how do you expect the early read into 2018? And what do you think would be incremental for Estenson and replacements and also some capacity expansion if you've gotten that far?

Yes. Our biggest spend for CapEx is containers and tractors, and now trailers, I should say, with Estenson. And in terms of a maintenance CapEx, it depends on the number of containers that we purchase next year. We have deferred about 1,900 containers from this year's order till next year, so that will certainly be in our spend for next year. Those run about a little over 10,000 a piece. And then, we'll have the tractors for the Hub and for Estenson. That number is hard to predict at this time. But for Estenson alone, in the second half, it's about $16 million for tractors and trailers. It would be at least double that next year and probably a little higher. So may be more like $40 million next year for Estenson. And we're going to continue to spend on IT. It's an investment we want to make. And so it will probably be similar to this year.

Yes.

Okay. And then last quick one, just you mentioned retail on consumer products off to a good start here. Autoexposure, just curious if you're seeing any noticeable slowdown as we get into a softer patch for production in the inventory and auto parts supply chain that's associated with that?

We do have obviously several large automotive companies that we do deal with primarily on the aftermarket parts. So we're probably not a good indicator for that. From what I've read, they are expecting for new car purchases to be down somewhat versus what have been, of course, some record years, but we had not seen anything as we are not really involved a lot in going to the production facility themselves.

Yes.

And our next question comes from [Griffin Amdur] from Susquehanna International Group.

Bascome Majors here from Susquehanna. I want to follow-up on your comment about intermodal pricing and your enthusiasm that you'll be able to perhaps ratchet that up a little bit between now and the peak season. Is this a scenario where you're taking contracts and willing to try to bid them up out of cycle? Or is this more spot messages? Can you just give us a little bit more on perhaps kind of what you're going to do to achieve this outcome so we can get a better understanding of how the market's working?

Yes. This is Don. The bid process takes longer than it has in the past, I think as our customers go through 3 rounds of pricing. So obviously, if we make commitments to our customers, we are going to stand behind those. But there's opportunities outside those bids that we have the opportunity to price up. Maybe because, A, the marketplace has changed a bit. B, our network needs may have changed and shifted over that period of time. But we do see an opportunity to go in and price up outside of our agreements that we've made to our customers.

So, I mean, would you call that spot business or maybe you think you can capture some new business at better pricing? I'm just trying to understand...

I would say it's capturing new business at better pricing.

Okay. Are you seeing -- is this just a response to some other kind of hopeful early cycle tightness that we're seeing in pockets of the truckload market? Are you seeing some of your intermodal competitors starting to do that? I guess what I'm trying to dig at is, is this Hub looking to take a lead role as pricer in intermodal? Or you're just kind of reflecting something you're seeing elsewhere in the marketplace and...

We're reflecting what we're seeing in the marketplace, tightness in certain markets.

Okay.

We're reacting to that.

Okay. And maybe one for Terri. And just wanted to dig in a little more to the CapEx. You said you're adding about $15 million to the budget for this year from the Estenson deal. But the 2017 guidance was, I think, down about $5 million, which would imply maybe a $20 million cut to pre-Estenson. And that number that you had out in April was already down $50 million or so from January. So you've seen a pretty dramatic decline in the expected envelope that you guys are going to spend. Are my numbers right? I just was trying to understand what kind of came out of the core budget between April and now and maybe what that means as we look forward as far as where you're investing or what you're investing in?

Yes, Bascome, your numbers are right on. And the biggest thing that is out of our numbers is adding on to our new corporate headquarters. That's been postponed for a while.

Okay. Is that a something you have visibility into or is that kind of indefinite at this point?

At this point, it's indefinite.

Okay. Lastly, just one on the truck brokerage business. Can you -- exiting this bid season, how much of your 2017 revenues are on what you would call committed rate business at this point? How much of that book is committed? How much is spottish?

70% is contract and 30% is spot.

Okay. And on truck brokerage, specifically on your contractual rate business, what sort of pricing outcomes did you achieve this bid season? I'm just trying to get a sense of where that came out versus the market.

