Hub Group - Q1 2016
April 26, 2016
Transcript
Operator (participant)
Hello, and welcome to the Hub Group First Quarter 2016 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO, Don Maltby, our President and Chief Operating Officer, and Terri Pizzuto, our CFO. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate, and project. Actual results may 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.
Dave Yeager (CEO)
Thank you, and good afternoon, and thank everyone here for participating in Hub Group's first quarter earnings call. I'm joined today by Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer. We had a strong first quarter, with slight declines in volume in January and March and solid increases in February. Historically, we've seen a spike in business out of the southeastern part of the U.S. each spring. That did not occur this year, as our customers' inventories continued to be larger than normal and truckload demand remains muted. On our last call, we talked about the internal changes within Hub as we realigned intermodal operations to be managed by our account management team.
This change has already reaped benefits at Hub's on-time performance with our customers, was up 430 basis points during the first quarter, and has improved 200 basis points versus 2013, when rail service was at its best. The realignment is also creating significant reductions in our operating costs, with further enhancements on the drawing board. On the acquisition front, we're actively pursuing several potential candidates. As we discussed previously, Hub intends to use its balance sheet to continue to invest in our core business, but also to diversify our service offerings to our clients, and we feel the best way to diversify is through acquisition. I'll now discuss the intermodal results for the first quarter. This will be followed by Don, who will provide the details on truck brokerage, Unyson, and Mode. For the first quarter, our consolidated intermodal volume increased just over 3%.
Local East was down 7%, while Transcon grew 8%, and Local West was up 9%. Mexico continues to show positive growth, with a volume increase of 24% for the first quarter. Thus far in April, we are down slightly in intermodal volume as a result of less demand from our clients, as well as a highly competitive price environment. Despite an industry slowdown and the aggressive pricing environment, we remain confident that our intermodal volume will continue to grow between 2%-4% for the remainder of this year. Overall, rail service continues to be very strong. For the first quarter, rail on-time performance improved 27% on a year-over-year basis and 8% sequentially. Fleet turns improved by six tenths of a day to 15 days on average.
We believe there's still room to enhance our utilization, and we'll continue to focus on that area. Our fleet size is currently 29,000 containers. We intend to purchase 4,000 units this year, of which 3,300 will be replacements and 700 will be additions to the fleet. 1,500 of the container order have already arrived in the U.S., and I would add that we do have the ability to flex up our container order if market conditions improve. Pricing is very competitive this year in the truckload market. Given the low price of fuel and the plentiful truck capacity, we've seen more intermodal volume convert to truck than in previous years. There's also been a lot of pricing pressure from our modal competitors in this soft freight market. Last year's pricing environment was the strongest we had seen in many years.
This year's pricing environment is much more challenging, but we do believe that Hub's service and price value proposition will allow us to continue to grow despite the competitive market conditions. With that, I'll pass the call on to Don to guide you through the specifics of our business segments.
Donald Maltby (President and COO)
Great. Thank you, Dave. I would now like to shed some additional light on our results and some insight into our business units. Obviously, we are pleased with the results, along with the progress we are making with our 2016 initiatives that are focused on growth, margin enhancement, and operational improvements across all our lines of business. Our account management leadership team, along with our intermodal business unit, have done a very good job in streamlining our processes, which has reduced our operating costs and improved our overall service to our customers. In fact, our overall service performance is at the highest level in years. With these improvements, combined with a better aligned sales structure, we are now better positioned to grow share across all of our business lines.
In addition, we have also started our next phase of improving our technology platform by identifying key drivers of success and workflow enhancements. We are in the early stages of this project, but expect to start implementing our streamlined process improvements over the next few quarters. In addition to the workflow enhancements of our intermodal product, we've also made some very nice progress with the implementation of our multimodal account management teams, as we are currently on pace to have the majority of our business under this model by year's end. We also onboarded additional Unison customers to our new technology platform, which continues to provide us insight into the future state across our enterprise. Our focus remains on growing each of our business lines through directed selling efforts, improved cross-selling, and refining our operational efficiencies to improve service levels. Now, let's talk about the business units.
Mode Transportation produced gross margin growth of 13% in the first quarter and delivered operating income of 24%. These results constitute the 16th consecutive quarter of year-over-year gross margin and operating income growth. Consistent with the way that 2015 closed, Mode again saw strength in all service lines. Intermodal led volume growth with 9%, and truckload was also strong with 6% growth year over year. Mode is off to a strong start toward its growth plan for 2016, with several new business implementations that are currently underway. Additionally, we added four new IBOs to the network, and we continue to aggressively work a strong pipeline for agent candidates. Truck brokerage. Our truck brokerage division continued to show positive signs of growth.
Hub Highway was able to grow 5% in spite of a soft truckload market. The focus remains on targeting customers for growth opportunities and integrating our value-added services. Our highway team is successfully navigating through a very tough market by increasing cross-selling opportunities, targeting customers and markets, while leveraging the carrier relationship to source capacity at profitable levels. We remain quite focused on continuing to grow this business unit and expect that 2016 will continue to offer both challenges and opportunities. We remain optimistic about our ability to continue to grow in this very important service line. Logistics. During the quarter, logistics again demonstrated margin and bottom-line growth through our margin enhancement initiatives, along with efficiency gains. As we expected, logistics revenue declined 10% for the quarter, largely due to the loss of a sizable account in May of 2015.
Our logistics service offering remains strong as we continue to provide creative logistics solutions that optimize transportation to produce significant customer savings while also enhancing our margin. In the first quarter, we onboarded several new customers and have additional onboarding scheduled in the second quarter. These new customer onboardings, an aggressive organic growth plan, and a strong sales pipeline have positioned our logistics division to grow the top line in the second half of 2016. Now I will turn the call over to Terri for the financial discussion.
