Hub Group - Q2 2017
July 26, 2017
Transcript
Operator (participant)
Hello, and welcome to the Hub Group Second Quarter 2017 Earnings Conference Call. Dave Yeager, Hub's CEO, Don Maltby, Hub's President, 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 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, Dave Yeager. You may now begin.
Dave Yeager (CEO)
Good afternoon, and thank you for participating in Hub Group's quarterly earnings call. With me today are Don Maltby, our President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer. For the second quarter, Hub had revenue growth of 8%. The Hub segment reflected a 9% growth in revenue, with Mode growing at 5%. All of Hub's business lines contributed to the revenue growth. Intermodal revenue grew 3%, truck brokerage revenue was up 26%, and logistics revenue grew 17%. We did, however, see a significant margin decline in all lines of business that more than offset the positive revenue growth. We're somewhat encouraged that we did begin to see some flattening in the downward pricing pressure on intermodal at the end of the quarter.
In addition, there have been recent signs of truckload capacity tightening in certain geographies as it appears demand is picking up. In response to the tightening, we're looking to increase intermodal prices in select geographies in anticipation of a normalized peak season. Going forward, we expect overall pricing to be flat in the second half of 2017, with intermodal prices increasing in 2018 as capacity continues to tighten. During the quarter, we did take actions to streamline and realign Hub's structure to more closely reflect the current business environment. This resulted in an annualized savings of approximately $8 million. Finally, ending on a positive note, we did close on the Estenson Logistics dedicated trucking transaction on July 1st. The Estenson acquisition provides Hub a strong foundation for growth in the dedicated trucking space that is much in demand by our clients.
Estenson is a quality carrier that is focused on safety first, customer service second, followed by profitability. They're a talented management team, and we welcome them to Hub Group. With that, I'll turn the call over to Don to go into more depth on the specifics of our business segments.
Don Maltby (President and COO)
Thank you, David. Now that the bid season is just about complete, we continue to see pricing pressure across all our lines of business. With that said, over the past month, we've seen some tightening in the market and believe we may be seeing that intermodal pricing has bottomed, along with the signs of truck market doing the same. To offset margin pressure, we also looked at our organization to streamline workflows and flatten the structure to reduce costs and provide a seamless service to our clients. We made those reductions and changes during this second quarter and believe we are positioned well for recovery and growth. While margins remain compressed, we continue upon our strategy of pricing to targeted customers, type of services, market, and our network.
We have also made significant strides in positioning our network needs with a targeted marketing approach, along with emphasizing network needs across our sales organization and clients. Now let's talk about the businesses. Truck brokerage continued to show strong growth, posting a 14% increase in volume. This is the fourth consecutive quarter we have seen double-digit volume growth. This growth is attributed to our continued focus on targeting clients, along with specific markets and services. Our margin compressed 390 basis points during the quarter due to less value-added services and a capacity-constrained market at the end of the quarter. For the second half of 2017, we will continue to focus on key customer initiatives and expanding our reach with these clients to include our value-added services. In addition, we remain focused on developing our core carrier relationships in strategic markets to better serve our customers.
Our belief is that the remainder of 2017 will be mixed with areas of soft capacity, along with pockets of very limited capacity, putting our truck brokerage division in a strong position with overall diversified service offerings. As anticipated, logistics had a strong top-line contribution. With a strong quarter of new onboardings, logistics revenue grew 17%. Our growth has been met with margin compression, primarily driven by new business implementations, a slower ramp-up period, and tighter-than-expected capacity in the latter part of the second quarter. Our pipeline remains strong, and we have several new onboardings scheduled to launch this quarter. In addition to the new onboardings, our solutions with existing customers continue to expand, fostering organic growth and contract renewals.... Mode produced top-line growth of 5% in the quarter.
Overall, top-line revenue remains positive year-to-date in the face of an extremely aggressive pricing environment in all of our service lines. We continue to leverage our technology platform with new customer wins to drive network efficiencies and increase our position in managed solutions. During the quarter, Mode added to the IBOs and sales network by adding 3 new IBOs, along with 9 new salespeople. In this very challenging market, we are proud that each line of business continued to show growth. Again, as the market recovers, we are positioned very well. Now I will turn it over to Terri to review the numbers.
Terri Pizzuto (CFO)
Thanks, Don, and hello, everyone. I'd like to highlight three points. First, the 8% growth in our top line demonstrates our success in providing multimodal solutions to our customers. Second, challenging market conditions, together with startup costs associated with bringing on new logistics customers, resulted in yield compression of 240 basis points. Third, our results include one-time costs of $4 million, or 7 cents a share. Severance costs were $2.8 million, and expenses related to the Estenson acquisition totaled $1.2 million. Here are the key numbers for the second quarter. Hub Group's revenue increased 8% to $925 million. Hub Group's diluted earnings per share was 29 cents, compared to 61 cents last year. Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment.
The Hub segment generated revenue of $705 million, which is a 9% 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, an increase in fuel revenue, and more favorable mix. Declines in freight rates partially offset these increases. The volume growth was driven by an 8% increase in loads with consumer products customers and a 5% increase in loads with retail customers, partially offset by a 55% decrease in loads with Mode. Truck brokerage revenue was up 26%. Truck brokerage handled 14% more loads. Fuel price and mix combined were up 12%. Logistics revenue increased 17%, due primarily to growth with new customers onboarded in the second half of last year and in the first half of this year.
Hub's gross margin decreased by $10.5 million, or 13%, due to a decline in margin in all three service lines. In order of magnitude, intermodal gross margin was down the most, followed by logistics, and then truck brokerage. Gross margin as a percentage of sales was 10.3%, or 250 basis points lower than last year. Intermodal gross margin decreased primarily because of rail cost increases and lower customer prices than last year. We offset part of the decline by improving loaded miles and with more favorable mix. These same factors drove a 250 basis point decline in intermodal gross margin as a percentage of sales. Truck brokerage gross margin decreased because of higher purchased transportation costs due to tight capacity and changes in customer mix.
Truck brokerage gross margin as a percentage of sales decreased 390 basis points because of these same factors. Logistics gross margin declined primarily due to startup costs related to new business onboarded this quarter. This was the main reason for the 210 basis point decline in gross margin as a percentage of sales. Sequentially, compared to the first quarter, the Hub segment gross margin as a percentage of sales decreased 30 basis points. Logistics gross margin decreased 60 basis points, truck brokerage decreased 30 basis points, and intermodal was down 10 basis points. Costs and expenses increased $6.3 million to $62.2 million in the second quarter of 2017, compared to $55.9 million in the second quarter of 2016.
The increase relates to a $4.1 million increase in general and administrative expense, and a $1.8 million increase in salaries and benefits. The increase in general and administrative costs is driven by an increase in IT costs, including costs for our transportation management system, as well as a $1.2 million increase in professional fees for the Estenson acquisition. Salaries and benefits increased as a result of $2.8 million of severance costs, employee raises, and higher headcount, partially offset by a decrease in bonus expense. Finally, operating margin for the Hub segment was 1.5%, which was 270 basis points lower than last year. Now I'll discuss results for our Mode segment. Mode's revenue was $243 million, which was up 5% from last year.
