Hello, and welcome to the Hub Group Fourth 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 this 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 the words 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 fourth quarter earnings call. We had another very strong quarter and a record year in 2018, as we continue to increase revenue, while reducing expenses in our network.

We put a significant amount of effort into improving service and profitability in all of our business lines resulting in a 72% increase in operating income for the year. This focused, coupled with the strategic investments we're making in our Elevate technology, provides a platform for continued profitable growth.

Intermodal had a stellar quarter, as volume was up 5%. PCs and Intermodal exceeded our expectations as pricing and volume were strong through year-end. The Intermodal team had a solid operating plan that was extremely well executed. We are bullish on our Intermodal plan for 2019.

We believe prices will increase in the mid-to-high-single-digits, while volumes will continue to grow as Hub continues to provide best-in-class solutions to our customers. Another highlight to the fourth quarter was our closing the acquisition of CaseStack on December 3rd.

CaseStack is non-asset based focusing on the growing warehouse consolidation market and LTL brokerage markets. CaseStack's strong retail and consumer products focus is very complementary to Hub, where those segments represent 70% of our business. We are pleased with the synergies we captured and have a robust pipeline of future opportunities.

CaseStack has a very talented workforce, a solid management team, and we welcome them to the Hub Group Family. With that, I'll turn the call over to Don to talk about the performance of our other business lines..

transactional truckload and LTL, contract, and special services. We have made great progress in restructuring our operations, bringing in new leadership, rolling out our new technology into pricing and operations, and adjusting our compensation models to drive more aggressive sales and procurement efforts.

Our strategic accounts value these services and we are bringing process, technology, and resources to better position this business for sustainable future growth. Logistics. We continue to gain momentum as we replaced logistics contracts lost early in 2018, and focused our efforts on improving yield.

During the back half of 2018, we onboarded two new accounts, while also implementing contract price increases with many of our clients. As I mentioned in our previous calls, in 2018, we focused our efforts on implementing our Oracle TMS standardized solutions to drive efficiencies and scale and will continue on that same path in 2019.

We have a very strong pipeline that will set us up well in the back half of the year. Also with the addition of CaseStack, we can now offer a full end-to-end solution that will further enhance our position with our customers and in the marketplace. Dedicated.

Revenue increased 40% as we continue to assimilate the new accounts onboarded earlier this year, while also taking a measured approach with new onboardings. Our focus this past quarter and into early part of 2019 is on operational discipline, yield improvement, and cost control.

We believe we've made great strides during the quarter and are now starting to see the results of those actions. Our sales pipeline remains robust and we are focused on ensuring strong returns throughout 2019 and in the future for this business. I will now turn it over to Terry to review the numbers..

Thanks, Don, and hello everyone. I'd like to highlight three points for the quarter.

First, we closed on the purchase of CaseStack on December 3rd, further diversifying our Multimodal Solutions; second, gross margin as a percentage of sales at 13.6% is the highest we've seen all year, and the highest fourth quarter since 2007; third, operating income was an impressive 4.7%.

Now let's take a more in-depth look at our performance in the fourth quarter. All the numbers that I'll be talking about exclude Mode since we sold it at the end of August. Hub Group's fourth quarter revenue increased 12% to a $1 billion due to growth in Intermodal, Logistics, and Dedicated, partially offset by a decline in Truck Brokerage revenue.

Hub Group's diluted earnings per share was $1.46 which includes earnings per share of a $1.01 from continuing operations and $0.45 of earnings per share from the additional gain on sale of Mode.

This is compared to an adjusted 2017 diluted earnings per share of $0.74 from continuing operations that uses a 25% effective tax rate, that's a solid 36% increase.

Each quarter we will report amortization expense related to acquisitions and compensation expense associated with restricted stock awarded to CaseStack management in connection with the purchase. Amortization expense in the fourth quarter of 2018 was $1.9 million compared to amortization in the fourth quarter of 2017 of $1.1 million.

Compensation expense associated with restricted stock issued to CaseStack management was $200,000 in the fourth quarter of 2018. Adjusted fourth quarter earnings per share from continuing operations for these items is a $1.05 compared to an adjusted 2017 earnings per share of $0.77 or 36% increase.

Taking a closer look at a few of our key metrics, Hub's gross margin increased $32 million or 30% due to growth in Intermodal, Dedicated and Logistics, partially offset by a decline in Truck Brokerage. The Logistics and Truck Brokerage service lines include CaseStack for the month of December.

Gross margin as a percentage of sales was 13.6% or 190 basis points higher than last year. Intermodal gross margin as a percentage of sales was 190 basis points higher than last year. Prices increased year-over-year and sequentially from the third quarter to the fourth quarter.

