Hub Group - Q1 2017
April 26, 2017
Transcript
Operator (participant)
Hello, and welcome to the Hub Group's first quarter 2017 earnings conference call. Dave Yeager, Hub's CEO, Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, Hub's CFO, are joining me on the call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate, and project, and variations of these words. Please review the cautionary statements in the release.
In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, David Yeager. You may now begin.
David Yeager (CEO)
Good afternoon, and thank you for participating in Hub Group's first quarter earnings call. With me today are Don Maltby, our President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer. As we reported on April 10th, the first quarter financial results were disappointing. The primary factor affecting earnings lies within our intermodal business. We continue to experience a soft pricing environment due to excess truck capacity and aggressive intermodal pricing. This environment has placed significant pressure on our margins despite a 2% growth in intermodal volume for the quarter. Another pressure point on our intermodal margins is that despite the soft market, rail cost increases continue. This is not unexpected, as the rails have significant capital needs. As a result, rail increases persist in all market environments, including those with soft demand and excess capacity.
But in a market such as this, we are not able to pass on these cost increases to our customers, thereby putting additional pressure on our margins. The intermodal market continues to be very competitive. Although we hope to see improved pricing in the second half of the year, we are positioning ourselves for an ongoing soft pricing environment by intensifying our cost containment efforts while substantially reducing our capital expenditure budget in 2017. Over the longer term, we believe that the strong economic advantage of intermodal, coupled with the solid service we're providing, will allow for upward pricing, which should improve our intermodal margins. On a more positive note, both our truck brokerage and Unyson businesses performed very well in the first quarter. Unyson revenue increased by 22%, primarily from growth with new customers.
The Unyson pipeline is robust, and we believe that 2017 should be a strong year. Truck brokerage revenue increased by 31%. This growth was from both new and existing customers. We believe that our truck brokerage business is very well positioned for growth in 2017. Finally, we continue to evaluate organic and acquisition-led expansion of our service offerings, which will allow us to offer a more complete solution to our clients. With that, I'll turn it over to Don.
Don Maltby (President and COO)
Thank you, Dave. Despite the pressure on our intermodal business, our truck brokerage and logistics business continued their upward trend. In the quarter, as Dave mentioned, truck brokerage grew volume by 19%. Top-line growth occurred in both logistics and mode, logistics at 22% and mode at 16%. These business lines have demonstrated excellent results while facing a very challenging market. As you've heard me mention previously, our focus remains on providing our customers multimodal solutions. This strategy has allowed us to diversify our service offerings while providing solid financial results. To support this strategy, we continue to invest in our people and technology to provide these value-added solutions to our customers.
While we expect intermodal pricing will continue to see headwinds throughout the year, we are very confident in our ability to grow both our truck brokerage and logistics business in 2017. I would now like to talk about the business lines. Highway, truck brokerage. Truck brokerage grew 19% in the quarter in a very soft marketplace. This correlates to the emphasis on our multimodal account strategy, in addition to supporting our targeted accounts. On the capacity side, our focus remains on filling the needs of our strategic carriers to drive their networks for improved efficiencies and reduced costs. We believe 2017 will continue to be a very competitive market, and our truck brokerage organization is positioned well for continued growth. Logistics. Our logistics business demonstrated strong top-line growth of 22%, while also improving contributions to the bottom line.
The growth is attributed to new customer onboardings as well as organic growth from existing customers. The new accounts secured and onboarded throughout 2016 are producing strong volumes and tailwinds as we go through 2017. Our pipeline remains strong, with several Q2 and Q3 onboardings already planned. In addition, our continuous improvement efforts have produced renewals of several multi-year agreements. We continue to develop our logistics solutions to benefit our customers, and we remain confident in our ability to continue to grow this business line. Mode. During the quarter, Mode also produced strong top-line growth, increasing revenue by 16%. Moreover, Mode grew the IBO and sales network by adding three new IBOs, along with 10 new salespeople. The pipeline remains strong for new recruits in 2017.
All of our business lines grew their revenue in the quarter, a very strong accomplishment considering the competitive marketplace. Cross-selling, providing world-class service, and leveraging our technology remain important ways to deliver value to our customers and differentiate us beyond price. Now I will turn it over to Terri.