Revenue breaks down as $112 million in the intermodal, which was down 4%, $83 million in truck brokerage, which was up 2%, and $48 million in logistics, which was up 43%. Mode's gross margin decreased $2.7 million year-over-year, due to a decrease in truck brokerage and intermodal margin, partially offset by an increase in logistics gross margin. Gross margin as a percentage of sales was 11.8%, compared to 13.5% last year, due to a 300 basis point decline in logistics yields, a 280 basis point decline in truck brokerage yields, and a 100 basis point decline in intermodal yields. Mode's costs and expenses went down $1.8 million compared to last year, primarily due to a decrease in agent commission.
Operating margin for Mode declined to 2.5%, compared to 3.1% last year. Turning now to headcount for Hub Group. We had 1,726 employees, excluding drivers, at the end of the quarter. That's down 30 people compared to the end of March. Now I'll discuss what we expect for 2017. Projected results for Estenson are included in our guidance. Estenson will be included in the Hub segment as a service line. We believe that our 2017 diluted earnings per share will range from $1.45 to $1.55. This guidance includes severance costs and the expenses related to the acquisitions in the first half of the year. We estimate high single to low double-digit revenue growth at Hub and mid to high single-digit revenue growth for the Mode segment.
We expect gross margin as a percentage of sales for the year to range from 10.9%-11.3%. We project that intermodal prices will stabilize in the last half of the year. We estimate consolidated big-box intermodal growth will range from 2%-4% for the year. We believe that our quarterly costs and expenses will range from $93 million-$94 million. Included in these costs are projected Estenson costs and expenses of between $8.2 million and $8.7 million. We believe that our effective tax rate for the year will range from 38.8%-39.3%. Turning now to the balance sheet and how we used our cash.
We ended the quarter with $152 million in cash and $166 million in debt, including capitalized leases. We spent $23 million on capital expenditures this quarter, mostly related to container purchases. That brings total year-to-date capital expenditures to $27 million. Capital expenditures are expected to range from $85 million to $95 million in 2017. This estimate includes approximately $16 million for Estenson. To wrap it up on a bright note, as Dave said, we closed on the purchase of Estenson on July first. The purchase price was approximately $286 million, including a $6 million contingent earn-out.
We assumed $114 million of Estenson debt, paid $111 million in cash, and borrowed $55 million on our new $350 million revolver. We're very excited about this great acquisition. Dave, over to you for questions.
Dave Yeager (CEO)
Thank you, Terri. With that, why don't we open up the lines 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 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, that is star, then one on your touchtone phone for a question. Our first question comes from Kevin Sterling from Seaport Global Securities. Please go ahead.
Kevin Sterling (Managing Director and Equity Research Analyst)
Oh, thank you. Good afternoon, everyone.
Dave Yeager (CEO)
Hi, Kevin.
Don Maltby (President and COO)
Kevin.
Kevin Sterling (Managing Director and Equity Research Analyst)
Dave, you talked about intermodal pricing improving or at least stabilizing in the back half of the year, then improving in 2018. You know, we see the truck market tightening and like spot rates moving higher, hopefully contract rates. How should we think about, kind of, as you think about intermodal pricing, you know, is it mainly the truck market that's going to drive it, or is it, you know, some of the other IMCs out there that have been aggressively pricing, maybe not being so aggressive, maybe a combination of both?
Dave Yeager (CEO)
Yeah, I think, as you know, that we have seen a lot of intra-intermodal competition, if you will. And I think what we've seen is that capacity within intermodal has grown enough that, in fact, we're starting to see people look at the pricing and to increase prices. We ourselves are currently looking at a variety of clients in a variety of corridors to increase the pricing right now prior to peak, as we do believe that this is an opportunistic time. From a truck market perspective, I do think that what we're seeing is a tightening, although this week, honestly, has been a little bit looser, but you can't really go. It's kind of anecdotal just for a few days.
But we did see a fair amount of pricing for an extended period of time late in the quarter and the beginning of July. And I think this is indicative of what we'll see in the second week in August through peak. And so since truck is a primary competitor, particularly for us in the Local East, we take that to be very positive. And I think if you look at the 12% growth we had in the Local East, and the great service that Norfolk Southern is giving us right now, that we can be quite competitive there and grow in that marketplace.
Kevin Sterling (Managing Director and Equity Research Analyst)
Great, thank you. Along those lines, Dave, you know, historically, when pricing has been this competitive and this low for some time, when we get a snapback, do we get a quick snapback, or is it more of a gradual increase in intermodal pricing?
Dave Yeager (CEO)
The trucking industry has always reacted quicker to both upturns as well as downturns, and intermodal traditionally has been a lag of three to six months. We intend not to let that happen this time. We believe that prices are poised to increase. We are going to be going forward on that assumption, and believe that we're correct in that.
Kevin Sterling (Managing Director and Equity Research Analyst)
Mm-hmm.
Dave Yeager (CEO)
So, you know, I'm not, I'm not saying we're going to see 3, 4 or 5% increases this year, but I do think that, we, we've bottomed. I think that intermodal pricing will respond much quicker than normal to, the tightening within the truckload market, and that we will see some at least flattening and hopefully some, some positive upswing during the second half of this year.
Don Maltby (President and COO)
Yeah, the other thing is, you know, we've completed basically our bid season, and that's behind us now, mostly behind us. And those prices we just established for some of our contract customers are just going in. So we're going to be opportunistic when we can.
Kevin Sterling (Managing Director and Equity Research Analyst)
Got you. Okay, thanks. And one last question on the acquisition front, you know, Estenson was a great acquisition. I know you guys are excited about it. What else are you seeing out there? Are you seeing additional opportunities on the M&A front, you know, are valuations, you know, kind of within your wheelhouse? Do you- can we see some more on M&A opportunities out of you guys, now that you've got one under your belt?
Dave Yeager (CEO)
We certainly, we are very happy with the Estenson acquisition, and obviously it's very early, but just as we got to know the people at Estenson, the cultures are extremely well aligned. They're a great dedicated trucking company, and so it'll be a very good fit. What we can bring to them, the synergies will be us bringing our customer base to them. There is definitely other acquisition opportunities that are out there. We are looking, nothing is pending at this point in time, but we certainly are looking for additional opportunities.
Kevin Sterling (Managing Director and Equity Research Analyst)
Got you. Okay, well, that's all I had. I'll turn it over to someone else. Thanks so much for your time this evening. Take care.
Dave Yeager (CEO)
Thanks, Kevin.
Operator (participant)
Our next question comes from Ben Hartford from Baird. Please go ahead. Your line is open.
Ben Hartford (Senior Equity Research Analyst)
Thanks. Dave, I think the pricing aggression during the first half of the year is well understood, but how would you describe network balance, one, and then two, some of the progress that you guys have been attempting to make, technology investments, et cetera, to improve the fluidity on the intermodal network? How does that stand in the kind of setting aside all the noise on the pricing front for the moment?