Fourth quarter utilization was up eight-tenths of a day at 16.9 days which negatively impacted our results, about six-tenths of a day was due to slower rail service. Truck Brokerage gross margin as a percentage of sales was down 30 basis points because of less spot business done last year.

About 28% of our loads were spot in 2017 compared to 17% this year. We partially offset the lower spot business with more value-added services and the CaseStack Truck Brokerage business.

Logistics gross margin as a percentage of sales was up 290 basis points due to price increases, positive changes in customer mix, purchasing more cost effectively, and the addition of CaseStack.

Dedicated gross margin as a percentage of sales increased 390 basis points because of lower insurance costs, new business, and reduced use of third-party carriers, temporary drivers, and rental trucks. Operating margin was 4.7% or a solid 80 basis points higher than last year.

Adjusted operating income excluding CaseStack and dedicated amortization of $1.9 million and $200,000 of compensation expense related to restricted stock awarded in connection with the CaseStack purchase is 4.9%. Our EBITDA was $73 million for the quarter and $208 million for the year.

Cash flow from operating activities for the year was $211 million and net capital expenditures were $189 million. Now I will discuss what we expect for 2019. We believe that our 2019 diluted earnings per share will range from $3.10 to $3.30.

By service line, we expect 10% to 15% revenue growth in Intermodal, 15% to 20% growth in Truck Brokerage revenue, 20% to 30% growth in Logistics revenue, and low-single-digit growth in Dedicated revenue. We expect gross margin as a percentage of sales for the full-year will range from 12.8% to 13.4%.

We expect gross margin growth of between 20% and 25%, with gross margin increasing in all of our service lines. We believe that our quarterly costs and expenses will be between $98 million and $100 million. We estimate that depreciation will range from $82 million to $92 million.

We project that amortization expense related to the CaseStack and Hub Group's Dedicated acquisitions will be approximately $13.5 million and that compensation expense related to restricted stock issued to CaseStack management in connection with the purchase will be approximately $2.4 million.

We project that operating margin adjusted for amortization expense and compensation expense for restricted stock will range from 3.8% to 4.3%. We project that our effective tax rate will be between 25% and 26%.

We expect to spend between $90 million and $100 million on capital expenditures in 2019 primarily for tractors, containers, and trailers, as well as technology investments. We plan to continue to fund purchases with cash and debt. That wraps up our financial performance, Dave, over to you for closing remarks..

Thank you, Terry. Needless to say 2018 was a great year for Hub Group. We achieved all time record earnings and continued to achieve high marks on our customer service. How divested the non-strategic asset in Mode, while expanding our service offerings with the acquisition of CaseStack, a strategically aligned non-asset based logistics company.

As we look towards 2019, Hub is very well-positioned in all of our business lines and we look forward to executing upon that opportunity. And with that, we will open up the line for any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Scott Group from Wolfe Research. Your line is open..

So, Terry, I just want to confirm the guidance of $3.10 to $3.30; is that with or without the amortization?.

That includes the amortization that's on a GAAP basis..

Okay.

And just so we can sort of calibrate our model, so when you report are you going to be talking about GAAP or adjusted excluding the amortization and then can you just share how much was the total deal-related amortization in 2018?.

The deal-related amortization in 2018 was about -- including the restricted stock of $200,000 was about $900,000. Yes and then from the 2017 acquisition of Dedicated on an annual basis that's about $4.4 million.

So annually that amortization associated with CaseStack will be about $9.1 million in 2019, and compensation expense associated with restricted stock will be about $2.4 million..

And do --.

And to answer your question about how we're going to report, we have to report GAAP because that's the rule but we're also going to give you what the adjusted number is and so that you've got both..

Okay. That's helpful. So Dave wanted to ask Intermodal pricing, you said mid-to-high-single-digits. I guess --.

That is correct..

What big picture like how long can we be in an environment where Intermodal pricing is going up more than truckload pricing? And is it realistic to think we can grow volume in an environment where Intermodal price -- can we grow intermodal volume if Intermodal pricing is going up more than truckload pricing?.

Yes, to answer your question I think for way too long Intermodal pricing has had a too deep of a discount versus truck. That's been problematic; it's primarily been an intra Intermodal competition which has driven a lot of that.

I think that at this point, we are all looking at the market saying that the variance between truck and Intermodal is too great. There is a lot of room to increase price yet still bring very solid value to our customers.

From what we've seen in the bid so far and granted it's only about 15% of our business but what I forecast the mid-to-high-single-digits is certainly in play right now.