Yes, we had to be price competitive of course. And we were, and we were successful in number of bids. And what we saw in the tightness of market is our purchase transportation changed a bit. And then the other part of our truck brokerage, which is a big part of our growth, is the project work that we do for our clients, which was down in the second quarter. So as things get tight, we think in our transactional side, we're positioned well. And hopefully our customers will buy more of our project work that we have for them.

Okay -- go ahead.

Our margins on our spot business were down compared to last year, but we got more of it to compensate for the yield thing.

Right.

Okay, so the committed pricing, I mean, are you willing to say how much the committed pricing or contractual is down this bid season like-for-like?

It was about flat.

Okay. And lastly, we haven't had this conversation on the intermodal business just then, and you suggested that you're going to stand by your annual commitments. I know truck brokerage can be a little bit squishier. And you've got certainly more volatile cost of capacity there...

Right.

Are you willing, if you start to see large players bid up contractual rates and brokerage, call it midcycle, out of cycle, are you willing to follow that? Just kind of, what's your sense in how sticky are the rates you committed to over the last 3, 4 months there?

Well, on the intermodal side, they're very sticky, right, because we've made commitments to major customers. So they're sticky. It's the new opportunities that will come our way from a tightness market that we will price up.

I'm sorry, I was specifically asking about the truck brokerage side of it there. In brokerage, are you willing to maybe be more aggressive out of cycle if the cost of capacity continues to move higher?

No. We will price that up to support the upward pressure on price.

And our next call comes from Jason Seidl from Cowen.

A couple of quick questions. Just a little housekeeping stuff so I make sure we're on the same page. You guys have a total of about $0.10 in one-time items for the first half of the year, correct, when I'm looking at that number?

Correct. $0.07 in Q2 and $0.03 in Q1, yes.

Okay, perfect. And I'm sorry if I missed this, did -- Terri, did you give the depreciation number for the year?

No, I didn't. You mean the depreciation below the gross margin line? I did not. I can tell you that will probably range between $13 million and $14 million.

Okay, fantastic. And when I think about the potential switching from CSX to Norfolk, you guys said you saw it in Mode, but not in the Hub segment. Is that where you would expect it to see going forward? Or do you expect it potentially to come over in the Hub segment if the disruptions continue?

If, in fact, disruptions continue, I would suggest that we would see conversion. As I said, we deal with a lot of large customers, we haven't seen the conversion as of yet, but they are definitely very service sensitive on these shorter lengths of haul. And we would definitely see conversion if, in fact, the service deteriorates on the other carrier.

Especially as NS is keeping their service levels where they're at.

Yes, they're exceptional.

Yes, I think you guys said that several times, that's good to hear. On Estenson, are you anticipating anymore charges for the third quarter or [overall] the one-time severance cost all done behind us?

We are not anticipating anymore for Estenson in the third quarter.

And our next question comes from Brandon Oglenski from Barclays.

It's been a long call, so I just want to ask a bigger picture issue for you, David. And I ask this [precisely] but industrial production is up this year, and there's a lot of items in your guidance, so I understand it. But earnings are going to be down, let's call it 30%. I mean, from a shareholder perspective, what can you do to drive incremental value in your core intermodal business? It feels like that's been slipping for some time. I know we're all waiting for better pricing outcomes there. But is there something that you can control on the cost side? Or maybe the customer service element that can help drive incremental value to help maybe right the ship in that regard?

That is a very good question. And certainly from the cost side, that's partially why we took the several million dollars in 1x in the second quarter as we did reduce headcount by about 75 people. As the business has evolved from both a sales and a service perspective, we realigned the organization to meet the current realities. We are very focused also, and I think that's a very good point, on the customer service. We won Walmart's Carrier of the Year, Home Depot's Carrier of the Year, Kimberly-Clarks' Carrier of the Year. I think all those are indicative of the service. And it does give us a certain advantage about winning a bid. Is it 100 basis points in margin? Certainly not. But it does give us an advantage. I do think that we will come to a point, and I think it's very soon that the pricing is going to become more normalized. Right now, we're at a very significant spread, a longer haul business on intermodal versus over the road. That is going to shrink at some point. Is that tomorrow? Is that this week? I would love to say yes. But -- and I think that if price is really the primary driver because we have to compete in the marketplace, yet at the same time, we certainly are very focused on expanding our margins so that we are bringing more value to our shareholders. But you have to be in the game from a price perspective in order to be competitive.

