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Edited Transcript of HUBG earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q2 2019 Hub Group Inc Earnings Call

DOWNERS GROVE Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Hub Group Inc earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David P. Yeager

Hub Group, Inc. - Chairman & CEO

* Phillip D. Yeager

Hub Group, Inc. - President & COO

* Terri A. Pizzuto

Hub Group, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Matthew Young

Morningstar Inc., Research Division - Equity Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Hub Group's Second Quarter 2019 Earnings Conference Call.

Dave Yeager, Hub's CEO; Phil Yeager, Hub's President and Chief Operating Officer; and Terri Pizzuto, Hub's CFO, are joining me on the call. (Operator Instructions)

Any forward looking statements made during the course of the call or contained in the release represent the company's best good-faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as expect, believe, 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.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [2]

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Good afternoon, and thank you for participating in Hub Group's second quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer; and Terri Pizzuto, our Chief Financial Officer.

At the close today, Hub Group reported a record second quarter as revenue increased by 3%, EPS by 71% and operating income by 60%. Our operating income increased double digits in all business lines except for truck brokerage, which was flat. This increase in profitability is the result of higher prices and also our intense focus on reducing costs while improving service.

Rail service has improved dramatically. The Union Pacific's on-time performance has improved by over 1,400 basis points, while the Norfolk Southern's on-time performance is at record levels. As the rails continue to enhance their operations, we believe we'll continue to see improved service, making intermodal more competitive versus truck.

The CaseStack acquisition is also moving along extremely well. We're continuing to identify operating synergies with CaseStack and it exceeded their profit forecast for the second quarter.

The one disappointing area is that of intermodal volume, which was down 7% for the quarter. There are numerous reasons for this that Phil will elaborate upon. The good news is that the volume declines have flatted, and we expect to continue to see sequential improvement through the second half of the year.

And with that, I'll turn the call over to Phil to review our business lines.

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Phillip D. Yeager, Hub Group, Inc. - President & COO [3]

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Thanks, Dave. As Dave said, we are pleased with our second quarter results and the progress we are making in improving our profitability and efficiency, while driving continuous improvement and great service to our customers. We're also proud that we were recently recognized as a top 5 3PL and as one of the country's best places to work. I will now discuss our service line performance.

Intermodal volume was down 7% and revenue was up 1% for the quarter. The volume decline was primarily due to a softening demand environment versus last year as well as increased truckload in intermodal competition. In addition, we saw a 2% volume impact from lane cancellations and weather disruption. However, our team executed extremely well and improved margin as we enhanced our efficiency to a 110 basis point improvement in loaded miles and improved third-party purchasing, while maintaining our pricing discipline. We are excited about the improvements we are seeing in rail service, which helped drive a 310 basis point improvement in our on-time performance to our customers. We believe that with continued economic strength and greater tightness in the truckload market, we will be positioned for a solid peak season.

Brokerage generated an increase in load count of 18%, a 380 basis point improvement in gross margin as a percentage of sales and a 240 basis point improvement in on-time performance. This was the result of us onboarding CaseStack and implementing our new operating model, our yield management strategy and the new technology platform. We are pleased with our progress in transforming the business and see a great opportunity to continue to grow and invest in this service line.

Our logistics business posted strong results in profitability and revenue growth. Onboarding CaseStack benefited logistics and we are seeing the results of our improved yield management and continuous improvement efforts, which led to a 540 basis point improvement in gross margin as a percentage of sales. We were able to win several new customer engagements during the quarter in both CaseStack and our legacy logistics business that will drive growth in the back half of this year and into next year. With our enhanced talent and operating model, we believe we can continue to grow, bring significant value to our clients and improve profitability.

Dedicated increased revenue and profitability with a 710 basis point improvement in gross margin as a percentage of sales. We achieved this through our improved operational discipline, winning new business, providing great service and executing on our yield management and continuous improvement strategy. We have an extremely strong pipeline and believe we can continue to grow the business while improving returns.

Overall, we had a great quarter and are performing well. As I mentioned before, we still see opportunity to improve our efficiency and profitability, while continuing to provide best-in-class service to our customers. We know these results are not possible without our great team members and we want to thank them for all their passion and effort.