Terri Pizzuto (CFO)
Thank you, Don, and hello, everyone. As usual, I'd like to highlight three points. First, despite the tough freight market, we had another amazing quarter, with every business line from both segments contributing to our best-ever first quarter earnings per share. Second, through today, we've completed 60% of our $100 million share repurchase authorization. Third, as the quarter progressed, we saw a more challenging environment for intermodal volume and pricing. Here are the key numbers for the first quarter. There are several one-time costs that I will explain. First, in connection with shutting down our Hub Group trucking terminal in Los Angeles, we incurred severance and other costs totaling approximately $3.1 million. $2 million of these costs are included in purchase transportation and reduced gross margin. Second, we incurred approximately $1 million of severance costs in connection with management changes.
In the first quarter of 2015, we had one-time costs totaling $2.3 million, which included $900,000 of severance and $1.4 million of Canadian currency translation loss. All the numbers that I'm going to report today have been adjusted to exclude the $4.1 million of one-time costs in 2016, which represents 7 cents per share, and the $2.3 million of one-time costs in 2015, which represents 4 cents per share. Hub Group's revenue decreased 4% to $806 million due to lower fuel revenue. Hub Group's diluted earnings per share increased 81% to 58 cents. Now I'll discuss details for the quarter, starting with the financial performance of the Hub segment.
The Hub segment generated revenue of $615 million, which is a 4% decline compared to last year. Taking a look at our business lines, intermodal revenue was down 2%. The revenue decline was due to lower fuel revenue. Partly offsetting the decline was a 1% increase in intermodal loads. Price and mix were also up. The volume growth was driven by a 7% increase in loads from retail customers and a 22% increase in loads from automotive customers. These increases were partially offset by a 4% decline in loads from durable goods customers.... Truck brokerage revenue was down 9%. Truck brokerage handled 5% more loads, but fuel price and mix combined were down 14%. Logistics revenue decreased 10%.
This decline is due primarily to losing a customer in May of last year and customers' business levels being down. Hub's gross margin increased by $18 million, or 29%. Gross margin as a percentage of sales was 13.2%, or 340 basis points higher than the first quarter of 2015. Intermodal gross margin increased because of price increases, improved accessorial management, and lower drayage costs. Rail cost increases partially offset some of this improvement. These same factors drove a 400 basis points improvement in intermodal gross margin as a percentage of sales. Truck brokerage margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales was up 340 basis points due to value-added services and better purchasing. Logistics gross margin increased due to improved customer mix.
Logistics gross margin as a percentage of sales was up 140 basis points due to operational efficiencies, customer mix, and more cost-effective purchasing. Sequentially, compared to the fourth quarter of 2015, the Hub segment gross margin as a percentage of sales increased 60 basis points. Intermodal gross margin improved 50 basis points, truck brokerage increased 80 basis points, and logistics was up 70 basis points. Hub's costs and expenses increased $6 million to $55 million in the first quarter of 2016, compared to $49 million in 2015. The increase relates to a $4 million increase in salaries and benefits and a $2 million increase in general and administrative expense. Salaries and benefits are up due to higher headcount, annual employee raises, and an increase in commissions.
General and administrative costs are higher because of an increase in IT costs, including costs for our new transportation management system and satellite tracking units. Finally, operating margin for the Hub segment was 4.3%, which was 200 basis points higher than last year's 2.3%. Now I'll discuss our Mode segment results. Mode had a strong quarter. Revenue was $209 million, which is down 2% from last year due to lower fuel revenue. The revenue breaks down as $113 million in intermodal, which was up 2%, $67 million in truck brokerage, which was down 9%, and $29 million in logistics, which was up 2%. Mode's gross margin increased $3.3 million year-over-year due to growth in intermodal and truck brokerage.
Gross margin as a percentage of sales was 14%, compared to 12.1% last year, due to a 170 basis point improvement in intermodal yields and a 315 basis point improvement in truck brokerage yields. Mode's total costs and expenses increased $2.1 million compared to last year, primarily because of an increase in agent commissions. Finally, operating margin for Mode was 3%, compared to 2.4% last year. Turning now to headcount for Hub Group. We had 1,638 employees, excluding drivers, at the end of March. That's up 41 people from the end of December. Now I'll discuss our expectations for the year. We believe that our 2016 diluted earnings per share will range from $2.15 to $2.30.
This guidance excludes one-time costs in the first quarter and includes the impact of expected share repurchases. We anticipate rail service will continue to improve and that utilization this year will be one day better than last year. We expect gross margin as a percentage of sales for the year to range from 11.7%-12.7%. The main levers to get to the high end are the level of price increases, growth in truck brokerage and intermodal, and increased operational efficiency. We think that our quarterly costs and expenses will range between $79 million and $83 million. Turning now to the balance sheet and how we used our cash. We ended the quarter with $200 million in cash and $140 million in debt, including capitalized leases.
We spent $5 million on capital expenditures this quarter for IT projects and satellite tracking units. In 2016, we expect to purchase 4,000 containers. We've already received 1,500 containers that will be financed with debt. We're also investing in technology projects, including transportation management systems and satellite tracking. We haven't decided if we'll finance the remaining 2,500 containers using debt or operating leases. If we finance with operating leases, we estimate our capital expenditures will range from $45 million to $55 million. If we finance with debt, we estimate our capital expenditures will range from $70 million to $80 million. And to wrap it up on a positive note, we purchased 1,213,082 shares of stock for $42.4 million during the quarter.
Through today, we've purchased 1,667,811 shares of stock for $60 million, and we intend to aggressively execute on the $40 million that remains on our share repurchase authorization. Dave, over to you for closing remarks.
Dave Yeager (CEO)
Great. Thank you, Terri. In conclusion, we're very pleased with our first quarter results. Yet again, every business line contributed to the earnings growth. We remain focused on providing our customers with an excellent value proposition of price and service in what is a very competitive environment. Ultimately, this focus will allow Hub to continue to grow with existing clients and in securing new relationships. And with that, we'll open the line for any questions.
Operator (participant)
Thank you. We'll now begin the question-and-answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. And our first question comes from John Barnes from RBC. Please go ahead.
