Hub Group Inc (HUBG) 2018 Q1 法說會逐字稿

Hello, and welcome to the Hub Group First Quarter 2018 earnings conference call. Dave Yeager, Hub's CEO, Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, Hub's CFO are joining me on the call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow up question. 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 First Quarter Earnings Call.

As we discussed in our fourth quarter earnings release, Hub Group had a very strong finish to 2017. That momentum continued into the first quarter as consolidated revenue grew 23%. Revenue for the Hub segment grew 23% and 19% for the Mode segment.

For much of the quarter, both Intermodal and truck capacity were tight due to strong demand throughout the country. Many markets that traditionally have surplus capacity in the first quarter, had capacity deficits as demand overwhelmed supply.

Intermodal volume for Hub Group was up 6%, which is in line with the overall industry. Thus far in April, demand continues to be exceedingly strong with the truckload industry running at full capacity, backed by a strong economy.

80% of Hub's business is either bid or repriced annually. We have completed the price changes on roughly 1/3 of our book of business.

Price continued to strengthen throughout the quarter. Thus far, we've not found a ceiling for the increases as price inflation continues to gain momentum. To-date, our price increases are in the mid-single digits.

With that said, on the cost side, we're experiencing driver wage inflation, increased cost with our outsourced drayman and rail price increases, but we remain committed to increasing prices to our customers that will outpace our cost increases in order to secure a reasonable margin that would allow us to continue to invest in the Intermodal product.

We're also seeing higher operational costs as we continue to see substandard rail service, especially in our Eastern network. These challenges not only harm Intermodal's competitive position versus truck, but also add unnecessary cost to our operation and reduce our fleet utilization. On a positive note, since mid-March, we have experienced gradual on-time improvement with our Western Rail partner. We believe that service will continue to improve in the West for the remainder of the year. In the East, service problems appear to have bottomed out, and we believe that improvements will be seen in the last half of the year. We continue to effectively work with our clients to minimize the impact of these rail service issues by establishing longer transits as benchmarks, and communicating and intervening when loads are delayed.

Turning to our Dedicated acquisition, our pipeline for the dedicated opportunities remained robust. Although, we just finished the first quarter, the awards we've received exceeded our revenue and margin projections for the year. So from our vantage point, the acquisition and implementation has been successful and our efforts to cross sell dedicated services to our clients continues to exceed our expectations.

Lastly, as we've demonstrated, Hub is committed to expanding our current service offerings, while entering into new verticals through acquisition.

We have several strategic acquisition opportunities in the pipeline that would add value to the Hub network. As always, we remain focused on acquisitions that have a strong management team, are culturally aligned with Hub, are not fixer-uppers and are immediately accretive.

And with that, I'll turn the call over to Don to go into more depth about the specifics of our business lines.

Thank you, Dave. Our results clearly reflect that our strategy to become a leading multi-modal solutions provider continues to gain traction. Our unwavering commitment to service, execution, along with standing by our commitments during capacity constrained peak has enabled us to provide our customers multiple options to support their network.

Over the years, we have improved our cross-selling capabilities. And as Dave mentioned, with the addition of Dedicated, our sales organization has many tools available to support our customers.

With that said, all of our service lines grew during the quarter. With bids being approximately 1/3 complete, we are seeing increased share, strong demand and improved price.

The commitments we made to our customers during peak are now bearing fruit in this year's awards.

During the quarter, we further aligned our organization, making internal efficiencies to better support our customers.

These changes will continue to bring value and position us for sustainable growth opportunities. We also been improving the overall performance of our network by deploying our multi-modal pricing and market strategy to our bids. Although, this initiative is in the early stages, we are seeing an improvement in balance and yield with targeted customers and markets.

We believe that our commitment to stay focused on further implementing our multi-modal strategy, coupled with the changing marketplace puts us in a very favorable position.

Truck brokerage grew revenue by 13% in the quarter in a tight capacity market. Our focus remains on targeting multi-modal solutions accounts. In doing so, we can offer our clients a diversified product offering from transactional and spot capabilities to project management and long-term committed capacity. During the quarter, we were able to secure new accounts, provide existing customers project management support, while at the same time growing our transactional business. We believe we will continue to see a challenging marketplace for the remainder of the year. However, we are well-positioned for growth by providing excellent service and integrated value-added services.

Logistics topline growth was 16% as we've benefited from the many 2017 on-boardings. Despite the strong topline growth, we experienced margin compression due to a tight capacity market and honoring our contractual obligations. Mix was also a factor. During the quarter, we were notified that we will lose 4 contracts. 2, due to in-sourcing of the logistics functions, 1 to an acquisition and one as a result of a bankruptcy filing. Due to these changes, we will see headwinds for most of the year, as we look to replace the loss of these accounts by focusing on yield, process improvement and cost reductions.

Our pipeline continues to be strong, and we expect to establish new on-boardings in the second half of the year.

Our logistics solution is positioned very well in the marketplace, and we will continue to focus on delivering solutions that drive cost improvements for both new and existing customers.

Mode continued strong topline momentum in the first quarter with growth of 19%.

Once again, we experienced revenue growth across all service lines led by logistics, which was up 38% and truckload, which was up 29%.

Our network worked diligently to support our clients in a very challenging, capacity-constrained market. Mode continues to expand its service line offerings to support its customers, while providing a leading-edge technology platform and experience and the tenure of its network of agents.

