Hello, welcome to the Hub Group First Quarter 2020 earnings conference call. Dave Yeager, Hub's CEO, Phil Yeager, Hub's President and Chief Operating Officer, and Terri Pizzuto, Hub's CFO, are joining me on the call. At this time, all participants are in a listening 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 begin.
Good afternoon, thank you for participating in Hub Group's first quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer. Before we begin reviewing the first quarter, I'd like to acknowledge the men and women of Hub Group who work tirelessly to ensure that we're serving our customers and suppliers during the pandemic. Like all businesses, safety is job one in the logistics business. Today, over 98% of our office team is working from home, providing service to our customers that deliver essential goods. We've been receiving many compliments from our clients on the level of service, and we thank the entire team for the extraordinary effort that they're putting forth. As for our drivers who are on the front lines every day delivering those essential goods, thank you.
We greatly appreciate your dedication and your commitment. On another front, I'd also like to acknowledge our CFO, Terri Pizzuto, who has announced her retirement as of June 30th of this year. Today is her 52nd earnings call as CFO. She's worked diligently to ensure that the financial reporting was accurate, clear, and concise while building relationships with our shareholders and the analysts who cover Hub. Thank you, Terri, for your years of service and contributions to making Hub successful. Obviously, the first quarter was challenging. We experienced margin compression due to the price competition from both over-the-road and modal competitors. In addition, we've incurred some additional costs as a result of the lack of imports, thereby unbalancing our intermodal network. A key area of focus for our team is on capital preservation during this volatile time.
We intend to continue to invest in technology and equipment that benefits our business both near and long-term. However, we have taken measures to reduce non-essential CapEx, such as placing a hold in the construction of our additional headquarters building. Although we do believe that second quarter volumes will further deteriorate, we are seeing wins across all business lines and have a strong pipeline for long-term growth. We believe that the economy will begin to recover and that volumes will increase as normal business conditions return in the latter part of 2020. I'll now turn the call over to Phil to review our business lines.
Thank you, Dave. I would also like to thank our drivers, team members, and vendors for their continued support of our customers during this challenging time. The safety of our team, our customers, and their families remains our top priority. I also wanted to thank Terri for all of her years of dedicated service to Hub. Your contributions have been immense and impactful, and while we are sad to see you leave the company, we know you have left us in an excellent position with your team and successors. Our team has shown resilience and character through this unprecedented environment as we have maintained our excellent service to our customers with a seamless transition to work from home. Our drivers remain safe and healthy through extensive new measures and protocols, and we have also been giving back to the community by supporting healthcare workers and food banks.
Our focus on reducing costs and improving efficiency will continue to serve us well during this dynamic economic environment, and we are ahead of schedule on our $40 million in profit improvement initiatives for the year. In order to ensure our success in delivering on these savings, we continue to add talent to areas across our company, including trucking, maintenance, technology, procurement, and sales. Most notably, we have hired a new president for our trucking operations, Vince Paperiello, who is a proven leader, and we believe he will be able to help us make significant improvements in both our drayage and dedicated networks. I will now discuss our business segment performance. Intermodal volume declined 7% and revenue was down 8% for the quarter. Transcon volume declined 2% while shorter haul local east and west volume was down 8% and 9% respectively.
Our team has done a great job in driving down costs in our drayage network through increasing the efficiency and utilization of our own capacity and decreasing our costs with third parties. These actions are helping to offset a challenging pricing and demand environment with increased truckload and intermodal competition, as well as headwinds from increased insurance and rail costs. These factors in aggregate led to a 210 basis point decline in gross margin as a percentage of sales year-over-year. We hope to see a return of demand and replenishment in the latter portion of this year as the economy begins to reopen. Our services continue to improve over the record that we set last year, and we are focused on leveraging that to drive growth. Logistics revenue declined 10%, and gross margin as a percentage of sales improved 70 basis points year-over-year.
CaseStack has performed extremely well during this difficult economic environment, and we have maintained our excellent service levels, which continue to improve our pipeline of opportunities for growth. Our transportation management business has improved profitability and has a strong pipeline for growth and onboarding. We are also nearing the completion of our technology transformation in logistics and see many opportunities to further utilize the platform to leverage our scale and drive efficiency. Brokerage volume declined 10%, and revenue was down 17% for the quarter. However, gross margin as a percentage of sales improved 150 basis points year-over-year. The decline in volume was driven by a decrease in LTL demand, which was offset by an increase in spot and contractual truckload activity in the latter portion of the quarter. Our team is doing a tremendous job of improving our costing and identifying opportunities for profitable growth.