John Barnes (SVP)
Hey, good afternoon, guys. Nice quarter. Hey, so two questions. Number one, can you just elaborate a little bit as to, you know, what you're seeing in terms of intermodal pricing to your customer base, how receptive they are to rate increases and, you know, just the competition you're seeing, you know, either from intermodal players or, you know, in the truckload market as well?
Dave Yeager (CEO)
Sure, John. This is Dave. You know, there's no question that it's a soft market out there. We're seeing the over-the-road carriers being very aggressive on what is even on what has been traditionally a lot of short-haul intermodal lanes. i.e., the local east, in particular, was where we've seen most of the aggression. And so with the soft demand right now, the choppy economy, high inventory levels, we're certainly seeing the over-the-road motor carriers react very quickly and very strongly with price decreases. And as I've said in my formal remarks, we have actually seen greater amounts of conversion back to over-the-road from intermodal than we've seen in many, many years. From an intermodal perspective, we're also seeing a very competitive environment with the most recent bids.
As usual, we're not reacting either downward or upward as quickly as or as dramatically as what the truckload sector is doing, but there's no question that there is price competition. But we believe that, you know, over the course of the year, it'll be up slightly to flattish from an intermodal perspective. So competitive, yes, but again, we're not feeling the pinch, I don't think, quite as much as the motor carrier industry is.
John Barnes (SVP)
I mean, was the pricing strong enough to offset the rail increases that you experienced in the quarter?
Dave Yeager (CEO)
You know, it was, to a degree, about, a part of it is, probably about 50% of it is enough. But we're also, as some of Terri's remarks and Don's remarks had indicated, we're working a lot on internal efficiencies as well, whether it's, accessorial reductions, speeding up the transit of the overall box. And so with that, we feel as though we'll still be able to, and minimally maintain margins and, probably more than likely be able to continue to enhance them. So we feel pretty good about the environment and, where we are with, our rail partners at this point.
John Barnes (SVP)
All right, so, so you're saying that 50% of the rail rate increase, you were able to cover with your own pricing initiatives, and 50% you were able to cover with the other efficiencies, box turns, drayage, and, and, and the like?
Dave Yeager (CEO)
Right. It's still early. I would point that out. It's still early in the bid cycle, but yes, that is our plan right now. We're not going to be able to cover the entire rail increase with price increases to our clients. It's just not going to happen.
John Barnes (SVP)
Yeah.
Dave Yeager (CEO)
Now and maintain our overall volume levels.
John Barnes (SVP)
Is that 50/50? Should we think about it, that split covering the rail increases for the balance of the year? Or does the internal initiatives on box turn and drayage, and I think, that kind of thing, become more important as the year progresses?
Dave Yeager (CEO)
That's very important, and I think it will become more so important over the course of the year as, again, a lot of the many of these initiatives are still very young in their infancy, but we've seen very strong results very quickly. I'm very, very happy with the excellent progress we've seen in a relatively short time.
John Barnes (SVP)
Right.
Terri Pizzuto (CFO)
Still in the early stages of it, so I think, your observation is correct.
John Barnes (SVP)
Okay. All right. Again, nice quarter. Thanks for the time.
Dave Yeager (CEO)
Thanks, John.
Operator (participant)
Our next question comes from Ben Hartford, from Robert W. Baird. Please go ahead.
John Barnes (SVP)
Yeah, good afternoon. Thanks. Terri, I'm just curious about the guidance. You're including the share repurchase activity done to date in that number. It's a $215-$230, is that right?
Terri Pizzuto (CFO)
That's correct.
John Barnes (SVP)
Okay, so to the way that you're looking at it, is the outlook here for the balance of the year weaker than expected because of the competitiveness in the environment, which is more than offsetting the upside in the first quarter? Is that a fair way to think about the guidance? It looks pretty straightforward. I just wanted to confirm that.
Yeah, let me give you a little more information on it, Ben. First, we changed the guidance to include the share repurchases, since we've now repurchased, you know, $60 million worth of stock, and we intend to aggressively execute on the remaining $40 million authorization. So the impact of the share repurchases included in our guidance is about $0.11. We're also bringing guidance down by $0.08 because we've seen a more challenging environment for intermodal pricing and volume. You know, we're in the middle of bid season, and in March, we saw volume decline and more pricing pressure. So we're trying to be realistic about our expectations, and we'll have more insight when we report on the second quarter in July.
Okay, that's helpful. Thanks. And then Dave, and maybe Don as well, I mean, given the competitiveness on the intermodal side, I don't wanna harp too much on that. You guys made great progress in the first quarter. You talked about the ability to flex up the container order, but what would it take for you to flex that down? Or are you looking at the adds that you're bringing in as opportunities to fill your own cans at the expense of some of the free running equipment? I'd be interested in your perspective in terms of how you're looking at those adds, whether those adds could turn into potential deletions as we go deeper into the year.
Dave Yeager (CEO)
Okay, that's a good question. You know, as far as the neutral rail fleet, we really like the neutral rail fleet, being as we're on UP and Norfolk Southern, we use the EMP fleet, and we have a very good relationship. If we're not the largest user of EMP on both railroads, we're one of the largest users. So we don't intend to decrease our participation there. I think that the way we're looking at it is that we do believe we're gonna grow 2%-4% this year in overall volume.
We think that, as part of that, the enhanced rail service will offer us some amount of a fleet expansion, if you will, just because our fleet will turn quicker, but we will need minimally that amount of boxes, for, just to handle the business that we expect to come on board this year. So you know, in the aggregate, I think that, that's safe. We do not intend, we don't have a plan to decrease the number from 4,000. And if anything, we believe that if the economy does in fact, come back, we want that capability, to add another, 1,000 or 2,000 boxes, to be able to, supply our customers' needs. Mm-hmm.
John Barnes (SVP)
Okay. Thank you.
Dave Yeager (CEO)
Don, do you have anything to?
Donald Maltby (President and COO)
No, I think we're positioned now to grow our business, and we're confident in our ability to do so. I think the 2%-4% is in the range that we wanna be, and I think the new equipment will help us do that.
