Q2 2019 Earnings Call
Thank you for holding your conference call beginning shortly thank you for your patience.
Once again, thank you for holding the conference call well be beginning shortly thank you for your patience.
Hello, and welcome to <unk> second quarter 2019 earnings Conference call.
Dave Yeager, <unk>, CEO filmmaker huts, President and Chief operating officer, and Terry because they know how CFO .
Joining me on the call.
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Great question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded its now my pleasure turn the call over to your host Dave Yeager you may now begin.
Good afternoon, and thank you for participating and hope group's second quarter earnings call.
Today I have with me fill yeager hubs, President and Chief operating officer, and Terry Pazuto, Our Chief Financial Officer.
At the close today have reported a record second quarter revenue increased by 3%.
The P.S. 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 as a result of higher prices and also our intense focus on reducing costs, while improving service.
[noise] rail service has improved dramatically.
The Union Pacific's on time performance has improved by over 1400 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.
Okay second acquisition is also moving along extremely well.
We're continuing to identify operating synergies will case back I said exceeded their profit forecast for the second quarter.
The one disappointing area is that an 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 or flat.
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.
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 five threepl and it's 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 and intermodal competition.
In addition, we saw a 2% volume impact from lane cancellations and weather disruption.
However, our team executed extremely well and improved margins as we enhanced our efficiency through a 110 basis point improvement in motive 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 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 a onboarding case stack and implementing our new operating model yield management strategy and 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 and profitability and revenue growth.
Onboarding case tax benefit of logistics and were 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 case stack 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 brings significant value to our clients and improved 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've 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 Teri to discuss our financial performance.
Thanks, Ellen Hello, everyone I'd like to highlight three points for the second quarter.
Operating income increased an impressive 60%, resulting in an operating margin of 4.4%, bringing us closer to our stated 5% call.
Second gross margin increased $31.7 million or 31% due to growth in our core service offerings.
And third EBIT out was $69.4 million or an increase of 55% over 2008 totaled $44.8 million.
Now lets take a more in depth, but that 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 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 with 4.9%.
Hub group's diluted earnings per share with a record at 87 cents.
This is compared to a 2018 diluted earnings per share from continuing operations of 51 cents an increase of 71%.
Cash provided by operating activities for the first six months of 2009 tool with a $135 million.
Free cash flow totaled $114 million in the first half of this year.
That compared to free cash flow in the first six months of 2018 totaling $30 million.
Turning now to our guidance.
We believe that our 2019 diluted earnings per share will range from $3.32 to $3 and 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 2009 pool and the funding purchases with a combination of cash and debt.
Through today, we purchased 626000 shares of stock at an aggregate cost of about $25 million.
$75 million remaining on the current authorization.
That wraps up our financial performance over to you Dave for closing remarks.
Great Teria. Thank you.
We're very pleased with the strong second quarter and believe we will 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.
Thank you well now begin the question answer session.
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And our first question comes from Scott Group from Wolfe Research. Your line is open.
Hey, Thanks afternoon guys.
Can 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 in.
You think in the second half and weaker volumes or less pricing.
I can give you the monthly volumes Scott it was down to in April .
Down eight in May and down 11 in June and then so far in July through yesterday were down 4%.
Yes, I would just add to that our customers are optimistic on the back half. We're currently in the process of finalizing peak planning.
Where compliance is pretty low right now in the 70% range.
Typically we see that around 80% and 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 performed well truckload will tighten up in that work compliance will come up as well.
And that should result in something similar to 2017 type peak, which was strong.
What do you make of that going from a minus 11 to minus four that uptick from June to July is that.
What what's driving that and then maybe.
Yes, more directly on pricing what pricing trends are you seeing right now is on contracts.
If you look at on a per business day basis, Scott June was down about 6.7%. So that were some of it there was one less day in June than last year and.
So actually if you look at on a per business day basis, we were.
Up in June .
And sequentially from April and May So, we think things did get a little better in June although bogged down by the flooding that happened.
On the rail.
And.
We think that we picked up off the west coast. So we think that plus right now and we've seen that in the month of July . So we think that will continue and.
As Phil mentioned, we are 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.
From a pricing perspective.
Scott, which was one of your questions.
We are we did see it a little more aggressive in the intermodal market, but it was very targeted.
We anticipated that we would be towards the middle part of this year at more mid single digit increases. It certainly is not going negative and as we have forecast originally.