I will now turn it over to Terri to discuss our financial performance.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Phil, and hello everyone. I'd like to highlight 3 points for the second quarter. First, operating income increased an impressive 60% resulting in operating margin of 4.4%, bringing us closer to our stated 5% goal. Second, gross margin grew $31.7 million or 31% due to growth in all 4 service lines. And third, EBITDA was $69.4 million or an increase of 55% over 2018's $44.8 million.

Now let's take a more in-depth look at our performance in the second quarter. Hub Group's revenue increased 3% to $921 million, driven primarily by logistics. Gross margin as a percentage of sales was 14.4%, the highest that it's been since 2007. Gross margin as a percentage of sales increased 310 basis points, and every service line was up compared to last year. Operating margin adjusted to exclude acquisition-related expenses totaling $4 million was 4.9%. Hub Group's diluted earnings per share was a record at $0.87. This is compared to a 2018 diluted earnings per share from continuing operations of $0.51, an increase of 71%.

Cash provided by operating activities for the first 6 months of 2019 was a $135 million. Free cash flow totaled $114 million in the first half of this year; that's compared to free cash flow in the first 6 months of 2018 totaling $30 million.

Turning now to our guidance. We believe that our 2019 diluted earnings per share will range from $3.30 to $3.40. Earnings per share in the second half of the year is projected to be very similar to what we projected back in April. We estimate that the third quarter earnings per share will be slightly higher than last year and lower than the second quarter of 2019 earnings per share. We project mid-single digit revenue growth for the full year. We expect gross margin as a percentage of sales to range from 13.9% to 14.3% in the second half of the year. We believe that our quarterly costs and expenses will range between $96 million and $98 million.

We project that our effective tax rate will be about 25% in the back half of the year.

We plan to spend between $100 million and $110 million on capital expenditures in 2019 and to fund these purchases with a combination of cash and debt.

Through today, we purchased 626,000 shares of stock at an aggregate cost of about $25 million. $75 million remains on the current authorization. That wraps up our financial performance. Over to you Dave for closing remarks.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [5]

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Great Terri, and thank you. We're very pleased with the strong second quarter and believe we'll continue to have positive financial results for the remainder of 2019. We continue to focus on improving our efficiency and productivity, while delivering best-in-class service to our clients.

With that, we'll open up the line to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Scott Group from Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [2]

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Can you talk about the monthly volume trends in intermodal and then maybe your expectations in second half? And then I know you talked about a more competitive intermodal market, is this manifesting for you? And you think in the second half in weaker volumes or less pricing?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [3]

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I can give you the monthly volumes, Scott, it was down 2% in April, down 8% in May and down 11% in June and then so far in July through yesterday were down 4%.

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Phillip D. Yeager, Hub Group, Inc. - President & COO [4]

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Yes. I'd just add that our customers are optimistic in the back half. We're currently in the process of finalizing peak planning. Award compliance is pretty low right now in the 70% range. Typically, we see that around 80%. Now that we're past the weather disruptions and see some sustained improvement in rail service, we're starting to see confidence build up. I think if you continue to see the consumer economy perform well, truckload will tighten up and that award compliance will come up as well. And that should result in something similar to 2017-type peak, which was strong.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [5]

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What do you make of that going from minus 11% to minus 4%, that uptick from June into July, is that -- what's driving that? And then maybe to ask more directly on pricing, what pricing trends are you seeing right now on contracts?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [6]

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Yes, if you look it on a per business day basis, Scott, June was down about 6.7%. So that was some of it. There was one less day in June than last year. And so actually if you look at it on a per business day basis, we were up in June sequentially from April and May. So we think things did get a little better in June although bogged down by flooding that happened on the rails. And we think that we picked up off the West Coast. So we think that's a plus right now. And we've seen that in the month of July so we think that will continue. And as Phil mentioned, we're anticipating a pretty good peak assuming that the truck market tightens up a little bit and that we still see the economic strength that we're continuing to see.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [7]

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From a pricing perspective, Scott, it was one of your questions, we did see it a little more aggressive in intermodal. That was very targeted. And we anticipated that we would be towards the middle part of this year at more the mid-single-digit increases. It certainly has not gone negative. And as we have forecast originally, the first quarter, we were able to the highest pricing at that point because in 2018, they paid the least. And so we have to look at it over a 2 years basis. So 80% of our bids are now completed. And I would imagine that those will be probably in the low mid-single digits for those clients.