We also saw a 24% increase in productivity of our associates year-over-year, driven by our improved organizational structure, processes, and technology. We believe this will pay increasing dividends as the economy reopens and load counts increase. We continue to see new customer wins and are leveraging our strong service to drive profitable growth. We are still in the early stages of our dedicated trucking transformation. Revenue for the quarter declined 18%, gross margin as a percentage of sales declined 160 basis points year-over-year. There was improvement at the end of the quarter, I'm pleased to note that in March, Dedicated was our highest margin business. We are onboarding new profitable wins and have shed poor performing accounts. We are continuing to focus on improving our operational efficiency and believe there is still ample opportunity to enhance our returns in this business.
Once again, I want to thank all of our Hub team members and our customers for their ongoing support and dedication. I will now hand it over to Terri to discuss our financial performance.
Thank you, Phil, and hello, everyone. Before I begin my comments on the quarter, I'd like to thank the drivers who are the heroes helping our country fight the pandemic and delivering the freight every day. It's inspiring to see the dedication, teamwork, and camaraderie of our tremendous employees as we rally together and navigate through these unprecedented challenges. Now I'd like to highlight three points for the first quarter. First, we're focused on liquidity, with $277 million in cash and $219 million of available borrowings on the revolver at the end of March. Second, CaseStack is a bright spot. Sales and operating performance are at record levels due to CaseStack's strong value proposition, delivering product to essential businesses. Third, we continue with solid cost control. Headcount is down 4% from year-end, and we are on track to achieve the other benefits of our profit improvement initiative.
Now let's take a more in-depth look at our performance in the first quarter. Hub Group's revenue decreased 10% to $839 million due to a decline in revenue in all four service lines. The largest dollar declines were in intermodal at 8% and logistics at 10%. Intermodal revenue decreased principally because of a 7% decrease in loads. Logistics revenue decreased because of soft customer demand. Gross margin as a percentage of sales was 12.5% and was down 110 basis points compared to last year, due mostly to a decline in intermodal gross margin. Rail cost increases, lower pricing, and insurance and claims headwinds were only partially offset by profit improvement initiatives. Salaries and benefits, which included $2.1 million of severance, decreased $11.2 million due to lower headcount and lower bonus compared to the first quarter of 2019. Headcount was down 14% compared to March of 2019.
Operating margin was 2.4% compared to 3.8% last year or 140 basis point decline. Hub Group's diluted earnings per share was $0.40. This $0.40 includes $0.07 of cost related to severance, consulting, and donations of Hub equipment to support COVID-19 relief efforts. This is compared to a record high diluted earnings per share of $0.71 in 2019. The decrease in earnings per share was driven by the soft freight market, including the impact of COVID-19 and intermodal and truck competition, partially offset by the savings from our profit improvement initiative. Looking at our cash flow. Cash flow from operating activities for the quarter totaled $41 million. Earnings before interest, taxes, depreciation, and amortization was $50 million. On the liquidity front, our balance sheet is strong, and we continue to generate cash.
Our management team meets daily to closely monitor customer credit limits, discuss any customers deviating from payment terms, and review cash inflows and outflows. Before I wrap up, thank you all, but especially Dave and Phil, for making my last 18 years the best years of my career and for your guidance and leadership. Congratulations to Jeff and Kevin. They'll be a key part of Hub's growth and success. To my colleagues at Hub and in the investment world, I treasure the relationships we've developed, and I'll miss working together. It's the friends along the journey that make life special, and I thank each of you for making this chapter so rewarding. Dave, over to you for closing remarks.
Great. Thank you, Terri. The first quarter was a challenging start to the year. The virus is a disruption, not a permanent reduction in economic activity. Hub Group is extremely well-positioned to endure the downturn with a talented workforce, strong balance sheet, solid technology, and excellent customer relationships. With that, we'll open up the line to any questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you are using a speakerphone, you will need to pick up your handset first before pressing any numbers. Once again, if you'd like to ask a question, please press star then one on your touch-tone phone. Our first question comes from Scott Group from Wolfe Research. Your line is now open.
All right. Thanks. Afternoon, everyone, and best of luck to Terri in retirement.
Thanks. Thank you.
I was hoping, can we start maybe just go down each of the business lines, and can you give us an update on sort of volume or revenue trends in April?
Scott, thanks. This is Phil. For the month of April, we're anticipating in total about a 15%-18% revenue decline for the organization as a whole. Logistics is really holding up the best, with CaseStack continuing to see a surge in demand and us bringing on some new logistics transportation management outsource onboardings that are offsetting some of the challenges with our non-essential retail customers. Dedicated is seeing surges with our home improvement and general retail clients that's offsetting some of the challenges, once again, with non-essential retail and automotive. Intermodal, once again, just is seeing some of the challenges with the loose truckload environment, as well as lower import activity and lower fuel prices. Brokerage is going to be the most significantly impacted as spot truckload and more in particular, LTL demand are dissipating with high tender accept levels in the marketplace.
All that kind of comes together to that 15%-18%, with intermodal and brokerage seeing the highest level of impact, and then dedicated and logistics faring better.
That helps. Do you think you can share what the intermodal volumes are down?
They're down about 16%.
