Hello, and welcome to the Hub Group 4th Quarter 2019 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 listen only mode. A brief question and answer session will follow the formal presentation. One follow-up question.
Any forward looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward looking can be identified by the use of the words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10 ks and other SEC filings regarding factors that could cause actual results to differ materially from those projected in the forward looking statements. As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin.
Good afternoon, and thank you for participating in Hub Group's 4th quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer and Terry Pizzuto, our Chief Financial Officer. Hub finished 2019 with yet another record year for earnings per share with solid 4th quarter results in a volume constrained environment. These results reinforce our belief that Hub's diversified service offerings enable us to profit in a variety of economic conditions. We continue to focus on reducing expenses throughout our network while seeing improving service and profitability in all of our business lines.
We expect intermodal pricing will be flat to down in the first half of twenty twenty, while recovering to be positive in the second half as the truckload market tightens. We expect to continue to drive margin growth through our profit improvement initiatives and through growth in our intermodal, logistics, brokerage and dedicated business units. I'll now turn the call over to Phil to review our business lines.
Thanks, Dave. As Dave said, we are pleased with our 4th quarter results given the challenging demand environment. We remain focused on improving our cost structure and delivering value to our customers, which drove our record earnings for the year. We surpassed our efficiency goals for the quarter and have continued our strong cost control efforts. We feel confident we can continue to improve our cost structure through enhanced operational discipline, while investing in technology and talent.
Now I will discuss our business unit performance. Intermodal volume was down 11% and revenue was down 9% for the quarter. The volume decline was primarily due to soft demand as we saw a lighter peak season as well as increased truckload and intermodal competition. In addition, we saw 1% volume impact from lane cancellations and weather disruption. Our team operated well as we maintained our pricing and operational discipline.
However, we saw 150 basis point compression in gross margin as a percentage of sales compared to last year due to increased insurance and claims costs, increased rail costs and lower surge volumes.
Our service levels were at
record highs as both Hub and our rail partners focused on delivering a world class customer experience. We are early in bid season, but we are expecting to see a return to growth this year in our intermodal business. Brokerage load count decreased 4% in the quarter. However, we saw 4.90 basis point improvement in gross margin as a percentage of sales. We saw a lighter demand environment than last year and less spot activity, which led to the decline in volume.
We are pleased with our transformation of our brokerage and are seeing strong progress in positioning this high service offering with our customers. We are poised for growth and believe there is a significant opportunity to cross sell brokerage to our other customers. Our logistics business posted strong results and profitability with a 4 60 basis point improvement in gross margin percentage, though with the decline in revenue. We continue to see the benefits of our technology investments, new products, enhanced operating model and focus on continuous improvement. CaseStack has also continued to perform well and is enabling us to access small to midsize clients and cross sell other hub solutions.
We continue to have a very strong pipeline and are anticipating significant growth this year.
Dedicated saw
a decline in revenue and a 50 basis point degradation in gross margin percentage year over year, but a 2 10 basis point improvement sequentially despite headwinds from insurance and claims costs. We have continued to rationalize poor performing business and are making progress in improving our operational discipline through enhancing our talent systems and process. We have ample upside in improving the service line this year and our entire team is focused on the execution of that plan. Hub had a strong quarter in a difficult freight environment and a record year. Our team is focused on continuous improvement in efficiency and we are seeing the benefits of our investments.
We are intent on improving our street operations in both Dedicated and Drayage, while growing our service lines and improving our cost structure. We remain on track with the profit improvement initiatives that we discussed last quarter and we will continue to invest in talent and technology. Finally, I also would like to thank our entire Hub team for all of their effort in delivering a record year for Hub Group. Now, I will hand it over to Terri to discuss our financial performance.
Thanks, Phil, and hello, everyone. I'd like to highlight 3 points for the 4th quarter. First, gross margin as a percentage of sales at 14% was the highest 4th quarter in HUB history due primarily to the addition of the CaseStack business in December of 2018 and the transformation of our truck brokerage business. 2nd, we're excited about the relentless execution of our profit improvement initiatives, which include a 12% decrease in headcount since January 1 and a 4% decrease in headcount since September 30. 3rd, dedicated gross margin as a percentage of sales improved 210 basis points sequentially as a result of operational and revenue management initiatives.