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Phillip D. Yeager, Hub Group, Inc. - President & COO [8]

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And I would just add. I think our transcon volumes are continuing to perform best within our network. It's really in the shorter-haul lanes, where we're seeing some increased truck competition. So we anticipate with some tightness in there that we would see a lot of that volume come back over.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [9]

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Okay. Terri, can I ask you, the gross margin guidance is a lot higher than what you gave us last quarter. Can you just walk us through the pieces of what's causing that upward revision?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [10]

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Yes. There were a couple of big drivers of that, Scott. Intermodal gross margin as a percentage of sales came in about 100 basis points higher than projected because of our focus on yield management, continuous improvement and cost efficiencies similar to the loaded mile improvement, for example, that Phil talked about in his prepared remarks. And then secondly, truck brokerage come in about 300 basis points higher than we had forecast due to more efficient operations, better procurement and benefits from our technology platform. Those were the 2 biggest drivers.

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Operator [11]

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And our next question comes from Benjamin Hartford with Robert Baird.

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Unidentified Analyst [12]

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This is Andy on for Ben. Wanted to get some additional perspective on the lowered CapEx guidance for the full year and what exactly is driving that?.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [13]

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Sure. It's less tractors and trailers for Hub Group Dedicated and Hub Group Trucking.

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Unidentified Analyst [14]

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And then just a follow up on that. Should we expect 2020 CapEx to be similar to 2019? It should be higher or lower, what are you seeing there?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [15]

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It will probably be a bit higher because on the high end, we're at $110 million for this year. We think next year we've got a higher truck spend. And so with replacement of some trucks and then we've got the remaining [spend for the] (corrected by company after the call) building. So probably closer to maybe $140 million, $150 million next year.

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Operator [16]

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And our next question comes from Justin Long of Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [17]

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So may be circling back to intermodal volumes, I'm sorry if I missed it, but could you give the trend in intermodal volumes by geography? And then also along those lines, Phil, you mentioned a little bit more price competition in the east, but could you give us a sense for what that spread looks like if we look at pricing in the east versus pricing in the west in intermodal right now?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [18]

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Sure. I'll give you the numbers and then let Phil elaborate on the pricing. Local east was down 9%, local west was down 7%, transcon was down 2% and other, which is Mexico and Canada, it was down 11%.

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Phillip D. Yeager, Hub Group, Inc. - President & COO [19]

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Sure. And from a pricing perspective, I would say the spread in the east certainly is tightening somewhat. We still think from a market in total, the gap is somewhere around 20%. But when you get into the shorter-haul lanes, it can get down to around 10%. But we've also heard with some of the more recent bids and aggressive truckload pricing that is around intermodal price, right? So we think that's short-lived though. We don't see that continuing for the long term, especially if we continue to see the economy perform well.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [20]

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Right. That's kind of aberrational and historically, we've seen that type of competition when there's an excess of truck capacity. The Chicago-Harrisburg, Chicago-Atlanta type lanes, LA-Dallas, you do see during those periods of -- a lot of capacity out there. You do see some price competition from the truckers, but it candidly, to Phil's point, it doesn't last along.

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Justin Trennon Long, Stephens Inc., Research Division - MD [21]

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Okay. That's helpful. And I know it's still a little early to talk about 2020, but I did want to ask about your high-level thoughts regarding intermodal margins since we progress into next year. If we did see a continuation of the intermodal pricing environment that we're currently seeing today, is that an environment where you still think you can improve intermodal margins just if you start to implement some of the changes you're making in your drayage operations, rail service gets better et cetera. Any thoughts around that?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [22]