Terri Pizzuto (CFO)
Thanks, Don, and hello, everyone. I'd like to highlight three points. First, the combined Hub segment, Logistics and Truck Brokerage revenue growth of 25% and margin growth of 11%, demonstrates our success in providing multimodal solutions to our customers. Second, lower intermodal customer rates, coupled with rail cost increases, resulted in intermodal yield compression of 280 basis points. Third, our results include $1.5 million of one-time costs. Due diligence costs for potential acquisitions totaled $1 million, and severance costs were $500,000. Here are the key numbers for the first quarter. Hub Group's revenue increased 11% to $893 million. Hub Group's diluted earnings per share was $0.31, compared to $0.51 last year. Now I'll discuss details for the quarter, starting with the financial performance of the Hub segment.
The Hub segment generated revenue of $677 million, which is a 10% increase compared to last year. Taking a closer look at our business lines, intermodal revenue was up 3% due to a 1% increase in loads and an increase in fuel revenue. Declines in freight rates and unfavorable mix partially offset these increases. The volume growth was driven by a 21% increase in loads with automotive customers and a 3% increase in loads with consumer products customers, partially offset by a 30% decrease in loads with Mode. Truck brokerage revenue was up 31%. Truck brokerage handled 19% more loads. Fuel price and mix combined were up 12%. Logistics revenue increased 22%, due primarily to growth with new customers onboarded last year and in the first quarter of this year.
Hub's gross margin decreased by $7.3 million, or 9%. The decline in intermodal gross margin was partially offset by truck brokerage and logistics margin growth. Gross margin as a percentage of sales was 10.6%, or 230 basis points lower than last year. Intermodal gross margin decreased primarily because of lower customer prices than last year and rail cost increases. These same factors drove a 280 basis points decline in intermodal gross margin as a percentage of sales. Truck brokerage gross margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales decreased 320 basis points due to lower customer contract rates, a change in customer mix, and a decrease in value-added services. Logistics gross margin was up due to growth with new and existing customers.
Logistics gross margin as a percentage of sales decreased 50 basis points, due primarily to a change in customer mix. Sequentially, compared to the fourth quarter, the Hub segment gross margin as a percentage of sales decreased 120 basis points. Intermodal gross margin decreased 140 basis points, truck brokerage decreased 170 basis points, and logistics was flat. Costs and expenses increased $3.6 million to $60.2 million in the first quarter of 2017, compared to $56.6 million in the first quarter of 2016. This increase relates to a $3.8 million dollar increase in general and administrative expense.
This is driven by an increase in IT costs, including costs for our transportation management system and human resource system, and an increase in professional fees related to due diligence for several potential acquisitions. Finally, operating margin for the Hub segment was 1.7%, which was 200 basis points lower than last year. Now I'll discuss results for our Mode segment. Mode's revenue was $242 million, which was up 16% from last year. Revenue breaks down as $122 million in intermodal, which was up 9%, $78 million in truck brokerage, which was up 16%, and $42 million in logistics, which was up 43%. Mode's gross margin increased $547,000 year-over-year, due primarily to an increase in logistics gross margin resulting from new business.
Gross margin as a percentage of sales was 12.3%, compared to 14% last year, due to a 200 basis point decline in intermodal yields, a 160 basis point decline in truck brokerage yields, and a 180 basis point decline in logistics yields. Mode's costs and expenses increased $1.3 million compared to last year, primarily due to an increase in agent commission. Operating margin for Mode declined to 2.3%, compared to 3% last year. Turning now to headcount for Hub Group. We had 1,756 employees, excluding drivers, at the end of the quarter. That's down 28 people compared to the end of December. Now I'll discuss what we expect for 2017.
We believe that our 2017 diluted earnings per share will range from $1.60 to $1.80. This guidance includes the due diligence and severance costs in the first quarter. We estimate mid- to high single-digit revenue growth for the Hub and Mode segments. We expect gross margin as a percentage of sales for the year to range from 11% to 11.5%. We project that intermodal prices will continue to decline in the second quarter and then stabilize in the last half of the year. We estimate intermodal volume growth will range from 2% to 5%. We believe that our quarterly costs and expenses will range from $84 million to $86 million. Turning now to the balance sheet and how we used our cash.
