Hub Group Inc
NASDAQ:HUBG
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Hub Group Inc
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Hello and welcome to the Hub Group's Second Quarter 2019 Earnings Conference Call. Dave Yeager, Hub's CEO; Phil Yeager, Hub's Chief Commercial 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 expect, believe, anticipate, and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, the conference is being recorded.
It is my pleasure to turn the call over to your host, Dave Yeager. You may now begin.
Good afternoon and thank you for participating in Hub Group's second quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer and Terri Pizzuto, our Chief Financial Officer.
At the close today, Hub Group reported a record second quarter as revenue increased by 3%, EPS by 71% and operating income by 60%. Our operating income increased double-digits in all business lines except for truck brokerage, which was flat. This increase in profitability as the result of higher prices and also our intense focus on reducing costs while improving service. Real service has improved dramatically. The Union Pacific's on type performance has improved by over 1400 basis points. While the Norfolk Southern's on time performances is at record levels. As the rails continue to enhance their operations, we believe we'll continue to see improved service making Intermodal more competitive versus truck.
The CaseStack acquisition is also moving along extremely well. We're continuing to identify operating synergies with CaseStack as it exceeded the profit forecast for the second quarter. The one disappointing areas that of intermodal volume which was down 70% for the quarter. There are numerous reasons for this that Phil will elaborate upon. The good news is that the boiling declines are flattened, and we expect to continue to see sequential improvement through the second half of the year.
And with that I'll turn the call over to Phil to review our business lines.
Thanks, Dave. As Dave said, we are pleased with our second quarter results and the progress we are making and improving our profitability and efficiency while driving continuous improvement and great service to our customers. We're also proud that we were recently recognized as a Top-Five three PL and is one of the country's best places to work. I will now discuss our service line performance.
Intermodal volume went down 7% and revenue was up 1% for the quarter. The volume decline was primarily due to a softening demand environment versus last year as well as increased truckload and intermodal competition. In addition, we saw a 2% volume impact from lane cancellations and weather disruption. However, our team executed extremely well and improved margins as we enhanced our efficiency through to a 110 basis point improvement in loaded miles and improved third-party purchasing while maintaining our pricing discipline. We are excited about the improvements we are seeing in rail service which helped drive a 310 basis point improvement and our on time performance to our customers. We believe that with continued economic strength and greater tightness in the truckload market, we will be positioned for a solid peak season. Brokerage generated an increase in load count of 18% a 380 basis point improvement in gross margin as a percentage of sales in a 240 basis point improvement in on-time performance. This was the result of us onboarding CaseStack and implementing our new operating model, yield management strategy and new technology platform. We are pleased with our progress in transforming the business and see a great opportunity to continue to grow and invest in this service line.
Our logistics business posted strong results in profitability and revenue growth, onboarding CaseStack benefit of logistics and we're seeing the results of our improved yield management and continuous improvement efforts which led to a 540 basis point improvement in gross margin as a percentage of sales. We were able to win several new customer engagements during the quarter in both CaseStack and our legacy logistics business that will drive growth in the back half of this year and into next year. With our enhanced talent and operating model, we believe we can continue to grow, bring significant value to our clients and improve profitability.
Dedicated increased revenue and profitability with a 710 basis point improvement in gross margin as a percentage of sales. We achieved this through our improved operational discipline, winning new business, providing great service and executing on our yield management and continuous improvement strategy. We have an extremely strong pipeline and believe we can continue to grow the business while improving returns. Overall, we had a great quarter and are performing well. As I've mentioned before, we still see opportunity to improve our efficiency and profitability while continuing to provide best-in-class service to our customers. We know these results are not possible without our great team members and we want to thank them for all their passion and effort.
I will now turn it over to Terri to discuss our financial performance.
Thanks, Phil, and hello everyone. I'd like to highlight three points for the second quarter. First, operating income increased an impressive 60% resulting in operating margin of 4.4% bringing us closer to our stated 5% goal. Second, gross margin grew $31.7 million or 31% due to growth in all four service lines. And third EBITDA was $69.4 million or an increase a 55% over 2018, $44.8 million.