Operator (participant)
Our next question comes from Justin Lawan from Stephens Inc. Please go ahead.
Speaker 14
Thanks, and good afternoon. So Terri, correct me if I'm wrong, but I think you talked about gross margins this year being somewhere between 11.7% and 12.7%, which implies a sequential decline in margins versus what we saw in the first quarter. So I was just wondering if you could provide some more color on the areas of the business that you expect to be the key drivers to that sequential decline.
Terri Pizzuto (CFO)
Sure. You're right on exactly what I said, and, you know, we, let me talk a little bit about the hub segment first. You know, we hope to improve gross margins from where we were in 2015. In 2015, we ended up with 11% margins at the hub segment. So we hope to improve on that and have margins of between, say, between 11.5% and 12% in 2016 for the year. You know, we're not gonna provide quarterly guidance, but as we lap the 2015 price increases, and assuming we don't get as much price in 2016 as we did in 2015, we expect the yields to go down as the year progresses.
Speaker 14
Mm-hmm.
Terri Pizzuto (CFO)
And then for the mode segment, you know, we also expect yields to go down as the year progresses because of the same pressures and the macro environment.
Speaker 14
Okay, great. And is there any more color you can provide, you know, looking at that consolidated gross margin guidance in terms of the quarterly cadence and, you know, what you expect in, you know, 2Q versus the back half of the year?
Terri Pizzuto (CFO)
Well, it will go down progressively, as you know, the yield will go down progressively each quarter. And in Q2, you know, we have some... We've seen already pricing decline somewhat in from March and April, and we've also got real cost increases from our western partner and our eastern partner going in on June 1st, and so that will bring the margin down a bit, you know, in the second quarter from the first quarter, and then it just goes on down the line from there as we lap the price increase that we got in 2015, midyear of 2016.
Speaker 14
Mm-hmm. Okay, great. And maybe for a last question, so there are a lot of internal initiatives you have going on to improve margins, and I was wondering if you're able to summarize the expected impact from all of these items in 2016. If you just combine the benefit of all these, what I would classify as kind of self-help items, all else being equal, what's the dollar amount of savings you expect this year?
Terri Pizzuto (CFO)
Well, you know, we can tell you that we hope to improve utilization by one day. That's one initiative. That's $6 million annually. We have several levers to pull there, including improved operations on the street, improved rail service, and our satellite tracking units. We do expect to realize dray cost savings by using the best carrier from a cost and service perspective and by improving loaded miles. Our external dray spend last year was about $200 million, so just saving a small portion of that goes a long way. And for every 100 basis point improvement in loaded miles, it's about $3 million annually.
Speaker 14
Right.
Terri Pizzuto (CFO)
Then we expect asset-light improvement will do that by reducing costs through improved operational processes and collaborating with our customers.
Donald Maltby (President and COO)
See, and we've seen that already. And again, we're back to, we're in the third inning of that game. So we're early in that process, and we've already started to see the cost takeouts. So you take the combination of the rail increases with the efficiencies that we're gaining, we figure it's around 50%.
Terri Pizzuto (CFO)
Yeah, I'd also add, you know, to what Dave had mentioned earlier a little bit, the realignment of our operations really helped us achieve our cost savings in the first quarter, and we expect that to continue for the rest of the year.
Speaker 14
Okay. That's all really helpful. Thanks so much for the time.
Operator (participant)
Our next question comes from Todd Fowler from KeyBanc Capital Markets. Please go ahead.
Speaker 10
Great, thanks. Good afternoon. You know, I guess just to follow up on the guidance, and maybe this is overly simplistic, but, I mean, when I think about the $0.58, you know, here in the first quarter, and I annualize that, it puts me at the high end, a little bit above the high end of the guidance range. And I understand in response to Justin's question, you know, some of the gross margin, you know, pressure that's gonna be coming throughout the year. But is it really all just, I mean, the price competition that you're seeing within the market and the rail cost increases, or is there something else that, you know, has that a very different seasonal pattern, I guess, to earnings than what you've experienced in the past?
Dave Yeager (CEO)
Todd, this is Dave. It's really not. It is those two items. It is the rail increases, and it's just the competitive environment that we're currently in.
Speaker 10
Mm-hmm.
Dave Yeager (CEO)
Just those two factors alone are enough to drive that.
Speaker 10
Between the two, Dave, I mean, have the rail cost increases been a higher magnitude than what you were anticipating, you know, back at the beginning of the year? Or have those been in line, and it's really just the pricing pressure within the market?
Dave Yeager (CEO)
No, the rails are pretty much in line with what we anticipated. It's-
Speaker 10
Okay/
Dave Yeager (CEO)
It's really looking at the price competitive nature of the today's market. We candidly, if you recall, in the fourth quarter, we actually did not, although many people did not see a peak, we did. We also, we had very strong volumes, and, I'd, I think we were a little bit insulated from what was occurring for last year. And certainly, in the light of the day, as we're seeing 2016, it's just, it's a very soft freight economy right now. And, so we have to react accordingly to what our competitive position is.
Speaker 10
Okay. And in some of that, the need to maintain the network balance as well and to make sure that you have... It's not just going after share or growth, it's just to make sure that you've got the balance within the network. Is that part of the equation?
Dave Yeager (CEO)
Absolutely.
Speaker 10
Okay.
Dave Yeager (CEO)
That is critical to, whenever you have as many assets as we do, you need to have your balance. You need to continue to grow, enhance your network, and certainly to maintain the balance. That's critical importance.
Speaker 10
Okay. Just for my follow-up, can you give us just an idea on the acquisition front? I'm sure that you probably don't want to talk about specific companies, but just a broad brush of areas that you're looking at and kind of size and that sort of thing, where you're at in the process, I think that would be helpful.