As far as length of time that we may expect to see that, we certainly believe that at least through 2019 and again because you don't take -- we're not taking 20%, 15% increases at a time, it's much more incremental. And so I do think that the overall tail that we've got to follow-up on that could very well extend through 2020..

And you look at the price into 2016 and 2017 where prices going down as much as they did, there is to this point -- to Dave's point is that the gap between truck and Intermodal is still sizable in some cases up to 40% on TransCon business. So we think there's a runway there to grow it and we're going to do it..

And at the same time, Scott, into the second part of your question, we do believe that we're going to be able to grow volume at -- as well as grow and increase the overall price and get our return on invested capital to a reasonable level..

So is it -- is the pricing a lot better in the West than the East because I'm guessing the gap is a lot wider there?.

The gap is a lot wider there but there's still a lot of room in the East as well..

And we saw growth in the East in January..

Yes..

Okay. And then --.

That's where the -- that's where the truck will tighten up first, right, in that local lease market and there is still a gap between Intermodal and truck..

But I do think we haven't fully -- with the ELDs are having an impact on some of those local lease because you can no longer do a Chicago to Harrisburg in a day at least not running legally and now that everybody is required to have ELDs, it's changed some of the overall economics for that mid haul trucking operations.

So I'm not convinced that there is still lot of room to grow pricing within the East as well as -- as well as gain share..

Okay. I’m going to ask one more and then I'll get back in queue.

So your rail partners, you are right in sort of the heart of 2019 precision railroading, what impact are you seeing at this point and have you assumed any sort of negative cost or gross margin impact from the changes that the rails are making?.

I think thus far we have seen some marginal additional cost but we do believe that we can recover those relatively easily. We have seen some areas that we've been -- that where lanes have been shut down that we have lost volume, although again we don't believe it's been really a tremendous problem thus far.

As I look at the precision railroading, it really focuses on long trains in dense corridors. And if we look at our business, 95-plus-percent of it is in dense corridors and so we feel quite good obviously precision railroading is there to take out costs but it's also there to longer-term enhanced service.

We're not at that point yet although we are seeing improvements in service within both the UP and the Norfolk Southern. I would suggest to you that it's still early but we are seeing an accelerated amount of changes with precision railroading at this point in time. There is no question the pace of change has increased with both carriers.

And so thus far, as I said, really nothing that has been overly negative and we really don't foresee it. But again the pace of change is increasing. But I do, I have to say the bulk of our partners are really communicating extremely well with us on changes that are being made and giving us some advance notice..

And the next question comes from Kevin Sterling from Seaport Global. Your line is open..

Oh gosh, days are running together here. So Dave let me piggyback on Scott's question about rail service and tariffs maybe for you as well, I think you said your box turns were up 16.9 days, that's up point 0.8 days obviously that's a negative drag.

As rail service improves throughout 2019 and that metric your utilization improves, how should we think about the impact to say gross margin and then the financial impact?.

Yes, as one day of utilization is now worth about $10 million to us. And so, as the rail service gets better we expect to improve our utilization. What we've got baked in our numbers, Kevin, is the first half of the year utilization will be worse than 2018, and the second half of the year it'll be better.

And so we've got kind of flat utilization in our numbers that we discussed for guidance in the plan..

Great, okay. And let me just follow-up on the on the pricing discussion here, Dave, because as Scott talked about with truckload pricing and for the spot pricing being negative and while truckload contract pricing is positive.

But as we think about Intermodal pricing and you're talking mid-to-high-single-digits and we've heard that from other IMCs, how much would rail service play into that too to help keep the pricing discussion at a higher level, if rail service improves I would imagine that would help make obviously Intermodal that much more competitive or attractive to truckload and I guess for the first time in a few years, we're going to actually get some decent rail service and I would imagine that might help the pricing discussion or maybe I'm missing the boat there?.

Kevin, I think you're right on target, it certainly we've been able to increase price in 2018 and of course that was an unusual market.

We do think we're getting poised for 2019 but the better the rail service gets and the more competitive we are versus truck, certainly that will allow us to convert more and more business over from -- four more to the road.

So, no, you're right on target and to reiterate we are seeing the rails begin to improve their service, we're seeing some meaningful improvements. So we're very encouraged, and as Terry had said, as the year gets on, we do believe that will be adjusting some of the expectations of our clients to shorter transit than where we're currently are..

Got it.

Are you losing any business back to the highway or is it you haven't seen that?.

Kevin, we really have not seen that. There's no question that the spot market that there's a lot more capacity but a less demand.

We think some of that is also because in 2018 a lot of people they just played the spot market put it under contract because spot market pricing went up so rapidly but no we're not seeing conversion back to truck at this point..