Now I'll turn it over to Terri to provide additional insights.

Thanks, Don, and hello, everyone. I'd like to highlight 3 points: First, we are excited that operating income grew 35% compared to last year; second, as we expected, Intermodal pricing accelerated as the quarter progressed; and third, Hub Group Dedicated won over $70 million of new business.

Now let's take a more in-depth look at our performance in the first quarter.

Hub Group's first quarter revenue increased 23% to $1.1 billion. Hub Group's diluted earnings per share was $0.48. This is compared to an adjusted first quarter 2017 earnings per share of $0.40, that excludes one-time costs and uses a 25% effective tax rate. That's an impressive 20% increase.

Now let's talk about details for the quarter starting with the financial performance of the Hub segment. The Hub segment generated revenue of $832 million, which is a 23% increase compared to last year. This increase came from combined topline growth of 14% in Intermodal, truck brokerage and logistics, and $60.4 million of revenue from Hub Group Dedicated, which we purchased on July 1, 2017.

Taking a closer look at our business lines, Intermodal revenue was up 14% due to a 6% increase in loads and an increase in fuel revenue and freight rates. Mix was also favorable. Transcon volume was up 13%, Local West volume was up 4% and Local East volume was up 4%.

Truck brokerage revenue was up 13%; fuel price and mix combined were up 14% and loads were down 1%.

Logistics revenue increased 16%, due to new customers on-boarded last year and an increase in existing business.

Hub's gross margin increased by $18.6 million or 26%, due to the addition of Hub Group Dedicated as well as growth in Intermodal and truck brokerage gross margin, partially offset by a decline in logistics margin.

Gross margin as a percentage of sales was 10.9% or 30 basis points higher than last year.

Intermodal gross margin increased due to price increases, higher volume and better network balance, which resulted in improved loaded miles. Partially offsetting the margin growth, were rail cost increases and drayage cost increases for driver pay and third-party carriers. All of these factors combined, drove a 20 basis point improvement in Intermodal gross margin as a percentage of sales.

Truck brokerage gross margin increased primarily because of the more spot business. Spot business was about 22% of total loads this year compared to 12% last year in the first quarter. Truck brokerage gross margin as a percentage of sales increased 30 basis points, because of the increase in this transactional business.

Logistics gross margin declined about 17%, due to changes in customer mix, higher purchased transportation costs and headwinds from the Toys "R" Us liquidation. These factors contributed to a 280 basis point decline in logistics gross margin as a percentage of sales.

Cost and expenses increased $14 million to $74.2 million in the first quarter. The primary reason for the increase is the addition of Hub Dedicated's costs and expenses of $10.7 million and higher bonus and commission expense, partially offset by a decrease in due diligence and severance cost.

Hub Group Dedicated startup costs associated with new business were approximately $500,000, and relate to travel, recruiting, sign-on bonuses, driver training and orientation, and additional costs for rental trucks and temporary drivers, while we ramp up.

Finally, operating margin for the Hub segment was 1.9%.

Now I'll discuss results for our Mode segment.

In the first quarter, Mode's revenue was $288 million, which was up 19% from last year, due to an increase in revenue in all 3 service lines. Revenue breaks down as $130 million in Intermodal, which was up 6%, $101 million in truck brokerage which was up 29% and $57 million in logistics, which was up 38%.

Mode's gross margin increased $2.6 million year-over-year due to an increase in logistics and truck brokerage margins, partially offset by a slight decline in Intermodal gross margin.

Gross margin as a percentage of sales was 11.3% compared to 12.3% last year, due mostly to a 140 basis point decline in truck brokerage yields, resulting from higher purchased transportation costs and an 80 basis point decline in Intermodal yields.

Mode's costs and expenses were up $1.2 million compared to last year, due to higher agency commission.

Operating margin for Mode increased to 2.4% compared to 2.3% last year.

Turning to headcount for Hub Group. We had 2,009 employees, excluding drivers at the end of the quarter. That's down 21 people compared to the end of the year.

Turning now to the balance sheet and our cash. We ended the quarter with $17.9 million in cash and $284 million in debt, including capitalized leases and $30 million of borrowings on the revolver. Our leverage ratio was 1.5:1.

We spent $22.2 million on capital expenditures this quarter, mostly related to tractors, containers, technology and trailers.

Now I'll discuss what we expect for 2018. We believe that our diluted earnings per share will range from $2.34 to $2.44.

We estimate high single-digit to low double-digit revenue growth for the year. By service line at the Hub segment, we expect 7% to 11% revenue growth in Intermodal, 2% to 6% growth in truck brokerage and slight growth in logistics revenue. We project Dedicated sales for the year will be between $275 million and $285 million. We project startup costs for new Dedicated business will range from $1.5 million to $2 million in 2018.

We expect consolidated gross margin as a percentage of sales to range from 11.4% to 11.9% for the full year. We estimate that gross margin as a percentage of sales will increase as the year progresses, with the fourth quarter being the highest.

We revised estimated gross margin as a percentage of sales downward for several reasons. We believe logistics margin will be lower than we planned, because of changes in customer mix, including the loss of Toys "R" Us business and 3 other customers we will be losing. Mode yields are also expected to be about 50 basis points lower than we originally projected. Finally, startup costs associated with significant new business will pressure Dedicated margins this year.