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Sure, I think we have good visibility to our rail cost increases and have room to continue to improve margins. There's a few big levers, buying better in the open market, utilizing our assets more effectively, in particular on the operational excellence side. I think from a yield to continuous improvement perspective, we still have a lot of opportunity there to provide great service and save our customers money. And so that's another great opportunity that will help us continue to grow. I think we can still be more efficient in our organization, really focusing on streamlining the organization in both the front line and back office and focusing on scaling the organization. And then our technology is really starting to take hold as well, which is allowing us to make better frontline decisions. We're integrating our platform. And I think, the other piece would be, that we are automating a lot of our processes, for example with RPA. So I still think there's opportunities in all of those. And if the pricing environment continues, I would anticipate we could continue to grow our margins.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [23]

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Although I would suggest that we do think a lot of what 2020 will look like from a pricing perspective is, it's going to relate directly to peak season. And from discussions we've had with both our rail partners as well as our customers, we're forecasting right now that we're going to have a 2017-type of the peak, which was very strong, but not like 2018, which was kind of aberrational.

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Justin Trennon Long, Stephens Inc., Research Division - MD [24]

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Okay. And one last follow-up on that point. So second half intermodal volumes, could you share what you're assuming for the year-over-year change? What's getting baked into the guidance?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [25]

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Flat to down slightly.

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Operator [26]

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And your next question comes from David Ross from Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [27]

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Talking about the container fleet for intermodal, has there been any changes there with the weak volumes? Is that one of the other things that impacted the CapEx decisions? And what do you expect to be on the container side going into next year?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [28]

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Yes. We are purchasing about 1,500 containers this year. So our net adds are only about 300 containers. So we'll end the year with about 38,500 containers. So not much growth there at all.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [29]

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And then, when you talked about the 310 basis point improvement in Hub Group's on-time performance for your customers, where is that versus, I guess, where it's been in the past and where you want it to be? Is there still good amount of room to run there? Are you getting pretty close?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [30]

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Yes. I think we've improved dramatically. Our team has done a great job focusing on service. This score is related to how our customers actually grade us. So there's a legitimate score. And I think we can always be better. We're certainly pleased to have rail service where it is at, which is really helping to improve that. And I still think there's significant room to improve. And with the more fluid and stable rail network, the opportunity for us to keep improving on that at a planning level is still there. So there's a lot of opportunity left.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [31]

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And then lastly just on the Dedicated side of things, what's the outlook for that business? Has demand slowed? What does the pipeline look like?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [32]

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Pipeline is really good. We've still got about $100 million in the pipeline. We continue to bring on new business. We brought some on near the end of the second quarter, and got good pricing, mid-single-digit pricing. So we're happy with the performance.

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Phillip D. Yeager, Hub Group, Inc. - President & COO [33]

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Yes. And we're continuing to improve our operational discipline and our pricing discipline as well. So with the business that we're bringing on, we're very pleased with the returns we're going to generate, mainly because we're also investing in systems and talent that are going to help us make that business generate return for the company as well. But the pipeline is really strong. We're actively out in the market. And our customers don't want to focus on the long-term. And so there's an opportunity to expand those dedicated fleets.

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Operator [34]

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Your next question comes from Todd Fowler from KeyBanc.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [35]

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Dave or Phil, I just want to get your thoughts on how we think about volume growth versus margin improvement in this environment. When I think back, historically, maybe it's been 10-plus years at this point, but there was a time when there were some opportunity to call some low margin freight, is that kind of the environment that we're in right now? Or is just -- is this more of a function that you've got some capabilities where if the volume is there, you participate and you see that kind of in the numbers and if the volumes isn't there, you can still improve margins with some of the efficiencies. Just how are you balancing volume growth versus margins right now?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [36]

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Yes, we have a much deeper understanding of our network now and are very focused on making sure that we're making optimal network decisions in our pricing. So there's certainly areas where we want to continue to compete and we will get aggressive, but at the same time, we are maintaining our pricing discipline. We're continuing to focus on anything that's in our bottom 10%, that's what we call it, that either needs to be up or out of our network. And so we plan to continue to focus on that type of yield strategy and continue to price to balance the network and keep (inaudible) operation.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [37]