The first quarter, we were able to get the the highest price and at that point because in 2018. They paid the least and so you have to look at it over a two year 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 and I would just add I think where 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. Two we anticipate with with some tightness in that that we would see a lot of that volume come back over anyway.
Okay.
Sorry, guys to 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.
Yes, there are 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 in cost efficiencies.
Or to the.
About a mile improvement for example that Phil.
Talked about in his prepared remarks, and then secondly truck brokerage came 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 two biggest drivers.
Okay. Thank you for the time guys.
And our next question comes from Benjamin Hartford, Robert Baird. Your line is open.
Hi, Thanks for taking the question. This is Andy on for Ben when we get some additional perspective on the lower Capex guidance for the full year in.
What exactly is driving that thanks.
Sure it.
Less tractors and trailers for hub group dedicated and have good tracking.
Thanks, and then just follow up on that should we expect 2020 capex to be.
Similar to 2019 should be higher or lower what are you seeing there.
Thanks, I would probably be up a bit higher because on the high end were at 110 for this year and we think next year, we've got that.
We've got a higher truck spend.
And so with replacement up some truck and then we've got the remaining piece of the building so probably closer to maybe 140 115 next year.
Perfect. Thank you very much.
And our next question comes from Justin Long of Stephens. Your line is open.
Thanks, Good afternoon.
So maybe 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 that Phil you mentioned, a little bit more price competition in the east, but could you give us.
Transcon was down two and other which is Mexico and Canada.
It was down 11%.
Sure and from a pricing perspective, I would say.
The spread these certainly is tightening.
Somewhat we still think from a market in total the gap is somewhere around 20%.
But when you get into those shorter haul lanes it can get down to around 10%, but we've also heard with some of the.
More recent bids some aggressive truckload pricing that is around intermodal price trade. So.
We think thats the short lived though we don't we don't see that continuing for the long term, especially if we continue to see the economy performed well right thats kind of aberrational and historically, we've seen that type of competition. When there is an excess of truck capacity.
The Chicago, Harrisburg, Chicago, Atlanta type lanes L $8.
You do see during those periods of a lot of capacity out there.
You do see some some price competition from the.
The truckers, but it candidly to Phil's point it doesn't last fall.
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 as we progress into next year. If we just see a continuation of the intermodal pricing environment that we're currently seeing today.
Is that an environment, where you still think you can prove intermodal margins just as 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.
Sure I think we have good visibility to our rail cost increases and have room to continue to improve margins I think theres, 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 and continuous improvement perspective, we still have a lot of opportunity there to provide great service and 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, we're really focusing on streamlining the organization in both the frontline and back office and focusing on 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 you know the other piece would be there were automating a lot of our process flows through our PPA. 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 merger.
Although I would suggest that we do think a lot of what 2020, we will look like from a pricing perspective is it's going to relate directly to peak season and from the discussions we've had with both our rail partners as well as our customers were forecasting right now that we're going to have a 2017 type.
Type of the peak, which was very strong.
But not like 2018, which was kind of aberrational.
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.
Flat to down slightly.
Okay perfect I appreciate the time.
Keith.
And your next question comes from David Ross from Steve Steve Your line is open.
Yes, thank you very much.
[noise] in 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 where do you expect to be on the container side going into next year.
Yeah, we are purchasing about 1500 containers. This year. So our net adds are only about 300 containers. So we'll end the year with about 38500 containers, so not much growth there at all.
And then when you talked about the 310 basis point improvement in how groups 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 a good amount of room to run there where you're getting pretty close.
Yeah, I think weve improved dramatically our team has done a great job focusing on service. This is really the score is related to how our customers actually great us. So it is a legitimate score and I think we can always be better.
We're certainly pleased with where rail services at which is really helping to improve that.
And I still think theres significant room to improve and with a more fluid and stable rail network the opportunity for us to keep improving on that at a planning level is still there. So theres a lot of opportunity left.
And then lastly, just on the dedicated side of things, what's the outlook for that business has demand slowed what's the pipeline look like.
Pipeline is really good we've still got about 100 million and the pipeline. We continue to bring on new business. We did brought some on near the end of the.
Second quarter and got.
Good pricing mid mid single digit pricing.
So we're happy with the performance yen were continuing to improve our operational discipline in 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 a return for the company as well, but the pipeline is really strong we're actively out in the market and our customers still want to.
Focus on the long term and so there is an opportunity to expand those dedicated fleets.
That's helpful. Thank you.
And our next question comes from Todd Fowler from Keybanc. Your line is open.
Great Good evening.
Dave or Phil.