We ended the quarter with $154 million in cash and $161 million in debt, including capitalized leases. We spent $6 million on capital expenditures this quarter, mostly related to IT projects. Capital expenditures are expected to range from $90 million-$100 million in 2017, which is down from our prior estimate of $155 million-$165 million. We're working with our container supplier on deferring a portion of this year's production to next year if market conditions remain soft. We are no longer planning on purchasing any chassis this year. We're also delaying the construction of our corporate headquarters expansion. Dave, over to you for closing remarks.
David Yeager (CEO)
Thank you, Terri. With that, we'll open up the line to any questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to remove from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you do have a question, please press star, then one on your touchtone phone. Standing by for questions. We have our first question. Our first question comes from Ben Hartford of Baird. Go ahead, Ben. Your line is now open.
Ben Hartford (Senior Equity Research Analyst)
Hey, good morning, or good evening, everybody. Dave, interested obviously in perspective on the intermodal environment here to begin the year. What stands out is Mode's strength, the growth in intermodal, which is good. You know, we understand what you had talked about a couple weeks ago within core Hub and those challenges and the weakness in the environment. But can you perhaps explain the divergence between some of the pressures that are evident in the core Hub intermodal segment, and then the relative strength and intermodal growth that you're seeing in the Mode segment?
David Yeager (CEO)
Sure, Ben. I think, you know, we really are in two very different markets, inasmuch as, although Mode does have some larger accounts, the vast majority are more mid-sized and small accounts. If you look at our business, for the most part, it is larger clients. I think as a result of that, at least from a margin perspective and all, it's a slightly different market. We, of course, we're dealing with large, sophisticated multinationals, and which on an annual basis, for many of them, do in fact bid their traffic.
Ben Hartford (Senior Equity Research Analyst)
Mm-hmm.
David Yeager (CEO)
Versus, and we certainly have a percentage of business which we just renegotiate each year, that doesn't go to bid, but they have a much larger percentage, and I think that that's part of what brings us apart there.
Terri Pizzuto (CFO)
Yeah, and I would tell you, Ben, that our Mode's gross margin as a percentage of sales was down 200 basis points year-over-year, so still quite a bit.
Ben Hartford (Senior Equity Research Analyst)
Right.
Terri Pizzuto (CFO)
That's because it was very difficult for them to get price in the market as well. And then our, the Hub segment gross margin, as a percentage of sales, was down to 280 basis points, so certainly more, but,
David Yeager (CEO)
Mm-hmm.
Terri Pizzuto (CFO)
we both really suffered because of the
David Yeager (CEO)
Absolutely.
Terri Pizzuto (CFO)
pricing environment.
David Yeager (CEO)
I think you can see by some of the other companies that are reporting at this time that this is, I guess, misery loves company, but it certainly is a market condition at this point.
Ben Hartford (Senior Equity Research Analyst)
Yeah, okay, that makes sense.
Don Maltby (President and COO)
To Dave's point, about 70% of our business is bid, and we're in that bid season right now, so that's also,
Ben Hartford (Senior Equity Research Analyst)
Okay. Yeah, Don, I guess, if you can forecast the remaining 30% or so, how do you assess the risk that to finish out the bid season generally, but then also on the intermodal side in particular, that the lingering excess capacity produces even more aggressive behavior from a pricing standpoint as you finalize what's left here in 2027's bid season. What's the likelihood that you see increased aggression?
Don Maltby (President and COO)
I think the aggression. I don't know, I can't see it getting more aggressive than it is now. I think it's going to continue the pricing pressure through the second quarter. Hopefully, then it'll stabilize, but the first quarter was more aggressive than I think the market thought.
David Yeager (CEO)
Yeah, I would agree with that. I think that what you saw was a very aggressive first quarter. We have not seen it really declining, if you will.
And we do, we're hopeful anyway, that the second half of the year we'll begin to, in fact, see a little bit greater shipper demand, which should, in fact, then drive things to flatter slightly up.
Don Maltby (President and COO)
Mm-hmm.
Ben Hartford (Senior Equity Research Analyst)
Okay, sounds good. And if I could ask a quick follow-on, then I'll jump back in queue. But, I think, Terri, you had mentioned the due diligence associated with several potential acquisition opportunities. What is the likelihood that you'll hit on at least one here during the second quarter?