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Okay. And then, Dave, to your comments on pricing I think you said that the last 20% of the bids, you're expecting to be kind of in the low to mid-single-digit range. Do you feel that you're above the market? Or do you think that the intermodal market right now is that that's kind of where pricing is more broadly industry wide?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [38]

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At this point in the bid cycle, that's kind of where the industry is right now, Todd. Again, the largest increase is just because of the curve from 2018, whereby the clients that took, in fact, increases at this point last year, took the largest increases of anybody during 2018. It was just natural that, in fact, that hockey stick had gone down to the right.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [39]

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Okay. So it's the comps, okay. And then last one from me. Terri, on the cost side, the last 2 quarters operating expenses have come in below the guidance. You've got a little bit of step-up for the third and fourth quarter, but salaries and benefits was actually down a little bit sequentially, 2Q versus 1Q. There is a potential that you can still do better on the cost side in the back half of the year. And can you talk a little bit about kind of what's embedded in the expectations in the step-up in costs for the third quarter and fourth quarter?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [40]

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Yes. Sure. You're exactly right. We beat our forecast this quarter, slightly because salaries and benefits were lower than what we had forecast and we've not hired as many people as forecast. We're down 42 people from last quarter. We're down about 54 from last year at this time. And we've scaled our resources to coincide with our performance and we've also benefited from the technology. And in terms of why our cost and expenses are going up? Most of the increase relates to increased IT cost. We estimate that IT cost will increase about $3 million from Q2 to Q3. And that the cost will stay flat from Q3 to Q4. The increase relates to ERP, logistics migrations to our new OTM systems and additional planned headcount in IT. And then the bonus will also fluctuate depending on our EPS performance. That too is backed in our guidance.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [41]

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Sure. Okay. Does the $3 million carry forward into 2020? Or is that tail-off at some point?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [42]

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We'll give you that guidance in 2020. I don't have that number handy.

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Operator [43]

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And your next question comes from Brian Ossenbeck from JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [44]

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You talked a little bit about yield management already, but just more generally speaking, it seems like it's a pretty (inaudible) theme across all the business lines. So maybe you can elaborate a little bit more on what you're doing differently in this cycle versus previous ones? What sort of innings do you think you're in? And what segment has the most opportunity to be more discipline on yield? And to the stick -- to have it stick throughout this cycle and into the next one?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [45]

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Sure. So I think there were a few questions on this, I'll try to address them. But generally, I would say we've taken a philosophy where we want to find mutually beneficial opportunities with our customers, where we're going to provide them great service and savings and we're going to be able to generate a strong return. And so we've really focused in intermodal on building a fluid network that is really balanced. That is a big focus for us. In truck brokerage, we have gotten a much deeper understanding of the market, and where we can purchase more effectively and build out a lot of density to do that. Within Dedicated, I think we have a much better understanding of our cost structure now. And where we can compete, once again, in those areas of density that we have where we actually have a better cost structure and can generate a strong return. And then finally, logistics, there's still a great deal of opportunity. But I would say once again, we know the value we're bringing to our customers and the savings we can provide and we're pricing to ensure that we maintain strong profitability. I would just say lastly, we've inserted a lot of processes across all the service lines to manage our bottom performing business and ensure that we are moving that business up from a returns perspective very quickly.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [46]

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Okay. Great. And on that topic, the new truck brokerage initiatives, I think, you started them a couple of quarters ago. New operating model, again, new management and in the tech platform. It sounds like you're getting some traction on that, but maybe if you could give a little bit more detail on what you're seeing kind of follow through to the bottom line? And then what's left to come?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [47]

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Sure. Yes. We had to start with the foundation of service to our customers and build trust with them that we could perform. I think we've done that. Now that we're getting our better purchasing and processes and pricing in place, that's really helping us as well. And the next piece is ensuring that we improve that efforts and become more efficient in our headcount through the technology platform that we've rolled out and we're in the early innings of that, and think there's still a lot of opportunity there. So I think we're building that customer trust. We've seen the wins come on and so we feel very good about our ability to grow this business. And we're ramping up some great wins right now that we're excited about.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [48]

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Okay. And last quick one for me, just to clean up on the Dedicated side. Lost business I know that was something you mentioned last quarter as well, I just want to make sure that was the same thing kind of going forward? Or if you've had seen any other changes in the dynamics there?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [49]

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No, that's still carrying forward. As I mentioned earlier, we did on board some new business at the tail end here of the second quarter, that will carry over into third and fourth quarter. We've got $100 million pipeline. We're optimistic about that. But net-net, when we're done, we still expect low to mid-single-digit sales growth in Dedicated for the full year.