Now let's take a more in-depth look at our performance in the second quarter. Average revenue increased 3% to $921 million driven primarily by logistics. Gross margin as a percentage of sales was 14.4% the highest that it's been since 2007. Gross margin as a percentage of sales increased 310 basis points and every service line was up compared to last year. Operating margin adjusted to exclude acquisition related expenses totaling $4 million with 4.9%. Hub Group's diluted earnings per share with a record at $0.87. This is compared to a 2018 diluted earnings per share from continuing operations of $0.51 an increase of 71%. Cash provided by operating activities for the first six months of 2019 was $135 million. Free cash flow total to $114 million in the first half of this year. That's compared to free cash flow in the first six months of 2018 totaling $30 million.
Turning now to our guidance, we believe that our 2019 diluted earnings per share will range from $3.30 to $3.40. Earnings per share in the second half of the year, it's projected to be very similar to what we projected back in April. We estimate that the third quarter earnings per share will be slightly higher than last year and lower than the second quarter of 2019 earnings per share. We project mid-single-digit revenue growth for the full year. We expect gross margin as a percentage of sales to range from 13.9% to 14.3% in the second half of the year. We believe that our quarterly costs and expenses will range between $96 million and $98 million. We projected our effective tax rate will be about 25% in the back half of the year. We plan to spend between $100 million and $110 million on capital expenditures in 2019 and to fund these purchases with a combination of cash and debt. Through today, we purchased 626,000 shares of stock at an aggregate cost of about $25 million. $75 million remained on the current authorization.
That wraps up our financial performance over to you, Dave, for closing remarks.
Great, Terri, and thank you. We're very pleased with a strong second quarter and believe we'll continue to have positive financial results for the remainder of 2019. We continue to focus on improving our efficiency and productivity while delivering best-in-class service to our clients.
With that, we'll open up the line to any questions.
[Operator Instructions] Our first question comes from Scott Group from Wolf Research. Your line is open.
Thanks, afternoon guys. Can you talk about the monthly volume trends in Intermodal and then maybe your expectations in second half? And then I know you talked about a more competitive Intermodal market. Is this manifesting for you and you think in the second half and weaker volumes or less pricing?
I can give you the monthly volume, Scott. It was down 2% in April, down 8% in May and down 11% in June. And then so far in July, through yesterday we're down 4%.
I would just add that our customers are optimistic on the back half. We're currently in the process of finalizing peak planning. Work compliance is pretty low right now in the 70% range. Typically we see that around 80% and now that we're past the weather disruptions and see some sustained improvement in rail service, we're starting to see confidence build up. I think if you continue to see the consumer economy perform well, truckload will tighten up in that work compliance will come up as well. And that should result in something similar to a 2017 type peak, which was strong.
What do you make of that going from minus 11% to minus 4%, that uptick from June to July? What's driving that? And then maybe to ask more directly on pricing, what pricing trends are you seeing right now on contracts?
If you look at it on a per business day basis, Scott June with down about 6.7%. So that was some of it. There was one left day in June than last year. And so actually if you look at it on a per business day basis, we were up in June sequentially from April and May. So we think things did get a little better in June, although bogged down by the flooding that happened on the rails. And we think we picked up off the West Coast. So we think that's a plus right now. And we've seen that in the month of July. So we think that'll continue. And as Phil mentioned, we're anticipating a pretty good peak assuming that the truck market tightens up a little bit and that we still see the economic strength that we're continuing to see.
From a pricing perspective, Scott was one of your questions, we did see it a little more aggressive in the Intermodal market, like puddles very targeted. And we anticipated that we would be towards the middle part of this year at more of the mid-single digit increases. It certainly is not going negative. And as we had forecast originally, the first quarter we are able to get the highest pricing at that point because in 2018 they paid the least. And so, you have to look at it over a two year basis. So 80% of our bits are now completed. And I would imagine that hose will be probably in the low mid-single digits for those clients.
And I would just add, I think where our transcon volumes are continuing to perform best within our network, it's really in the shorter haul lanes where we're seeing some increased competition. So we anticipate with some tightness in that that we would see a lot of that volume come back over anyway.
Okay. Terri, can I ask you, the gross margin guidance's a lot higher than what you gave us last quarter. Can you just walk us through the pieces of what's causing that upward revision?
Yes, there are a couple of big drivers of that, Scott. Intermodal gross margin as a percentage of sales came in about 100 basis points higher than projected because of our focus on yield management, continuous improvement and cost efficiencies similar to the loaded mile improvement, for example, that Phil talked about in his prepared remarks. And then secondly, truck brokerage came in about 300 basis points higher than we had forecast due to more efficient operations, better procurement and benefits from our technology platform. So those were the two biggest drivers.
