David P. Yeager - Hub Group, Inc. Donald G. Maltby - Hub Group, Inc. Terri A. Pizzuto - Hub Group, Inc..

Kevin Sterling - Seaport Global Securities LLC Ben J. Hartford - Robert W. Baird & Co., Inc. Scott H. Group - Wolfe Research LLC Justin Long - Stephens, Inc. Thomas Wadewitz - UBS Securities LLC Todd C. Fowler - KeyBanc Capital Markets, Inc. Brian P.

Ossenbeck - JPMorgan Securities LLC Bascome Majors - Susquehanna Financial Group LLLP Jason Seidl - Cowen & Co. LLC Brandon Oglenski - Barclays Capital, Inc. Matthew Young - Morningstar, Inc. (Research).

Hello, and welcome to the Hub Group's 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. 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 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 of 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 have 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, that 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've seen some tightening in the market and believe we may be seeing that IML (3:46) 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 work flows and flatten the structure to reduce costs and provide a seamless service to our clients. We made those reductions and changes during the second quarter, and believe we are positioned well for recovery and growth.

While margins remain compressed, we continued 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 onboardings scheduled to launch this quarter. In addition to the new onboardings, 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 continued 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 three points. First, the 8% growth in our top line demonstrates our success in providing multimodal solutions to the customers. Second, challenging market conditions together with start-up 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 line, intermodal revenue was up 3% due to a 1% increase in loads and 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. Trust 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 onboarded 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 costs 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 start-up costs related to new business onboarded this quarter. This was the main reason for the 210 basis point decline in gross margin as a percentage of sale.

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.

Costs 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 $1.8 million increase in salaries and benefits.

The increase in general and administrative costs 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 head count, 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 the 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 yield, a 280 basis point decline in truck brokerage yields, and 100 basis point decline in intermodal yields.

Mode's costs and expenses went down $1.8 million compared to last year, primarily due to an decrease in agent commission. Operating margin for Mode declined to 2.5% compared to 3.1% last year. Turning now to head count 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 cost 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 will 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..

Thank you. We will now begin the question-and-answer session. And our first question comes from Kevin Sterling from Seaport Global Securities. Please go ahead..

Thank you. Good afternoon, everyone..

Hi, Kevin..

Hi, Kevin..

Dave, you talked about intermodal pricing improving, or at least stabilizing in the back half of the year, then improving in 2018. And we see the truck market tightening, and these spot rates moving higher, hopefully 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 INCs (17:35) out there that have been aggressively pricing, maybe not being so aggressive, maybe a combination of both?.

Yeah. 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's giving us right now, that we can be quite competitive there and grow in that marketplace..

Great. Thank you. And along those lines, Dave, historically when pricing has been this competitive and this low for some time.

When 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 months 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%, or 5% increases this year, but I do think that we 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 it'd be opportunistic when we can..

Got you. Okay, thanks. 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? Can we see some more M&A opportunities out of you guys, now that you've got one under your belt?.

We certainly, A, we 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'll be a very good fit. What we can bring to them, the synergies, will be us bringing our customer base to them.

There is 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..

Got you. Okay, well, that's all I had. I'll turn it over to someone else. Thanks so much for your time this evening. Take care..

Thanks, Kevin..

And our next question comes from Ben Hartford from Baird. Please go ahead. Your line is open..

Thanks. 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 a 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've grown in the local East.

And as you know, Ben, when you – 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 right now in the conceptual part of the Oracle Transportation Management system, which will help us out a great deal with reducing our empty miles for Hub Group 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 adopting our processes to fit those (23:08)..

Yes, 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 onboarding 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 because we have a lot of legacy operations that we've done over the years. So we're now easing into that. And you'll start to see that efficiencies probably in the first quarter of next year (23:43)..

Okay..

Yes, we're just starting the design phase....

Right..

...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, we'll be implementing drayage and then we'll have a phased approach to roll out after that..

Okay. So the first half of 2018, we should start to see some of the benefits from phase one? Okay.

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%.

Was that full year or was that back half 2017?.

Full year..

Full year, okay. So with that gross margin guidance, it does suggest we're probably at the trough here.

But the quote, unquote, cut, the reduction of the (24:42) back half outlook, it sounds like it's a function of gross margin compression across the three 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 (25:03) to the reduced outlook on the margin for the back half of the year?.