Okay. If I On the intermodal gross margins, it sounds like the big culprits are sort of insurance and rail costs if I heard right. Those don't necessarily feel like COVID impacts. Those just feel like business impacts. Am I thinking about that right? Are these headwinds that we just are going to need to deal with all year, sort of regardless of the volume environment? Then just along those lines, if we're now compounding that with volume, at least in the second quarter, do you think the gross margin decline in intermodal is worse in the second quarter? Any thoughts on all that?
Scott, this is Dave. I would suggest to you that we do think that the second quarter will be the quarter where we'll see volumes down, just if nothing else, due to a lack of imports. As the country begins to open up and demand comes back, we think a lot of the non-essential products will be coming in, will be flowing. That'll better balance our networks. It'll better reduce our costs. It is not the rail increases. We have very clear visibility of them.
This is really a competitive environment that we're dealing in, which still remains very aggressive, both with our traditional motor competitors as well as over-the-road competitors. Again, we do believe that, and it's also volume related at this point in time. An interesting statistic is that of our clients, our top 100, 78% are currently open. That's 78% of our revenue versus 17%, which are just closed. That revenue just does not exist and did not exist for most of March. We're forecasting that as well for the second quarter, but believe it will begin to open back up again.
Okay. Then what about the insurance piece? Is there any way to quantify that? If that's a, we should think about that impact continuing all year?
Yeah, that'll continue for half the year, probably. In the second half, we might get some of that back. I will say that our overall Hub Group trucking drayage costs are lower than last year, as well as our third-party drayage costs, so that helps to offset that. The other impactful thing on our margin would be mix. I mean, the mix of business that we had was more unfavorable than we planned. Pricing, because of the challenging pricing environment, was a little lower than we planned as well.
Okay. Just lastly, I take it you're not giving earnings guidance, but any guidance pieces you want to give us, either on the quarterly OpEx or gross margins, whatever you feel comfortable sharing if there's anything?
Yeah. There's quite a bit of uncertainty surrounding the pandemic with the free fall in the economic indicators and the uncertainty about when we'll see the COVID pandemic curve start to flatten. Giving guidance is difficult. We have modeled various downside scenarios from dire to base case, and believe we're on solid footing to flourish once we come out of the recession, and we'll be pulling every lever available. We do generate free cash flow in all of the scenarios that we modeled and believe we have substantial liquidity. We feel very comfortable with where we're at, and as Dave mentioned previously, once we get out of this pandemic and businesses start opening again, we'll be very strong and ready to react accordingly because our customer service during this time has also been excellent.
Okay. Thank you. I'll pass on to somebody else.
Thank you. Our next question comes from Justin Long from Stephens. Your line is now open.
Thanks. Good afternoon. Terri, congrats on a great career. You'll definitely be missed.
Oh, thank you.
Maybe following up on the April commentary, that was really helpful, Phil. I was wondering if you could give us any color on gross margins in April as well, even if it's on a consolidated basis, just to see how the business is flexing given that top-line pressure. On intermodal volumes, I think it would be helpful to get the monthly volumes for the first quarter as well. Dave, you mentioned that there was quite a bit of pressure in March. I just wanted to know how pronounced that was.
I can give you the monthly volumes for the intermodal. We were down eight in January, down six in Feb, and down seven in March. If you looked at the last couple of weeks of March, we were down nine, 10%. We really started feeling the impact of COVID in March.
Sure. This is Phil. On the gross margin, difficult to give exactly where it's going to wind up. What I could tell you is dedicated has been our highest gross margin business, logistics being the lowest, with brokerage and intermodal in the middle. As that mix change happens, we don't see a significant mix impact. That is really the direction. We would anticipate it'll continue to be rather similar, if that makes sense.
It does. That's primarily what I was getting at with just kind of the mix changes. Maybe secondly, on bid season, I was wondering if you could give an update on that front, how much your business is actually coming up for bid, and maybe an update on the business that has come up for bid, roughly where that's priced so far.
Sure. We are anticipating pricing to be down low single digits for the year. We're about 31% of the way through bid season at this point with full awards, and 35% of our intermodal business is active. We are seeing good wins come on. We're seeing customers think long term about capacity availability given the limited capital expenditures they're seeing on the truckload side and trying to lock in now more of their intermodal capacity. We are feeling good about bid season. We're continuing to get good feedback from our clients, and we're certainly excited to see those wins come on and start to really come back once the economy reopens.
Okay, great. Maybe lastly on the profit improvement plan. You stuck to the $40 million guidance. It sounds like you're ahead of schedule on that front. Can you share how much of that $40 million was recognized in the first quarter and what will be incremental going forward? Maybe as you go through that, you could talk about your comfort in this guidance in the various scenarios that Terri mentioned. Do you feel like this is something that's achievable in all of those scenarios?