The next question comes from Benjamin Hartford, Robert Baird. Your line is open.
Hi, thanks for taking the question. This is Andy [ph] on for Ben. I want to get some additional perspective on the lower CapEx guidance for the full year and what exactly is driving that? Thanks.
Sure. It's less tractors and trailers for Hub Group dedicated and Hub Group tracking.
Thanks. And then just to follow-up on that, should we expect 2020 CapEx to be similar to 2019, should it be higher or lower? What are you seeing there?
It'll probably be a bit higher cause on the high end where at $110 for this year and we think next year we've got a higher truck spend and so with replacement of some truck and then we've got the remaining piece of the building. So probably closer to maybe $141, $150 next year.
And the next question comes from Justin Long of Stephens. Your line is open.
Thanks, good afternoon. So maybe circling back to intermodal volumes, I'm sorry if I missed it, but could you give the trend in intermodal volumes by geography and then also along those lines, Phil, you mentioned a little bit more price competition in the east, but could you give us a sense for what that spread looks like? If we look at pricing in the east versus pricing in the West in Intermodal right now?
Sure. I'll give you the numbers and then let Phil elaborate on the pricing. Local East was down 9%, local West with down 7% trashcan was down two and other which is Mexico and Canada was down 11%.
Sure. And from a pricing perspective, I would say, the spread east certainly is tightening. Somewhat, we still think from a market in total, the gap is somewhere around 20%. But when you get into those shorter haul lanes, it can get down to around 10%. But we've also heard with some of the more recent bits and aggressive truckload pricing that is around Intermodal price. So we think that's short-lived though. We don't see that continuing for the long-term, especially if we continue to see the economy perform well.
But that's kind of aberrational in historically we've seen that type of competition when there's an excess of truck capacity, the Chicago, Harrisburg, Chicago, Atlanta type lanes, LA, Dallas, you do see during those periods a lot of capacity out there. You do see some price competition from the truckers, but it came to lead to Phil's point. It doesn't last long.
Okay. That's helpful. And I know it's still a little early to talk about 2020, but I did want to ask about your high level thoughts regarding intermodal margins as we progress into next year. If we just see a continuation of the intermodal pricing environment that we're currently seeing today, is that an environment where you still think you can improve intermodal margins just as you start to implement some of the changes you're making in your drayage operations, rail service gets better, etcetera; any thoughts around?
Sure. I think we have good visibility to our rail cost increase and have room to continue to improve margins that there's a few big levers buying better in the open market, utilizing our assets more effectively. In particular on the operational excellence side. I think from a yield and continuous improvement perspective, we still have a lot of opportunity there to provide great service and save our customers money. And so, that's another great opportunity that'll help us continue to grow. I think we can still be more efficient in our organization. We're really focusing on streamlining the organization in both the front line and back office and focusing on scaling the organization. And then our technology is really starting to take hold as well, which is allowing us to make better front line decisions. We're integrating our platform and I think the other piece would be that we're automating a lot of our process was through RPA. So I still think there's opportunities in all of those and if the pricing environment continues, I would anticipate we could continue to grow our margins.
Although I would suggest that we do think a lot of what 2020 will look like from a pricing perspective. It's going to Rear Lake directly to peak season. And from the discussions we've had with both our rail partners as well as our customers, we're forecasting right now that we're going to have a 2017 type of a peak, which was very strong but not like 2018, which was kind of operational.
Okay. And one last follow-up on that point, so second half intermodal volumes, could you share what you're assuming for the year over year change? What's getting baked into the guidance?
Flat to down slightly.
The next question comes from David Ross from Stifel. Your line is open.
Thank you very much. Talking about the container fleet for Intermodal, has there been any changes there with the week volumes? Is that one of the other things that impacted the CapEx decision? And where do you expect to be on the container side going into next year?
We are purchasing about 1,500 containers this year. So our net assets are only about 300 containers, so we'll end the year with about 38,500 containers. So not much growth there at all.
And then when you talked about the 310 basis point improvement in Hub Groups on time performance for your customers, where is that versus I guess where it's been in the past and where you want it to be? Is there still a good amount of room to run there or are you getting pretty close?
I think we've improved dramatically. Our team has done a great job focusing on service. The score is related to how our customers actually great at. So, there's the legitimate score and I think we can always be better. We're certainly pleased with where rail service is at, which is really helping to improve that. And I still think there's significant room to improve. And with a more fluid and a stable rail network, the opportunity for us to keep improving on that at a planning level is still there. So there's a lot of opportunity left.