Dave Yeager (CEO)
Yeah, from a balance perspective, the amount of empty repos that we're doing is relatively the same. It's slightly greater than last year, so we have seen some imbalances, particularly as we've grown in the Local East. And as you know, Ben, when you if you go eastbound, the likelihood of getting a backhaul is not as great as it would be going out of California. So, that's just an accepted part of growing Local East. We are very focused, from a technology perspective. We're working on right now in the conceptual part of the Oracle Transportation Management System, which will help us out a great deal with reducing our empty miles for our Hub Group Trucking operation, identification of container locations, and therefore with the balance.
You'll see our IT investments continue ongoing, at a much more rapid pace than we had been historically. We are not going to be building any new software. We will be buying packages and adopting our processes to fit those packages.
Don Maltby (President and COO)
Yeah, Ben, I'll add to that is that, you know, we've deployed Oracle Transportation into our logistics space, and every new customer that comes on, we are onboarding them in, in OTM, as we call it. And on the intermodal side of it, we're in the planning process. We're doing our due diligence, we're getting our processes down because we have a lot of legacy, you know, operations that we've done over the years. So we're now easing into that, and you'll start to see that in efficiencies probably in the first quarter of next year, starting to see.
Ben Hartford (Senior Equity Research Analyst)
Okay.
Terri Pizzuto (CFO)
Yeah, we're just starting the design phase on-
Ben Hartford (Senior Equity Research Analyst)
Right
Terri Pizzuto (CFO)
for intermodal and truck brokerage with OTM, and we'll probably begin our implementation with managing all equipment in OTM in the first quarter of 2018, which will give us accurate equipment inventory and allow us to integrate with other programs and have full visibility.
Ben Hartford (Senior Equity Research Analyst)
Right
Terri Pizzuto (CFO)
- to all our assets. And the second phase will be implementing drayage, and then we'll have a phased approach to roll out after that.
Ben Hartford (Senior Equity Research Analyst)
Mm-hmm. Okay, so the first half of 2018, we should start to see some of the benefits from phase one?
Terri Pizzuto (CFO)
Mm-hmm.
Ben Hartford (Senior Equity Research Analyst)
Okay.
Terri, when you gave the guidance, gross margin guidance of 10.9%-11.3%, was that for the full year 2017?
Terri Pizzuto (CFO)
That was for the full year. Mm-hmm.
Ben Hartford (Senior Equity Research Analyst)
The same for the tax rate of 38.8%-39.3%, that, was that full year or was that back half 2017?
Terri Pizzuto (CFO)
Full year.
Ben Hartford (Senior Equity Research Analyst)
Full year. Okay. So, so with that gross margin guidance, it does suggest we're, we're probably at the trough here, that the, the quote-unquote, cut, the reduction in the back half outlook, it, it sounds like it's, it's a function of gross margin compression across the three primary service offerings, and it's probably a combination of the ongoing competitiveness in intermodal and some of the, some of the tightness and capacity late in the quarter. Is that, is that what you would ascribe to the, the, the reduced outlook on the margin for the back half of the year?
Dave Yeager (CEO)
Yeah. Oh, sorry. There you go.
Terri Pizzuto (CFO)
It is. We reduced our guidance in intermodal because of the pricing environment being a little worse than anticipated and to factor in costs related to network imbalances. We reduced our guidance slightly for truck brokerage to factor in higher purchase transportation costs because of tight capacity.
Ben Hartford (Senior Equity Research Analyst)
Okay.
Terri Pizzuto (CFO)
And then we reduced our guidance a bit for logistics as well to factor in start-up costs for new customer onboardings and higher purchase transportation costs from tight capacity.
Ben Hartford (Senior Equity Research Analyst)
Okay, sounds good.
Terri Pizzuto (CFO)
We correspondingly reduced it for Mode for those very same reasons.
Ben Hartford (Senior Equity Research Analyst)
Right. Okay, that makes sense. So, so Dave, again, just kind of thinking strategically about the portfolio. You've got Estenson, you know, success in brokerage and logistics, intermodal is pressured this year. Load growth is below what you had initially budgeted. Again, understanding the challenges this year, what gives you confidence that, you know, one, long-term intermodal volume growth can be, you know, mid to upper single digits, perhaps taking share from truck? And, whatever that market growth is, that, as the business as it is constituted, can grow at or above whatever that market baseline growth rate is.
Dave Yeager (CEO)
Well, I think the intermodal market in particular, you're seeing consolidation. I mean, if you look at the market share that we and our largest competitor have, it's grown substantially, and we think that that's going to continue, that we'll see ongoing consolidation within the intermodal space. I think that, in addition, it's just the underlying economics of intermodal. As long as the service product is there, it's so compelling, particularly on the longer lengths of haul, that in fact, we will see intermodal continue to grow, and we believe that, we, as the number two player, are well positioned to continue to grow with that market.
Ben Hartford (Senior Equity Research Analyst)
Okay, sounds good. I'll hop back into the queue. Thank you.
Dave Yeager (CEO)
Thanks, Ben.
Operator (participant)
Thank you. Our next question comes from Scott Group from Wolfe Research. Please go ahead.
Scott Group (Managing Director)
Hey, thanks, afternoon, everyone.
Dave Yeager (CEO)
Hi, Scott.
Scott Group (Managing Director)
So, was wondering, in hearing more about some service issues at CSX, and I know you're on with Norfolk, but are you hearing anything from customers looking to move from one rail to Norfolk that maybe could be an opportunity for you? And any signs of that happening?
Dave Yeager (CEO)
You know, we read what you're reading in some of the publications about some question marks. I think that thus far, that Hunter and team have been focusing primarily on the commodity trains on the merchandise trains, and so, we haven't really heard of a lot of deterioration in the intermodal trains as of yet.
Scott Group (Managing Director)
Right. Yeah.
Dave Yeager (CEO)
So, if in fact it would, I think that, you know, obviously there would be a lot of opportunities for us to grow because the Norfolk Southern service has been as good as I can remember it. It's running very fluidly.
Terri Pizzuto (CFO)
Ben and Scott, Jim Damman, who's at our Mode, runs Mode, would tell you that, you know, they use CSX, and he has seen some customers go from CSX to NS because of the service.
Scott Group (Managing Director)
Okay. Okay. Terri, I jumped on the call, so I don't know if you went through this, but how are you going to be reporting Estenson going forward? Is it going to be as its own operating income segment, like we've seen with Mode, or does it get lumped into the Hub segment? And your guidance that you just gave on gross margin, I'm guessing that's excluding Estenson, is that right?
Terri Pizzuto (CFO)
I'll try and answer those in order that you gave them. First of all, Estenson will be included in the Hub segment as a separate service line called Dedicated, just like we have intermodal, truck brokerage, and logistics, we'll report Dedicated. The guidance that we gave of $1.45-$1.55 for the whole year does include Estenson projected results for the last half of the year when we own them.
Scott Group (Managing Director)
The gross margin guidance includes Estenson or not?
Terri Pizzuto (CFO)
It does, yes.