We believe that our quarterly costs and expenses will range from $104 million to $109 million, and will be highest in the fourth quarter.

We estimate that operating income will increase between 17% and 23% compared to our reported operating income of $96.6 million in 2017.

We project that our effective income tax rate will be about 25%.

Capital expenditures are expected to range from $190 million to $210 million in 2018. We will execute on our strategy, investing approximately $160 million to $170 million for equipment and between $30 million and $40 million for technology. Included in this equipment spend is between $85 million and $95 million for Hub Group Dedicated, related to both customer contract renewals and new customer wins.

That wraps up the financials. Dave, over to you for closing remarks.

Great. Thank you, Terri. With that why don't we just open up the phone to your questions?

(Operator Instructions) We have the first question in the queue, comes from Scott Group from Wolfe Research.

So wanted to ask, so first quarter, obviously came in a lot better than you guys were expecting, or certainly a lot more than $0.04 better than you were expecting. But the guidance only goes up $0.04. So what -- I guess why was the first quarter so much better? And why are you sort of implying that the rest of the year is worse than you originally thought?

Scott, I'll take part of that. Back when we gave our guidance in February, we didn't foresee about the Toys "R" Us liquidation or losing 3 other logistics customers. And as I mentioned in my prepared remarks, logistics gross margin was down about 17% in the first quarter. We do expect our logistics margins to be down between 3% and 6% for the whole year, meaning that on a combined basis, gross margin will be up in Q2, Q3 and Q4. We feel confident about that. But on an overall basis, when we look at what we originally provided guidance on back in February, specifically for logistics versus where we are now with losing 4 customers essentially, that was an impact of about $0.10.

Yes, Scott, this is Dave. On the positive side, I would say that, first and foremost, I think we're comfortable with the higher end of the range. There's no question there is some headwind with the logistics. But if you look at the Intermodal business at this point in time, we have not -- as I indicated in my formal remarks, really found a ceiling on price increases. We're 1/3 of the way through. We've been very focused on increasing our overall pricing to our clients, ahead of what we feel our costs will be. And so, I think that we'll be able to give you another update after the second quarter when we've got over half of the price increases accomplished. But for right now, we're looking at -- mid-single digits that are continuing to rise from our perspective due to demand.

Yes. With 2/3 of our bids done by the end of the second quarter, we certainly have visibility. But the push has been the price. We've been doing that and also the demand has been strong on the Intermodal piece. The headwinds are simply on the logistics side for the first 6 months of this year.

Did you say how much revenue you're losing on the logistics side?

It's about $130 million annually.

That starts going forward?

Yes.

That already started in the second quarter?

Yes.

It started with obviously Toys "R" Us with that bankruptcy.

Right and the rest comes later on.

And maybe talking just about rail service. Is there any way to think about the operating income impact it may have had in the quarter? And what gives you the confidence in Norfolk starting to get better the second half of the year? And then, just big picture, we've got a really tight truck market, rising truck rates, rising fuel, but bad rail service. What's the customer telling you about Intermodal? Do they want to be here despite the service? Or they want to be here, but they can't be here because of the service? What's the customers say?

I'll answer that last part. What the customers saying right now. We work with these customers to set the proper level of expectations. In this case, if it's going to be 0.5 day longer from Chicago to Harrisburg, we're right upfront with them and we intervene when there's issues. And so, I think that our service versus our on-time performance versus the current service is actually pretty good. We're able to deal with that, because we're dealing with realistic benchmarks. I think that particularly in this environment, with a tight truck environment, that for the customers, really -- there is a place to go, but it's much, much more expensive and more costly. As far as why do we think Norfolk Southern will improve in the second half, we obviously, we talked to the people on an ongoing basis. They're doing an awful lot to change the service. But as you know, Scott, there's not just a light switch. You can add locomotives, you'll add crews, you add chassis. But it takes time. It's gradual, that's why we looking towards the second half of the year. But we're quite confident that it's going to improve during that period.

And how that impacted the numbers, I'll take that part of the question. Our utilization was about 0.4 day worse this quarter than it was in the first quarter of last year. So for every day of utilization, that's about $6 million annually. And then the other thing that hurts us is, when rail service is unpredictable or inconsistent. And that makes it more difficult for us to set appointments for delivery for example, with our customers, and can make the load planning and improving our loaded miles more difficult.

Yes. To Terri's point here, your customer how the customer saying, that's exactly it. It's consistency that they want so they can plan. So we work with our clients to say, if the transit's going to change, we have to tell you that upfront so you can adjust your TMS accordingly. So consistency has to be there.

Okay, and then just one last question. Why do you think transcon's so strong, probably a little bit of a different mix than what others have said? And then can you give me an update on April Intermodal volume?

This is Don. Transcon is strong. We're fortunate to be growing that the last 6 months or so, with some retail accounts, strong retail accounts. And with the pricing moving up, we're continuing to keep that transcon business and grow it, actually. We have grown every region especially in the East also, 4% for the quarter.

And then as far as April, we're up about 5%.

Yes. And also contributing to that transcon volume was the new business that we landed this last year. And then growth related to delivering on our commitments during peak season. And finally we believe part of the growth was also conversion freight.

Yes, good point.

The next question in the queue comes from Ben Hartford of Baird.

Maybe Don, how confident are you that you'll be able to recoup most if not all of the revenue lost here in logistics over the next year or 2? Is that a reasonable expectation?