We believe trucking, including our drayage operations, is one of the greatest remaining opportunities to improve profitability. Now let's take a more in-depth look at our performance in the 4th quarter. Hub Group's revenue decreased 12% to $901,000,000 because of a decline in revenue in all four service lines. The largest declines were in intermodal at 9% and truck brokerage at 29%. Intermodal revenue decreased primarily because of an 11% decrease in load.
Truck brokerage revenue was down because of a decline in spot business and project work. Gross margin as a percentage of sales was 14%, the highest 4th quarter in Hub history. Gross margin as a percentage of sales increased 40 basis points over last year, driven by a 460 basis point improvement in logistics gross margin and a 490 basis point improvement in truck brokerage gross margins. These increases were partially offset by declines in intermodal of prior year claims. Salaries and benefits were down $6,000,000 due primarily to lower headcount and lower bonus compared to the Q4 of 2018.
Operating margin was 4.3% compared to 4.7% last year. Hub Group's diluted earnings per share was $0.84 This is compared to a 2018 diluted earnings per share from continuing operations of $1.01 a decrease of 17% driven by the soft freight market, partially offset by the savings from our profit improvement initiatives. Looking at our cash flow. Cash from operations for the year totaled $255,000,000 Free cash flow was $170,000,000 EBITDA for the year was $269,000,000 compared to $208,000,000 last year or an increase of 29%. Our cash balance at the end of December was $169,000,000 Turning now to our guidance for 2020.
We believe that our 2020 earnings per share will range from $3.39 to $3.60 We project revenue will be up low to mid single digits. We expect gross margin as a percentage of sales for the full year to range from 13.5% to 13.9%. We believe that our quarterly costs and expenses will range between $92,000,000 $94,000,000 We believe that our effective tax rate for the year will be between 24% 25%. We plan to spend between $115,000,000 $120,000,000 on capital expenditures and to fund these expenditures with a combination of cash and debt. That wraps up the financial performance.
Over to you, Dave, for closing remarks.
Thank you, Terry. 2019 proved to be yet another year of record traffic for Hub Group in a difficult freight environment. All of our business lines contributed to this record performance, reflecting the value of Hub's diversified service offerings. We had great success in reducing $60,000,000 in costs within our network, and we remain focused on removing yet another $40,000,000 in costs in 2020. And with that, we'll now open up the lines to any questions.
Thank you. We'll now begin the question and answer session. And our first question comes from Scott Group from Wolfe Research. Your line is open.
Hey, thanks. Afternoon, guys. So can you help us figure out how much cost have you did you realize in total in 2019? And then what do you think is the right way to think about 2020?
Yes, Scott. We're on track. We announced in the Q3 that we had at that time had about $60,000,000 of identified opportunities for cost savings and a lot of that was realized in August. And so we saw a lot of that savings in the Q4 of this year that will continue on to next year. So estimating maybe half of that you saw in 2019 and another half of that we'll see in 2020.
And then on top of that, we have the $40,000,000 of cost savings that we identified that we had not taken action on, that we started to take action on in the 4th quarter and that we will continue on during 2020. We anticipate that that will be completed by the Q3 and that we'll have it fully realized by then. So it will be ratable through 2020.
So maybe get half of that second bucket in 2020?
Yes.
Okay.
And half of it about if you wanted to know what the split is between SG and A and margin. Of the $60,000,000 it's about fifty-fifty. And of the $40,000,000 it's about 75,000,000 dollars to gross margin and 20 I'm sorry, 75 percent to gross margin and 25 percent to SG and A.
Scott, this is Phil. I would tell you the 75% of the $40,000,000 is mostly related to our trucking operations. Really, we're looking at 4 key categories there being our maintenance, procurement, driver retention and utilization and then lastly, continuing to push on our revenue management improvements. And so we're feeling very confident in our ability to deliver on that and they're going to continue to push that forward.