Scott Group (Managing Director)
So is that, I'm guessing, that's a much higher gross margin business for you?
Terri Pizzuto (CFO)
It is higher than our other lines of business, yes.
Scott Group (Managing Director)
So is there a way, potentially, just so we can think about kind of the 10.3 Hub segment gross margin, kind of how you're thinking that's going to be in the back half of the year, excluding, just on a like on an apples-to-apples basis? Is there any way to help us with that?
Terri Pizzuto (CFO)
Excluding Dedicated for the back half of the year, you'd have to take out revenue in the third quarter for Dedicated of between $60 million and $65 million and take out gross margin for Dedicated of between $10 million and $11 million from our numbers.
Scott Group (Managing Director)
Okay. That's helpful. And then, lastly, just for Dave. So we've got truckload market that looks like it's tightening, but it's still pretty low fuel environment. In your history, what's more important? What are you - obviously, both is what you root for, but if you can only have one, which is it?
Dave Yeager (CEO)
That's either truckload tightening or?
Scott Group (Managing Director)
... or rising fuel?
Dave Yeager (CEO)
Truckload tightening would definitely be the choice. The fuel, it does have an impact, but as you know, the economics of the trucking fuel is a large component, but a tightening of the market is what we would root for, more so than anything else. The tightening capacity just creates a lot of opportunity. People begin to realize that they should be converting more to intermodal, and that's the major driver for us to be able to increase volumes as well as increase prices.
Don Maltby (President and COO)
That's right. Yep.
Scott Group (Managing Director)
Are you seeing it stay kind of tighter than normal so far in supply?
Dave Yeager (CEO)
You know, I think overall, it's probably a normalized tightening. We have this week seen it be a little bit looser, but we do believe that it's going to be a normalized peak shipping period. We do believe that there's going to be tightness in the market in specific areas. So, we feel confident because candidly, for a bit in the early of this part of the second quarter, I think we were a little bit concerned that, in fact, it might be a little subpar for as far as being a normalized peak. So we feel good about the increase in demand that we've seen.
Scott Group (Managing Director)
Okay. Thank you, guys. Appreciate it.
Dave Yeager (CEO)
Thanks, Scott.
Operator (participant)
Thank you. Our next question comes from Justin Long, from Stephens. Please go ahead. Your line is open.
Justin Long (Managing Director)
Thanks, and good afternoon.
Dave Yeager (CEO)
Hey, Justin.
Justin Long (Managing Director)
So, Terri, you gave a couple of numbers that are helpful on Estenson in the back half of the year. But thinking about the 2017 guidance, could you give any color on the EPS impact you're assuming from Estenson in the back half of the year? And then also just curious if your expectations for the accretion in 2018 have changed at all since your call earlier in the quarter.
Terri Pizzuto (CFO)
Sure. Estenson is accretive, even when factoring in the additional interest expense that we'll have related to the debt. It's slightly accretive, I would tell you. So maybe between, you know, $0.02 and $0.04.
Justin Long (Managing Director)
Okay, over the entire back half of the year?
Terri Pizzuto (CFO)
Correct. Mm-hmm.
Justin Long (Managing Director)
Okay. That's, that's really helpful. And then maybe to get a sense for... a better sense for how intermodal trended throughout the quarter, could you share monthly intermodal volumes for the Hub segment during 2Q? And then if you have that number for July, that would be helpful as well.
Terri Pizzuto (CFO)
We do. April was down 4%, May was up 6%, June was up 2%, and July was flat.
Dave Yeager (CEO)
July is flat, although last week was up about 5%.
Justin Long (Managing Director)
Right.
Dave Yeager (CEO)
So, one week does not make a trend. That used to be a Cubs winning streak, but, that's encouraging.
Justin Long (Managing Director)
Well, you know, I guess just kind of circling back to some of the commentary you had in response to Scott. I mean, what do you think is really kind of driving the pickup in demand that we've seen? And do you have a view on whether you feel this is just a near-term pop due to seasonality or the beginning of a cyclical recovery?
Dave Yeager (CEO)
Certainly, there's some seasonality involved. Anytime you're end of quarter such as that, and around July Fourth weekend, you're going to see some tightening in the truckload market. But it does seem, again, and this is very anecdotal, but it does seem as though the industrial economy is getting a bit stronger, and as a result of that, demand is increasing. So we're hopeful that is something that continues. We believe it is, you know, something that is going to be ongoing.
Don Maltby (President and COO)
Right. And we've also picked up some share in this year's bid process. That's helped us too, to support the, to support the network.
Justin Long (Managing Director)
Okay, great. Then maybe one last numbers question. I think, Terri, you may have mentioned, or Dave, that Local East volumes are up 12% in the quarter. Do you have what the change in Local West and Transcon volumes were as well?
Terri Pizzuto (CFO)
We do. You're right, Dave said 12% for Local East, down 6% Local West, and flat Transcon. That's all Hub segments.
Don Maltby (President and COO)
Right.
Justin Long (Managing Director)
Okay, great. That's helpful. I appreciate the answers and the time.
Dave Yeager (CEO)
Thank you.
Operator (participant)
Our next question comes from Wadewitz from UBS. Please go ahead, your line is open.
Tom Wadewitz (Senior Equity Research Analyst)
Yes, good afternoon. I wanted to ask you a bit about your position in drayage right now. I think there have been, over the last couple of years, changes in strategy in terms of how much you want to do in-house drayage and how much you want to do with outside providers. You know, just, I guess, the sense of where you're at right now and how you think that positions you in terms of, you know, driver challenges, maybe tightness in truck. I know it's, you know, a little different market than right, you know, intercity truckload. But just wondering if you could give us some thoughts on drayage and whether that's point of some potential pressure as the driver market seems pretty tight.
Dave Yeager (CEO)
There's no question the driver market is tight right now. We're actually down at around 55% as far as of Hub Trucking handling of Hub business.
Tom Wadewitz (Senior Equity Research Analyst)
Okay.
Dave Yeager (CEO)
And again, that's about where we anticipated that we would be. We're not so much optimizing for our Hub Group Trucking, but we're optimizing for our clients, and often that just entails outsourcing the origin or destination drayage. So, our turnover rate is slightly higher than it was. In fact, significantly higher, I would actually suggest-
Terri Pizzuto (CFO)
Yeah
Dave Yeager (CEO)
... than what it had been.... versus last year, with turnover, it's above 50% at this point in time. So that's probably as high as it's been in quite some time to you. So to your point, there's no question that it's a very, very competitive market for, truck drivers.
Terri Pizzuto (CFO)
But the beautiful thing about Estenson's acquisition is we'll be able to share drivers with Estenson.
Dave Yeager (CEO)
Right.
Terri Pizzuto (CFO)
And so that will help from an efficiency standpoint for us. And they bring on over, let's see, about 1,273 drivers-
Dave Yeager (CEO)
Right
Terri Pizzuto (CFO)
that they have right now.
Dave Yeager (CEO)
Their turnover is very low.
Terri Pizzuto (CFO)
Right.
Dave Yeager (CEO)
Of course, because in dedicated, you're able to keep them at a very low basis.