And then lastly, just on the dedicated side of things, what's the outlook for that business? Has demand slowed what the pipeline look like?
Pipeline is really good. We've still got about $100 million in the pipeline. We continue to bring on new business. We did brought some on near the end of the second quarter and got good pricing, mid-single-digit pricing. So we're happy with the performance.
And we're continuing to improve our operational discipline and our pricing discipline as well. So the business that we're bringing on, we're very pleased with the returns we're going to generate, mainly because we're also investing in systems and talent that are going to help us make that business generate a return for the company as well. But the pipeline is really strong. We're actively out in the market and our customers still want to focus on the long-term. And so there's an opportunity to expand those dedicated please.
And the next question comes from Todd Fowler from KeyBank. Your line is open.
Dave, I feel I just want to get your thoughts on how we think about volume growth versus margin improvement in this environment. When I think back historically, and maybe it's been 10 plus years at this point, but there was a time when there were some opportunity to call some low margin freight. Is that kind of the environment that we're in right now or is this more of a function that you've got some capabilities where if the volumes there you participate in and you see that kind of in the numbers and the volume isn't there, you can still improve margins with some of the efficiencies. Just how are you balancing volume growth versus margins right now?
We have a much deeper understanding of our network now and are very focused on making sure that we're making optical network decisions in our pricing. So there are certainly areas where we want to continue to compete and we will get aggressive, but at the same time we are maintaining our pricing discipline. We're continuing to focus on anything that's in our bottom 10% is what we call it, that either needs to be up or out of our network. And so, we plan to continue to focus on that type of yield strategy and continue to price to balance the network and keep a fluid operation.
Okay. And then Dave, to your comments on pricing, I think you said that the last 20% of the bids you're expecting to be kind of in the low to mid-single digit range. Do you feel that you're above the market or do you think that the Intermodal market right now is that, that's kind of where pricing is more broadly industry-wide?
At this point, in the bid cycle, that's kind of where the industry is right now, Todd. Again, the largest increases, this is just because of the curve from 2018, whereby the clients that took in fact increases at this point last year, took the largest increases of anybody during 2018. And so let's see, just natural that in fact that hockey stick had gone down to the right.
Okay. So it's the comps. Okay. And then last one for me, Terri, on the cost side, the last two quarters operating expenses have come in below the guidance. You've got a little bit of step up for the third and fourth quarter, but salaries and benefits was actually down a little bit sequentially 2Q versus 1Q. Is there the potential that you can still do better on the cost side in the back half of the year? And then can you talk a little bit about kind of what's embedded in the expectations in the step up in costs for the third quarter and fourth quarter? Thanks.
Yes, sure. You're exactly right. We beat our forecast this quarter slightly because of salaries and benefits are lower than what we had forecast and we've not hired as many people as forecast. We're down 42 people from last quarter. We're down about 54 from last year at this time and we've scaled our resources to coincide with our performance and we've also benefited from the technology. And in terms of how we get the -- while our costs and expenses are going up, most of the increased relates to increased IT costs. We estimate that IT cost will increased about $3 million from Q2 to Q3 and that the cost have stayed flat from Q3 to Q4. So the increase relates to ERP Logistics, migration to our new OTM systems and additional plant had counted IT. And then the bonus will also fluctuate depending on our EPF performance in that too is packed in our guidance.
Sure. Okay. Does the $3 million carry forward into 2020 years? That tail off at some point?
Well, we'll give you that guidance in 2020. I don't have number now. All right?
And the next question comes from Brian [ph] of JP Morgan.
Hey, good evening. Thanks for taking the question. You talked a little bit about your management already, but just more generally speaking, it seems like it's a pretty pervasive theme across all the business lines. So, maybe you can elaborate a little bit more on what you're doing differently in this cycle versus previous ones, what sort of things you think you're in and which segment has the most opportunity to be more disciplined on yield and to have it stick throughout the cycle and into the next one?
Sure. So, I think there were few key questions in there, so I'll try to address them. But generally, I would say we've taken a philosophy where we want to be -- find mutually beneficial opportunities with our customers where we're going to provide them great service and savings and we're going to be able to generate a strong return. And so, we've really focused in intermodal on building a fluid network that is very balanced. That is a big focus for us. In truck brokerage, we have gotten a much deeper understanding of the market. And where we can purchase more effectively and built out really a line of density to do that. Within dedicated, I think we have a much better understanding of our cost structure now and where we can compete. Once again in those areas of density that we have where we actually have a better cost structure and can generate a stronger return.