Well, I guess from the outside looking in, should investors be fully aware that you guys are focused on this? Because you're doing the Estenson integration. So have you dedicated the right amount of resources and thought to how are we going to improve these outcomes incrementally from here?

I don't think there's a day go by -- that goes by that we're not, and whether it's looking at margin by account and how to enhance it, how to take out cost within accessorials, within empty miles, or drayage, we have a lot of resources that are focusing everyday on not just reducing headcount cost, but reducing our internal costs and, at the same point in time, looking at how to expand our share with business that, in fact, makes sense to our network and, thereby, contributes well to our overall gross margin. So are there additional things we can do? We think we can. We think that through systems investments, which we're doing right now, which will enhance our visibility, which will also give our people more information that they can deal with while they're making decisions. We think there's certain optimization tools from pricing that we are using currently that we think we can expand to enhance how we're pricing in the marketplace. So there are things. And to your point, maybe it's something we need to more effectively communicate as far as what we're actually doing internally to try and make sure that the margins we're seeing and the earnings per share is what our shareholders would expect.

And our next question comes from Matt Young from MorningStar.

Just one quick follow-up on the CapEx. I think when you announced the deal, you mentioned that Estenson's CapEx run rate would include relatively significant growth investment over the next few years. I'm guessing that's as you ramp cross-selling and so forth. What would you say a normal steady-state looks like for them once cross-selling subsides longer-term, say, 3 years down the road?

What I can tell you, for 2016, their CapEx was about $29 million. And we'll build on that, as you said, Matt. And you're right, we're planning on constant cross synergies. So up until 5 years from now and we projected about $100 million of cross-selling synergies out 5 years. And we think there's even more opportunity than that. So in that fifth year, we have about $92 million of CapEx for Estenson, so we don't really see that slowing down for a while.

Right, it doesn't.

We intend to make those investments.

This is -- we believe this is a platform that we can build dramatically on for the foreseeable future.

So you said $92 million CapEx in the fifth year, is that, right?

Yes.

Okay. That was what I was getting at. I didn't know if it would fall back down to 50, in the 50 or something like that?

No. We are going to grow it.

Got it. And then just one quick one here. In terms of the tighter truckload capacity in the quarter, any thoughts on whether or not ELD adoption and related productivity losses among the small carrier base might be behind some of that? Or would you say that it was more seasonal like you talked about before and some of the other transports have discussed?

I think it was seasonality and industrial production being up, so thereby demand being up. I don't think ELDs at this point have any impact on our customers' decisions.

I agree.

If, in fact, they're enacted and if, in fact, they're enforced, I do think it will have an impact. We just don't know what the -- how to quantify that. Is that 2% or 7% or some place in-between?

Yes, it does seem early. Yes, I just wanted to see if you have any thoughts on that, that's what I -- I'd agree with that.

Yes. I think we had originally thought that they'll -- actually clients it would start to impact them earlier in the beginning of this year when we were coming into it, but it certainly is not the case.

And we do have Ben Hartford from Baird back on with a question.

Sorry, I meant to drop out since it's been ,long but since I'm in. I'll ask Terri, when you look at that $93 million to $94 million in quarterly costs in the back half of the year, what's a credible opportunity to be able to reduce that in 2018 as you get Estenson in the fold and you kind of take a look at what you have. You guys have always been good at cost control. Is there a number that you're willing to commit to or give us an idea how to think about that on a quality basis in 2018?

Yes, with Estenson, Ben, really, it's all about the cross-selling synergies more than any cost synergy. We have some cost synergies that we make in purchased transportation as a result of buying better since we're bigger combined. But below the gross margin line, there really are't a lot there.

Okay, so that's an embedded cost going forward?

Yes.

And as we have no more questions. That concludes today's call.

Well, just to wrap it up, thank you, everyone, for participating in the call today. As always, if there are additional questions, please feel free to contact Terri, Don or myself. And that's the end.