Terri Pizzuto (CFO)
We're hopeful that we'll hit on one, sometime this year, hopefully sooner rather than later. We're working very diligently on potential acquisitions.
Ben Hartford (Senior Equity Research Analyst)
Okay, thank you. I'll leave it there.
Operator (participant)
We have our next question. Our next question comes from Justin Long of Stephens. Go ahead, Justin, your line is now open.
Justin Long (Managing Director of Equity Research in Transportation)
Thanks, and good afternoon. So last year, when we saw a competitive pricing environment in intermodal, I felt like the strategy was to take a targeted approach of getting aggressive with key customers to grow market share. And I'm just curious, is that strategy of trying to grow market share, how you're thinking about the remainder of this bid season as well? Or has the second leg down in the pricing environment changed your strategic approach?
David Yeager (CEO)
No, Justin, we have not changed that strategic approach. I think that we believe that the best way for us to continue to grow is with targeted customers in targeted lanes, and delivering excellent service. And I think with some of the awards we've received from, to name a few, Kimberly-Clark, and Walmart, and Home Depot, and Lowe's, reflects that service. So no, that is very much continues to be our strategy. And I think if anything, we're also being very, very focused on the lanes, which are, in fact, specific, where we feel as though we have either a service or some kind of a price advantage.
Justin Long (Managing Director of Equity Research in Transportation)
Okay, that's helpful. And then maybe one for you, Terri. Sorry if I missed it, but [inaudible]
Operator (participant)
I do apologize for that. Justin, you are now back on the line.
Justin Long (Managing Director of Equity Research in Transportation)
Okay, I think I'm back now. Terri, I had one for you, and I'm sorry if I missed it, but do you have what Hub segment intermodal growth was in Transcon, Local East, and Local West in the quarter?
Terri Pizzuto (CFO)
You didn't miss it, because I didn't talk about it yet. Let me give you that. For the Hub segment by itself, Local East was up 10%, Local West was down 9%, and Transcon was up 1%.
Justin Long (Managing Director of Equity Research in Transportation)
Okay, great. And then maybe one last one, and this is more of a bigger picture question on the long-term strategy for the business. Because based on some of your recent commentary, it feels like there's a focus on de-emphasizing intermodal and putting more attention and capital towards growth in non-intermodal operations. So first, is that a fair assessment? And second, what's your view on the ideal mix between intermodal and non-intermodal as a percentage of the total business?
David Yeager (CEO)
Yeah, Justin, this is Dave. I would say, first and foremost, we believe that intermodal will always be a very important component for Hub Group. It is what we were founded upon. It is 60% of our revenue today, and it'll continue to be a major focus for us. We do believe that there's additional products which we should be able to offer to our clients, if you will, to further develop the relationship with those customers. The broader the array and the deeper, the stronger the relationship. And so that's why we are focused on diversification.
We think that with some areas of diversification, such as dedicated trucking, there are some natural synergies with our own trucking operation, as well as obviously, again, developing that relationship with our clients further and further. As far as the second part of your question, an ideal mix, I don't know that I have an ideal mix. If we are in a few years at $5 billion of revenue, I don't know that it would be unrealistic that intermodal is 5% or, excuse me, 50% or some number larger. But I don't think there's an ideal mix. I think that we want to be opportunistic with our acquisitions and with diversifying our product mix.
Justin Long (Managing Director of Equity Research in Transportation)
Okay, great. That's helpful. I appreciate the time.
David Yeager (CEO)
Thanks, Justin.
Operator (participant)
Our next question comes from Thomas Wadewitz of UBS. Go ahead, Thomas, your line is now open.
Thomas Wadewitz (Senior Equity Research Analyst)
Yeah, good afternoon. I guess, apologize if I'm asking something that's been covered already. It just we had a couple overlapping calls this afternoon. But wanted to see if you could give, I guess, a bit more perspective on how the pricing impact came through so quickly. I tend to think of the bid season being something, you know, kind of first half of the year, and then when you run over to new contracts, then that's when you see the impact. But it seemed like you know, obviously coming through very quickly in the first quarter results. So was that a result of the, you know, bid season being poor in fourth quarter? Or is there just kind of flowing through more quickly, you know, into,
I guess I'm just trying to understand if, you know, I don't think you have a lot of spot impact-spot business, so maybe if you could give some more color on that. And given the speed of that, is it possible as things kind of, you know, improve quickly in second half if the truck market tightens up and so forth? Or, you know, are you really looking at a one-year period where it's just tough on contract rates, and, you know, we'll just have to wait for a while?