Okay, well that's all I had. Thank you for your time this evening and congrats on a very, very nice quarter and a very good year..

Thanks, Kevin..

Thank you..

And the next question comes from Benjamin Hartford from Baird. Please go ahead. Your line is open..

Hey good evening.

Can I just -- Dave just kind of interested in your thoughts for where are you in land right now, a lot of talk about inbound freight into the West Coast being strong, a lot of uncertainty on the other side of Lunar New Year, interested in what you guys are hearing and planning for in terms of the seasonal build in March and then maybe just the cadence through the balance of the year?.

Yes, I think that there is no question that some of our clients, many of our clients did pull forward some degree of inventory in anticipation of the tariffs.

At the same point in time, I don't think we have seen a little rise in inventory levels but it's still nothing that is deeply concerning and we do think that a lot of that business which was pulled forward may still very well be on the West Coast. So there's still a surge that could occur with that.

So our January was up 4% in overall volume in Intermodal. So it was candidly it was stronger than what we had originally budgeted, part of that could be in fact a pulled forward. But we do believe that winter New Year, we always had -- we always have it -- it always has an impact.

But we really do believe that the first quarter and through the rest of the year that we will have in the low-to-mid single-digit volume growth..

Okay, that's great.

Terri If I could come back to you, your comment on EBIT margins, so the 3.8% to 4.3% that's excluding amortization and restricted stock, I wanted to clarify that I guess in that context, when you guys have talked about 4% margins as a waypoint, you've got a healthy pricing environment this year it seems like you're on that path, when you talked about 5% margins as kind of a longer-term target, one is that including or excluding these charges, and two, what's the pathway now forward to get to the 5%?.

Yes, it would be including the amortization because we're going to report that as well as the GAAP number.

And we think we can get really close to the 4%, not 4% this year, so if we have another mid-to-high-single-digits -- mid-to-high-single-digit pricing year, if economy cooperate, if our competitors continue to have an orderly bid season, we think will be just that much closer to the 5% next year..

Okay..

Plus in the organization that we're going to gain through leveraging the network..

Yes. And the synergies that we will get from CaseStack in terms of the procurement spend as well as the cross-selling synergies..

Right..

Okay.

Maybe related to that, Don, you had mentioned the Oracle System specifically on the Logistics side but may be can you get an update on that rollout more broadly and what the cadence of maybe expenses -- expenses coming out and saving starting to ramp both in 2019 and longer-term?.

Yes, I'll let Terry talk about the numbers. But as far as where we're at now obviously we've invested a lot of time and energy in getting our Logistics solutions up and running, we will have the -- that completed in the second quarter of this year and then we'll start transitioning some accounts that are in our old legacy system into Oracle.

While at the same time over the past few years we've been working on the overall business, fleet is now being worked on and rolled out. And we'll have all the fleet on our Oracle system by the end of the third quarter. And then we'll start working on -- working now on our ERP system which will be up in, in the second.

So a lot of progress we've made, a lot of investment we've made, we're starting to see the effects of that in our business, obviously on the Logistics side first and now we're going to see it on fleet.

David, anything there you want to add to that?.

No, no I think that's right on target and obviously some of the benefits of the new Oracle system is optimizing and we've got a set of drivers, improved visibility, makes our drivers jobs easier. So there's a lot of really positive aspects from this rollout that we've been working on for the last year-and-a-half..

And the total spend for this year is around $65 million that includes capital as well as stock.

And one of the other initiatives that we're working on is Oracle Pay for our drivers which will enhance efficiency in the back office, improve the accuracy of the driver pay and the drivers will have a lot better visibility to their pay details make them happier improve retention..

We've been looking at availability of our network, right. So as we get further and further involved without getting into all the details it's about how we can use the leverage of our assets across all our business lines to make us more efficient..

Perfect, great..

Yes, and to improve our profit abilities like Dave said, listed out the benefits for Elevate fleet that improves loaded miles, customer on-time performance, load per drive per day while always been safe, which internally leads to enhance profitability..

Great.

And if I could one quick follow-up, Terri, remember what -- what's going to be upper threshold in terms of the leverage ratio that you guys are comfortable going to?.

We are comfortable going up to three times EBITDA, but right now we're only 0.8 to 1. So we are pretty..

There is a fair amount of room..

Yes, there you go..

That was good. Thanks for the time..

Thanks..

And our next question comes from Justin Long from Stephens. Your line is open..

Thanks and congrats on the quarter.

So I wanted to circle back to PSR, are you seeing any impact to your rail costs as a result of PSR implementation and maybe could you just comment on your level of visibility to rail cost this year and if those rail cost increases look similar to what you saw last year?.