Terri Pizzuto (CFO)
Mm-hmm.
Tom Wadewitz (Senior Equity Research Analyst)
You can actually use some of the dedicated drivers for dray moves?
Dave Yeager (CEO)
We do think as if in fact it is their client is one that ebbs and flows, we would be able to utilize those drivers when in fact the customer has no use for them.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, great.
Dave Yeager (CEO)
I would suggest it's very early. That's an assumption we're making. We've looked at the data. We believe it's true. We don't know how big of an impact that will have as of yet.
Tom Wadewitz (Senior Equity Research Analyst)
Right.
Dave Yeager (CEO)
But we do think that there's definitely potential there.
Terri Pizzuto (CFO)
Mm-hmm. But we think their recruiting efforts and recruiting programs will help us as well, and their onboarding for their drivers.
Tom Wadewitz (Senior Equity Research Analyst)
Right. Right. Sure. That's some leveraging of their capability. That makes a lot of sense.
Dave Yeager (CEO)
That's right.
Tom Wadewitz (Senior Equity Research Analyst)
What about, I think last year, you had a lot of optimism that I think was realized in terms of growth with big e-commerce customers. And I'm just wondering how you're thinking about the relationship with, you know, customers that are significant in e-commerce and that, you know, could, you know, the volumes in peak season would be meaningful. Is that... You know, do you expect to gain more share and have a lot of business there? And, or how do you think about that, as that would affect your business in maybe fourth quarter?
Don Maltby (President and COO)
Yeah, this is Don. We've really targeted the e-commerce space with our existing customers that have e-commerce arms, along with Amazon. But at the end of the day, we think we're set up very well for the remainder of the year with e-commerce.
Dave Yeager (CEO)
So yeah, obviously, it's a portion that a lot of our current brick-and-mortar clients have e-commerce subsidiaries, if you will, for lack of a better term, or focus. And so we see a lot of opportunity there, as well as just the e-commerce players.
Terri Pizzuto (CFO)
Mm-hmm.
Don Maltby (President and COO)
That's offering our suite of services to them.
Tom Wadewitz (Senior Equity Research Analyst)
So I mean, if you parsed it out, would you say that, you know, across the year, I mean, obviously, in peak, you're going to have more leverage to them, but, yeah, are they becoming a bigger percent of the total mix you have at Hub with just, you know, those that, you know, e-commerce activity?
Don Maltby (President and COO)
We haven't broken it out by customer that has done e-commerce, meaning, you know, the big box retailers that are going that way. But I would say overall, if you took it apart, it would certainly be a higher percentage.
Terri Pizzuto (CFO)
Yep.
Tom Wadewitz (Senior Equity Research Analyst)
Right. Okay. Maybe one last one, Terri. The change in the guidance, how much are there one-time items that are affecting the new guidance, the $1.45-$1.55? Like, if you added back the new, I guess, like, the charge in second quarter and other one-off items. I'm not saying the accretion from Estenson, but just to understand what's different between the new guidance versus the old.
Terri Pizzuto (CFO)
Right. To answer your question, yeah, the one-time cost of $0.07 this quarter would not have been baked in our guidance before, and now they are. So that's with $0.07. And then, in order of magnitude for the Hub segment, we reduced our guidance for logistics the most to factor in the startup costs for new customer onboarding. We reduced our guidance for intermodal because of the pricing environment. And then third, we reduced our guidance for truck brokerage slightly because of the tight capacity and higher transportation costs. And then in addition to that, for mode, we also reduced guidance for them because of the same factors.
Tom Wadewitz (Senior Equity Research Analyst)
Okay, so you'd add back the $0.07, but then beyond that, there are some pressures in the, you know, in the business that are factored into the new guide.
Terri Pizzuto (CFO)
Exactly. Mm-hmm.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. All right. Thank you. I appreciate it. Thanks for the time.
Terri Pizzuto (CFO)
You're welcome.
Operator (participant)
Our next question comes from Todd Fowler from KeyBanc Capital Markets. Please go ahead. Your line is open.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Great, thanks, and good evening. Just to follow up on the last comment about the change in the intermodal guidance. The pricing commentary, Terri, that's the result of the bids and customer pricing, or is that purchase transportation and rail rates that was the reduction in the second half?
Terri Pizzuto (CFO)
It was the pricing environment being a little worse than we anticipated. You know, the other factor in there is we refactored in some extra costs for network imbalances. The majority of it was pricing.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, got it. And then, Dave, to your comments earlier in the call about the pricing actions that you're targeting or that you're thinking about, if I heard the comments right, it sounds like you're expecting pricing to be flat in the back half of the year on the intermodal side. Would the pricing actions be in addition to that, if you're successful in going out and maybe getting some peak season surcharges or something along those lines? Would that be incremental to flat pricing, or are you assuming within your guidance that you're going to be successful in getting some additional pricing, given the tightness in the market?
Dave Yeager (CEO)
We do feel as though we'll get some pricing, just because of the current tightness in the market. That will contribute toward being slightly up. If in fact we aren't able to get the pricing, then we'll be in the flattish range.
Don Maltby (President and COO)
That's right.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, that helps. And then just on the volume expectation, the 2-4, you've got more difficult comparisons in the back half of the year, and, you know, volumes were a little bit below that during the first half. The volume expectation, is that based on what you've seen within the bids that you've been awarded? Or is that more on an assumption that we're gonna see, you know, I know it would have been based on just the last week here in July, that up 5, but how much of that's predicated on a strong peak versus normal bid awards? I'm just trying to get a sense of how much variability there could be from an underlying, you know, economic factor within the volume, on the volume side.
Don Maltby (President and COO)
Yeah, we are going with what we think, what we won in the bid award and the sharing.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay.
Don Maltby (President and COO)
So that's one, and then two is we've baked in a normal peak season, as we've seen the last couple of years.
Terri Pizzuto (CFO)
That is consolidated big-box volume growth, Todd, which would include both, you know, Hub and Mode together.
Don Maltby (President and COO)
That's correct.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay. Okay. And, Don, just out of curiosity, at this point, you know, when you talk about the traditional peak season, when are you really looking for that to kick off at this point? Where would you kind of gauge... Is that something at this point that should be, you know, September, or is it even later than that at this point?
Don Maltby (President and COO)
Well, we see that inventory levels have dropped a little bit, so last year, we started, if you think about it, mid-October in peak.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay.
Don Maltby (President and COO)
We think we'll start earlier this year. We think we'll start in September. Our customers are indicating that, our retail customers.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, good. That helps. And then just lastly, just a detailed question. Terri, what's the interest expense run rate gonna be on a quarterly basis, with the borrowings for Estenson at this point?
Terri Pizzuto (CFO)
Well, other expense consisted primarily of interest, and that was about $850,000 in the second quarter. And so we estimate for the rest of the year, other expense will be about $2.5 million a quarter, because we-
Don Maltby (President and COO)
$2.5 million a quarter.