David Yeager (CEO)
Yeah, I think, to answer your question, with the fourth quarter, it did slow down a bit, and we did see some amount of aggressiveness, maybe a little bit more so than normal. To start the bid season, it was like the Kentucky Derby. They opened the gates, and off we went with the very aggressive environment overall. So it was quicker than usual. 2016 had been quick as well, but this lapped it. And so I think that you are right, that if we do see some truck capacity, it was so quick out of the gate that in fact, we could see the tables turned and pricing becomes a little less aggressive.
I think, you know, and maybe this is hopeful thinking, but, but certainly, we got out of the gate very quickly, and it could change just as quickly, I believe, with contractual pricing.
Thomas Wadewitz (Senior Equity Research Analyst)
Mm-hmm.
Terri Pizzuto (CFO)
Yeah, just to add a little more specifics on numbers. You know, as the quarter progressed, on a year-over-year basis, our pricing was down more each month. So we didn't see it get in. It started out not so great, and then it didn't get any better.
Don Maltby (President and COO)
Right. I think the bid season started a little earlier, and it was much more active this year than it's been in the past.
Terri Pizzuto (CFO)
Yeah, we had 10% more bids and about 18% more loads in the bids-
Don Maltby (President and COO)
Yep
Terri Pizzuto (CFO)
this year.
David Yeager (CEO)
Right. And I think we, like I believe most of the industry, we honestly felt that 2017 was going to be a good year for pricing, just with the ELDs pending and but there's been a lot less reaction from our clients towards that than we had anticipated.
Thomas Wadewitz (Senior Equity Research Analyst)
If I can ask one follow-on on that. I mean, Dave, you've, well, I guess all of you've, you know, seen multiple cycles and the competitive dynamic. When you have this intensive downward pressure on rates, does that make it tough for the competitive dynamic to kind of heal and recover, and then it just gets drawn out? Or how would you think about that? Because it just seems like, you know, you got a couple big players in intermodal, and something seems to have gone wrong in seeing this much pressure on rates. Just, you know, hard to know if that can be fixed quickly or if that really lasts for a while in terms of the impact on competitive dynamic.
David Yeager (CEO)
You know, the beautiful thing about having 70% of your business in annual contracts is that just that can occur. If in fact, the market shifts, if there is more demand, that can shift very, very quickly. And we certainly, we've seen it shift quickly in the past. I believe that it will, it very likely can occur, in the near term.
Don Maltby (President and COO)
And if it's the market does pick up, if we're a secondary provider with the service levels we have, we think we're in good position to get that business at a higher price.
Thomas Wadewitz (Senior Equity Research Analyst)
Okay, great. Thanks for the time.
Operator (participant)
We have our next question. Our next question comes from Scott Group of Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Hey, afternoon, everyone,
David Yeager (CEO)
Hi, Scott, and I believe that is Wolfe Research, so.
Scott Group (Managing Director and Senior Analyst)
Yes, still Wolfe Research.
David Yeager (CEO)
Yes.
Scott Group (Managing Director and Senior Analyst)
So the Local East up a lot, and Local West down a lot. Can you give some perspective on why you think you're seeing such a big disparity there? I would have thought that lower fuel and low truck rates would hurt the east more than the west. And, you know, as you think about that, is there any big difference in profitability for you in east versus west?
David Yeager (CEO)
Margins are relatively constant. Of course, there's more revenue in the west than there is in the east, so in a raw margin per unit, the west is larger. But the reason is that it has nothing to do with truck competition in the west. It's solely intermodal competition has been much more aggressive into and out of California, as well as out of Mexico. And so that has been the real difference. We found the eastern market, again, with fuel prices going up a bit. I think the truck competition is a little less intense, as well as just the intermodal competition is not as intense as we had seen, particularly last year.
Scott Group (Managing Director and Senior Analyst)
Mm-hmm. Okay.