So with all that, why are you guys raising the quarterly cost guidance?
That is due to a couple of different things. I mean, if you wanted to compare Q4, if you will, to Q1, I guess that's one way to look at it. We're going to have higher D and A on a quarterly basis of about $1,500,000 We also think from Q4 to Q1, we'll have higher salaries and benefits totaling about $3,500,000 That's from a few different things. In the Q1, payroll taxes and benefits are higher because people haven't maxed out. We're also planning on higher commissions and G and A really should be flat compared to Q4.
And then lastly, I would just highlight, we do have a consulting engagement in place right now that is an investment in supporting the trucking improvement, that is also an increase in SG and A that we'll be seeing the larger impact of that in the first half of the year.
Okay. And the other piece of the salaries benefit is, of course, we're going to give our people raises, so Scott Meredith is in there too.
Okay. Can you talk about what you're seeing with intermodal pricing and bid season? And then maybe just compare that versus your rail costs. I'm guessing this is a year where rail costs are up more than pricing is up. So within the guidance, what's the net impact you've assumed to net revenue?
Sure. So I would tell you it's early in mid season and we are seeing a competitive environment both with truckload and intermodal competition. We believe we are performing well. We're continuing to execute on our strategy with our yield management focus, but also making sure that we're balancing our network and reducing repositioning costs and continuing to drive business into where we know we have cost and structural advantages. It's a little early to tell exactly what pricing will be like, but I would tell you it is a somewhat competitive environment out there and we're focused on making sure that we have the right business for our network.
Dave, I would say also that we do have clear visibility on our rail costs and what those increases will be for this year. And in El Canada, they're probably, we think, in line with what we had in 2019 as well. So we've got clear visibility. We understand where it's going to be at and are going to attempt to regain all the rail cost increases as well as put some to the bottom line.
I just wanted to understand, like you've got these cost pieces and then you've got guidance that's earnings flat to up a little bit. So like are you assuming a negative rail price cost spread in the guidance already or is that potentially the rest?
In the first half of the year, we're assuming that prices are down. And so that's We do think that over. But then in the second half of the year
They would go and be positive. Not a lot, but I mean single digits. We do believe it's going to go from being down a bit to flat to price increasing in the second half of the year.
And then just on top
of that, we do have built in some increases in insurance claims costs and warehousing costs as well on top
of that. So those would just
be the other headwinds we have in the gross margin.
Okay. So with that, maybe just last question and then I'll pass it on. Maybe, Teri, just some thoughts on the quarterly cadence that you expect.
Yes. We believe that the first half of twenty twenty will be approximately flat as compared to the first half twenty nineteen. The second half really depends on how quickly the truckload market tightens and will react quickly when it does. So, our expectation is that the second half of the year is better than the first half of the year.
All right. Thank you, guys. Appreciate the time.
Thank you.
And our next question comes from Justin Long from Stephens. Your line is open.
Thanks and congrats on the quarter. Just to clarify on that last question, was that in reference to EPS? Yes. Okay. Maybe you could help us out with intermodal volumes as well.
I know, Phil, you mentioned in the prepared remarks that you expect growth this year. But can you give us something in terms of the order of magnitude that's getting baked into the guidance and how you're seeing that see that play out over the course of the year?
Sure. So we're anticipating low to mid single digit volume growth for the year. First quarter, we are anticipating being negative as we did have a very strong start to the year last year and continually increasing throughout the rest of the year as we progress with the Q4 being the largest percentage increase, just given obviously a lower comparable, but we're also going to continue to see bid wins. And we are seeing a lot of customers start to think more long term about converting back to intermodal to make sure that they have capacity available. So we do feel as the year progresses, we'll see volume continue to improve.
And again, Justin, this is Dave. There's no question because the comparables are easier because 2019 obviously started out strong and then eventually got weaker. Last year, we had no spring peak. Last year, we had a very moderate Christmas holidays peak. So we think that also that the inventory levels have kind of been drained or a little bit flatter versus when a lot of people had pulled forward inventory last year in order to avoid the tariffs.