Dave Yeager (CEO)
Sure. We've been looking at a dedicated operation in some length. We also are currently looking at a logistics company that is both, some of it actually is air freight, but a great deal of it also is transportation management related. And so they're all pretty much within the line of what we had outlined previously, that again, we're very interested in dedicated. We're very interested in outsource logistics of various type, whether it's transportation management, cross-docking, all those types of operations are what are of particular interest, and we've maintained that focus. We're not suddenly looking to purchase a large international freight forwarder or a small international freight forwarder, even worse.
We're keeping very focused on the areas we think that are going to be very sellable business lines to our clients.
Speaker 10
Okay, that helps. Thanks again for the time, and congratulations.
Dave Yeager (CEO)
Thanks. Thank you, Todd.
Operator (participant)
Our next question comes from Kelly Doherty from Macquarie. Please go ahead.
Speaker 12
Hey, everybody. Thanks for taking the question. Just a quick one. Am I right that you were previously expecting to grow intermodal volumes kind of 1%-3% in 2016? Because it now looks like you're saying 2%-4%, but at the same time, you know, the pricing and the volume is more challenging. So just wondering if the first quarter was a lot better than you'd expected, or maybe what might explain that increase?
Donald Maltby (President and COO)
Yeah, Kelly, this is Don. What we feel is that we've been working on our operational efficiencies in the company and getting our service levels up to where we'd be more attractive to gain new customers, and we feel we're there. Our focus now is growing through target accounts, cross-selling opportunities, and we're positioned better now, and we think that the 2%-4% is in line with what we think in a tough market.
Terri Pizzuto (CFO)
And you're right, Kelly, you had that right. We did say 1%-3% last quarter.
Speaker 12
Okay, so you think I guess I'm just trying to get my head around. You think the volume can be stronger, which I understand from a you know a service and that perspective, but the margins look like they're also going to be a little bit higher than you were saying before, even though it looks like pricing is more difficult. So I guess the upside comes on, you know, Don, maybe what you're talking about, some of the operational efficiencies are just coming through faster and maybe to a greater magnitude than you'd expected?
Donald Maltby (President and COO)
I think we've got off to a good start, but as I said, I think we're in the early stages of it. I think it'll get better as the year goes on, as we meld our operations groups together and implement our account management teams.
Dave Yeager (CEO)
So we're confident in that ability, but we're also confident in being able to grow share with not only the existing customers and also new customers that we don't have business with today. You know, we're in the early stages of our bid cycle, and what we're seeing is, especially in the local east, the truck prices are going down faster, obviously, than what the other intermodal providers are doing. So we're watching that closely, but we feel we're very competitive in the marketplace, and we'll be able to grab that share that we need.
Speaker 12
Okay, great. Thanks. And just a quick one on the logistics side. You know, you talked on the last call about expectation to win more business, which looks like it happened. Can you maybe help us think about the magnitude or the cadence throughout the year on the revenue side, and how it should help improve the margins? Because I think that that business is all coming on at, you know, a much better profitability profile than you had in the past.
Terri Pizzuto (CFO)
Yeah, you're right, Kelly. We expect revenue for the year for logistics to be up mid-single- to high-single-digit, and that growth is in the back half of the year. We Don talked about the business that we onboarded in the first quarter for logistics. That would be about $35 million annually. Some of that business is from new customers, and some is from existing customers. The beauty of that business is we're saving, you know, our customers money, and it's in a variety of our service lines. And then he also talked about onboarding business in Q2, and that's minimally $30 million annually, and the pipeline is pretty strong.
Dave Yeager (CEO)
Correct. Mm-hmm.
Speaker 12
No, thank you for that, though. Are there any kind of startup costs or anything associated with onboarding this business that might impact the margins initially, and then, you know, they improve thereafter? Or I'm not exactly sure how it works on that side.
Dave Yeager (CEO)
Well, twofold. One is, this is Don again, sorry. There's an onboarding cost that's generally a transfer with our customer. But then secondly, as you onboard the customer, it takes time to ramp it up to get to the margin levels you need. Generally, it's 90 days. 90 days after startup, you should start to see the margin levels that you expected.
Speaker 12
Have you said what those margin levels would be?
Terri Pizzuto (CFO)
No, we haven't said specifically what they'd be. You know, last year, as compared to last year, we would say the yields would go up in logistics by 50-100 basis points.
Speaker 9
Okay, great. Thanks very much, guys.
Dave Yeager (CEO)
Thank you.
Operator (participant)
The next question comes from Kevin Sterling from BB&T. Please go ahead.
Speaker 9
Thank you. Good evening, and congratulations on a nice quarter in a challenging environment.
Dave Yeager (CEO)
Thanks, Kevin.
Terri Pizzuto (CFO)
Thank you.
Speaker 9
Dave or Terri or Don, did you guys tell us what your box turns were in the quarter?
Dave Yeager (CEO)
They were 15 days.
Speaker 9
15 days. How does that compare to, ma'am, if you don't mind, how does that compare to last quarter and a year ago? I know it's up, but just maybe for comparison purposes.
Dave Yeager (CEO)
If I'm not mistaken, year-over-year, it's up 0.6 of a day.
Terri Pizzuto (CFO)
Better by 0.6 of a day.
Dave Yeager (CEO)
Yeah, better by 0.6 of a day. It was 15.6 before. And sequentially, Terri?
Terri Pizzuto (CFO)
In Q4, it was 15.4 days, so it's better than that, too.
Dave Yeager (CEO)
Yeah.
Speaker 9
Okay.
Dave Yeager (CEO)
So that's something we certainly believe that we can continue to get better and better at as the rail service is now back to a good competitive level. It was at 2013. And so I think at the low point, we were at about 13.6 or so.
Terri Pizzuto (CFO)
Yeah, yeah. 13 3.
Dave Yeager (CEO)
13.3. So I don't know that we'll get back there next quarter, but certainly that's one of our focuses.
Speaker 9
Okay. So obviously, you mentioned rail service driving that. I imagine, is satellite tracking helping as well?