Yes. It's a realistic expectation to continue to grow that business. We expect though really to start on boarding new accounts in the second half of the year. But it will be a slow rise up.

Okay. But to completely fill that bucket, is it 2 years out or is it too big of a hole to really estimate at this point?

$130 million would be one year starting from the second half of this year.

Okay. Then Terri, as we think about some of the headwinds here, you talked about the gross margin relative to your initial base. But some of those fall-off start-up costs, fall-off Modes, yields probably reverse if and when gross margins normalize, the loss of business you fill that bucket, you still expand gross margins sequentially. The probability that it continues to rise in '19, I assume is high in terms of gross margin percentage? What -- is that a fair assumption as well?

Right. The start-up costs at Dedicated will abate pretty much in the fourth quarter related to the -- over $70 million annualized in new business that we're bringing on. All of that revenue will not be in this year, but it will certainly ramp up this year. And then, you're correct, as we begin to fill that, as Don, said that logistic pipeline with new business that will help. And then finally, Mode's margin was just 50 basis points lower than what we originally projected and that was primarily due to Intermodal. Mode just didn't have as much margin growth as the Hub segment did in Intermodal. That's a turnaround too when they reprice that business.

Yes and as we repriced the Intermodal, it's -- we're 1/3 of the way through on bids to the second and third quarter, those margin as we on-board, that business will increase.

And then from a high-level perspective, the mix of the businesses has changed and is changing. Gross margins are inflecting from the trough. There's, 2017, a trough -- gross margin trough in overall EBIT margins. Hopefully, fingers crossed, investors will have their opinion on when the cycle ends. But as you think about the profile of this business with Dedicated growing with some of the acquisitions in the pipeline, with the focus on getting to reinvestable levels, sustainably on the Intermodal side, what are reasonable kind of peak gross margin and EBIT margin targets in the business as it's presently constructed? You don't need to give a specific number, if you don't want to. But just trying to get a sense for what is a reasonable ceiling on both fronts as presently constructed?

Yes. We love 4% operating margins, that's where we used to be. And for the Hub segment, it was 1.9% this quarter. Since the Mode segment was 2.4%, we think we can get back to those levels with a couple of strong pricing cycles in Intermodal. As Dave mentioned, we haven't hit the price ceiling yet. So we hope to get part of the way there this year. And then, further along, in 2019. And this year, if you remember, from our discussion back in February, we have headwinds for more bonus this year, a lot more bonus than we had last year. That certainly drives operating margin down, but we won't have that headwind next year. It will be in the numbers, already. So to answer your question specifically, 4% is the ideal operating margin we'd hope to get to in a couple of years, maybe by the end of next year. And then, on the gross margin front, because Dedicated is a higher gross margin business than our other business lines and truck brokerage is second biggest and we've had significant growth in our truck brokerage business over the last couple of years, we're confident that we'll be able to grow that as well. And maybe gross margins get back to closer to the 13% range.

In the next -- right, we did this bid cycle and the next year's bid cycle.

Right. But we're being very, very focused on being opportunistic here on increasing prices. We're very focused within the spot market with our truck brokerage because it's our sweet spot right now. And so, again, we're not going to lose that focus throughout the year. I think the entire market is looking at what was an abysmal late 2016 and 2017. I think everybody's looking at earning our cost of capital. And so that's going to be our focus and it does -- as I said -- it does appear as though that's the industries focus as well.

And the acquisitions that we're looking at would improve our operating margin and our gross margins as well.

Right, yes.

The next question in the queue comes from Justin Long from Stephens.

So just wanted to clarify first on the guidance Terri. I think you said the impact from the lost logistics customers was $0.10. So is the right way to think about it is that the kind of fundamental outlook for the business actually improved by about $0.14, if you strip out those losses?

Yes. Exactly, right.

Okay. And thinking about the cadence of earnings over the remainder of the year. I think last quarter you gave a little bit of guidance for the first quarter. Could you help us think about the ramp in 2Q in the back half or at least what's baked into the guidance?

Yes. Well, I'll talk to operating income perhaps and how that trends. Maybe that's the easiest. So operating income on an adjusted basis was up the same percent as our adjusted EPS, when you normalize for taxes -- at a 25% effective tax rate and add back the one-time costs. If you look at Q2, operating income could be up a similar amount, maybe a little bit less. And then in Q3, operating income growth ramps up more than Q1 and Q2, and this is all on a consolidated basis. And then, because we have such a tough comp in the fourth quarter, maybe operating income is about flat in the fourth quarter.

Okay, that's very helpful. And going back to the question on service. Terri, you mentioned you saw degradation of about 0.4 year-over-year. What was that utilization number in the first quarter? And how are you expecting that utilization number to progress the rest of the year?

Yes. It was 15.8 days compared to 15.4 days last year, Justin. And we expect utilization to be about 0.2 day worse than last year overall, for the whole year. So we're assuming rail service is similar for the rest of the year to what it is now.

Yes, I do think that we are seeing some improvement in the West. And Justin, we really do expect that the NS will be improving the last half of the year. So I think that our estimates are conservative. But again, we want to establish proper expectations with our clients. And we'll change for the better, hopefully, those expectations as the year goes on.