And then finally, logistics, there's still a great deal of opportunity. But I would say once again, we know the value we're bringing to our customers and the savings we can provide and we're pricing to ensure that we maintain, you know, strong profitability. I would just say lastly, we've inserted a lot of processes across all those service lines to manage our bottom performing business and ensure that we are, you know, moving that business up from a return perspective very quickly.
Okay, great. Thanks for that, Phil. And on that topic though, the new truck brokerage initiatives, I think you started them a couple of quarters ago, new operating model. Again, you have management in the tech platform. It sounds like you're getting some traction on that. But maybe if you could give a little bit more detail on what you've seen kind of fall through to the bottom line, and then what's still left to come?
Sure. For me, it was we had to start with the foundation of service to our customers and build trust with them that we could perform. I think we've done that. Now that we're getting our better purchasing and processes and pricing in place, that's really helping us as well. And the next piece is ensuring that we improve that [indiscernible] become more efficient in our headcount through the technology platform that we've rolled out, and we're really started -- we're in the early innings of that and think there's still a lot of opportunity there. So I think we're building that customer trust. We've seen the winds come on and so we feel very good about our ability to grow this business and we're ramping up some -- some great wins right now that we're excited about.
Okay, last quick one for me, just to clean up on the dedicated tide. Last business. I know that was something you mentioned last quarter, as well, I just want to -- want to make sure that was the same thing kind of carrying forward or if you've seen any other changes in the dynamics there.
No, that's still carrying forward. As I mentioned earlier, we did onboard some new business at the tail end here of the third -- second quarter, that'll carry over into third and fourth quarter. We've got $100 million pipeline. We're optimistic about that but net-net when we're done, we still expect you know, low to mid-single-digit sales growth and dedicated for the full year.
Okay, thanks for your time. I appreciate it.
And the next question comes from Bascome Majors with Susquehanna. Your line is open.
Yes, thanks for taking my questions here. You said earlier that big compliance was in the 70-something percent range more normally in the 80%. In the outlook for some improvement in the second half sequentially, are you assuming that you get back to normal big compliance range in your modal wars? And if so, is that because you've rebuild with lower volume commitments or is it because your customers are telling you the freight is coming?
We are -- we haven't built it all in our guidance back on. We have built-in, you know, as Dave mentioned, it's about 70% right now. And, you know, normally we're like 80% compliance. So to get to the high end of the guidance we have built-in recovering some of that, but not all of that
Our customers are telling us that in fact, that to expect a strong peak. Again, not 2018, but more closely aligned with 2017 which was still a very, very strong peak with a lot of demand.
Thank you for that.
I'm sorry. Just to elaborate a little bit further. And Terri earlier had mentioned that we're beginning to see some tightness in LA and obviously, it's a little bit early for peak, but we're certainly beginning to see some pickup in the overall volumes coming off of West Coast.
So we think we're a bit realistic with our guidance.
Well, I appreciate the color. And if -- I guess a lot of the questions today have, you know, it feels like people are looking back at the last time intermodal demand and pricing surprised the downside 2 years ago. And it's, you know, it's happening market-wide this year, but you're having much better bottom-line outcomes. And I appreciate Phil going through a lot of the initiatives that you guys are doing at the company level to improve that. Can -- without walking through all of those again, qualitatively, maybe can we talk a little bit about, you know, what inning you are and some of these processes and other improvements that you're doing. I mean, is there more for us to see on structural margin improvement into 2020? Thanks.
I think we -- we still have room to improve. There's always going to be room to improve. I believe we're middle of the game here and we've made a lot of progress. I'm really proud of what our team has done, but we still have room to go. We haven't gotten the full benefits of our technology investments, which I think will be substantial. So we have the processes now to take advantage of that. But really, you know, becoming more efficient and intelligent through the technology I think is going to be a big shift for us as an organization. So I would say we're still you know, middle of the game and feel like there's upside for the organization going forward.
Thank you for that. And last one, Terri, just a housekeeping item. You had talked a little bit about EBITDA last quarter. I believe you said $260 million to $275 million. And what's the translation -- translating ups earnings translate to you on EBITDA? Thanks.
Yes. We are projecting now $275 million to $285 million.
All right, thank you.
Sure.
Next question comes from Jason Seidl from Cowen & Company.