Yes – oh, I'm sorry, Terri. You go. Go ahead..

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

Okay, that's good..

And 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.

But 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's constituted, can grow at or above whatever that market baseline growth rate is..

Well, I think the intermodal market in particular, you're seeing consolidation. I mean, if you look at the market share that we and our largest competitor have, it's grown substantially. And we think that that's going to continue, that we'll see ongoing consolidation within the intermodal space.

I think that in addition to 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 number two player, are well positioned to continue to grow with that market..

Okay, sounds good. I'll hop back into the queue. Thank you..

Thanks, Ben..

Thank you. And our next question comes from Scott Group from Wolfe Research. Please go ahead..

Hey, thanks. Good afternoon, everyone..

Hi, Scott..

Hi, Scott..

Hi, Scott..

So, I was wondering, in hearing more about some service issues at CSX and I know you're on with Norfolk, but are you hearing anything from customers looking to move from one rail (27:31) to Norfolk that maybe could be an opportunity for you.

Any signs of that happening?.

We read what you're reading in 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..

(28:02)..

So if, in fact it 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 is at our most rent mode (28:22) would tell you that they use CSX and he has seen some customers go from CSX to NS because of the service..

Okay..

Okay. Terri, I jumped on the call.

(28:37) know if you went through, but how are you going to be reporting Estenson going forward? Is it going to be (28:43) operating income segment like we're achieving (28:46) with Mode? (28:47) a 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 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, (29:10) dedicated.

And the guidance that we gave of $1.45 to $1.55 for the whole year does include Estenson's projected results for the last half of the year when we own them..

And the gross margin guidance, does it include 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..

Is there a way potentially just so we can think about kind of (29:48) the 10.3% Hub segment gross margin, how you're thinking that's going to be in the back half of the year, excluding Estenson, just 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 (30:26)..

Okay. That's helpful. And then lastly just for Dave. So we've got truckload markets that look like it's tightening. But it's still a pretty (30:41).

In your history, what's more important? Obviously, both is what you root for, but if you could only have one, which is it?.

And that's either truckload 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..

And are you seeing it stay kind of tighter than normal so far (31:36)?.

I think overall it probably is 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 (32:04) part of the second quarter, I think we were a little bit concerned that in fact it might be subpar for as far as being the normalized peak. So we feel good about the increase in demand that we've seen..

Okay. Thank you, guys. Appreciate it..

Thanks, Scott..

Thank you. And our next question comes from Justin Long from Stephens. Please go ahead. Your line is open..

Thanks and good afternoon..

Hey, Justin..

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 slightly 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 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..

July was flat, although last week it was up about 5%. So, one week does not make a trend. It used to be a Cubs (34:00) winning streak, but it'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. Any time your end of (34:30) quarter such as that and around July 4 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 is 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 are up 12% in the quarter.

Do you have what the change in local West and trans-con volumes were as well?.

We do, and you're right. Dave said 12% for local East. Down 6% local West and flat trans-con. That's all Hub segment..

Right..

Okay, great. That's helpful. I appreciate the answers and the time..

Thank you..

And our next question comes from Tom Wadewitz from UBS. Please go ahead. Your line is open..

Yes, good afternoon. I wanted to ask you a bit about your position in drayage right now. I think there have been, over the last couple of years, 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 get the 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 still a little different market than broad intercity truckload.

But just wondered if you could give us some thoughts on dray and whether that point of some potential pressure is that driver market seems pretty tight..

There's no question the driver market is tight right now. We're actually down at around 55% as far as the Hub trucking, handling of Hub business..

Okay..

And, again, that's about where we anticipated that we would be. We're not so much optimizing for our Hub Group 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....

Yes..

...than what it had been versus last year. With turnover, 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, very competitive market for truck drivers..

But the beautiful thing about Estenson's 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 that they have right now..

Right. And their turnover's very low..

Right..

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

So you could actually use some of the dedicated drivers for dray move?.

We do think as, 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 no use for them..

Okay, great..

We don't – yes, 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..

We think their recruiting efforts and recruiting programs will help us as well, and their onboarding for their drivers..

Right, right, sure. (38:24) leveraging of their capability. That makes a lot of sense..