I just wanted to get your thoughts on how we think about volume growth versus margin improvement in this environment.
When I think back historically and maybe it's been 10 plus years at this point, but there was a time when there was some opportunity to call. Some low margin freight is 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 volumes. There you participate in and you see that kind of in the numbers of the volume isn't there you can still improve margins with some of the efficiencies just how are you balancing volume growth versus margins right now.
Yeah, we 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 are 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% is what we call it to that either needs to be upper 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 a fluid operation.
Okay, and then Steve to your comments on.
Pricing I think you said that the 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 thats kind of where pricing is more broadly industry wide.
At this point in the bid cycle, that's that's kind of where the industry is right now Todd.
Again of the largest increases is just because of the curve from writing 18, whereby the.
The clients that took in fact increases at this point last year took the largest increases of anybody.
During 2018, and so is it just it just natural that in fact the.
That hockey stick had gone down to the right. Okay. So it's the comps Okay and then last one for me Terry on the cost side.
The the last two 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 twoq versus one Q.
Yes, there is the 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. Thanks.
Yes, sure you're exactly right, we beat our forecast this quarter slightly because of salaries and benefits are lower than what we had forecasted.
We've not hired as many people as forecast were down 42 people from last quarter were down about 54 from last year at this time and we have scaled our resources to coincide with our performance and we've also benefited from that technology and in terms of how how we.
Get the <unk> wire costs and expenses are going up most of the increase relates to increased IP costs. We estimate that IP cost will increase about $3 million from Q2 to Q3 and that the cost will stay flat from Q3 to Q4. So the increase relates to ERP logistics migration to our new LTM system and additional planned headcount in IP and then the bonus the law so fluctuate depending on our EPS performance in that too is factored in our guidance.
Sure. Okay does the 3 million carry forward into 2020 years that tail off at some point.
Well, we'll give you that guidance in 2020, I don't have that number.
Hi, Okay.
[laughter] ill be patient okay. Thanks for the time guys.
And our next question comes from Brian Ossenbeck from Jpmorgan.
Hi, good evening, thanks for taking the question.
You talked a little bit about yield management already but just more generally speaking it seems like it's a pretty pervasive 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 and what sort of seeing do you think you're in.
And which segment has the most opportunity to be more disciplined on yield and too.
Just to add to have it stick throughout the cycle and into the next one.
Sure. So I think there are a few few questions in there so I'll try to address them.
But generally I would say, we've taken a philosophy, where we want to be find mutually beneficial opportunities with our customers, where we're going to provide them great service and saving 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 very 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 built out.
Really 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 with 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 were pricing to ensure that we.
Maintain.
Strong profitability I would just say lastly, we've inserted a lot of processes across all those service lines to manage our bottom performing business and ensure that we are.
Moving that business up from a return perspective very quickly.
Okay, great thanks for that though.
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 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 youve seen kind of fall through to the bottom line and then what's still left to come.
Sure Yes, eight for me. It was 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 in the next piece is ensuring that we improve that purchasing become more efficient in our head count.
Through the technology platform that we've rolled out and we're we're really started we're in the early innings of that and think there's still a lot of opportunity. There. So I think we're building customer trust, where 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 some great wins right now that we're excited about.
Okay last quick one from me just a cleanup on the dedicated side.
Lost business I know that was something you mentioned last quarter as well just wondering going to make sure that was the same thing kind of carrying forward or if you'd seen any other changes in the dynamics there.
Yes, no thats still carrying forward as I mentioned earlier, we did onboard some new business at the tail end here up to.
Third.
Second quarter that will carry over into third and fourth quarter, We've got $100 million pipeline, we're optimistic about that.
Net net when we're done we still expect you know.
Low to mid single digit sales growth in dedicated for the full year.
Okay. Thank you for your time I appreciate it.
And our next question comes from Bascome majors from Susquehanna. Your line is open.
Yes, thanks for taking my questions here.
You said earlier that big compliance was in the 70 something percent range more normally at 80%.
In the outlook for some improvement in the second half sequentially are you assuming that you get back to normal Big compliance range Intermodal awards and if so is that because youve rebid with lower volume commitments or is it because your customers are telling you if rates coming.
We we haven't built at all in our our guidance Bascome, we have built in.
As Dave mentioned, it's about 70% right now and you know normally it's more like 80% big compliance so to get to the high end of the guidance, we have built and recovering some of that but not all of that.
But our costs. Thank you well go ahead, but 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.
Thank you for that I'm sorry.