Yes, as far as the rail cost, your second question. We have clear visibility, we feel very comfortable we'll be able to cover those with price increases and then so. So we have very clear visibility to us and feeling very good about that and being able to move forward.

As far as any impact on rail costs or costs in general for business that we're handling when in fact some aspects of PSR are implemented. We're seeing some minor costs as an example on some of the interchange lines and so the steel wheeling freight, we've had to cross-sell and buy a rubber tire at the interchange points.

There is some expense associated with that but it hasn't been too burdensome as of yet. UP just announced that they are closing the Las Vegas Ramp that will be some business probably lost because there's really no other way to get there.

But it's such a small market again I think then and that's again with as -- as the UP and Norfolk Southern are looking at the lines and implementing PSR, I think that they are saying that there's just not enough density. So thus far, no, we have not had a minimal amount of rail cost increases; they've all been very, very big..

Okay, that's helpful.

And then maybe secondly this is probably one for Terri, I know you don't give specific quarterly guidance but can you help us think about the quarterly cadence of EPS even from a high-level just as we layer in CaseStack and think about seasonality, just curious what you're baking into that 2019 guidance? And then also wanted to ask you about the incentive comp impact that you're expecting this year?.

Sure, yes.

Our comps of course get tougher as we progress throughout the year and so we expect significantly more growth in earnings per share in the first half of the year as opposed to the back half of the year, and if we were to flag it, we guess maybe 40% to 50% growth in earnings per share in the first half of the year and between 8% and 12% in the back half of the year..

Okay, that's helpful.

And incentive comp what's the year-over-year impact you're expecting?.

We are expecting it to be down about $10 million in total..

Okay. And lastly I wanted to ask about free cash flow, if I think about the reduction in CapEx and the improvement in cash earnings, it seems like it should be a really good year for free cash flow.

But do you have an expectation on what that free cash flow number looks like and maybe you will be able to get any color on working capital changes you anticipate this year?.

Yes, our working capital should improve because with the divestiture of Mode and Mode products, our DSO up, and our days payable up as well so that should only help working capital.

And you are right it should be a good year for cash flow generation and I could tell you that in terms of EBITDA we mentioned in my prepared remarks that it was $208 million for full-year this year. We would expect that EBITDA will be between $255 million and $270 million this year..

And the next question comes from Todd Fowler from KeyBanc. Your line is open..

Great. Good afternoon. Dave, I just wanted to circle back on the Intermodal pricing conversation, it seems like maybe there's a little bit of a misconception I mean if Intermodal is still 20% or 25% below truck, if Intermodal pricing on a percentage basis goes up high-single-digits and truck goes up mid-single, you're really are not closing the gap.

I mean so is that kind of a message on Intermodal pricing, it's -- don't be so focused on high-single-digit versus mid-single-digit or something different for truck is that there is still is that gap in that bid value that somebody is getting with Intermodal and that's really where the pricing opportunity is going forward?.

Todd, you are right on target there, and you expressed it I think more eloquently than I did. Let know that is the fact that the gap is such that we are going to see truck prices continue to increase, we may be higher by 200, 300, 400 basis points in pricing than over the road but it still has a very large delta between the two costs.

So that's right on target..

That's helpful. And I think it's just been one of the things that people are trying to get their arms around as we move into 2019 because that's a different paradigm than what we have seen historically but it seems to make sense when you think about just the gap between the two, so that's helpful.

And then, Terri, just following up on Justin's questions about the guidance, you gave us a lot of metrics so we can back into a lot of things.

But I guess just conceptually thinking about doing let's call it roughly a dollar here in the fourth quarter, it sounds like that there still is the expectation that even though you've got tough comps you see some growth in the back half of the year, is there something that makes a bit where you wouldn't see something maybe stronger than what you've guided to just given the run rate where you're coming off in the fourth quarter, was it that 4Q was unusually strong because of some of the pull-forward and if you could quantify some of that that could be helpful or are there other things that we need to be thinking about from a conservatism standpoint into 2019?.

Yes. Well pricing is a big lever for us and we got a lot of pricing in the fourth quarter. And we hope next year in the fourth quarter we will get as much for some of our search capacity solutions, so it's tight next year as it is this year.

Was this past year, I'm sorry there's a lot more opportunity to have that growth be higher in the last half of the year but we don't want to assume that into our guidance..

Okay..

And then the other big factors are our competitors I will say they're having an orderly bid season, so if that continues like it is that could be upside as well..

Okay. And then, I will pass it along, but maybe just again sorry for clarification I know that we did talk about this, it sounds like that the expectation is the analyst community should be modeling to a GAAP number.