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 big e-commerce customers. And I'm just wondering how you're thinking about the relationship with customers that are significant in e-commerce and the volumes in peak season would be meaningful.

Do you expect to gain some more share and have a lot of business there? Or how do you think about that, as 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 are focused, 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 to spend (39:46), but are they becoming a bigger percent of the total mix you have at Hub with just the 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 one last one, Terri, the change in the guidance, what would the – how much are there one-time items that are affecting the new guidance, the $1.45 to $1.55? Like if you added back the new, I guess like the charge in second quarter and other one-off items – 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, the one-time cost of $0.07 this quarter would not have been baked in our guidance before, and now they are. So that was $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 costs for new customer onboarding.

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 cost. And then in addition to that for Mode, we also reduced guidance for them (41:16) because of the same factors..

Okay.

So you'd add back the $0.07, but then beyond that, there's some pressures in the business that are factored into the new guide?.

Exactly..

Okay. All right, thank you. I appreciate it. Thanks for the time..

Thanks, Tom..

And our next question comes from Todd Fowler from KeyBanc Capital Markets. Please go ahead. Your line is open..

Great, thanks. And good evening.

Just to 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 in 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 – I know it wouldn't been based on just the last week here in July, that up 5%.

But how much of that's predicated on a strong peak versus normal bid awards? I'm just trying to get a sense of how much variability there could be from an underlying economic factor within the volume, on the volume side?.

Yes, we are going with what we – basically what we won in the bid award, and the share repurchase (43:46), so that's one. And then two is, we've baked in a normal peak season as we've seen 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, 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?.

Well, we see that inventory's levels have dropped a little bit, so we're going to – last year we started, if you think about it, mid-October in peak. We think we'll start earlier this year..

Okay..

We think we'll start in September. Our customers are indicating that, our retail customer..

Okay. Good. That helps.

And then just lastly, just a detail question, Terri, what is the interest expense run rate going to be on a quarterly basis with the borrowings from Estenson at this point?.

Well, 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. (45:05) $114 million of debt, with Estenson deal borrowed $55 million on our revolver, and we financed about $14 million of containers in the quarter..

Okay, good. That's what I had. Thanks a lot for the time tonight..

Thank you, Todd..

Sure..

And our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead. Your line is open..

Hi, good evening. Thanks for taking my questions..

You're welcome, Brian..

So, just quick follow-up on the peak. You mentioned that you're basically expecting to follow the last couple of peak seasons. It seems like you swing it through a bit different and perhaps there's multiple smaller peaks.

So maybe you can 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 back 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. They're scheduling to get 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 with 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 let's 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 is things are getting more intense from a customer expectation standpoint, and customers' customers. So, you tend to think of that as shorter length of haul, more frequent delivery, smaller (48:24) sizes perhaps.

So just some thoughts on that, and 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'd be intermodal dominant for the most part, the longer length of haul, but how do you address that pressure when you look out for 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, 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 brick and mortar have historically done, use intermodal to get to that long haul, because of the economics and the service consistency.

So instead of going into a distribution center now that might deliver to stores, we're going to a fulfillment center that's delivering direct to the customer. Very costly. Where can 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 follow-up housekeeping. CapEx obviously 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 a normal maintenance level, what do you think that would trend and how do you expect the early read into 2018, what do you think of the incremental for Estenson and replacement and also some capacity expansion if you've gotten that far?.

Yes, our biggest (50:12) CapEx is containers and tractors and now trailers, I should say, with Estenson. And so 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'd certainly be in our spend for next year (50:37).

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 maybe more like $40 million next year for Estenson.

So it will probably still be – and we're going to continue to spend on IT. It's an investment we want to make. And so, it'll probably be similar to this year..

Okay. And the last quick one just on you mentioned retail and consumer product is off to a good start here.

Auto exposure, just curious if you're seeing any noticeable slowdown as we get into the softer patch for production and then assuming 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 had been of course some record years.

But we have not seen anything, as we are not really involved a lot in going to the production facility themselves..

Yes..

Okay, great. That's it for me. Thanks for your time..

Thank you..

Thanks, Brian..

And our next question comes from (52:27) from Susquehanna International Group. Please go ahead. Your line is open..