Just to elaborate a little bit further and Terry earlier had mentioned that we're beginning to see some tightness in that way 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.
Let me be clear.
With our guidance.
No well I appreciate the color.
And if I guess a lot of the questions today.
Have you know it feels like people are looking back at the last time intermodal demand and pricing surprise to the downside two years ago.
And it seems happening market wide. This year, but you are having much better bottom line outcomes and I appreciate feel going through a lot of the initiatives that you guys are doing at the company level to improve that.
Couldnt without walking through all of those again qualitatively maybe can we talk a little bit about what inning. You are in some of these these processes and other improvements that you're doing or is there more for us to see on structural margin improvement into 2020. Thanks.
I think we still have room to improve there is always going to be room to improve you do I believe were middle of the of the game here and we've made a lot of progress and I'm really proud of what our team has done but we still have room to go we haven't gotten the full benefit 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 shift for us as an organization. So I would say, we're still middle of the game and feel feel like Theres upside for the organization going forward.
Thank you for that.
And last one Terry just a housekeeping item you had talked a little bit about EBITDA last quarter. I believe you said to 60 to 75 and whats the translation translating yes reinsurance relate to you I leave it there. Thanks.
Yeah, we are projecting now to 75 to 85 million.
All right. Thank you.
Sure.
Your next question comes from Jason CD from Cowen and company.
Thanks, operator, everyone. Good afternoon.
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.
Well, it's less generally through the a lot of the economic cycle. So.
I think that if we begin to see demand to go back to a little bit more normalize level of 2017 level even.
That you will see that they'll begin to look at better freight that better fits their networks.
The shorter hauls again, you can kind of monitor how the economy is doing and how the trucking industry is doing just by seeing how aggressive are they getting some of the shorter haul love corners.
So.
You know I can't really pinpoint an exact time, but again a lot of it's dependent on the economic cycle in the amount of freight that's available out there.
So do you think with where your commentary on peak season looking like a 2017 linking these two statements together do you think we'll start to see.
Some of that pricing pressure ease.
Yes.
Okay, great. The other question I had was on acquisitions, we'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 had 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.
We we are out looking we would agree we think that expectations are normalizing and and so we are we're certainly out looking right now mostly non asset 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 non asset based companies that can help us drive scale and new solutions for our customers.
Yeah, <unk> k. stuck with a great acquisition, so with dedicated we're integrating knows very well and we had $150 million in cash the ended the quarter no borrowings on our $350 million revolver that we've got plenty of dry powder as well.
Sounds like you're in a good position I appreciate the time as always.
Thank you.
And our next question comes sometime Ludwig Yes. Your line is open.
Yeah good afternoon.
Wanted to go back to the commentary on can competition in intermodal did you see it seems like you've whether 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 a in freight.
And I guess in second half it doesn't sound like you're expecting to kind of lose market share, but it just I guess I wanted to see if you could offer smart.
Comments on impacted the increased competition in intermodal on your volume.
Yes, a lot of the decline was actually just the compliance issue was the bids I mean, that's that's a that's a huge variance.
From what we anticipated I mean, we would if in fact, we were to build into 80% for the second half. We certainly will for would grow intermodal in the low single digit. So a lot of that is that you know we did lose in a few cases, which is normal during the bid process. We also gained in multiple instances. So I wouldn't say that though we lost share I think that Oh, just the though the pies a little bit smaller and.
We took a shrink like I think most of the players that yeah. The whole domestic intermodal market, Tom was down 8% and we were only down seven so we didnt. We don't think we lost share and the competitors were down more than we were.
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 a clearly some capacity that's come into the market on the trucking side in 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 weak the rail volume and cast freight shipments index. If you want to look at that.
How do you think this a bit but it sounds like you are 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 discipline. Among the intermodal players because it does seem like you're you're not expecting to have this kind of protracted weakness that we had in 2015 and 16 and a lot of that Tom I think is driven by the overall economy. That's that's a key we've seen many freight recessions before.
And again, we did have 2018 was such an anomaly that.
It added a lot of capacity into the market that we'll see we'll filter through at this point in time and as it does tighten in as we see.
The shipments gets stronger and a little bit more concise assistant 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 that just from talking to our clients again in our rail partners that it's it's going to be short lived and this is nothing like some of the severe recession. So 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 on 2020 to be a positive year as well.
You talked a bit about the view on 2020. The I. I think you were saying that you think rates in intermodal will be up in 2020, what how would you think about it if the kind of truck capacity is an issue in truckload contract rates are down in the 2020 bid season would you be able to you know would you expect to decouple from that and potentially see intermodal rates up or is it pretty tough to you know see intermodal rates be resilient, if truckload contract rates are down next year.