And then that's what you'd expect from our estimates even though you'll be talking about a GAAP versus non-GAAP and I mean asking just because I think it would be helpful that everybody's doing something consistent, I don't obviously we can model what we want to but it sounds like you're going to be reporting GAAP, you're also going to be breaking out these costs, and so from a consistency standpoint just curious what your view is?.

Yes, because we've got to report GAAP and because you're right, everybody was kind of all over the board we said -- we're going to report GAAP numbers because we have to do but we'll also give you the adjusted numbers which include the amortization and the compensation expense to get you more to a cash flow number..

Right. So you can get a clear line of sight because we know some of our competitors do in fact focus more on non-GAAP and so we wanted to just give you all the numbers so that you can see exactly how we are performing..

Yes..

Yes, that's helpful and the EBITDA guidance is helpful as well because that adjusts for a lot of that. So thanks so much for the time everybody, nice, nice year this year..

Thanks, Todd..

Thanks, Todd..

And your next question comes from Brian Ossenbeck from J.P. Morgan. Your line is open..

Hey good evening, thanks for taking the question.

So, Terri, just to follow-up you're talking about the competition and the orderly bid season, we've seen some changes in your competitors over the last year or so, one's got arbitration with a revenue share agreement, the other one is put some new chassis in place and improved margins and you even got the smaller ones getting a little bit more competitive out best out West so.

What's the expectation given all those changes, do you still think it will be more of an orderly bid season or do you expect the math a little bit more competition or friction on the french?.

We expect it to be more orderly and so far --.

From what we've seen thus far --.

Yes..

It has been an orderly bid season. So we haven't seen nothing within the market within the pricing environment that will lead us to believe anything other than that..

Yes..

Yes, and that's what we saw in the -- for the freight that's priced in the fourth quarter, it's running right now and we have that high-single-digit pricing on that, so..

And Brian, what we do as an organization is try to sense what's going on in the market obviously as we do our bids in usually, in December, we are all sitting here going okay, but what are the competitors doing in today's point, it's orderly..

Okay, thank you.

And on the today's market I think you guys managed it pretty well continuing on third-party exposure last year when the driver pool was pretty tight? Granted there is going to be some PSR disruptions as you mentioned some of the ramps closed, and you got maybe call it a little bit further but is that an overall potential tailwind for this year as the truck market starts to loosen up, do you expect to see benefit on the dray side or is that programming pretty tight?.

Well we are of course very focused on productivity enhancements with our drivers on reducing MT miles. And so we have made some headway on that. I think there's a lot more headroom there for us to continue to become more productivity -- more productive. If we look at it for -- we do still use about 50% third-party driving.

And they have -- they did last year go up in the high-single-digits from a price perspective. I think that again we're working with them, we understand they have increased costs, we don't expect them to be going up as substantially as they did last year and so that will be somewhat of a tailwind for us..

Yes, we have got models in low-to-mid-single-digit increases for the third-party dray cost..

Okay, got it.

And just one last housekeeping on CaseStack, there has only been a couple of months since you closed the deal but is that still kind of in I think last you spoke was like $0.40 to $0.45 accretion ex the items, is that still expected -- is that still where you expect it to be in the 2019?.

I think, things haven't changed from what we've thought when we announced the deal..

And the next question comes from Bascome Majors with Susquehanna. Your line is open..

Yes, thanks for taking my question here.

Going back to the beginning of last year, I think the initial outlook for the year ended up coming in about 25% higher by the time you are in, I mean clearly last year was an exceptional year, but what degree of upside kind of downside risk do you see could to the gap kind of $320-ish range that you're guiding now and is it real pricing kind of what are the levers to get us above or below that, if something moves from the way you budgeted your asset today? Thanks..

We could have upside for rail service. Rail service impacts our volume, our utilization, our loaded miles, our customer service, and accessorials. So, as Dave mentioned earlier, PSR could certainly help us to improve the reliability and consistency of the rail service.

So we've assumed kind of flat utilization, if it's better than we think and that is certainly upside. Downside risk would be for our truck brokerage margin and revenue growth since we have headwinds related to customer mix and spot business that we intend to replace with committed business. And downside risk could also be an economic downturn.

We anticipate that but we never know and upside could be pricing being higher than we are projecting, right now..

Okay.

And can you talk a little bit more about the cadence and you seem pretty constructive on the first half of the year, is anyway you could kind of help us quarter-to-quarter just given the difference in magnitude between the first half and the second half as far as earnings growth?.

Yes. Well we are anticipating that we've got strong -- comps get tougher because pricing got higher right as the year went along in 2018.

And so as we're repricing the business, we repriced in the first half of 2018, that's naturally going to be at higher prices then perhaps we'll get later in the year as we repriced the bid with just price later with higher at that time..