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Operator [50]

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And your question comes from Bascome Majors from Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [51]

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You said earlier that bid compliance was in the 70-something percent range, more normally in the 80%. In the outlook for some improvement in the second half sequentially, are you assuming that you get back to normal big compliance range in [your modal] wars? And if so, is that because you've rebid with lower volume commitments? Or it's because your customers are telling you the freight's coming?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [52]

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We haven't built it all in our guidance Bascome. As Dave mentioned, it's about 70% right now. And normally it's 80% bid compliance. So to get to the high end of the guidance, we have built in -- recovering - some of that, but not all of it.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [53]

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But our customers are...

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [54]

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Go ahead.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [55]

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Yes. Our customers are telling us that, in fact, that to expect a strong peak. Again, not 2018, but more closely aligned with 2017, which was still a very, very strong peak with a lot of demand. And just to elaborate a little bit further. And Terri, earlier had mentioned that we're beginning to see some tightness in LA and obviously, it's a little bit early for peak, but we're certainly beginning to see some pickup in the overall volumes coming off the business.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [56]

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So we think we are realistic with our guidance.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [57]

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Well, I appreciate that color. And if -- I guess a lot of the questions today have -- it feels like people are looking back at the last time intermodal demand and pricing surprised the downside 2 years ago. And it's happening market-wide this year, but you're having much better bottom line outcomes. And I appreciate Phil going through a lot of the initiatives that you guys are doing at the company level to improve that. Can -- without walking through all of those again qualitative, maybe can we talk a little bit about what inning you are in some these processes and other improvements that you're doing? And is there more for us to see on structural margin improvement into 2020?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [58]

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I think we still have room to improve. There's always going to be room to improve. I believe we're in the middle of the game here and we've made a lot of progress. I'm really proud of what our team has done, but we still have room to go. We haven't seen the full benefits of our technology investments, which I think will be substantial. So we have the processes now to take advantage of that. But really becoming more efficient and intelligent through the technology, I think is going to be a big shift for us as an organization. So I would say we're still in the middle of the game and feel like there's upside for the organization going forward.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [59]

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And last one. Terri, just a housekeeping item, you had talked a little bit about EBITDA last quarter. I believe you said $260 million to $275 million. What's the translation -- translating the EPS range translate to your EBITDA?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [60]

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Yes. We're projecting now $275 million to $285 million.

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Operator [61]

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And our next question comes from Jason Seidl from Cowen and company.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [62]

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You mentioned that some of the truckload pricing is sort of at-intermodal pricing but you said it doesn't last long. Historically, how long has it actually lasted?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [63]

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Well, it last generally through a lot of the economic cycle. So I think that if we begin to see demand go back to a little bit more than normalized level like 2017 level even that you'll begin to look at better freight that better fits their networks. These shorter hauls, again, you can kind of monitor how the economy still ended up with trucking industry is doing just by seeing how aggressive they get in some of these shorter-haul corridors. So I [cannot] pinpoint an exact time, but again, a lot of its dependent on the economic cycle, on the amount of freight that's available out there.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [64]

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So do you think with your commentary on peak season looking like 2017, linking these 2 statements together, do you think we'll start to see some of that pricing pressure ease?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [65]

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Yes.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [66]

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Okay. Great. The other question I had was on acquisitions. You've had a few companies in the transportation space call out the fact that multiples are getting lower and that they're getting interested again. You guys have been acquisitive over the last few years. You generate some good free cash flow. Should we be looking at anything potentially for 2020? And if so, what are the areas that you'd be interested in?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [67]

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We are out looking -- We would agree, we think that expectations are normalizing. And so we are certainly out looking right now mostly nonasset-based types of organizations, whether it's specialty brokerage or logistics or fulfillment. We would be opportunistic on filling out our geographic footprint in Dedicated and Intermodal as well. But the main areas of focus are really nonasset-based, companies that can help us drive scale and new solutions for our customers.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [68]

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And CaseStack was a great acquisition. So was dedicated. We're integrating those very well. And we had $150 million in cash at the end of the quarter with no borrowings on our $350 million revolver that we've got. So plenty of dry powder as well.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [69]

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It sounds like you're in a good position. Appreciate the time as always.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [70]

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Thank you.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [71]

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Thank you.