Dave Yeager (CEO)
Yes, in a big way. We're roughly 60% of our fleet is done is now completed, and we'll have the remainder of the fleet done by the end of the year. So it's a tremendous asset. Yeah, and basically, Kevin, it's kind... Some of the statistics are actually kind of shocking to us, because the average customer, this is the average of what we've seen, they don't call us for 24 hours once the container's made available, once it's empty. We now know that, and-
Speaker 9
Mm.
Dave Yeager (CEO)
So we can actually be a lot more proactive. While it may not reduce it by an entire day itself, it should help reduce it by at least a half a day, particularly as we get the entire fleet with GPS units.
Speaker 9
Gotcha, gotcha. Okay, no, that makes sense. And Dave, I think also, too, you mentioned in your prepared remarks or in the Q&A, you said, I think maybe particularly on the east, you're seeing more conversion from the rail back to the highway.
Dave Yeager (CEO)
Yep.
Speaker 9
Do you anticipate that to continue? Do you maybe bleed into other markets, or how should we think about that? Or, you know, and what if maybe fuel, what impact would fuel play into that conversion as well?
Dave Yeager (CEO)
Well, certainly fuel is a major impact on it. It certainly reduces the motor carrier's costs, and you combine that with the weak market we're in. I think local lease is particularly attractive to the carriers that might generally like to go at a 350-, 400-, 500-mile haul, to lengthen to the large metropolitan consuming areas like Chicago to Harrisburg, Atlanta to Chicago. Those are areas that have a lot of round-trip business that we historically, when freight has gotten soft, we've traditionally seen motor carriers come back in with aggressive pricing, and that's what we're seeing today.
Speaker 9
Okay, gotcha. And last question, how much of your drayage now is internal versus external? What %?
Terri Pizzuto (CFO)
59% is internal now.
Dave Yeager (CEO)
Versus 64% year-over-year?
Terri Pizzuto (CFO)
Correct.
Dave Yeager (CEO)
Okay.
Speaker 9
Okay, great. That's all I had. Thanks again for your time.
Terri Pizzuto (CFO)
Thank you.
Dave Yeager (CEO)
Thanks, Kevin.
Operator (participant)
The next question comes from Scott Group from Wolfe Research. Please go ahead.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Afternoon, guys.
Dave Yeager (CEO)
Scott.
Scott Group (Managing Director and Senior Analyst)
So, I'm not sure, did you tell us, or can you tell us what you think intermodal and truckload pricing are gonna be this year?
Terri Pizzuto (CFO)
We think that for the whole year, they'll be up low single digits.
Scott Group (Managing Director and Senior Analyst)
Okay. And then within the sequential kind of gross margin compression you're expecting from the first quarter, is that weighted more towards intermodal or brokerage, Terri?
Terri Pizzuto (CFO)
Oh, it's weighted more towards intermodal.
Scott Group (Managing Director and Senior Analyst)
Yeah, I guess that's much bigger. So, I, I mean, I guess what I'm struggling with is, we've been in pricing environments that are, that are worse than, certainly worse than most single digits. We've never seen such a sharp, or never even seen close to such a sharp drop in gross margins from, from the first quarter to the rest of the year like you're talking about. So I guess I'm just struggling with what's really changing here.
Terri Pizzuto (CFO)
It's the challenging pricing environment and the price pressure we're seeing, as well as the demand being, you know, not what... It's pretty soft.
Dave Yeager (CEO)
Yes, Scott, I would. I'm not so sure that this is a very competitive pricing environment right now, so I would not undersell that at all. So I don't know that that's necessarily the direction. We're just reacting to the market, making sure that we maintain or grow share and service our clients effectively, and we just feel as though the margins are going to be compressed somewhat as we go through this cycle.
Terri Pizzuto (CFO)
Mm-hmm.
Scott Group (Managing Director and Senior Analyst)
Okay, no. No, that makes sense. I was just, I guess I'm surprised then you still think you can get slightly positive pricing then.
Terri Pizzuto (CFO)
It's our best guess right now.
Scott Group (Managing Director and Senior Analyst)
Okay.
Dave Yeager (CEO)
Exactly. We're still very early in the overall bid cycle, and 70% of our overall business is bids.
Scott Group (Managing Director and Senior Analyst)
Sure.
Dave Yeager (CEO)
So, as Terri had said earlier in her remarks, we will have a much better insight when we report in July, but that right now is our best guesstimate.
Terri Pizzuto (CFO)
Yeah, and we're only 30% done with bids that are effective right now, so it's hard for us to know what the remaining 70% are going to be.
Dave Yeager (CEO)
Hopefully, we see inventory levels get drastically reduced and demand pick up, and
Scott Group (Managing Director and Senior Analyst)
That's good
Dave Yeager (CEO)
Then we're completely wrong, and we'd love to be wrong in that direction.
Scott Group (Managing Director and Senior Analyst)
Sounds good. And then just last question, Terri, on the guidance for operating expenses, assuming a pretty meaningful pickup, can you just talk about the puts and takes there?
Terri Pizzuto (CFO)
Yeah. Our operating and expense guidance, you know, was lower than we projected for a couple reasons. In this first quarter, IT costs were lower than we projected, and we think that IT costs are gonna catch up to projected levels for the rest of the year. In addition, our bonus was lower than we originally projected. Bonus is lower because our outlook for our intermodal business for the rest of the year isn't as optimistic as it was at the time of our Q4 call, because we've seen the challenging environment for intermodal pricing and volume. And so as a result of that, we lowered our bonus projection for the year, and that's why we brought our cost and expense guidance down by $1 million a quarter.
Scott Group (Managing Director and Senior Analyst)
Okay, perfect. Thank you, guys. Appreciate it.
Terri Pizzuto (CFO)
Sure.
Dave Yeager (CEO)
Thanks, Scott.
Operator (participant)
Our next question comes from Tom Wadewitz from UBS. Please go ahead.
Tom Wadewitz (Senior Equity Research Analyst)
Yeah, good, good afternoon, and, you know, congratulations on the strong quarter. It looks like a, you know, very, very good results. Can you review the timing of the rail rate increases? Did, did you start paying higher rates on January 1st, or is all of the rate increase, in- on the June 1st, you talked about?