And the next question comes from Diane Huang from Morgan Stanley. Your line is open..

Hi.

I think you touched on this briefly earlier but can you just expand on if you have seen any impact or spillover from your Western peers' ongoing arbitration process?.

You're questioning if we're picking up additional business because of the arbitration issue with that competitor?.

Yes.

And whether you kind of expect the dynamics to impact your pricing or volumes going forward?.

Yes, I don't think that we've seen any amount of business that has come over to us as a result of the arbitration. That was obviously -- that was something that was very public -- it was public and as much as actually taking place for well over a year, probably 18 months.

So we really haven't seen any fallout from it nor have we seen any direct benefits from it as well.

I think it just continues to reinforce just one of many items that I think that all of us that are in the Intermodal industry that we need to continue to focus and get an adequate ROIC in order to reinvest in our physical plant so that we can offer our clients the proper services they expect..

And your next question comes from Jason Seidl from Cowen and Company. Your line is open..

Hey guys this is Adam on for Jason.

Just a quick one from me, I just maybe wanted to ask a little bit from a higher level perspective about the integration of CaseStack, how has that been so far, I know it's been about two months so far, so how has that been and maybe has the process of acquiring CaseStack changed your acquisition strategy or your approach to looking at potential acquisition targets in the future? Thanks..

Okay. I would say number one the integration has going extremely well. When we went into this, we really weren't looking for headcount synergies things such as that. This was a value-added product that we felt as though has scale within their market and a unique niche that is something that we could capitalize on and then help them to grow and prosper.

And that's really what we've been focused on. We have found some cost synergies and as much as able to reduce some of their line hauls and that kind of a thing. But, and again I think the most exciting thing which really it's going to take a little longer than just a couple of months is the sales synergies.

I think that we obviously have relationships with significantly sized CPG customers that do in fact shift LTL at times into some of a very large retailer. So there's a lot of upside opportunity from a sales synergy perspective. So all in all, I would say that we feel very, very positive about it.

As far as how does it impact our future acquisitions, I would say to you that this one was the due diligence, it puts us into a different market which is exciting for us and while it's a different market it is aligned to what our core is.

So I think that continuing to focus and look for acquisition opportunities such as this is really what our playbook will be made of..

You think about it, it allows us to offer a full end-to-end solution and it allows us to enter into a market that we couldn't do before..

Right..

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

Yes, good afternoon. You have gotten much on the brokerage side; I'll offer one up on that. Guess Intermodal is performing so well that's taken all the attention.

Can you I guess give a little more perspective on the -- I don't know if turnaround is a fair characterization but the improvement effort at brokerage kind of how long you think that takes to implement and maybe some more perspective on what specifically you're doing with some of the incentive changes?.

Yes, I mean it's a business that we've been very proud of and not very proud of, other results we have had over the years. And we had a three legged stool if you think about it going to market but we really didn't act like a broker, right.

We acted like a carrier manager, a logistics manager, we did spot business and then we did special services which we're very good at. So we really took a look at ourselves internally and said what market share can we grow and it really is the contracted business, right, the ability to go to market and buy and sell.

And to do that, we needed to reengineer the whole process, we needed to process to it, we needed to put technology to it, we needed to put leadership to it. And I would consider it the fair road would be is under construction.

But we've made great strides especially in the last quarter; I think you'll start to see positive results and a turn on volume probably in the second half of the year. And continue on our path that if market gets tight, we have this transactional option that we can provide our customers and of course the special services that we're very strong on.

So we look at reengineering this, we look at the ability to grow with our existing customer base that we're underpenetrated on, our Top 100 customers that were underpenetrated on the brokerage business..

So what's the target mix in the future, do you try to go to a more kind of conventional 50:50 spot contract split or --?.

It's 60:40 ish roughly. Yes --.

70:30..

Yes, 70:30. So I see us being in that game still, it’s just a matter of turning the volume up in that transactional side of the business excuse me in the contractual side of the business. It's buying and selling, it's what we are trying to do better..

But still you are going to stay skewed towards contract at 70% and just execute it more effectively I guess?.

It could be -- it could be 65% depending on how we grow that business but we see upside in that, right so even though it's 65%, 70% now there's an ability to really explode..

Right, okay. And then maybe a quick one on the M&A side, it sounds like things are going well with CaseStack as I understand that kind of opportunity on the sales cycle that that takes some time.

But what do you think about your capacity to do another deal in 2019, your level of interest or is that something you say you've got enough on your plate that you'd look a little further out in terms of other deals?.