Sure. Yeah. As you mentioned, we are ahead of schedule. A small amount was recognized really in the fourth quarter, that $40 million. We are making significant headway, though. There's really a few key categories of the profit improvement initiatives, the first being really headcount efficiency, continuing to find ways to do more with less and utilizing technology. That I would say we're making the most progress on and have been ahead of schedule there. We're also making significant strides in our procurement strategy and are doing an excellent job in driving down costs in our trucking business as a core focus. The areas where we still have some opportunity and are earlier stages is really in the transformation of the trucking operations, where we have, as Terri mentioned, reduced our cost per load in our drayage network.
We're improving the retention of our drivers, but we're also very early stages in our maintenance program and the evolution that we're going through there. I still feel confident that we're going to achieve the full amount in those scenarios. We're going to continue to focus on delivering on that, and that's really why we're adding talent to the organization as well, like Vince, who we think can help us deliver on that.
Okay, great. I'll leave it at that. Thanks for the time.
Thank you. Our next question comes from Ben Hartford from Baird. Your line is now open.
Hey, thanks. Thanks for the time. Phil, could we get a little bit of perspective on the IT project and whether you've been able to accelerate the timeline on that given some of the changes here? Maybe just talk a little bit about how the organization has responded through COVID-19, through the changes, the work from home, etcetera, amid the tech changes and the projects that you do have underway.
Yeah. I've been extremely impressed with how our team has handled it, in particular our logistics team, as we come to the conclusion of our transition to OTM there. I'm really pleased with how we've handled it with our clients and how we're supporting them through it, and the training that we've put in place to ensure that is effective. We are also very focused on improving the planning tools that are available to our intermodal and dedicated teams. We think there's significant opportunity there to continue to push that forward, and we plan to continue to roll that out throughout the year, and we're seeing really good results in the markets where we've put that forward. The other piece that we're very focused on is customer experience, getting them better information more quickly.
I would say our customer feedback on what we're doing there continues to be very positive. The last piece of the opportunity, and I would say we're somewhat early stages on this, is continuing to drive automation. We have a lot of areas that we've already succeeded in. As we get integrated fully into the platform, we continue to find more opportunities, which is very exciting, and I think an opportunity as we look out past even this year.
Yep. Ben, this is Dave. Just to elaborate maybe a little bit on the work from home. In all candor, I've been very surprised. The productivity levels, and the compliments that we've been receiving from our clients have been quite frequently. I was surprised just how productive people are. I guess considering that a fair amount of our people live in downtown Chicago have a reverse commute that's anywhere from two to three hours, it's not that surprising. I do think ultimately that this pandemic, one of the things we'll learn is it may change the way that we work and how we conduct our work.
On the cost-saving side, the $40 million number. I know Terri had said that there's a variety of outcomes as it relates to scenarios that we can see. Have you taken cost action steps above and beyond what you had previously stated, the $60 million at the end of the year, the $40 million through this year? Are there cost opportunities identified and underway above and beyond those previous targets, given what we've undergone here over the past six weeks and the anticipation of obviously further declines here to come during 2Q?
Sure. Yeah. This is Phil. We continue to find additional opportunities, and we are executing on those. I would say it's not just directly because of COVID, but because of the hard work that everybody's put in on us being as efficient as we possibly can. To your point, we continue to find opportunities, and we plan to execute on all of those really independent of what the economic environment is going to be.
Okay. I guess, Terri, or as you pass the baton on to Jeff, obviously congratulations to you and your retirement, Terri. As you think about free cash flow and volumes normalizing in the back half of the year, priorities of cash and kind of returning to the growth focus, are there criteria or benchmarks when you think about reengaging the expansion of headquarters or deploying capital in forms of share repurchases, or perhaps acquisitions? As we kind of get beyond the bunker down type mentality here at the moment, what are some things that you'll be looking for in the coming weeks and months and even quarters to begin to redeploy some of the capital that's been pulled back upon here now?
Yeah, we continue to have an active pipeline for M&A, Ben. The current environment causes us to be thoughtful in terms of the valuation, liquidity, and financing. We've got some good opportunities there that we'd like to use our free cash flow for when we're able to do adequate due diligence on some of those potential acquisitions. Also, we talk about share repurchases at every board meeting. We have a board meeting coming up in May, so we'll talk about that as well. That's once we get through this pandemic, because right now we're focused on liquidity and making sure that we get through this. We are very confident that we're going to have adequate liquidity and free cash flow. As you mentioned, we have the building that we will stop next month on, and we can start that back up anytime we want.
We've got a lot of efficiencies actually as a result of having to work from home as well. That will help until we're able to start back on that. Our CapEx, we reduced our CapEx for the building, and you can see that for the rest of the year, it ranges from $50 million-$80 million. Of that $50 million-$80 million, there's only $20 million, give or take, that is for IT investments that we're going to make and the building, and the rest is more discretionary based on growth. That's the other use of our cash.
Okay. That's helpful. Thank you.
Our next question comes from David Ross from Stifel. Your line is now open.
Good afternoon, Terri. Going to miss you.