Don Maltby (President and COO)
Some accounts are looking for that capacity for when things get tight, so they're more strategic in their thought. We wish more were.
Scott Group (Managing Director and Senior Analyst)
And then, in terms of the rail cost increases, Dave, that I think you talked about at the beginning of the call, are those increases similar with last year, more than last year, less than last year? And then, given kind of the pressure in your pricing, do you sense any kind of willingness from the rails to give back on some of those cost increases?
David Yeager (CEO)
Scott, I have a dream. No. That is just, that's not going to happen. You know, and it, it's natural that the railroads, I think, you know, they have a lot of capital intensity, as you well know. And, we are going to... There is a certain rail inflation rate that we're going to see on a constant basis in good markets and bad. This just happens to be a soft market, so we see the rail increases, at any rate. And, as far as, it they were in line with our forecast this year. So, you know, it's just, it's a fact of life. It is, if you will, it's kind of a creative tension that we've always had with the rails. This is nothing new.
It's, it's not something that I foresee changing.
Scott Group (Managing Director and Senior Analyst)
Okay, fair enough. The, you're obviously exposed to Norfolk in the East. Have you sensed anything from customers that say, "Hey, given the changes in management at CSX, we're looking to kind of get more exposed to Norfolk and less exposed to CSX?" And are you hearing that at all from customers? Do you think that's an opportunity for you?
David Yeager (CEO)
You know, it could be. I think at this point in time, it's pretty well known that Hunter's, you know, really focusing on the boxcar network and some of their commodity train networks, and intermodal has been pretty much left aside. So I think everybody's in a wait-and-see mode. If service would deteriorate, I think that there would be an opportunity, but I haven't heard of anyone that's switching, just as a result of what speculation there may be.
Scott Group (Managing Director and Senior Analyst)
Okay. And then just last one real quick. Dave, your comment about getting to $5 billion of revenue, was that an implication that the deals you're looking at are kind of in that $1 billion in size from a revenue standpoint?
David Yeager (CEO)
No, I'm sorry. I just used that as an example. That certainly is an aspiration for us to continue to grow, get to that mark. But no, they are not in the billion-dollar area.
Scott Group (Managing Director and Senior Analyst)
And, kind of just to help calibrate expectations, like what kind of size deals you're looking at right now?
David Yeager (CEO)
Yeah, I'd prefer not to comment on that at this point in time. I mean, if, if you look at it from a revenue perspective in the $200 million-$400 million range.
Scott Group (Managing Director and Senior Analyst)
Right. Okay, very helpful. Thank you, guys. Appreciate it.
David Yeager (CEO)
Thanks, Scott.
Operator (participant)
Once again, if you do have a question, that is star then one. We do have our next question from Todd Fowler from KeyBanc Capital Markets. Go ahead, Todd, your line is now open.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Great, thanks. Good evening, everyone. Dave, just to follow up on the last caller's question about your relationship with the rails. At this point, I mean, is there anything, is there any leverage that you have from a relationship standpoint, where you think about, you know, potentially having conversations with some of the rails that you're not doing as much business with? I mean, you are a sizable customer for all the rails. You've got, you know, your box network in place at this point. Is that something that you can look at and think about from a diversification standpoint to help you, or do you think that it still makes sense to continue to partner with primary rails and that you really get the benefit from those relationships?
David Yeager (CEO)
You know, we very much value the relationships that we have with our two partners, both our western partner, Union Pacific, and our eastern partner, Norfolk Southern. And you know, I understand that, from the outside, when you consider that the rails are increasing prices despite the fact that the market's off, but that seems as though it's not well, it's obviously not market driven. At the same point, I really do believe that having our fleets on those railroads, aligning with them, growing with them, is the best strategy. It's very, very difficult to manage two fleets. We had done that before, in the West, and it's a very complicated structure. So something very serious would have to occur for us to really entertain that.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, that's helpful. Yeah, it's always easier than the analysis of the spreadsheet to make assumptions, but I know that the real world works a little bit differently. So, just as a follow-up, given the reduction in your CapEx plan for this year, does it make sense to have a share buyback in place, you know, given some of the softness in the market? And I understand that you're entertaining acquisitions, but it feels like with the capital structure, you might be able to, you kind of walk and chew gum and do both at the same time, or is that not something that you're contemplating at this point?