I would say that we certainly are looking, we are opportunistic. Our major goal for 2019 you're right on target, Tom, is to make sure that we fully integrate and effectively integrate, further integration with Dedicated and then also with CaseStack. So those certainly are job one.

But at the same point we're not going to forego something that would be strategically important to us. So we'll continue to be in the market, Geoff De Martino and his people will continue to be looking and we will be opportunistic if something arises..

Okay, yes that's great. That makes sense. Thank you for the time and strong nice results in the quarter..

Thank you..

Thank you..

And your next question comes from Matt Brooklier from Buckingham Research. Your line is open..

Yes, thanks and good evening. So couple of CaseStack incremental questions for you, could you talk to how much revenue contribution we're going to get from CaseStack in 2019 and then also I think we talked to the continuing.

EPS accretion from CaseStack what's the GAAP number if you will?.

Yes, we don't break out GAAP separately for CaseStack. I can tell you that for 2019, we're projecting about $220 million to $230 million of Logistics revenue associated with CaseStack. And for Truck Brokerage we are estimating between $60 million and $65 million of revenue from Case Stack related to the LTL brokerage..

Okay, that's helpful.

And then you guys have touched on it, but you did talk to potential for sale synergies but potential I think for maybe some cost synergies from CaseStack, I don't know if you want to put a number to it but maybe walk through -- maybe some of the bigger buckets in both those categories and how those could play out over 2019, if you think you could add upside?.

We've got about $10 million of revenue baked into our cross-selling synergies in that guidance that I just mentioned. And we've got some procurement side of the house savings and so those are not as significant as the cross selling..

And some of the areas that for instance of being able to substitute Intermodal for some of the truck moves they had into some of the warehouses. The whole thing is though it’s got to be 100% on time.

So it's got to be very focused the on-time performance is critical and so that kind of limits the amount of conversion we can do but at the same point in time there is still enough to make it very attractive and to add to the bottom-line..

And our next question comes from Rick Patterson from Loop Capital. Your line is open..

Hi, thank you. My question is -- how do you think the railroads handled the cold met last week, specifically with regard to the Chicago Terminal, are they back to normal now or still working through freight backlogs? Thanks..

Yes, I think they handled them as well as can be expected, I mean it certainly wasn't just the railroads, they certainly did have some slowdowns from the polar vortex but in all candor, if we look at it of our -- we probably had on the Wednesday and Thursday maybe 10% to 20% of our drivers out on the road, so the terminals can get congested with that, I thought the actions they took made a lot of sense.

So that we didn't get locked and but I mean the polar vortex there's only so much you can do. And we don't want to risk our people, our drivers, our personnel during that kind of period of time in that kind of a deadly cold and nor did the railroads.

So I thought some of the ramp lockouts they had, not lockout, just lot of that freights coming it's going to Chicago made a lot of sense and they -- I thought they communicated to us very effectively..

[Operator Instructions]. And your next question comes from Scott Group from Wolfe Research. Your line is open..

Hey guys, thanks for the follow-up.

So Terri if I just took the 40% to 50% growth in the first half and like 10% in the back half like we get to closer like $3.50 plus of earnings, so were you speaking to sort of adjusted numbers ex the amortization when you gave that 40% to 50% in Dedicated?.

No, I was speaking to solid and the GAAP..

Okay, all right.

Maybe I don't know maybe if I'm doing the math wrong but I think it gets you north of the $3.10 to $3.30 guidance?.

I don’t know if we have our continuing ops numbers, right, as we sell Modes and I'm just talking continuing ops now which is old Hub segment, new Hub and so I have for Q1 of 2018 our earnings per share was $0.33 in Q2 of 2018 our earnings per share was $0.51 and then we had $0.77 we reported in Q3 and the $1.01 that we reported in Q4..

All right that explains it and that's helpful, I think probably for everybody.

And then the last quick thing, can you bridge us to the -- I think we did $90 million of OpEx in Q4 and bridge us to the $98 plus for that forward guide?.

Yes, most of that change relates to the addition of CaseStack. We only had one month of CaseStack in the fourth quarter and we'll have a full quarter in each of those in 2019 CaseStack's costs and expenses are about $14 million to $15 million a quarter, so that's the biggest jump..

Okay.

And CaseStack revenue is in brokerage, correct?.

Well part of it's in brokerage and part of it's in Logistics, so it's $50 million to $60 million it's in brokerage is our estimate and then $220 million to $230 million is in Logistics..

And we have no further questions. I'll turn the call back over to David Yeager for final remarks..

Great. Well thank you again for joining us for the earnings call. As always, Terri, Don and I would be available, if you do have any further questions or if you need any clarification. Thanks again for joining us. Have a good evening..

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