So there is some tailwinds, but it is going to be a tale of 2 halves.
Okay. That's helpful. And maybe one on brokerage. Obviously, it's a competitive market out there. I was wondering if you could talk through some of your assumptions for that segment from both a top line and margin perspective.
And maybe you could go through some of the company specific benefits that could play out this year?
Yes. We're projecting high single digit to low double digit growth on the top line based on new business awards from existing and new customers because of our new structure in our truck brokerage business as well as the technology investments we made that allow us to better source capacity and be more efficient. We also expect to grow our spot volumes in 2020 and we're planning on expanding our account development inside and our inside sales team with a focus on brokerage. We expect that gross margin as a percentage of sales will decline slightly in 2020 because of the strong levels that we achieved in 2019. And as the truckload market begins to tighten, those margins will still probably get pressured a bit.
Yes. And I would just add, we are continuing to see wins. Our service offering is garnering trust, I think, with our clients, which is fantastic. And we're finding that our carrier reps are becoming much more productive. And so really the job is to make sure that we're layering in high quality freight that is going to allow our carrier reps to continue to do what they're doing so well right now.
We have a great baseline, great technology, really improved and enhanced leadership and feel very good about our ability to continue to improve that service line. So really happy with the results we've seen thus far though.
Okay, great. I'll hop back in the queue. I appreciate the time.
And your next question comes from Ben Hartford from Baird. Your line is open.
Hi, good evening, everyone. Teri, that was helpful on the revenue growth for 2020 for how you're thinking about brokerage. Can you do the same for the other two segments, logistics and dedicated?
Sure. We expect I'll talk about logistics first. We expect logistics will have a strong year, pipeline is good. We'll have the full impact of several recent big wins. And in addition, we've got some new service lines within our logistics group.
So we expect there to benefit from that. And so we expect the most significant growth really in logistics will be high single digit on the top line to low double digit. And we're also expecting pretty good growth on the margin side. We're expecting gross margin as a percentage of sales to be fairly similar to what it was in 2019. And then intermodal is the other that you pointed.
So for intermodal, we expect gross margin as a percent of sales to decline slightly in 2020 based on our expectations for pricing and rail costs, which are partially offset by the profit improvement initiatives that we have. And we expect the gross margins will be a little lower in the second half as compared to the first half due to the carryover pricing that we have in the first half of the year for customers compared to the second half. And top line growth will be up slightly.
And then, yes, I think you also were looking for dedicated and we are anticipating pretty flat to down revenues in dedicated. We're very focused on making sure that we transform that business through the right revenue management, getting the right processes in place and growing with the right customers and the right business. So we're making progress on that. I would tell you we're early stages and that's why we're anticipating a flat year for dedicated.
Okay. That's good.
But we do expect gross margin as a percentage of sales to be up between 203 100 basis points dedicated.
Okay, great. Dave, just your perspective on 2020 back to the intermodal bid environment, I understand why it's going to be tough in the front half of the year. Do you how do you expect mix to trend and what is going to be the approach? Where do you think you're going to be able to see volume growth East versus West? I mean, can you talk to a little bit about that because obviously there's some meaningful headwinds on the East.
Can you talk through some of the dynamics specifically?
Yes, certainly in the East, there is a lot of headwinds right now because it is not just intermodal competition, but truck competition. I know we had several large customers last year that converted as much as 15% of their local leased intermodal back over to truck because of the fluid capacity in the truck market. We do think that this year that we're going to again, it's going to be a little rough in the first half, but we do believe that we're going to see truck capacity get tighter. We're going to see the opportunity to continue to increase our pricing. And we're very, very focused more so than ever I think in making sure that the business we do go after aggressively fits our network and is going to add a lot of value to it.
So I feel very confident in our forecast for this year. And again, I think that the comparables are they're kind of low. I mean, when you look at I think that's the first non spring peak I've ever seen was last year. And it was just more or less a function A of not having a spring, but also just of the inventory pull forward. So and if you look at the broader economic climate, consumer is doing well.