Okay, great. And I guess lastly I wanted to ask about Intermodal pricing. You made a comment that you're not finding the ceiling yet. Could you talk about where you exited the quarter? And maybe what you're seeing in April in terms of Intermodal pricing? We talked about mid-single-digit increases on average. But I'm just curious, if you're more in that high single-digit level or maybe something better as it stands today?

It really does vary a lot by customer as far as the amount of the increase. We are in the mid-single digits right now. We're hoping that we can continue to increase that and rise. But again, a lot of is very account specific, where some may be in the 15% range and some may be in lower range. If sequentially, we have been able to consistently increase -- January is better than December, February better than January. So again, where we may end up this quarter, I'm not quite sure. It's going to be interesting, but we are pressing to find that ceiling.

Right and what we're seeing with price is also growth. So you've got twofold: One is how we're pricing to the market and how we're pricing to our network. We talked a little bit about that in my comments, as we're really looking at how we can try to reduce our empty repositioning cost and look at our network to grow. So we've seen that. And to Dave's point, closely looking at the lanes that we're bidding on and then trying to take that price up, which has been very effective so far.

Your next question in the queue comes from Tom Wadewitz from UBS.

Dave, I wanted to ask you a bit about growth in Intermodal in the cycle. And also how you think about container add. Maybe first off, could you just refresh on what you're doing with container -- your container fleet this year? Is it basically flat? Or you have some net adds this year?

We do have some net adds.

We do. We're increasing our container count by about 7%. At the end of the year, we had about 34,500 containers. We expect to have around 37,000 containers by the end of '18. This means we'll get 4,000 new containers in. And you remember that we had about 1,300 manufactured last year that we didn't bring over. We're in the process of bringing those over now and we'll be returning about 1,500 containers for a net add of 2,500. If you remember from our last call, we did up that order by about 500 containers to have those containers, that capacity, available for our customers when they need it. And so, with transits what they are, and with the demand that we've had, we thought it was prudent to increase the order by 500.

So net-net, when you consider the service, we're probably at about flat versus 2017 on the fleet.

When you consider the service.

Right. You have to consider the service.

Okay. So you -- right, so the turns being down and your effective capacity is essentially flat today or at year end, it would be flat?

I would say more by the later third quarter, it would be flat.

Okay. So I guess the -- the other question is really as shippers see such a dramatic step-up in their rates, maybe they can't do as much more on Intermodal as they would like to, rail service constraints, maybe you don't get a lot more containers in. There are probably some drayage constraints for some people. So do you think that looking back at prior cycles as this sets up to be really powerful year potentially or when you look forward a bit, and rail's made some investments, you get some more containers in that you could set up for a pretty strong conversion, your -- in 2019? Or maybe you see some of that come in later this year? Is that a reasonable way to think about the potential setup for the cycle? Then I guess, I suppose fuel is hard to predict where it's going but there has been somewhat of a move up in fuel, I suppose, the last several months. So how much you think about that?

Well, I would say first and foremost, I do think that there's no question that our customers are not particularly happy with the increase in cost that are occurring. But I think at the same point in time, if you look at the entire industry and what we've gone through the last 18 months, that it shouldn't be unexpected. We, like them, need to return our cost of capital to our shareholders. So that's first and foremost. I do think that right now, since the economy is so strong, we burned up so much inventory, that demand is going to continue to be very, very strong. I would suggest your one observation there, Tom, with potentially the drayage capacity. I think that, that could be one issue, not so much for us and some others, but for the non-asset-based guys. But I do think it's definitely -- it's a constrained market. There's not a lot of new drivers that are entering the drayage industry. And so that potentially could be a factor that would keep a damper on how much growth overall Intermodal may have. Although, we feel as though -- we like where we're positioned on that. From a fuel perspective, no question, when fuel rises, Intermodal becomes even more attractive than it is today. So it does seem as though, that's an ongoing trend right now. And you or I picking whether it's going up or down in the next 6 months probably doesn't make much sense. But as it does rise, Intermodal is already extremely attractive, increases in fuel just makes it more so.

Yes, there's a spread, right now, divide between truck and Intermodal is anywhere 24% to 30%. So that spread is nice. And that will continue to spread higher once the fuel keeps going up.

So I guess just to ask a little bit more on that. Is it reasonable to think there might be some pent up demand for Intermodal that rail constraints and maybe container limitation so forth, you can't take as much volume as shippers might want to move from truck to Intermodal? Is that -- or is that being at too optimistic in a very constrained market to think about pent-up demand and volume looking forward a couple of quarters?

It's interesting you ask that. In the first quarter, we actually had constrained markets in traditionally non-constrained environments. So we do look for, and we're beginning our peak planning already, a very, very strong peak. And we obviously, we're very committed to our clients on making sure that we live up to our commitments. But I would suggest that probably, you are correct that when we get later into the second quarter end and into late third quarter, we will -- there will be a lot more opportunity than capacity.

Yes.

Okay. Just one more related question. Have you experienced drayage as a significant constraint? Or you have more outsourced drayage than some of the big players. Has that been an issue for you or have you been able to get that drayage capacity that you need?

We have been able to get the drayage capacity we need. Our spend is about $230 million, roughly, with outsourced drayage. We work very, very closely with our outsourced draymen. We try not to be transactionally focused, but we try to work with them the same way we want our clients to work with us. So that has allowed us I think to build some very strong relationships that we have been able to in fact get the capacity that's required.

Absolutely, yes.