Well, if if if in fact under the hypothetical that trucking rates are down would put pressure on the shorter length of haul.
But I do think to your earlier point, we've seen a lot more disciplined within the intermodal players again I think that we've all looked at a return on invested capital and it's it hasn't been what it should be and.
So we're all working towards.
Individually as far as enhancing profitability so.
The truck, but Theres no question that the Theres, a loose truck market.
Shorter length of haul the more challenging.
But again, we really don't believe that that is going to be the case at this point certainly I know that I just for the June result, so consumer settlement was through the roof again and consumers drive an awful lot of this economy.
Right, Okay, yes, great. It seems like your model's working well in the period of weakness in freight you know in a good performance in gross margin. So anyway. Thank you for the time.
Thanks, Tom.
And your next question comes to Matt Young from Morningstar. Your line is open.
Thanks. Good afternoon, just quickly to clarify last question, so the 10% spread that you're seeing versus truckload on the shorter haul I'm guessing that that is meaningfully better than what you guys saw in 2016, the last time truckload rate truckload truckload rates fell correct.
Are you talking about the difference between truck and intermodal right. Yeah. Yeah, you got it I think bill mentioned, 20% actually Oh, Okay, I thought I heard 10 on shorter haul lanes, but.
I think it can get that low and generally we see you know around 20 yeah.
Okay around 20%, but but I'm guessing that's markedly better than what you guys saw in 2016. The last time truckload rates corrected you are absolutely correct.
Okay, and it sounds like that just overall demand and pricing conditions for intermodal or are.
Were also better than they were last time and you guys are in a better position to see that improving second half.
Absolutely, yes, yes, and we are expecting that.
Okay and then one quick question about the on the truck brokerage gross margin. If you ignore the mix shift impact from K stack wondering how the gross margins trended for legacy truckload brokerage operations.
Those up year over year.
Oh, they yes, they were up year over year.
About 100 and okay.
70 basis.
With some of that have anything to do with kind of your internal efforts, what I T as opposed to the cycle or are both of those.
Yes, I would say both.
Okay, all right that's all I had thanks.
And as a reminder, if you have a question. Please press Star then one on your Touchtone phone to enter the queue.
And your next question comes from Matt Brooklier from Buckingham Research.
Yeah, Thanks, and good afternoon, I'm wanted to circle back to your dedicated business could you remind us.
What's the average length of contract.
On that business I'm, just curious as to how we should think it can be thinking about you know what percentage of your contracts are coming up.
Up for renewal over the next 12 months.
Yeah. It's it's typically a three year contract, we have visibility to the renewals, who we work through them every year.
So you know next year won't be outsized versus traditional.
Okay got it and then you talked to achieving mid single digit price increases I think through the first half on your you know on dedicated contracts on average are your expectations for the second half similar or do you think that maybe price increases may be a little bit lower than that just given kind of the current state of the broader tale market.
Sure I think driver wage inflation has subsided somewhat a lot of those renewals were a 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 yeah. So you know if we if we do continue to.
As we look at renewal going forward I would say you know you'll continue to see it balance out somewhat but we are also focused when you know we are underperforming at a site and making sure that we can generate a return as well.
Okay. That's all I got thank you.
And your next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, Thanks for the follow up so maybe Terry if if we think that trans con is going to do better than sort of local east local last because of this.
Truck competition dynamic what are the implications of a better transcon.
On gross margins and margins for you.
It's a longer length of haul, it's our longest length of haul for trans con so that higher.
Margin dollars and gross margin as a percent of sales is really pretty consistent across all of our different geography. So it's really more dollars.
Hi, Hi revenue because the revenue per unit is not to hire on it on a trans con men.
And the op margin.
Is it similar.
Okay.
Okay, and then just lastly, the guidance on gross margin for the back half do you think there.
Higher or lower in third or fourth quarter.
Gross margins I think are higher in the fourth quarter.
Roclatan due to seasonality and and up <unk>.
The fees and surcharges.
Great all right. Thank you guys.
And that concludes the question answer session I now turn the call back over to Dave Yeager for final remarks.
Great well again, thank you for joining us for a second quarter earnings call as always Terry and Phil and I would be available or if theres any additional questions that you may have thank you again.
[laughter].
Thank you ladies and gentlemen, this concludes today's conference call.
Thank you for participating you may now disconnect.