Terri Pizzuto (CFO)
Yeah. We assumed $114 million of debt, you know, with Estenson deal, borrowed $55 million on our revolver, and we financed about $14 million worth of containers in the quarter.
Todd Fowler (Managing Director and Senior Equity Research Analyst)
Okay, good. That- that's what I had. Thanks a lot for the time tonight.
Don Maltby (President and COO)
Thanks, Todd.
Operator (participant)
Our next question comes from Brian Ossenbeck, from J.P. Morgan. Please go ahead. Your line is open.
Brian Ossenbeck (Senior Analyst)
Hi, good evening. Thanks for taking my questions.
Don Maltby (President and COO)
You're welcome, Brian.
Brian Ossenbeck (Senior Analyst)
So I just had a quick follow-up on the peak. You mentioned that it's, you're basically expecting to follow the last couple of peak seasons. Seems like each one gets a little bit different, and perhaps there's multiple smaller peaks. So maybe you can just talk about how you think that's evolving over the next couple of years, and, you know, how you see the intermodal service offering changing with that, and, you know, if that's factored into what, you know, your additional exposure to e-commerce. Is intermodal really the service you expect to grow the most with peak, or do you think it's gonna be more multimodal in the next several years?
Dave Yeager (CEO)
You know, I would suggest to you that, with the advent of e-commerce, and, not just with the e-retailers, but, also the brick-and-mortar, that, also are involved in e-commerce as a way to get to their clients, that we're seeing an extended peak. Traditionally, peak by Thanksgiving was done. It's now extending into mid-December, and in some cases, because of returns, it actually goes back to...
Into mid January. We see some spikes in there. So, I think that it does change it. It's lengthened the peak. We think our brick-and-mortar retail clients that are getting to their stores, that those have been relatively unchanged. You'll sometimes see them move up their scheduling to get the inventory in, if in fact, they think that there could be any labor issues at the ports. But for the most part, they're very consistent, and we're in fact in the planning process right now with all of our retail clients as far as when they see the heaviest shipping will be, to make sure that we can stagger ourselves to be able to cover with them with the capacity that they require.
Don Maltby (President and COO)
And Brian, this is Don, the other thing is that they're looking for more services. So even though peak may start, let's say, in September, it's also more intense, and to David's point, it could last into January with returns. So what we're seeing is customers want more products and services from us, and then we have to commit on the capacity that we can deliver to them.
Brian Ossenbeck (Senior Analyst)
Right. Okay, that, that's helpful. I guess and that kind of gets to the follow-up question is, you know, things are getting more intense are from a customer expectation standpoint and your customer's customers. So, you tend to think of that as shorter length of haul, more frequent deliveries, smaller lot sizes, perhaps. So, just some thoughts on how intermodal, you know, as kind of the core of the business, would be able to participate in that. Certainly, lanes are gonna stay open and, you know, be intermodal dominant for the most part, the longer length of haul. But, you know, is how do you, how do you address that, that pressure when you look out for the next several years, if you think it's a pressure at all?
Dave Yeager (CEO)
You know, I'll be honest, I really don't believe it's a pressure. What happens is more and more is that the fulfillment centers get very, very close to the ultimate customer. And there's a lot of expense in delivering directly to the home. and so the e-retailers and retailers, as retailers, brick-and-mortar, have historically done, use intermodal to get to that long haul because of the economics and the service consistency. So instead of going into a distribution center now that might deliver to stores, we're going to a fulfillment center that's delivering direct to the customer. Very costly. Where can they save on that overall supply chain? It's on the long length of haul that intermodal can supply.
Brian Ossenbeck (Senior Analyst)
Okay, got it. So just a couple follow-up housekeeping. CapEx, obviously, you started the year at a, it's a different spot. The market has changed, and you've made an acquisition. So it's come down a little bit here, but if you think of kind of a normal maintenance level, what do you think that would trend? And how do you expect, you know, the early read into 2018, you know, what would be incremental for Estenson and replacement and also some capacity expansion if you've gotten that far?
Terri Pizzuto (CFO)
Yeah, I mean, our biggest spend for CapEx is containers and tractors, and now trailers, I should say, with Estenson. And so in terms of a maintenance CapEx, it depends on the number of containers that we purchase next year. We have deferred about 1,900 containers from this year's order till next year, so that will certainly be in our spend for next year. Those run about $10,000, a little over $10,000 apiece. And then we'll, you know, have the tractors for the Hub and for Estenson. That number is hard to predict at this time, but for Estenson alone, in the second half, it's about $16 million for tractors and trailers. It would be at least double that next year and probably a little higher, so maybe more like $40 million next year for Estenson.
So, you know, it will probably still be... And we're kind of going to continue to spend on IT. It's an investment we want to make. And so it, it'll probably be similar to this year.
Dave Yeager (CEO)
Mm-hmm. Yeah.
Brian Ossenbeck (Senior Analyst)
Okay. And the last quick one, just on, you mentioned retail and consumer product goods off to a good start here. Auto exposure, just curious if you're seeing any noticeable slowdown as we get into a softer patch for production, and I'm assuming the inventory and auto parts supply chain that's associated with that?
Dave Yeager (CEO)
We do have, obviously, several large automotive companies that we do deal with, primarily, on the aftermarket parts. So we're probably not a good indicator for that. From what I've read, they are expecting for new car purchases to be down somewhat-
Brian Ossenbeck (Senior Analyst)
Right.
Dave Yeager (CEO)
versus what had been, of course, some record years. So, but, we have not seen anything, as we are not really involved a lot in going to the production facility themselves.
Brian Ossenbeck (Senior Analyst)
Yeah. Okay, great. Well, that's it for me. Thanks for your time.
Terri Pizzuto (CFO)
Thank you.
Dave Yeager (CEO)
Thanks, Brian.
Operator (participant)
Our next question comes from Griffin Undur from Susquehanna International Group. Please go ahead. Your line is open.
Bascome Majors (Senior Equity Research Analyst)
Hey, guys, Bascome Majors here from Susquehanna. I wanted to follow up on your comments about intermodal pricing and, you know, your enthusiasm that you'll be able to perhaps ratchet that up a little bit between now and the peak season. You know, is this a scenario where you're taking contracts and willing to try to bid them up out of cycle, or is this more spot business? Can you just give us a little bit more on, you know, perhaps kind of what you're going to do to achieve this outcome so we can better understand kind of the markets working?
Don Maltby (President and COO)
Yeah. So this is Don. The, you know, the bid process takes longer than it has in the past, I think, as our customers go through three rounds of pricing. So obviously, if we make commitments to our customers, we are going to stand behind those. But there's opportunities outside those bids that we have the opportunity to price up, maybe because, a, the marketplace has changed a bit, b, our network needs may have changed and shifted over that period of time. But we do see an opportunity to go in and price up, outside of our agreements that we've made to our customers.
Bascome Majors (Senior Equity Research Analyst)
So, I mean, would you call that spot business, or is maybe you think you can capture some new business at better pricing? I'm just trying to understand, you know, what-
Don Maltby (President and COO)
I would say it's capturing new business at better pricing.