I'll miss you too. Thanks.
On the truckload hire, this new guy, Dario, coming in. What's his background?
Sure. This is Phil. Yeah, Dario worked at UPS for about 24 years, and then most recently, he ran all transportation for US Foods, which is obviously an extremely large private fleet and warehouse network. Really a great background for us where I think his focus on operational discipline and technology is really going to help us improve significantly. We're really excited to have him on board.
Is he going to spend more time on the dedicated side, or is he going to get involved with drayage as well?
It will be both. Initially, given the progress that we're making on drayage, his focus will be primarily on dedicated to start. That's where we continue to have a significant opportunity. Obviously, we still think we have opportunities in our drayage network. We're making more progress there. The priority will be dedicated.
On the intermodal pricing side, you said it's expected to be down low single digits for the year. Service seems to have improved. When do you think that translates into better pricing? Maybe because of better service, you could argue that you shouldn't have to have a reduction in rates.
Yeah, this is Dave. Yeah, there's no question the service right now is as good as we've seen it. It's exceptional. I think that the issue is the competitive rate structure right now. Obviously, fuel is extraordinarily cheap. Obviously, the demand for truckload capacity is just not there, and as a result, a lot of the over-the-road motor carriers are basically running just to kind of survive, if you will. I do think as the economy does come back to normal, that in fact, we'll see that demand pick up. At that point in time, I think we'll have a good opportunity to be able to increase pricing.
Are you seeing any service differential at this point between the East and the West?
They're both very good, honestly. We see constant improvement as well from both of our carriers, the Union Pacific and the Norfolk Southern. No, they're both doing a great job, and the consistency of service is substantially better than it had been several years ago. As I said, continues to improve.
Excellent. Thank you.
Thank you. Our next question comes from Todd Fowler from KeyBanc Capital Markets. Your line is now open.
Great, thanks, good evening. Terri, congratulations again. I just wanted to follow up on the net revenue margin conversation. Is it right to think that net revenue margins are going to compress sequentially into the second quarter, just given some of the pressure that you're seeing? If we do see volumes rebound in the back half of the year and kind of get back to more of a normalized environment, can we get back into the range that you previously had, the 13.5% to almost 14? With the pricing environment and some of the costs, has that changed the net revenue margin, what expectations more intermediately?
Todd, it's really hard to say. We've got visibility for April now, but we'll kind of take it as it goes, and we certainly hope things recover by the second half. We think it will, but not sure. It'll depend on what happens for a peak in the second half as well. That could impact our margins significantly if we have a strong peak, for example. I think we'll just take it as it comes and give you more color second quarter.
If we do see demand come back, that's really going to help with our asset utilization, our load of miles, and we're going to be able to take advantage of our improved cost structure as well. Our hope would be strong in the back half, but certainly we don't have a ton of visibility to what that's going to look like right now.
Yep.
Yeah, that helps. Really what I was trying to get at is, with the pricing commentary and some of the costs, does that feel dramatically different than where you were at the beginning of the year? We understand that the volume environment has changed and that piece has changed. If we got back to more of a normalized volume, and revenue situation, would those prior expectations still be realistic?
If the truck market tightens, that helps too. That's another factor that would be a plus for us. Our other businesses, of course, like Phil said earlier, continue to do well. CaseStack has been on fire, done a great job serving essential businesses. Their service has been fantastic, they're seeing a lot of peak business right now where they have demand up 60% higher than normal sometimes during this past quarter. Currently, it's about 10% higher than normal. They've worked with customers and warehouses to prioritize supply and retailers to prioritize demand. E-commerce with CaseStack is up as well. It's up 400% in Q1 compared to Q4. We've got a great pipeline there in CaseStack as well as legacy logistics.
We have a lot of strength and good foundation for the second half of the year, and not only intermodal, but our other business lines.
Okay, that helps. Just on the intermodal volume commentary, the down 16 in April. If I remember the second quarter of last year, you kind of didn't see that seasonal build as you moved through 2Q. Can you remind us, do the comparisons get easier in May and June? What are the indications that you're hearing from the customers? Is the down 16, and I know visibility is limited, but is that kind of a stable level from this point going forward, or do the comparisons impact what we could see for the last couple of months of the quarter?
Yeah. Our intermodal volume in Q2 of last year was down 7.2%. I don't remember off the top of my head what the volumes were by month. I think you're right. We didn't see the seasonal peak last year either.
Yeah, I would just highlight that as the year progresses, the comps will get easier. This is really the time last year where we saw pricing from intermodal and truckload competitors really deteriorate. Obviously, we stayed very disciplined during that, and so a lot of those are up for renewal right now, and so we'll keep participating in those RFPs.
Just to give you those numbers, as Phil mentioned, our comps do get easier. In Q3, our volume was down 9%. Q4 was down 11%.
Terri, I thought that you had all 54 quarters memorized. You can give us every one.
I did not. My memory's going.