So again, we do believe that gradually and by the second half, it should be a pretty strong demand environment.
And to complete that thought, if we get into the back half of the year and the inflection is kind of muted for whatever reason, how much more opportunity do you guys have on the cost side, recognizing you've done really solid work thus far? I don't want to minimize that, but what how much further can you go? Where can you go? And maybe you can talk a little bit about some of the IT capabilities and the timing of when those projects begin to layer on as well, some incremental cost opportunities that you may still have?
Sure. Yes, this is Phil. So as we laid out, I think the opportunity in our trucking organization is very large and we're very early stage in achieving those savings. I think the numbers that we've laid out, we're confident that we're going to be able to hit and we continue to find more opportunities to drive improvement. So as we're digging in, as we're really looking through all the detail within the business, we are finding significant opportunities that are going to continue to drive us forward.
So I feel very good about upside in the trucking division that will drive in the back half. And then as you mentioned, the investments we've made in technology will really start to drive in the back half, in particular in our Dedicated and Logistics businesses as we get rid of redundant legacy software, but doing some really doing some really creative things in logistics that I think will allow us to continue to move forward, in particular in LTL, where I think we have a best in class solution. So those savings to our customers, we get to participate in that as well. And once again, really eliminates redundant system costs, which are on top of us right now. So we're we do think we have upside and we're going to continue to push to keep identifying more opportunities.
Got it. Thanks.
And our next question comes from Todd Fowler from KeyBanc. Your line is open.
Great. Thanks and good evening. So I think that we've kind of tackled the nuts and bolts of the guidance, but maybe to take a step back and think about it at a higher level. Can you talk about, I mean, what would put you at the low end of the range versus the high end of the range? And I guess what I'm curious about is maybe how the low end of the range has been stress tested and what sort of volumes will get you there?
And then to get you to the high end of the range, really what's that contingent on? Is that a better volume outlook in intermodal? Is it better pricing? So maybe just some high level differences between the high and the low end of guidance?
Yes, sure, Todd. It would be upside would be and getting to the higher end would be if we have a stronger peak than this past year, which is quite possible. If we have a spring peak season, if the truck market tightens sooner than the second half twenty twenty and it's more aggressive than we anticipate. We get to the high end. And then if we as Phil mentioned just a little bit earlier, we're constantly adding to our list of opportunities for cost savings.
So to the extent we realize more cost savings from the profit improvement initiatives than we've laid out, that would be certainly top end of the range. And then we've got great growth initiatives in our service lines, including even though Intermodal volume will or Intermodal revenue will probably only be up slightly, dedicated logistics, truck brokerage, we've got lots of opportunity there in the pipeline as well. Those business lines, some of them have higher gross margin as a percent of sales than intermodal. And so we that will also could also be upside if we grow them more than we anticipate. The downside would be a recession coming along or competitor pricing actions in intermodal and the truck market doesn't tighten like everybody thinks it will.
So I don't think there
is a whole lot of downside.
Sorry, I didn't mean to interrupt. Yes. And so Terri, just to that point, I think that Phil gave some volume cadence and basically down in the Q1, but then progressively getting better. So at the low end of the guidance, would that imply flat intermodal volumes or would it be something that would actually volumes would remain negative for the whole year?
So it would be mid lowtomidsingledigits for the whole year.
But it would Lowtomidsingledigits for volume?
Yes.
Great. Okay. And then just for my follow-up, can you talk I know you don't give the specific margins by your segments, but can you rank where really the operating margins are? And then from an opportunity set, it really sounds like that dedicated still has a lot of opportunity from a margin profile. But when you think about the cost initiatives, maybe kind of a sense sort of order of magnitude of how much margin improvement you think you can see from where you're at currently to kind of when you implement some of the cost initiatives where the margins can be?
Sure. So this is Phil. So intermodal has been our highest operating margin business and we've done an excellent job I think in driving improvements there in our pricing and our network strategy. We still have a lot of room in our trucking operations, though. And our street operations, I think, can be a differentiator for us in the marketplace if we get that right, both to drive above market growth, but also to improve the profitability.