Terri Pizzuto (CFO)
In 2Q this year, we had some rail cost increases go in, in January, and another portion will go in June 1.
Tom Wadewitz (Senior Equity Research Analyst)
So part of the rail pressure might have already been in the first quarter, or is that the right way to look at it?
Terri Pizzuto (CFO)
A piece of it is, but not the majority of it goes in June 1.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. What? And I mean, I think this has kind of come through in some of the questions before, but it just seems that, you know, it's such a strong first quarter, and even if the market's weak, you know, you're- it, it's kind of hard to see the numbers come in, and deteriorate as much as you're talking about. So I mean, is it fair to say that maybe you're being a little conservative with the full year guidance, or is it just that pricing maybe ends up being down and that's, that's just so tough in terms of rail price, you know, costs up and rail prices up and y- your pricing may be down, or how do you...
It still seems like it's a little hard to kind of match it together unless you're just saying, "Well, well, maybe it's a little conservative on the guidance.
Dave Yeager (CEO)
Well, Tom, you've covered us for a long time. We are always a little bit conservative on the guidance. But again, we're early in the bid cycle, and so we are being on the conservative side here as far as what we believe the remainder of the year will play out. But again, it's a soft freight economy. It's an aggressive price economy, and so we're going to react accordingly and make sure that we protect share and protect our clients.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. I've got just one more, if I can sneak it in. What's the timing on the drayage? I mean, I guess you know, from a truck brokerage perspective, in a weak market, you benefit on your, you know, your buy of capacity. Do you have some of that dynamic in your drayage, where it's not all kind of contractually fixed, and as the trucking market gets weaker and maybe dray costs go down, you can kind of benefit near term on that, or does that tend to be kind of one-year contractual that you wouldn't see? You know, the benefit on the intermodal dray?
Dave Yeager (CEO)
Well, from a drayage perspective, first of all, we will see a benefit from closing our Los Angeles terminal throughout the year. That was a drag on all of 2015, and I would say not an inconsequential drag at that. As far as our pricing actions, as Terri had indicated, we're at 59% Hub dray. We intend to continue to grow Hub Group trucking where appropriate, as it is a very important part of our business from a strategic perspective, but we have had outsourcing events that will occur all the way through July. You don't want to go too much beyond that just because you get into peak season, you can get into capacity shortages.
It's hard, hard to execute, but, we do believe we may see some, but, very nominal costs. I think the biggest benefit you'll see in dray in 2016 versus 2015 is the closure of the L.A. terminal.
Tom Wadewitz (Senior Equity Research Analyst)
Right. Okay. Thank you for the time. Appreciate it.
Dave Yeager (CEO)
Thank you.
Operator (participant)
Our next question comes from Alex Fuocchio from Morgan Stanley. Please go ahead.
Speaker 13
Good afternoon, thanks for taking the questions. In terms of the competitive pricing environment, to the extent you could kind of force rank where you're seeing the greatest pressure from, and maybe kind of characterizing it in three buckets. One, the major intermodal player out there. Two, other smaller IMCs, or three, the truckload market and the situation there with capacity and pricing. How would you kind of rank the pressures to intermodal pricing between those three?
Dave Yeager (CEO)
You know, I think that if we looked at this, it's got to be kind of by region. If you look at local east, I would suggest to you that our largest competitor and the truckloads carriers are probably equally weighted at this point, with a smaller weighting on the smaller IMCs. If you get to the longer lengths of haul, it's certainly your first question with our large competitor, and not just them, though, but there is some other asset-based players which are being more aggressive in the market. So I would say that our largest competitor would probably be one on the longer lengths of haul. But a not too distant second would be the smaller asset-based players, and as well as we're seeing some of the smaller IMCs.
We never really focus on them as much, just simply because, from a competitive perspective, they're usually not quite in the same game as us, just due to some of the efficiencies we have with the equipment and with the in-house drayage.
Speaker 13
Okay, that's helpful. In terms of the large competitor, would you, would you say some of their pricing behavior is outright irrational from your perspective, or is it, does it look more opportunistic in certain lanes where it might make sense from a, from a balance standpoint? I just kind of want to get a sense for, you know, just that, that kind of dynamic there and, and the extent to which that's really pressuring the overall market.
Dave Yeager (CEO)
Yeah, you know, as we've evolved in a, as an asset player, ourselves, I think that I've found that really the pricing generally is never irrational, that there's always a reason for it. That's, there's some fit within a network that makes sense, and that's the reason the prices go to levels that they do. And so, I would say not irrational, I would say aggressive in this market. I would say that, but they're trying to make sure that they're turning their assets, and, they're turning them as quickly as possible. So, no, I wouldn't say irrational, but I would say aggressive.
Terri Pizzuto (CFO)
I would agree. Yeah.
Speaker 13
Okay, that's helpful. And then just lastly, Terry, on the first quarter, what was the total cost and expenses, if we adjust for the one-timers? I came up with kind of $77 million, but I wanted to just double-check that.
Terri Pizzuto (CFO)
Yeah, that's right, Alex, $77.5. Yep, perfect.
Speaker 13
Okay, perfect. Thanks so much.
Terri Pizzuto (CFO)
Uh-huh.
Operator (participant)
Our next question comes from Van Keppel from Barclays. Please go ahead.
Eric Morgan (Equity Research)
Hi, this is Eric Morgan on from Barclays. I just wanted to come back to rail pricing real quick. Can you just talk about what willingness or flexibility you have with the contracts to adjust, you know, for cost increases, especially in what's clearly a weaker freight environment with, you know, rail volumes trending down 7% in intermodal right now?
Dave Yeager (CEO)
I would say that for the most part, our rail prices, while there may be some room for negotiation, it's very limited, and so for the most part, they're set. So I think that the estimates that we have in our outlook for the year are going to be pretty accurate.
Terri Pizzuto (CFO)
Mm-hmm.