David Yeager (CEO)
You know, we it is on the agenda for our May 10th board meeting, but not to increase expectations or anything, but we do believe that acquisitions is the best way to use our shareholders' money and to invest in the business, to diversify our service offerings so that in fact, we can in fact, expand our relationships with our existing clients. So that is what we foresee as the primary use of funds, but certainly it's something that's going to be discussed at the board meeting on May 10th.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, great. And then just one last one. It's been a while, but Terri, I think that you used to give some color about the gross margin profile between intermodal, brokerage, and logistics in the legacy Hub segments. Is truck brokerage still the highest margin business there? And, you know, what's kind of the rank order for the margin profile as we think about the different growth rates between those business lines?
Terri Pizzuto (CFO)
Yeah, you're right, Todd. Truck brokerage is still the highest gross margin as a percent of sales business in the Hub segment. It's also high in the Mode segment. And, second would be intermodal, and then third would be logistics.
David Yeager (CEO)
Logistics, right. Mm-hmm.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, thanks for the time tonight.
David Yeager (CEO)
Mm-hmm, thank you.
Operator (participant)
We have our next question from Ben Hartford, from Baird. Go ahead, Ben, your line is now open.
Ben Hartford (Senior Equity Research Analyst)
Thanks for the follow-up. Can you remind us what the timeline is with regard to the systems, both the TMS and the human resource systems?
David Yeager (CEO)
The HR systems, we're already done with stage one of it, and they're working on the second phase. And I believe that that should be fully implemented by the end of the second quarter?
Don Maltby (President and COO)
That's correct. Mm-hmm.
David Yeager (CEO)
As far as the Unyson Logistics, Don, would you want to comment on that?
Don Maltby (President and COO)
Yeah. The TMS for the logistics side is up and running. We're onboarding new customers. As new customers come on, we're using that new platform. And the challenge has been transferring our existing business over to that, is the pipeline's been so strong and the onboardings have been strong. As far as the overall network, we're working towards the development piece of that, and we expect a partial deployment sometime in 2018.
Ben Hartford (Senior Equity Research Analyst)
Okay, that's great. That's helpful. That's all I have. Thank you.
Operator (participant)
We now have Scott Group back on the line from Wolfe Research. Go ahead, Scott. Your line is now open.
Scott Group (Managing Director and Senior Analyst)
Great, thanks. Just real quick, Terri, sometimes you give the volume breakout by end market. If you have that, that'd be great.
Terri Pizzuto (CFO)
Sure. Automotive was up 21%, consumer products was up 3%, mode was down 30%, and those are the main drivers. Retail was up 1%.
Scott Group (Managing Director and Senior Analyst)
Okay. Thank you. That's it.
Operator (participant)
Once again, if you do have a question that is star, then one. We do have our next question. Our next question comes from Kevin Sterling from Seaport Global Securities. Go ahead, Kevin, your line is now open.
Kevin Sterling (Managing Director and Equity Research Analyst)
Thank you. Good evening, everyone.
David Yeager (CEO)
Hello.
Kevin Sterling (Managing Director and Equity Research Analyst)
Dave, what's the lag time, in kind of all your years in the business, the lag time for intermodal pricing to really start moving higher as truck pricing moves higher? Now, if we get in the back half of the year and things get crazy, you know, typically, how quickly can intermodal pricing move? I know there's a little bit of a lag. Maybe you could help kind of walk us through that lag time, just based upon your experiences.
David Yeager (CEO)
Kevin, that's a really good question, because there is no question, there is a lag. I'd say historically, we were anywhere from three to six months of lagging behind the trucking industry, was responding aggressively
to price increases or decreases. I would suggest to you that as strong as we came, the bid season came out of the gate this year, I think that we'll be much more responsive to market changes. That would be my hope, that if in fact it does tighten up, I know we will be very focused on increasing prices on those clients that we aren't necessarily locked into.
Kevin Sterling (Managing Director and Equity Research Analyst)
Mm-hmm.
David Yeager (CEO)
And again, on our focus client list.
Kevin Sterling (Managing Director and Equity Research Analyst)
Yeah.
David Yeager (CEO)
So, that's a really good point. I do think it's changed. I think that the timeframe has shortened quite a bit, just, I guess, like all commerce has in past years. So I would look forward to responding very quickly to any change in the marketplace.