Hey, just the last one, if I could. There was a question earlier about quarterly operating expenses, and there was a little bit of color around it. With the $85 million here in the first quarter and the severance, should we expect that to trend down with some of the cost takeout that's happening? Is there any sort of directional commentary you can give us on quarterly operating expenses? Thanks.
Sure. We can give you a little bit on Q2. I'm sure you've read the press release. You'll see that we donated about $5 million worth of equipment to different food organizations as well as hospitals in connection with COVID-19. You'll see that as a non-recurring item in the second quarter. It's obviously non-cash. We did reduce our headcount sequentially from year-end about 4%. Much of those headcount reductions came at the very end of the quarter. You'll see some of that in the second quarter. Severance also comes out. We only had part of the year's raises in the first quarter because our raises don't go into effect until mid-February. Net-net, maybe it's similar, assuming things stay the same.
We don't have any bonus recorded in the first quarter, and we hope things get better, and we do get to record some. If things stayed like they are, we would not have any bonus recorded.
Okay, got it. Thanks again for the time.
Thank you. Our next question comes from Brian Ossenbeck from JPMorgan Chase & Co. Your line is now open.
Thank you very much for taking the questions. Terri, Jeff, and Kevin, congratulations on your new role and what's next. If we can go back to the rail service question, just to follow up on that, how much of the improvements do you think is really from something as structural that you can count on when volumes return, as everybody kind of expects in the second half, to some degree? How much of that you think is really structural versus just having a lot less volume to put on the network right now?
Yeah, honestly, I think a lot of it is operational and structural. I think that PSR, which I was always a little bit skeptical of, is working. I think it's making the railroads more efficient. They're taking not only costs out, but they're taking transit out at the same point in time, and it's making them more consistent. With all of our customer surveys that we've done, consistency is always the key issue. They're really addressing the service concern that our clients have. I think it's a very sustainable process, and that we'll see it continue to improve, at least over the near term.
Yeah, this is Phil. I would just add to that when volumes do return and we do see that surge, that is going to be the task and the opportunity where us and our rail partners can prove that consistency is going to be maintained and really bring more trust with our clients that they can rely on intermodal service, and we think help reignite it in more of a constant growth story going from there.
Okay, got it. On the topic of peaks, you mentioned the one last year. This time didn't really happen. What do you think happens with back to school, if whatever back to school actually looks like? When things do open back up, is there stuff, I'm assuming there's stuff stranded with the 70% or so of your customers that are shut down. I'm assuming they have stuff stranded. Do they have to reposition that, fire sale it, or how does that work? What do you think is going to happen on that front? It does seem like there'll be some activity, but maybe not the same types that we've seen in the past. Curious to hear your thoughts on how that all plays out.
Sure. Yeah. This is Phil. We do think that when import demand reopens, that we're going to be in a really good position to take advantage of that. We have equipment ready to service our clients, and we do think that we will see some jump at the end of the year as people get back out and feel more comfortable in spending money and hopefully the holidays come around. Obviously, that's our hope. There's no certainty around that. Certainly, if that does occur, we're in a very good position to take advantage of it and feel confident in our ability to provide a really good service during that time period.
Okay. The last one on CaseStack, it sounds like it's continuing to outperform, especially with the current environment. Can you just provide a bit more context on if it's grown since you've acquired it? Can you still move that
In a bigger way and expand a footprint at a low level of capital intensity. What's the competition look like now that one of the other major players has been acquired by a big broker in the industry?
Yeah. During the first quarter, CaseStack revenue grew about 17%, margin also grew. Can't tell exactly how much, but as a growth margin, as a percentage of sales was up about 50 basis points, just for the logistics business. They continue to have a very strong pipeline. I'll let Phil talk about that, and great value proposition to the customers in terms of allowing the product to get to the retailer on time, in full, and prioritizing the product that should be there with the supplier.
Sure. Yeah. What I would highlight with CaseStack, which is fantastic, is we do have the most sizable scale in this business. We have great service to our customers. At this point, we have actually brought our sales and solutions groups together. What we're starting to see is wins with some larger clients than we would have in the past. That is building up a significant amount in our pipeline as well. We think that while the legacy CaseStack customer of a small to mid-size CPG is going to continue to be a core of that, we can introduce this product to some of our larger consumer product clients on some of their lower volume SKUs and help them save some money. We're also continuing to make headway with setting up additional retail consolidation programs.
As our customers think about how do they utilize their space, which is a critical item for them, more effectively, this is going to continue to be an opportunity. We're very excited about the pipeline, excited about what we're doing, and think we're going to continue to grow the business significantly, regardless of other headwinds.
The footprint is something you can still expand pretty much in the asset-light fashion, or would that require more capital when you get there?
Yes. No, we plan to continue to grow it in the current format. We have a great set of warehouse partners, and we have a great geographic footprint at this point. We'll really be continuing to grow in the same geographies that we already operate in, which I think is a great thing for us as well.