Dave Yeager (CEO)
So I don't see a whole lot of flexibility with that. You know, again, the railroads, I think that you'll find in all cases, they have a certain amount of capital that they require in order to maintain their track or maintain their service. And so their fixed costs are something that we will have to contend with for many years to come, whether it's a good market such as last year, or a poor pricing environment such as we have this year.
Eric Morgan (Equity Research)
Okay. Then, maybe just one quick one on the cash priority discussion. You know, given where you are with the share repurchase program, just can you comment on, you know, potentially ramping that up even further, or is that kind of off the table with the M&A you're looking at?
Terri Pizzuto (CFO)
We're going to execute on the $40 million that remains on our share repurchase authorization. We hope to do that in Q2 and Q3. And, you know, we had $200 million in cash at the end of March, and so we have ample ability to do both share repurchases and an acquisition. You know, we'd look to next year before we do another share repurchase and see where we're at in the acquisition market.
Eric Morgan (Equity Research)
Got it. Okay. Thank you.
Dave Yeager (CEO)
You're welcome.
Operator (participant)
Our next question comes from Matt Brickley from Longbow Research. Please go ahead.
Speaker 11
Hey, thanks. Good afternoon. Wanted to get some commentary in terms of intermodal volume growth, how it progressed through first quarter. If you have the month by months, that'd be great. And then I think you did mention that things getting a little bit softer in second quarter thus far, April, if you're able to talk to maybe magnitude of that softness relative to 1Q. Just trying to get a feel for, you know, what 2Q looks like right now versus what you put up in first quarter.
Dave Yeager (CEO)
Yeah, Q1, it was a little bit choppy. January and, oddly enough, March, were actually down, and I don't know the specific numbers, Terri. I don't know if we-
Terri Pizzuto (CFO)
Yep. Yeah.
Dave Yeager (CEO)
But February was very strong, and, which again, is not necessarily historically the way you would expect it to follow. April, it's less than 1% we're down, so it's a de minimis amount. And so it's not something that we're overly concerned with. We really believe that the 2%-4% volume increase for the year is a very fair estimate.
Speaker 11
Okay. So down less than 1 in April, and it sounds like you were down a little bit in March as well, so it's not like things are falling off a cliff here.
Dave Yeager (CEO)
No, it's not falling off a cliff by any stretch of the imagination.
Speaker 11
Okay. And then my second question, is there any way to quantify, or at least provide, you know, some incremental color in terms of how much intermodal to over-the-road truck conversions were potentially a headwind for your volume growth this quarter?
Terri Pizzuto (CFO)
Most of them, Dave, I think they've said local lease was down 7% for the quarter.
Speaker 11
Right.
Terri Pizzuto (CFO)
You could say maybe half of that business went to truck.
Dave Yeager (CEO)
Yeah, I think that's probably a fair assessment, Terry.
Terri Pizzuto (CFO)
Mm-hmm. Mm-hmm.
Speaker 11
Has that changed at all in April? Do you have a sense for that?
Dave Yeager (CEO)
We still see the trucking market very, very aggressive on their pricing in the local lease, and, that's something we don't think is going to change until, we see, demand, increase, pretty dramatically. So at this point in time, no. We're seeing, the truckers very aggressive on pricing, so we would expect, for that to continue in local lease business.
Terri Pizzuto (CFO)
Sure.
Donald Maltby (President and COO)
Yeah, anywhere from 350-700 mile range, as the trucks have been very aggressive.
Speaker 11
Okay, that's helpful. Appreciate the time.
Operator (participant)
As a reminder, if you have a question, please press star then one on your touchtone phone. Our next question comes from Matt Young from Morningstar. Please go ahead.
Matt Young (Senior Equity Analyst)
Good afternoon. Thanks for taking my question. If I could, I just wanted to go back real quick to the acquisition topic. You guys did mention transportation management as a focus, and I, I just wanted to clarify if by saying that you were implying highway brokerage. I know that that can, can mean several different niches, so I, I just wanted to clarify that.
Dave Yeager (CEO)
Yep. With transportation, I think what we would—we would list out, separately, truck brokerage. Truck brokerage is kind of an... It's an interesting potential acquisition target, but it depends upon what it's going to do for us. Is it going to bring us, technology we may not possess or processes? The cultures of so many of these startups are very foreign to Hub's culture, and so not all of them would be something that we could assimilate. You'd almost have to kind of let it go by itself. But transportation management, we really view transportation management as bringing technology to clients that allows them to better manage their supply chain.
We have a strong offering with Unyson, but there may be other transportation management companies that possibly specialize in a vertical, a chemical vertical, a steel vertical, other areas such as that, that could be of great interest for us.
Matt Young (Senior Equity Analyst)
Okay.
Dave Yeager (CEO)
So that-
Matt Young (Senior Equity Analyst)
That makes sense.
Dave Yeager (CEO)
That's kind of how we define transportation management.
Matt Young (Senior Equity Analyst)
Okay, thanks for, thanks for the clarity on that. And then I guess one more question along those lines. Would you be looking for, if you did look at truck brokerage, would you look at a mode-like model, or would it be more of the company store, company employee model?
Dave Yeager (CEO)
You know, we have the best agent network right now out there, in our minds anyway. And so I think that it would be more company store-focused. You know, the pay could be different than us, but that is much more variable compensation, as many of the models are. But no, it would be, it would be a company store. Again, we really think that we've got the best agent model, and we wouldn't be interested in expanding through acquisition in that area.
Matt Young (Senior Equity Analyst)
Fair enough. I appreciate it. Thanks.
Operator (participant)
We have no further questions at this time. I'll now turn the call back over to Dave Yeager for closing comments.
Dave Yeager (CEO)
Great. Well, again, thank you everyone for joining us on our first quarter earnings call. As always, Terri, Don, and I are available if, in fact, you have further questions. Thank you.
Operator (participant)
Thank you, ladies and gentlemen. This is today's conference. Thank you for participating, and you may now disconnect.