The next question in the queue comes from Todd Fowler from KeyBanc Capital Markets.

Terri, in the guidance right now, as it stands, the $2.34 to $2.44. Did you share the volume assumptions for the Hub segment? I think previously it was 3% to 5% and I wasn't sure if that was updated. And then same thing for the pricing, I think previously it had been single digits and it sounds like that's what you're talking to right now. But do you give any more color on volume and pricing expectations in the guidance as it stands?

Sure. Our Intermodal Hub segment volume guidance is now being raised to between 3% and 6% instead of between 3% and 5%, because we're seeing the demand and confident we can execute. And then the pricing, we're assuming that mid-single-digit as Dave said. We'll have more visibility to that as we complete the rest of our bids but that's what we went within our guidance.

Okay. This was a covered a little bit but just on the mid-single-digit pricing, I think that some of your peers that have reported have been speaking to more high-single digits. And pricing the Intermodal market, I think you have is approximately one of the truck market which seems to be higher than the mid-single digit level. And -- could you maybe help clarify little bit -- and again, I think you talk to us a little bit but just so we understand, the volume growth seems good in the quarter, the pricing is a little bit below what we're hearing from some of the peers. So is that more of a focus on the network and targeting the volumes? Or how do we think about maybe some of the industry comments versus your comments on pricing?

Todd, this is Dave. We certainly are very focused on what fits our network, what's going to create better balance to reduce empty miles. But I would suggest to you, as I said in some of the remarks here, that sequentially, we have seen increases in pricing. We're only a 1/3 of the way through. And so, I would not discount the fact that we could end up in the high-single digits. But again, we're only 1/3 of the way through, our bid process and our repricing process. But certainly, all signals are very positive at this point that we can continue to increase that percentage.

Okay. I think I understand what you're coming from there. But just I wanted to ask on the Dedicated business that you're winning. Can you speak to where that's coming from? Is that private fleets being converted or is that existing Dedicated that you won from somebody else? And I know that you quantified the startup costs at least that you're expecting in the back half of the year. But we've also been seeing -- with the driver market where it is right now, some additional cost and recruiting or retaining drivers. So I was just hoping to get to the extent that you can provide some confidence that you can on-board that amount of business and have the capacity to do that at the margins you're expecting?

Yes, Todd. We're really excited about the new Dedicated business. The total is about $75 million annually, and the 2 most significant wins that represent about 70% of the business, are a private fleet conversion and then business from an existing Hub customer. They're pretty huge wins for Hub Group Dedicated compared to their historical wins. And we are adding drivers and we believe we are well-positioned to be successful. And the start-up costs, you're right, were about $0.5 million in the first quarter. We projected that start-up costs will be $1.5 million to $2 million for the whole year. And that those costs would include the travel, the recruiting, the sign-on bonuses, the driver training and orientation. And then the fact that in some cases, we have to rent tractors drivers as we ramp up.

Yes, the other point to that Todd is, we want to make sure we deliver value to our customers. We do not want to sacrifice service and safety to support them. So we're conservative in our approach and how we on-board Dedicated. It's far exceeding our expectations, and that's a good thing. But we also want to be very cognizant that as we add business we want to do it right.

Okay, good. This is helpful too. I just -- I think in the context of what you've got in your expectation for your guidance on a couple of these areas. So just lastly, I think the comment was made about the acquisition market and I was curious if you could speak to maybe how close or how far you might be from doing something? I know obviously the timing of that can be very lumpy. And then just give us a reminder, I know that some general criteria but some of the areas that you're still focused on, that could be helpful?

Sure. We do have several that are in the pipeline that we're kind of in the final stages, if you will, not actually signed, but we've gone through several stages in the cycle as far as where they stand. So we've made some progress there. We feel as though we're close. We're hoping that we will have 1 possibly 2 more acquisitions this year. And so, the pipeline is very full. Geoff's doing a great job in identifying them and then making sure that we're competitive. Where it's appropriate, where it strategically makes sense. As always, we're looking at businesses that will help us to diversify. And also, those that may be complementary within the IMC business. The drayage business can be attractive, particularly in this market of constrained drivers. We're looking at truck brokerage. In particular, we do have a desire to build scale, but we also have a desire for better technology that will make us more productive. So I would say, that those are the 2 primary areas that are looking at right now. And as always, logistics opportunities, transportation management, that may take us into verticals that we're not in, would also be very attractive.

Your next question in the queue comes from Brian Ossenbeck from JPMorgan.

So just a quick clarification on pricing. Are there trends you're seeing inclusive of accessorials? I know we've recently been talking about that in the trend this year versus perhaps the prior years, we're trying to go back and get those with contract renewals, especially if the equipment perhaps isn't being as -- used [as] efficiently as you might like. So maybe you could give us a little comments on that please?

Yes, absolutely, this is Don. We certainly are going after the accessorials contracts in a way that brings back negative to positive. So part of our agreements with our customers as we look at them is not only the price of the transaction for the move, but also the accessorial agreement that we have in place. So we've been actively changing those agreements over the last 4 months, 5 months. And we're going to continue to do that. And it's bearing fruit.

And it's really -- part of a cost. And I think the beauty of it is when we do approach a customer that has a negative accessorial agreement, we give them the option of an increase X plus. If you want to give that accessorial agreement, in place because the real cost or at X, which is a smaller number. If they change the accessorial agreement, because that's something that is under their control. And so, that way they can actually direct how large of an increase they take or don't take.