Thanks, operator. Everyone, good afternoon. You mentioned that some of the truckload pricing is sort of at intermodal pricing, but you said it doesn't last long. Historically, how long has it actually lasted?
Well, it lasts generally, through the -- a lot of the economic cycle. So I think that if we begin to see demand, go back to a little bit more normalized level or 2017 level even that you'll see that they'll begin to look at better freight that better fits their networks. The shorter hauls, again, you can kind of monitor how the economy is doing and how the trucking industry is doing just by seeing how aggressive they get in some of the shorter haul quarters. So, you know, I can't really pinpoint an exact time. But again, a lot of it's dependent on the economic cycle and the amount of freight that's available out there.
So do you think with your commentary on peak season looking like 2017 linking these two statements together, do you think we'll start to see some of that pricing pressure ease?
Yes.
Okay, great. The other question I had was on acquisitions. We've had a few companies in the transportation space, call out the fact that multiples are getting lower and that they're getting interested again. You know, you guys have been acquisitive over the last few years. You generate some good free cash flow. Should we be looking at anything potentially for 2020? And if so, what are the areas that you'd be interested in?
We are out looking. We would agree we think that expectations are normalizing. And so we are -- we are certainly out looking right now. Mostly non-asset based types of organizations, whether it's special to brokerage or logistics or fulfillment, we would be opportunistic on filling out our geographic footprint in dedicated, and intermodal as well. But the main areas of focus are really not asset-based companies that can help us drive scale and new solutions for our customers.
And we're, you know, -- CaseStack was a great acquisition so was dedicated. We're integrating those, you know, very well. And we had $150 million in cash at the end of the quarter. No borrowing on our $350 million revolver that we've got so plenty of dry powder as well.
Sounds like you're in a good position. Appreciate the time as always.
And our next question comes from Tom Wadewitz [ph]. Your line is open.
Yes. Good afternoon. I wanted to go back to the commentary on competition in intermodal. Did you see -- you know, it seems like you've weathered that pretty well. Do you think some of the decline in second quarter was a function of contracts that move to, you know, a more competitive player in the market? Or was that just weakness in freights? And I guess in second half it doesn't sound like you're expecting to kind of lose market share. But it just -- I guess I wanted to see if you could offer some more comments on impact of the increased competition in intermodal on your volume.
You know, a lot of the decline was actually just the compliance issue with the bids. I mean, that's a huge variance from what we anticipated. I mean, we would -- if in fact, we were to build into 80% for the second half, we certainly will -- would grow intermodal in the low single-digit. So a lot of what's left -- you know, we did lose in a few cases, which is normal during the bid process, but we also gained in multiple instances. So I wouldn't say that we lost share. I think that just the -- the pie is a little bit smaller and we took a shrink like I think most of the players did.
Yes, the whole domestic intermodal market Tom was down 8% and we were only down 7% so we didn't -- we don't think we lost share and the competitors were down more than we were.
Right, okay. How would you, you know -- Dave or Phil, how would you compare this cycle to the prior cycle? I mean, it seems like you've had clearly some capacity is coming to the market on the trucking side and truckload side. You've had I think, some weakness in freight in the first half of the year. I mean, it seems fairly straightforward given the weekly rail volume and cash rate shipments index if you want to look at that. How do you think this -- but it sounds like you're pretty optimistic looking forward to -- how do you think this cycle is different? Is it just a more narrow period of weakness in freight or more discipline among the intermodal players? Because it does seem like you're not expecting to have this kind of protracted weakness that we had in 2015 and 2016.
And a lot of that, Tom, I think is driven by the overall economy. That's the key. We've seen many freight recessions before. And again, we did -- 2018 was such an anomaly that it added a lot of capacity into the market that we'll see will filter through at this point in time. And as it does tighten, and as we see the shipments get stronger and a little bit more consistent as well, because there was a fair amount pull forward from the threat of tariffs. So I think it's going to -- our feeling is that just from talking to our clients again and our rail partners that it's going to be short-lived. And this is nothing like some of the severe recessions that we've seen in the past. We do believe that it's in the process of flattening out and as we have a strong peak like 2017, that will really set up 2020 to be a positive year as well.
You talked a bit about the view on 2020. The -- I think you were saying that you think rates in intermodal will be up in 2020. How would you think about it if the, you know, kind of truck capacity is an issue and truckload contract rates are down in the 2020 bid season? Would you be able to, you know, -- would you expect to decouple from that and potentially see intermodal rates up or is it pretty tough to you know, see intermodal rates be resilient if truckload contract rates are down next year?