Bascome Majors (Senior Equity Research Analyst)
Okay. Okay, are you seeing... You know, is this just a response to some of the kind of, you know, hopeful early cycle tightness that we're seeing in pockets of the truckload market? Are you seeing, you know, some of your intermodal competitors start to do that? I guess what I'm trying to dig at is, you know, is this Hub looking to take a lead role as pricer in intermodal, or are you just kind of reflecting something you're seeing elsewhere in the marketplace and-
Don Maltby (President and COO)
So, we're reflecting what we're seeing in the marketplace, the tightness in certain markets.
Bascome Majors (Senior Equity Research Analyst)
Okay, um-
Don Maltby (President and COO)
We're reacting to that.
Bascome Majors (Senior Equity Research Analyst)
Okay, and, you know, maybe one for Terri, and just want to dig in a little more to the CapEx. You said you're adding about $15 million to the budget for this year from the Estenson deal, but the 2017 guidance was, I think, down about $5 million, which would imply maybe a $20 million cut to pre-Estenson. And that number that you had out in April was already down $50 million or so from January. So you've seen a pretty dramatic decline in the expected envelope that you guys are going to spend. Can I... Are my numbers right? You know, I'm just trying to understand what kind of came out of the core budget between April and now, and maybe what that means as we look forward, as far as where you're investing or what you're investing in.
Terri Pizzuto (CFO)
... Yep, your numbers are right on, and the biggest thing that is out of our numbers is our adding on to our new corporate headquarters. That's been postponed for a while.
Bascome Majors (Senior Equity Research Analyst)
Okay. Is that a, you know, something you have visibility into, or is that kind of indefinite at this point?
Don Maltby (President and COO)
At this point, it's indefinite.
Bascome Majors (Senior Equity Research Analyst)
Okay. Okay, and, lastly, just one on the truck brokerage business. Can you, exiting this bid season, you know, how much of your 2017 revenues are on what you would call, you know, committed rate business at this point? How much of that book is committed? How much is spot-ish?
Don Maltby (President and COO)
70% is contracted, 30% is spot.
Bascome Majors (Senior Equity Research Analyst)
Okay, you know, on truck brokerage, specifically on your contractual rate business, you know, what sort of pricing outcomes did you achieve this bid season? I'm just trying to get a sense of where that came out versus the market.
Don Maltby (President and COO)
Yeah, we, we had to be price competitive, of course, and, we were, and we were successful in, in, in number of bids. And what we saw in the, tightness of market is our purchase transportation changed a bit. And then the other part of our truck brokerage, which is a big part of our growth, is the project work that we do for our clients, which was down in the second quarter. So as things get tight, we think in our transactional side, we're positioned well, and hopefully, our customers will buy more of our, project work that we have for them.
Bascome Majors (Senior Equity Research Analyst)
Okay. I mean... Go ahead.
Terri Pizzuto (CFO)
Our margins on our spot business were down, compared to last year, but we got more of it to compensate for the freight yields being down.
Bascome Majors (Senior Equity Research Analyst)
Okay, so the committed pricing, I mean, are you willing to say how much the committed pricing or contractual was down this bid season, like for like?
Terri Pizzuto (CFO)
It was about flat.
Bascome Majors (Senior Equity Research Analyst)
Okay. Lastly, you know, we kind of had this conversation on the intermodal business just then, and, you know, you suggested that you're gonna stand by your annual commitments. I know truck brokerage can be a little bit squishier, and you've got, you know, certainly a more volatile cost of capacity there.
Don Maltby (President and COO)
Right.
Bascome Majors (Senior Equity Research Analyst)
I mean, are you willing, if, if you start to see large players bid up contractual rates and brokerage, you know, call it mid-cycle, out of cycle, are you willing to follow that? Just kind of, you know, what's your sense and, you know, how sticky are the rates you committed to over the last three, four months there?
Don Maltby (President and COO)
Well, on the intermodal side, they're very sticky, right? Because we've made commitments to major customers, so they're sticky. It's the new opportunities that will come our way from a tightness market that we will price up.
Bascome Majors (Senior Equity Research Analyst)
I'm sorry. I was specifically asking about the truck brokerage side of it there. You know, in brokerage, are you willing to, to maybe be more aggressive out of cycle if the, if the cost of capacity continues to move higher?
Don Maltby (President and COO)
No, we will price that up to support the upward pressure on price.
Bascome Majors (Senior Equity Research Analyst)
Okay. Thank you very much for the time.
Don Maltby (President and COO)
Thank you.
Terri Pizzuto (CFO)
Thanks.
Operator (participant)
Our next call comes from Jason Seidel from Cowen. Please go ahead. Your line is open.
Jason Seidl (Managing Director)
Thank you, operator. Hey, everyone. A couple quick questions. Just a little housekeeping stuff, so I make sure we're all on the same page. You guys have a total of about $0.10 in one-time items for the first half of the year, correct, when I'm looking at that number?
Terri Pizzuto (CFO)
Correct. $0.07 in Q2 and $0.03 in Q1. Yep.
Jason Seidl (Managing Director)
Okay, perfect. I'm sorry if I missed this. Did Terri give the depreciation number for the year?
Terri Pizzuto (CFO)
No. No, I didn't. You mean the depreciation below the depreciation and amortization within the-
Jason Seidl (Managing Director)
Yes.
Terri Pizzuto (CFO)
But below the gross margin line? I did not.
Jason Seidl (Managing Director)
Yes.
Terri Pizzuto (CFO)
I can tell you that will probably range between $13 million and $14 million.
Jason Seidl (Managing Director)
Okay, fantastic. And when I think about the potential switching from CSX to Norfolk, and you guys said you saw it in Mode, but not in the Hub segment, is that where you would expect it to see going forward, or do you expect it potentially to come over in the Hub segment if the disruptions continue?
Dave Yeager (CEO)
If in fact, disruptions continue, I would suggest that we would see conversion. You know, as I said, we deal with a lot of large customers. We haven't seen the conversion as of yet, but they are definitely very, very service sensitive on these shorter lengths of haul, and we would definitely see conversion if in fact, the service deteriorates on the other carrier. Especially as NS is keeping their service levels where they're at. Yeah, they're exceptional.
Jason Seidl (Managing Director)
Yeah. Yeah, I think you guys said that several times. That's good to hear. On Estenson, are you anticipating any more charges for the third quarter, or no, are all the one-time severance costs all done behind us?
Terri Pizzuto (CFO)
We are not anticipating any more for Estenson in the third quarter.
Jason Seidl (Managing Director)
Okay, fantastic. That's all I have, guys. Thanks a bunch.
Don Maltby (President and COO)
Thank you.
Terri Pizzuto (CFO)
Thank you.
Operator (participant)
Our next question comes from Brandon Oglenski from Barclays. Please go ahead. Your line is open.