Okay. Thank you. Congrats again, Terri.
Thanks. Thank you.
Thank you. Our next question comes from Jason Seidl from Cowen & Company. Your line is now open.
Hey, guys, this is Adam on for Jason. Just wanted to ask quickly about competition in intermodal. Obviously, kind of competition with truck, it makes sense what's going on between fuel, between soft freight market. I guess competition with other intermodal providers, is pricing still rational? Have you seen kind of any competitors, other intermodal providers kind of drop price significantly or get a little bit more aggressive in the space?
It's been, since last year this time, the pricing environment's been extraordinarily aggressive, as aggressive as any I've seen. I think it's just basically because there is a lack of demand and a lot of supply, we've seen prices come down.
Got it. Maybe a similar question in brokerage. One of the larger brokers commented recently that they kind of tried to gain share earlier this year and were a little bit more aggressive in trying to gain market share. What are you guys seeing in terms of the competitive environment in brokerage? Maybe specifically also with some of the kind of more app-based or more electronic brokers. Are you seeing them be as aggressive as they were maybe this time last year, or have they kind of focused on margin a little bit more?
Obviously, brokerage is a highly competitive market, and in a market like this where there's less demand to go around and still an oversupply of truckload capacity, it's going to be extremely competitive. We've certainly seen other companies go more for share gains. We still believe that there is a great opportunity for us now that we've built a foundation and a platform that can provide a high level of service at an effective cost to our customers, to cross-sell to our top 100. We have not fully penetrated that, or even near that at this point. There's still a long runway to go. We are seeing wins with those customers, especially since we've honed our pricing strategy and what we've asked our customers for as we focus on what we call power lanes, where we can buy better than the market, better than other brokers.
We are seeing wins. It's obviously a highly competitive market. There's a variety of players in it now, and who we run into, I think are more of the legacy players that you're referring to in our customers who are more kind of Fortune 500, Fortune 1,000 in nature.
Got it. That was all really helpful. Thank you for the time.
Thank you. Our next question comes from Bascome Majors from Susquehanna Financial Group. Your line is now open.
Terri, congratulations from us as well.
Thank you.
I was hoping that you could maybe shed a little light on the framework you've used in stress testing the business that you talked about in your prepared remarks. I don't know if that's the kind of revenue declines or volume declines or anything else you can kind of think of the wringer that you ran your models through. Thank you.
It was pretty significant. The dire case was very significant.
Revenue and margin decline. A lot of our transportation costs are variable. The only fixed cost really within our transportation is depreciation, which is about $20 million this quarter. We have flexibility there. We also modeled the profit improvement initiatives that we have. We kind of took where we're at today, or for the last couple of months and said, "Okay, what if that business went down substantially?" That was the dire case. We took more base case thinking that, well, maybe the second quarter will be pretty tough, and then after that we see some recovery. Those were the two benchmarks that we modeled.
Among those scenarios, do you think that the second quarter remains break even on an EPS basis, maybe except in the dire case? Just trying to think about the sensitivity based on your own work. Thank you.
Yes, we do.
Thank you.
Thank you. Our next question comes from Tom Wadewitz from UBS. Your line is now open.
Yeah, good afternoon, Terri, wish you the best. I hope you have fun in retirement. Thanks for your patience with me over the years. I tend to have a lot of questions when we talk. Anyways. You know what? I just have one. Obviously, you had a lot of good questions on the call. Dave, how would you think about the current framework relative to what happened in 2008 and 2009? I think, obviously Hub's in a very different place than you were back then. Just in terms of how volumes recover, how pricing recovers, whether that's going to be a good framework for thinking about the market, or whether you think what might be different from that timeframe.
Sure. Well, of course, in 2008, 2009, it was really a financial crisis. It was, to a large extent, a lack of money supply within the economy. This time it really is a social issue. It's a people issue. I do think that if in fact we open the economy back up, that there should be at least a U-shape, if not a V-shape recovery. There is pent-up demand. I think everybody's a little sick of hanging out at home. I think it's very stressful in this environment. I do think that depending upon how quickly they open up and how everything's opened up, that we will see more demand for imports as well as for domestic production. I think one of the big questions is, I heard one statistic that in New York, 60% of all meals were eaten in restaurants.
I don't know if that's factual, but how quickly do people begin to go back out again and thereby achieving the near full employment that we had before so that people have expendable funds. I do think it'll be quicker. I do think the administration here is a bit more pro-business and will be proactive with it. I'm hopeful. It's not going to be back to normal by the end of the year, but certainly it can head definitely in that direction, and I think we will see some strength in demand in the near term.
Would you be optimistic that pricing would potentially, I'm thinking like 2021, potentially bounce back a lot? Or if fuel stays down, is that going to kind of weigh on the intermodal pricing opportunity?