Don Maltby (President and COO)
Kevin, this is Don. What we see is we're tracking that every week now, especially in the key corridors, to see how spot trucking prices are adjusting to the market.
Kevin Sterling (Managing Director and Equity Research Analyst)
Mm-hmm.
Don Maltby (President and COO)
So to Dave's point, I think if it does start to change, we'll be in better position now to look at our prices.
Kevin Sterling (Managing Director and Equity Research Analyst)
Great. And I gotta imagine, too, if fuel prices start rising, that'll might speed up that lag or timeframe. Is that true, too?
David Yeager (CEO)
It'll certainly make trucks less competitive.
Kevin Sterling (Managing Director and Equity Research Analyst)
Yeah.
David Yeager (CEO)
It'll make intermodal
[Yeah]
the value proposition that much better. So, I would suggest you're absolutely on target.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay. One last question here. Kind of as you talked about the changing landscape and obviously with the growth in e-commerce, how much of an impact is that having on, like, seasonality or business? Maybe touch base a little bit on what you're seeing from an e-commerce perspective, and then maybe looking to use intermodal a little bit more, particularly as rail service is definitely a lot more fluid than it was maybe a few years ago.
Don Maltby (President and COO)
Sure. This is Don. Yeah, we're seeing all of our retail accounts struggle with adapting to this new world of e-commerce, right? What we're seeing is speed to market. What we're seeing is fluidity and visibility. And if you look at peak seasons, I think the traditional peak season, if it's reflective of last year, start later and are more intense.
Terri Pizzuto (CFO)
Mm-hmm.
Don Maltby (President and COO)
An example also would be, spring's spring season, right? Spring peak. So far, it's been pretty flat. So what you're seeing is more flattening of the supply chain with speed, but I can tell you, based on our experience with our retailers, they're all rushing hard to try to get quicker, faster into the customer, shorter lead times.
Kevin Sterling (Managing Director and Equity Research Analyst)
Right. Well, well, great. Now, thanks for your thoughts this evening, and it's great to talk with you again.
Don Maltby (President and COO)
Same here.
David Yeager (CEO)
Thanks, Kevin.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay.
Operator (participant)
Once again, if you do have a question, please press star then one. Our next question comes from Ben Hartford, again, of Baird. Go ahead, Ben, your line is now open.
Ben Hartford (Senior Equity Research Analyst)
Sorry to jump back and forth here in the queue. The box congestion issues that's arising out of China, I know it's probably more of an ISO box type issue, but wondering if that is having any impact, either currently in the domestic intermodal market, or if you anticipate that creating, you know, a bit of a surge as that congestion begins to unwind, later into Q? And I guess in a related note, I mean, I can understand why you'd want to defer some of the box purchases, but I'm wondering if you're having any issues with regard to, to some of the planned boxes getting that over, kind of bottom line is, to what extent are you experiencing any sort of disruption currently or, or expecting any disruption, associated with that congestion in China?
David Yeager (CEO)
Ben, I can honestly say that it's having no impact on us. As far as potentially postponing some of our boxes coming over, I mean, our box partner, the people that actually fabricate them, has been extraordinarily helpful and has worked with us very well. So, we don't foresee any issues at this point in time.
Ben Hartford (Senior Equity Research Analyst)
And then the deferral of the chassis purchases as well this year, was that simply a function of the weaker than planned volume, or is there another component driving that, the decision to defer the chassis purchases?
David Yeager (CEO)
You know, it actually is more just as we reanalyzed it, as we looked at all of our capital expenditures again, after the year started out so soft. When we looked at it, it was certainly above our weighted average cost of capital, but it wasn't that far above our WAC. So we decided that it just wasn't something that was going to make that much of a difference and to just postpone it, considering the environment that we're currently in.
Ben Hartford (Senior Equity Research Analyst)
Okay. Sounds good. Thanks for the time.
Operator (participant)
I am showing no further questions at this time. David, I turn the call back over to you.
David Yeager (CEO)
Okay, great. Thank you, Danielle. So, again, thank you for joining us today on the call. As always, if you do have any additional questions, Terri, Don, and I would be available. So thank you very much. Have a good day.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Once again, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