Hey, guys. Bascome Majors here from Susquehanna. I want to follow up on your comments 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 (52:58) just give us a little bit more on perhaps kind of what you're going to do to achieve this outcome so we can better understand kind of the market's working..

Yes, so this is Don. The bid process takes longer than it has in the past, I think as our customers go through three 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 it's maybe you think you can capture some new business at better pricing? I'm just trying to understand what....

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

Okay.

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 price (54:17) intermodal or are you just kind of reflecting something you're seeing elsewhere in the marketplace?.

We're reflecting what we're seeing in the marketplace through the 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 $15 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'm just 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..

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

Okay.

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

At this point, it's indefinite..

Okay. Okay. And lastly, just one on the truck brokerage business.

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 and 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 purchased 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, but yield's being down..

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

It was about flat..

Okay. And lastly, we haven't (57:15) 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 a more volatile cost to capacity there.

Are you willing – if you start to see large players bid up contractual rates and brokerage, call it mid-cycle, out of cycle, are you willing to follow that? What's your sense and how sticky are the rates you committed to over the last three, four 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..

Okay. Thank you very much for the time..

Thank you..

Thanks..

And our next call comes from Jason Seidl from Cowen. Please go ahead. Your line is open..

Thank you, operator. Hey, everyone. Couple of quick questions. Just a little housekeeping stuff so I make sure we're all 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.

Terri, did you give the depreciation number for the year?.

No, I didn't. You mean the depreciation below the – depreciation and amortization within....

Yes..

...below the gross margin line? I did not. But 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, and 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, 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 stated that several times. That's good to hear.

On Estenson, are you anticipating any more charges for the third quarter or (60:20) one-time severance costs all done and behind us?.

We are not anticipating any more for Estenson in the third quarter..

Okay. Fantastic. That's all I have, guys. Thanks so much..

Thanks, Jason..

Thank you..

Thank you..

And our next question comes from Brandon Oglenski from Barclays. Please go ahead. Your line is open..

Hey, good evening, everyone, and thanks for getting me in here. It's been a long call, so I just want to ask a bigger picture issue for you, David. And I ask this respectfully, but industrial production's up this year, and there's a lot of items in your guidance, 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's a very good question. And certainly from a cost side, that's partially why we took the several million dollars in one-times in the second quarter, as we did reduce head count by about 75 people as the business has evolved from both a sales and a service perspective. We realign 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-Clark's Carrier of the Year. I think all those are indicative of the service, and it does give us a certain advantage when in a bid. Is it at 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 on 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. And I think that 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 (62:56) 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 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 costs within accessorials, within empty miles for drayage.

We have a lot of resources that are focusing every day on, not just reducing head count cost, but reducing our internal costs, and at the same point in time, looking at how to expand our share, and with business that in fact makes sense to our network and thereby contributes well to our overall gross margin.

So, is 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 is 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 in the earnings per share is what our shareholders would expect..

Okay, thank you..

And our next question comes from Matt Young from Morningstar. Please go ahead. Your line is open..

Good afternoon. Thanks for squeezing me in here. 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 look like for them once cross-selling subsides longer-term, say three years down the road?.

Well, I can tell you, for 2016, their CapEx was about $29 million, and so maybe – and we'll build on that, as you said, Matt. And you're right. We're planning on constant cross synergy. So up until five years from now, and we projected about $100 million of cross-selling synergy out five 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, exactly..

We tend to make those investments..

We believe this is the platform that we can build dramatically on for the foreseeable future..

You said $92 million CapEx in the fifth year.

Is that right?.

Yes..

Okay. That's what I was getting at. I didn't know if it would fall back down to $50 million in the fifth year or something like that..

Oh, no..

Okay, great..

We're going to grow it like crazy..

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 you've discussed?.

I think it was seasonality and industrial production being up, 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'll have an impact. We just don't know what the – how to quantity that. Is that 2% or 7% or someplace in between..

Yes, it does seem early yet. I just wanted to see if you had any thoughts on that. I would agree with that..

Yes, I think we'd originally thought that actually clients 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..

Got it. Okay, thanks..

Thanks, Matt..

Thank you..

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

Hey, thanks. 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 quarterly basis in 2018?.

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

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

Yes..

Okay. Great, thank you..

Thank you..

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

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