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Operator [72]

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And our next question comes from Tom Wadewitz from UBS.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [73]

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I wanted to go back to the commentary on competition in intermodal, did you see -- it seems like you've weathered that pretty well. Do you think some of the decline in second quarter was a function of contracts that moved to a more competitive player in the market? Or was that just weakness in freights? And I guess in second half, it doesn't sound like you are expecting to kind of lose market share. But I just -- I guess I wanted to see if you could offer some more comments on impact of the increased competition in intermodal on your volume?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [74]

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I think a lot of the decline was actually just the compliance issue with the bids. I mean that's a huge variance from what we anticipated. If, in fact, we were to build in to 80% for the second half, we certainly would grow intermodal in low-single-digit. So a lot of it is that. We did lose in a few cases, which is normal during the bid process, but we also gained in multiple instances. So I wouldn't say that we lost share. I think that just the pie is a little bit smaller and we took a shrink like, I think, most of the players did.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [75]

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Yes, the domestic intermodal market, Tom, was down 8% and we were only down 7%. We don't think we lost share and the competitors were down more than we were.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [76]

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Right. Okay. How would you -- Dave or Phil, how would you compare this cycle to the prior cycle? I mean it seems like you've had clearly some capacity that's coming in to market on the trucking side and truckload side. You've had, I think, some weakness in freight in first half of the year. I mean it seems fairly straightforward given the weekly rail volume and Cass Freight shipment's index, if you want to look at that. How do you think this -- but it sounds like you're pretty optimistic looking forward to. How do you think this cycle is different? Is it just a more narrow period of weakness in freight? Or more disciplined among the intermodal players? Because it does seem like you're not expecting to have this kind of protracted weakness that we had in 2015 and '16?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [77]

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A lot of that, Tom, I think is driven by the overall economy. That's a key. We've seen many freight recessions before. And again, 2018 was such an anomaly that it added a lot of capacity into the market that we will see filter through at this point in time. And as it does tighten and as we see the shipments get stronger, and a little bit more consistent as well because there was a fair amount of pull forward from the threat of tariffs. So I think it's going to be -- our feeling is, is that just from talking to our clients, again, and our rail partners, that it's going to be short-lived. And this is nothing like some of the severe recessions that we've seen in the past. We do believe that it's in the process of flattening out. And as we have a strong peak like 2017, that will really set up 2020 to be a positive year as well.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [78]

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You talked a bit about the view on 2020. I think you were saying that you think rates in intermodal will be up in 2020. How would you think about if the kind of truck capacity is an issue and truckload contract rates are down in the 2020 bid season? Would you be able to -- would you expect to decouple from that and potentially see intermodal rates up? Or is it pretty tough to see intermodal rates be [resilience] if truckload contract rates are down next year?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [79]

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Well, if, in fact, on to the hypothetical, that trucking rates are down. We put pressure on the shorter lengths of haul. But I do think to your earlier point, we've seen a lot more discipline within the intermodal players. Again, I think that we've all looked at our return on invested capital and it hasn't been what it should be. And so we're all working towards individually as far as enhancing profitability. So the truck -- that there's no question that there is a loose truck market. Shorter lengths of haul will be more challenging. But again, we really don't believe that that's going to be the case at this point. Certainly, I know that I just heard the June results. Consumer sentiment was through the roof again and consumers are driving an awful lot of this economy.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [80]

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Right. Okay. Yes, great. It seems like your model is working well and the period of weakness in freight and good performance in gross margin.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [81]

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Thanks, Tom.