Well, it's intact under the hypothetical that trucking rates are down. We would put pressure on the shorter lengths of haul but I do think to your earlier point, we've seen a lot more discipline within the intermodal players. Again, I think that we've all looked at a return on invested capital and it's -- it hasn't been what it should be. And so we're all working towards individually as far as enhancing profitability. So the truck -- there's no question that there's a loose truck market. Shorter links of haul would be more challenging. But again, we really don't believe that that's going to be the case at this point. Certainly, I know that I just heard that June results of consumer settlement was through the roof again, and consumers drive an awful lot of this economy.
Right. Okay. Yes, great. Seems like your model is working well in the period of weakness and trade, you know, in good performance and gross margin. So, anyways, thank you for the time.
Thanks, Tom
Your next question comes from Matt Young from Morningstar. Your line is open.
Thanks. Good afternoon. Just quickly to clarify in the last question. So the 10% spread that you've seen versus truckloads in the shorter haul, I'm guessing that that is meaningfully better than what you guys saw in 2016. The last time truckloads rates -- truckloads rates fell, correct?
Are you talking about the difference between truck and intermodal rate?
Yes.
I think Phil mentioned 20%. Actually, as the average.
Okay. I thought I heard 10% on shorter haul lanes, but.
I think it can get that low and generally, we see you know, around 20%.
Okay, around 20% but I'm guessing that -- that's markedly better than what you guys saw in 2016. The last time truckload rates corrected.
You are absolutely correct.
Okay. And it sounds like that just overall demand and pricing conditions for intermodal rates are -- are also better than they were last time and you guys are in a better position to see them improve in the second half.
Absolutely, yes and we are expecting that.
Okay. And then one quick question about the truck brokerage gross margin. If you ignore the mix shift impact from CaseStack, I'm wondering how the gross margins trended for legacy truckload brokerage operations for those up year-over-year?
They -- yes, they were up year-over-year. About 170 basis.
Would some of that have anything to do with kind of your internal efforts with IT as opposed to the cycle or both of those?
I would just say both.
Okay. All right. That's all I had. Thanks.
Thanks, Matt.
[Operator Instructions] And our next question comes from Matt Brooklier from Buckingham Research.
Yes, thanks. Good afternoon. I wanted to circle back to your dedicated business. Could you remind us what's the average length of contract on that business? I'm just curious as to how we should think -- be thinking about, you know, what percentage of your contracts are coming up for renewal over the next 12 months.
It's typically a 3-year contract. We have visibility to the renewals so, you know, we work through them every year. So, next year won't be outsized versus traditional.
Okay, got it. And then you talked to achieving mid-single-digit price increases, I think through the first half on your, you know, -- on dedicated contracts on average. Are your expectations for the second half similar or do you think that maybe, you know, pricing increases maybe a little bit lower than that just given kind of the current state of the broader tier market?
Sure. I think driver wage inflation has subsided somewhat. A lot of those renewals were driver wage driven. And we need to make sure we're staying competitive in the market to service our customers in the right way. I would say the competitiveness has subsided somewhat. So you know, if we -- if we do continue to -- as we look at renewals going forward, I would say, you know, you'll continue to see us balance out somewhat, but we are also focused when you know, we are underperforming and excited making sure that we can generate a return as well.
Okay, that's all I got. Thank you.
And the next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, thanks for the follow-up. So, maybe Terri, if we think that transcon is going to do better than sort of local -- east locals because of this truck competition dynamic. What are the implications of better Transcon on gross margins and not margins for you?
It's a longer length to haul. It's our longest length of haul for Transcon. So that's higher margin dollars. And gross margin as a percent of sales is really pretty consistent across all of our different geographies. So it's really more dollars, higher revenue because the revenue per unit is also higher on it.
And then our margin?
Similar.
Okay. And then, just lastly, the guidance on gross margin for the back half, do you think they're higher, lower in third or fourth quarter?
Gross margins I think are higher in the fourth quarter. Typically that's due to seasonality and peak season surcharges.
Great. All right. Thank you, guys.
And that completes the question-answer session. I'll now turn the call back over to Dave Yeager for final remarks.
Great. Well, again, thank you for joining us for our second quarter earnings call. As always, Terri and Phil and I would be available if there's any additional questions that you may have. Thank you again.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.