Brandon Oglenski (Director and Senior Equity Analyst)
Hey, good evening, everyone, and thanks for getting me in here. It's been a long call, so I just want to ask a bigger picture issue for you, David. I ask this respectfully, but, you know, industrial production's up this year, and there's a lot of items in your guidance, I understand it, but earnings are going to be down, let's call it 30%. I mean, from a shareholder perspective, what can you do to drive incremental value in your core intermodal business? It feels like that's been slipping for some time. I know we're all waiting for better pricing outcomes there, but is there something that you can control on the cost side or maybe the customer service element that can help drive incremental value to help maybe right the ship in that regard?
Dave Yeager (CEO)
... You know, that's a very good question. That's a very good question. And certainly from a cost side, that's partially why we took the $several million in one-times in the second quarter, as we did reduce headcount by about 75 people. As the business has evolved from both a sales and a service perspective, we realigned the organization to meet the current realities. We are very focused also, and I think that's a very good point, on the customer service. We won Walmart's Carrier of the Year, Home Depot's Carrier of the Year, Kimberly-Clark's Carrier of the Year. I think all those are indicative of the service, and it does give us a certain advantage when in a bid.
Is it one hundred basis points in margin? Certainly not, but it does give us an advantage. I do think that we will come to a point, and I think it's very soon, that the pricing is going to become more normalized. Right now, we're at a very significant spread on longer haul business on intermodal versus over-the-road. That is going to shrink at some point. Is that tomorrow? Is that this week? I would love to say yes, but, and I think that if price is really the primary driver, because we have to compete in the marketplace.
Brandon Oglenski (Director and Senior Equity Analyst)
That's right.
Dave Yeager (CEO)
Yet at the same time, we certainly are very focused on expanding our margins, so that we are bringing more value to our shareholders. But yet in the game, from a price perspective in order to be competitive.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, I, I guess from the outside looking in, should investors be fully aware that you guys are focused on this? 'Cause you're doing the Estenson, you know, integration. So have you dedicated the right amount of resources and thought to how are we gonna improve these outcomes incrementally from here?
Dave Yeager (CEO)
I don't think there's a day that goes by that we're not, and whether it's looking at margin by account and how to enhance it, how to take out costs within accessorials, within empty miles for drayage. We have a lot of resources that are focusing every day on not just reducing headcount costs, but reducing our internal costs, and at the same point in time, looking at how to expand our share and with business that, in fact, makes sense to our network and thereby contributes well to our overall gross margin. So, is there additional things we can do? We think we can.
We think that through systems investments, which we're doing right now, which will enhance our visibility, which will also give our people more information that they can deal with while they're making decisions. We think there's certain optimization tools from pricing that we are using currently that we think we can expand to enhance how we're pricing in the marketplace. So there is things and, you know, to your point, maybe it's something we need to more effectively communicate as far as what we're actually doing internally to try and make sure that the margins we're seeing in the earnings per share is what our shareholders would expect.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay. Thank you.
Operator (participant)
Our next question comes from Matt Young from Morningstar. Please go ahead, your line is open.
Matt Young (Senior Equity Analyst)
Good afternoon, and thanks for squeezing me in here. Just a one quick follow-up on the CapEx. I think when you announced the deal, you mentioned that Estenson's CapEx run rate would include relatively significant growth investment over the next few years, guessing as you-- I'm guessing that's as you ramp cross-selling and so forth. What would you say a normal steady state look like for them, once cross-selling subsides longer term, say, three years down the road?
Terri Pizzuto (CFO)
Well, I can tell you, you know, for 2016, their CapEx was about $29 million. And, so, you know, maybe ... And we'll build on that, as you said, Matt, and you're right, as we're planning on constant cross synergy. So I up until five years from now, and we've projected about $100 million of cross-selling synergy out five years, and we think there's even more opportunity than that. So in that fifth year, we have about $92 million of CapEx for Estenson, so we don't really see that slowing down for a while.
Dave Yeager (CEO)
Right. Exactly.
Terri Pizzuto (CFO)
To make those investments.
Dave Yeager (CEO)
We believe this is a platform that we can build dramatically on for the foreseeable future.
Matt Young (Senior Equity Analyst)
So you said $92 million CapEx in the fifth year, is that right?
Terri Pizzuto (CFO)
Yes. Uh-huh.
Matt Young (Senior Equity Analyst)
Okay. That, that was what I was getting at. I didn't know if it would-
Terri Pizzuto (CFO)
Oh, yeah. I'm sorry.
Matt Young (Senior Equity Analyst)
You know, it would fall back down to 50 in the fifth year or something like that.
Terri Pizzuto (CFO)
Oh, no. Mm-mm.
Matt Young (Senior Equity Analyst)
Okay, great.
Terri Pizzuto (CFO)
Gonna grow it like crazy.
Matt Young (Senior Equity Analyst)
Got it. And then, just one quick one here. In terms of the tighter truckload capacity in the quarter, any thoughts on whether or not, ELD adoption and related productivity losses among the small carrier base might be behind some of that? Or would you say that it was more seasonal, like by, like you talked about before and, and some of the other, transports have discussed?
Dave Yeager (CEO)
I think it was seasonality and industrial production being up, thereby demand being up. I don't think ELDs at this point have any impact on our customers' decisions.
Brandon Oglenski (Director and Senior Equity Analyst)
I agree.
Dave Yeager (CEO)
Yeah. If, in fact, they're enacted, and if, in fact, they're enforced, I do think it'll have an impact. We just don't know how to quantify that. Is that 2% or 7% or someplace in between?
Matt Young (Senior Equity Analyst)
Yeah, it does seem early yet. I just wanted to see if you had any thoughts on that. That's, that's what I'd agree with that.
Dave Yeager (CEO)
Yeah, I think we'd originally thought that, actually, it would start to impact them earlier in the beginning of this year when we were coming into it, but it certainly is not the case.
Matt Young (Senior Equity Analyst)
Got it. Hey, thanks.
Dave Yeager (CEO)
Thank you.
Operator (participant)
We do have Ben Hartford from Baird back on with a question. Please go ahead.
Ben Hartford (Senior Equity Research Analyst)
Hey, thanks. Sorry, I meant to drop out since it's been long, but since I'm in, I'll ask Terri, when you look at that $93 million-$94 million in quarterly costs in the back half of the year, what's a credible opportunity to be able to reduce that in 2018 as you get Estenson in the fold, and you kind of take a look at what you have? You guys have always been good at cost control. What? Is there a number that you're willing to commit to or give us an idea how to think about that on a quarterly basis in 2018?
Terri Pizzuto (CFO)
Yeah, our with Estenson, Ben, you know, really it's all about the cross-selling synergies more than any cost synergies. We have some cost synergies that we may get in purchased transportation as a result of buying better since we're bigger combined. But below the gross margin line, there really aren't a lot there.
Ben Hartford (Senior Equity Research Analyst)
Okay, so that's an embedded cost going forward?
Terri Pizzuto (CFO)
Yes.
Ben Hartford (Senior Equity Research Analyst)
Okay, great. Thank you.
Terri Pizzuto (CFO)
Thank you.
Operator (participant)
As we have no more questions, that concludes today's call.
Dave Yeager (CEO)
Just to wrap it up, thank you everyone for participating on the call today. As always, if there are additional questions, please feel free to contact Terri, Don, or myself.