Okay. That's helpful. So I guess is the way to -- if I heard you correctly, the way to interpret the pricing is some of it just didn't pan out, that would be excluding accessorials. So if shippers decide to make the choice or not, that will be your flexibility (inaudible) in those rates?

Yes. And it's not like all of our customers have negative accessorials, but those that do, we're addressing upfront right now. It's a cost.

Right. Okay. The other question I have is just on just refresh on the technology, the investments that pace of spend and where you might start to some of that leverage rolling out that leaves the Oracle PMS system and anything else you have in the works right now?

Yes, this quarter, Brian, we spent the majority of our time working on finalizing our quote-to-cash design, looking to create the foundation of a new financial system that will go live in the first half of 2019. And in addition, we continue to configure capabilities in OTM to facilitate the asset portions of our business. So that's what we've been working on.

Right, and we've also been working on implementation within the Unyson Logistics products. And I feel good we're making excellent progress right now, and it's very focused with our outside consultants.

Last quick one for me if you just comment on the in-sourcing contracts and logistics. I mean, I think it's typically, we think of this environment is where outsourcing would be more of a trend. I know a lot of factors can drive in-sourcing M&A on the customer side or incumbents or anything along those lines. So in a tight market, I would expect more outsourcing than in, so if you could give the context around that.

In one of the accounts that the contract change was an acquisition. So that contract's being absorbed internally. And that the other 2 to our point are brought in, because they had a TMS. And they wanted to be able to use their own tools to handle it. Was a surprise, I'd say one of them. But the others, I understand. So yes, you're right. That's that balance of a customer of how much it costs to in-source versus outsource it. And to this day, still some customers fight it. They want to in-source their own. But they realize quickly that they can't get the IT resources to support it.

Okay. And is that included in the $130 million, or was that just one large customer?

The $130 million includes the loss of the 4 contracts.

The next question in the queue comes from Bascome Majors from Susquehanna Financial.

Just a follow-up on the M&A line of questioning. The 1 or 2 deals that you may get done this year, hopefully will get done this year. Can we think about that moving the needle? I mean are we talking pennies of EPS here on a run rate basis if these things go through? Just trying to size that up as we think about the cadence of 2019?

Yes, we're still in -- we're in the latter stages of process with these. But we're still a bit of here and we're trying to -- nothing is finalized with the numbers. To try and get an accretion number at this point would be difficult. We obviously -- one of our major focuses that, we have -- that it's initially accretive to earnings. So -- that's would be hard to do right now, because we're not at that point that we can finalize the purchase price and the cost. We are getting closer but we don't have it ironed out yet.

Now you maybe -- just directionally size things up could you talk about, or could you put a bracket around dealer investment value, so you can kind of think about the size of what may be coming on?

That's hard to do too, because we're just not far along enough yet. But on a combined basis, it would be less than we paid for Dedicated.

Understood, that's helpful. And just lastly, maybe put a finer point on the first question of the call. Just trying to reconcile the seasonality. It looks like kind of what you guided for the full year is fairly normal seasonality with where the first quarter went off. Yet most trucking in intermodal-related businesses are guiding pretty significant -- or seasonal plus acceleration in the second half of the year. It sounds -- if I can interpret an earlier comment, it sounds like you're suggesting that logistic loss is a headwind that kept maybe a more material guide up from happening and potential tailwind would be a rail pricing accelerating as you hoped but aren't willing to guide what it is. Is that a fair assessment of kind of how you see the puts and takes in the second half of the year? Or is there anything you like to add to that?

Yes, I think that's pretty fair. But as we had said, number one, we're comfortable with the top end of the range. Secondarily, we do feel as though unless something dramatic happens in the economy, that all indications are that the pricing increases will continue to accelerate through the year. Again, we are, by our nature, very conservative. But we're only 1/3 of the way through the bid cycle. And so we're not being cautious with trying to find what the ceiling is from a price increase. But I think as we give you guidance, we want to make sure that it's something that we can live up to.

The next question the queue comes from Diane Huang from Morgan Stanley.

Great. My first question is that have been some fears that the TL market will weaken from here. So from your perspective, how much has your Intermodal pricing outlook for the second half is dependent on the TL market? Have you seen any impact from ELDs? And what are your expectations of ELDs impact in the second half?

As far as our dependency on the truckload market, of course, it does especially on the shorter lengths of haul which are more truck competitive when, in fact, there's an excess number of trucks. I would be shocked if that occurs in the second half of this year or even the first half of next year. I think, it's the demographics with the truck drivers, aging. It's people that are in fact are leaving the industry, at this point in time. And partially with the impact of the ELDs, it's hard to really quantify how large it is, because there are still some exemptions on agricultural goods and that type of things. I do believe once those become effective, that we're going to continue to see an impact of ELDs in shrinking the overall truckload capacity. So I think that Intermodal is very -- we're very well positioned to continue to grow at the existing pace through this year and certainly into the next half -- the first half of next year.

As we said before, it was mentioned that 1/3 of our bids, we're seeing growth -- incremental growth on top of what we had. So price is coming up and growth is happening on the Intermodal side.

Okay. Got it. So it sounds like the impact from ELDs will be more gradual or next 6 to 12 months, rather than an immediate impact, following April 1.