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Operator [82]

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And your next question comes from Matt Young from Morningstar.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [83]

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Just quickly to clarify on last question. So the 10% spread that you're seeing versus truckload on the shorter, I'm guessing that, that is meaningfully better than what you guys saw in 2016, the last time truckload rates fell, correct?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [84]

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Are you talking about the difference being truck and intermodal rates?

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [85]

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Yes.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [86]

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I think Phil mentioned 20%, actually is the average...

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [87]

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Oh, okay. I thought I heard 10% on shorter haul lanes, but...

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Phillip D. Yeager, Hub Group, Inc. - President & COO [88]

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I think it can get that low and generally, we see around 20%.

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [89]

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Yes.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [90]

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Okay. Around 20%. But I'm guessing that's markedly better than what you guys saw in 2016, the last time truckload rates, correct?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [91]

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You are absolutely correct.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [92]

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Okay. And it sounds like just overall demand and pricing conditions for intermodal list are also better than they were last time and you guys are in a better position to see that improvement in the second half?

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [93]

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Absolutely. Yes. And we are expecting that.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [94]

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Okay. And then, one quick question about -- on the truck brokerage gross margin. If you ignore the mix shift impact from CaseStack, wondering how the gross margins trended for legacy truckload brokerage operations, were those up year-over-year?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [95]

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Yes. They were up year-over-year, about [270] (corrected by company after the call) basis points.

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Matthew Young, Morningstar Inc., Research Division - Equity Analyst [96]

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Okay. Would some of that have anything to do with kind of your internal efforts with IT as opposed to the cycle or both of those?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [97]

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Yes. They both...

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Phillip D. Yeager, Hub Group, Inc. - President & COO [98]

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I would say both.

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Operator [99]

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(Operator Instructions) And your next question comes from Matt Brooklier from Buckingham Research.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [100]

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I wanted to circle back to your Dedicated business. Could you remind us what's the average length of contract on that business? And I'm just curious as to how we should be thinking about what percentage of your contracts are coming up for renewal over the next 12 months?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [101]

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Yes. It's typically a 3-year contract we have visibility to the renewals. We work through them every year. So next year won't be outsized versus traditional.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [102]

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Okay. Got it. And then, you talked to achieving mid-single digit price increases. I think through the first half on your -- on Dedicated contracts on average, are your expectations for the second half similar? Or do you think that maybe price increases maybe a little bit lower than that just given kind of the current state of the broader TL market?

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Phillip D. Yeager, Hub Group, Inc. - President & COO [103]

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Sure. I think driver wage inflation has subsided somewhat. A lot of those renewals were driver-wage driven. And we need to make sure we're staying competitive in the market to service our customers in the right way. I would say the competitiveness has subsided somewhat. So if we do continue to -- as we look at renewals going forward, I would say you will continue to see it balance out somewhat. But we are also focused when we are underperforming at a site and making sure that we can generate a return as well.

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Operator [104]

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

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [105]

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So maybe Terri, if we think that transcon's going to do better than sort of local east, local west because of this truck competition dynamic, what are the implications of better transcon on gross margins and margins for you?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [106]

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It's a longer length of haul. It's our longest length of haul for transcon. So that means higher margin dollars and gross margin as a percent of sales is really pretty consistent across all of our different geographies. So it's really more [margin] (added by company after the call) dollars and higher revenue because the revenue per unit is also higher.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [107]

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And then out margin?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [108]

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It's similar [to the other geographies] (added by company after the call).

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [109]

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Okay. Okay. And then just lastly, the guidance on gross margin for the back half, do you think they are higher, lower in third or fourth quarter?

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Terri A. Pizzuto, Hub Group, Inc. - Executive VP, CFO & Treasurer [110]

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Gross margins, we think are higher in the fourth quarter. Typically that's due to seasonality and peak season surcharges.

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Operator [111]

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And that concludes the question-and-answer session. I'll now turn the call back over to Dave Yeager for final remarks.

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David P. Yeager, Hub Group, Inc. - Chairman & CEO [112]

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Great. Well, again, thank you, for joining us for our second quarter earnings call. As always, Terri and Phil and I would be available if there's any additional questions that you may have. Thank you, again.

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Operator [113]

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