Fuel impact is significant. I do think, though, if there is a pickup in demand, we are going to see some motor carriers that just aren't going to be able to cut it. It's a very difficult environment. You can only run for gas money for so long. I do think that 2021 should see an improved pricing environment. I doubt seriously that it'll be like 2018, my fondest year.
Yeah. Okay, great. Thank you for the time.
Thanks, Tom.
Once again, if you would like to ask a question, please press star then one on your touchtone phone. To ask a question, please press star then one on your touchtone phone. Our next question comes from Brandon Oglenski from Barclays. Your line is now open.
Hey, this is David Zazula on from Brandon. Thanks for taking my question. Just as a question about the dedicated space. I guess, in some of the scenarios you ran, how did you view the dedicated space holding up in maybe an adverse scenario? Do you feel carriers will still look to kind of prioritize the dedicated fleets?
Sure, this is Phil. Yeah, with our dedicated business, we're in a really great position with our customer base, where we're mostly handling for essential retailers, distribution center to store or distribution center to home deliveries. This sets us up very well, I think, with our particular customer base, which is once again, very heavy retail, very heavy in the home improvement and general retail sector. We feel good that revenues will hold up. We're also bringing on new wins that are more profitable than some of the portfolio that we shed late last year and earlier this year. As those start up, we anticipate getting back to full utility on our trucks. Really reducing costs from there.
As I mentioned before, our profit improvement initiatives are also heavily tied to our trucking organization, and as we continue to take out costs and improve efficiency there, we are anticipating profit improvement in the dedicated space.
Great. Just as a quick follow-up, when you mentioned the deterioration in second quarter, was that specifically with respect to the stats you already talked to about how April is shaping up, or is it kind of relative to how the 3Q run rate was?
Yeah, it's really relative to the April run rate and where we're at with the declining volume and revenue.
Okay. All right. Thanks, Terri, and congratulations on the retirement.
Thank you.
Thank you. We have a follow-up question from Scott Group from Wolfe Research. Your line is now open.
Hey, thanks, guys. I just had a couple of just quick things. On the OpEx side, is there no volume variability to the OpEx as volumes fall? I understand we have that on PT, but I was just wondering about OpEx.
There is volume variability. I mean, our biggest cost below the gross margin line is salary, and we're going to pull all the levers we need to pull. As I mentioned a little bit earlier, we did have a reduction in force at the end of March, so those people come out for the second quarter and the rest of the year. As Phil mentioned, we continue to invest in technology and automation, and that saves us resources as well, so that assuming we do see a little ramp-up in the second half of the year, that we'll be able to do more with less, which is always our plan, and do it most efficiently and effectively while providing great service to the customers. As I mentioned earlier, bonuses varies like it should with our earnings.
That is flexible, and we've looked at other areas as well, and we're carefully watching our costs. We've cut some G&A costs. Travel and entertainment certainly is one that you can't go out, you can't spend any money, so that's kind of easy. We've also cut back on some contractors, where we are not wanting to invest right now because it's not necessary, and we'll continue to look at those costs.
Okay. Phil, earlier, your comment about truck brokerage seeing the biggest headwinds, was that a gross revenue or net revenue comment? I would have thought that brokerage would be seeing some relief on PT.
Yeah. It's a gross revenue comment, actually. Yeah, net revenue margins-
Great.
are still holding very strong. It's just from a top-line perspective.
Yeah. Phil mentioned in his prepared remarks, I think, that truck brokerage gross margin as a percentage of sales was up 150 basis points year-over-year. We continue to see the benefits from the technology changes we've made, the leadership changes we've made, and the changes in purchasing that we've had as a result of changing how we deal with our carriers.
Okay. Just last thing for Dave, you mentioned a few times about working remotely, and it's working. Do you think maybe about permanently canceling the plans for the new headquarters?
That's a really interesting question, Scott, and I don't know. I think that it is going to have us re-look at how we're working, at how our people feel about working from home. I think that albeit there is many that are more productive now, I think that there is social aspects to work, which I think you need to take into consideration. Plus, I'm just not sure. If you've been to the building, but it's relatively dense now. There is not six feet of separation between people in the cubes, and they're not cubes, but they're called dog bones. I don't know if there's going to be governmental regulations on how much space, and so will we require the space just because we can't have the density?
I think it certainly is something that we're going to look at very closely, but I don't have a good answer for you now. I think when next we speak with the second quarter, I'll have a much better idea as far as what that direction is, but we are basically shutting down the building now. It still has probably another six months for the build before, and we're not going to re-engage until we've come to a decision.
Okay. Thank you, guys.
We have no further questions in queue. At this time, I will turn the call back to Dave Yeager for closing comments.
Well, again, thank you everyone for joining us on the conference call. On behalf of the management team, Terri, thank you for all your great work, and it's been a pleasure working with you for the last 18 plus years.
Yes. Thank you.
We do wish you well in your retirement. Thank you again. As always, if there are any questions, please do feel free to call. Thank you.
Thank you, ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.