Yes, absolutely.

Okay. And then quick question for Terri. Last quarter, I think you guys got up about $6 million to $7 million of one-time-ish cost, that would be in the first quarter. Just wondering if you could quantify if you had any of those costs in 1Q? Because when I look at 1Q's cost, excluding transportation, it was much lower than the guidance of $104 million to $109 million?

Oh yes, the -- the $6.1 million you're referring to were one-time costs in 2017. Is that what you're talking about on the $6.1 million of one-time cost? And then you're right that our guidance was higher on our costs and expenses than what they came in at. That was for a couple of different reasons. Number one, we expected our headcount to be down -- excuse me, up and it's actually down 21 people, as I mentioned. Number two, Mode agency commissions were down about $1 million from what we projected, because gross margin was also down from what we originally projected in the first quarter. And then, number three, our IT spend was about $1 million less than we projected in the first quarter.

Okay. Yes, I was referring to the bonuses, the restricted stock and the IT spend but it sounds like those changed.

Yes.

The next question in the queue comes from Matt Brooklier from Buckingham Research.

So added another driver question. In terms of market tightness, is there a difference between Dedicated driver market and the drayage driver market or are they equally as tight right now?

They certainly are both very, very tight. Obviously when you take over a fleet from another carrier, it's a lot simpler, because you have an automatic driver base that obviously likes the business, likes the way it's operated. But actually -- we were kind of staying level set, if you will, with our Intermodal drayage drivers. And we have a change in recruiting, we've added recruiters and we have actually -- the last several weeks are seeing very, very positive signs of adding on to the Intermodal driver fleet. No question that the Dedicated is ongoing. And we're thinking the total for this year, that we'll need to is about 400 drivers for both Hub Group Dedicated as well as Hub Group Trucking. And so, we think that those are very achievable.

Okay. And then, I -- can you talk to driver wages, where those trending in the quarter? Where do you think they're going to land in the year? A couple of your competitors talked to driver wage increases kind of commensurate with the pricing that they're getting right now. But would be curious to hear you opinion on the topic.

Yes. We did increase our driver wages in February. We've also changed some of the structure of how we pay drivers, particularly within Intermodal to make it more attractive. But I would agree that, by the end of this year, they're very likely to be additional pay increases in geographic regions, maybe additional increases that we'll be taking with increasing our driver wages. And it's really done on a region-by-region basis that we look at it. So there's no question, one of the key assets is certainly the driver at this point in time.

Okay. And then just switching gears. You mentioned there is some end markets, some industries that you're not currently in. What are some of those markets that potentially like to get the exposure to and I'm assuming you would potentially do that through M&A?

Yes, Matt. We're actually looking more towards adding on, if you will with existing business lines. When I talk about with Unyson, we are looking for a transportation management solutions company, that may offer different verticals. As an example, we're not very big in the refrigerated space, we are not very big in the industrial space within logistics. Those would add value to us. Because as we look at it, we do like the business that we're in and we want to be very deep in those businesses. With Intermodal, we're the second largest player. With truck brokerage, we want more depth. With logistics, we want more depth. And the same with Dedicated, we'll grow that organically. That's what I was referring to is actually looking to different business verticals to expand into but some of our existing products.

Okay. That's helpful. What about final mile?

We've looked there and we've talked about it. It's our belief that those that large infrastructures are better positioned to do that than us. That could change, but we have not found an acquisition target that in fact we think would put us on solid enough space, that would be defensible longer term.

(Operator Instructions) The next question in the queue comes from David Ross with Stifel.

I'm not going to take up too much time, but I appreciate you squeezing me in. Truck brokerage you mentioned is the hot market right now. How do you guys find capacity? You're a decent size broker, you're not only competing against all the other brokers for the truckers, you're competing against all the shippers for truckers. What has allowed you to find your customers freight and keep carriers or increase the carrier base?

Well, it's always -- this is Don -- we've always been different in the brokerage space with regards to how we went to market. We generally have around 150 to 250 carriers that are really the go-to folks that service our business. We've got 35,000 carriers that are under contract with us. But at the end of the day, what we've been able to do is leverage that relationship with those carriers to drive performance. The other part of it, on the truck brokerage side is to leverage a greater amount of carriers on transactional business, which as you know, is the spot side of the business, which has been growing rapidly for us. And as we try to grow more and more into that space, to get more and more load boards when capacity gets tight, we've got to lean on our carrier base. So we've been loyal to our carriers since we've had brokerage. And we've been able to develop those relationships. So we look at both brokerage again in 3 stools: one is transactional, one is contract and one is project. And when we're selling to a customer, we're selling those 3 products to them.

And then, just real quick on Dedicated. It's a fairly new business line for you all, but looks like you're having success so far. What do you view as a target margin for that business or target operating ratio to allow for it as a good, safe product that you want to provide to your customers?

As Dave and Don mentioned, we're going to carefully ramp up on this new business and make sure we do it right. So in the long run, we target operating ratios in Dedicated similar to what our competitors have, which is the mid-to high single-digit.

There are no further questions in the queue at this time. I'll turn the call back to Mr. Yeager for final remarks.

Okay, great. Well thank you, for joining us for the first quarter earnings call today. As always, if there's any further questions that you would like to ask Don, Terri or I, please do not hesitate to call us. Have a good night.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your phone lines at this time. Enjoy your evening.