Within brokerage, we've done a great transformation there. And actually in the quarter, it's our highest margin it was our highest margin business line. And I'm very pleased with what we've been able to accomplish there and what the team has done. And so that has been a fantastic evolution. Now if we're able to layer in growth on top of that great infrastructure, I think the opportunity is significant to even expand upon those record margins that we have within brokerage.
For dedicated, which would be 3rd, we have significant opportunity and we've laid that out very clearly. I think it's the 4 key categories of the maintenance, procurement, revenue management and continuing to make sure that we're focused on driver utilization and retention. And so we're very focused on that. We're putting in new systems and 50% of the way through that process as well. So I think there's significant upside there and that would be the highest growth from a margin percentage opportunity that we have this year.
And then once again, finally with logistics, I would tell you a very similar story to what we've done with brokerage, where we changed our model, we improved our go to market strategy, we enhanced our pricing and the continuous improvement that we're bringing to our customers. And now as we're layering business in on top of that and not having to add headcount, the operating margin expansion can be pretty significant. And once again, we're just continuing to evolve that service line and bring more solutions to
our customers. So we feel really good about the growth
and margin expansion opportunity there. Phil. I
really appreciate the color with all of that. And Dave, we'll have to catch up Phil. I really appreciate the color with all of that. And Dave, we'll have to catch up on the flyers ranking right now and see if they can meet expectations too.
Number 6, we'll have to get some tickets from the final 4.
All right. Thanks for the time, guys.
Thank you. Thanks, Todd.
And our next question comes from Brian Ossenbeck from JPMorgan. Your line is open.
Hey, good evening. Thanks for taking the question. Just wanted to see if you could talk a little bit about what we've been hearing more of new lane opportunities reopening on the intermodal side and just if you can lay out what you think you might hear from or see from the rails on that front? And also, how do you think with coal doing what it was doing in carloads where they are, how do you think the rails will view partnership for intermodal growth, recognizing that it's not the best margin opportunity for them? How do you see those all those factors playing out this year and into next year?
Yes, I think as far as intermodal overall has certainly the margins have increased and been enhanced by the rails. They're also running it much more efficiently than they ever have before as a result of implementing PSR at varying levels. I would like to say on that that the rails right now, their service is as good as we've ever seen it. And I think when you're consistent, you're on time, you're running efficiently, that makes the gross margin, the profitability of that line of business much better. Our relationships with our railroads are very strong.
I think that they certainly are looking to partner, I think, with strong players and that we're extremely well positioned with our asset base and with our drayage fleet and with our size on our rail partners to be able to balance their networks and really have a very, very strong mutually beneficial relationship.
And this is Dylan. I would just add, as you cast on the intermodal lane openings just specifically, for us, we maintained service through that disruption on most of the lanes that were specifically on the Transcon side, we maintained a lot of that service, just us taking over the rubber wheel. So it didn't have a very large impact that recent announcement. But we are hopeful and are pushing obviously to have lanes reopened and would like to expand the service given the great on time performance that they're showing right now. And once again, as you mentioned, an appetite to grow.
Okay. And then on the big chunk of that happened last year conversion in the local East. Maybe just some thoughts on the pace of conversion if you expect to get those early switchers back or if you're targeting something that's maybe a little bit more sustainable. How do you expect and what do you think will drive back the shippers who converted other than price and how quickly you think that might happen?
Yes, this is Phil. Certainly, our hope is to see that business convert back. We do not want to chase truckload spot market rates in order to get that. We do think that there is a bottom being put in on the spot market and over time through the first half of the year, we will see a continuing cycle of tightening. A lot of our customers who are currently opening RFPs are looking very seriously at converting business back to intermodal front truck, recognizing the impact that a significant tightening could have and that the likelihood that, that will occur in the back half.
So we are pricing that to the value that we think we're providing where we don't certainly want to chase spot truck auto and but we are anticipating a good portion of that coming back, but we want to make sure that we're supporting the right customers once again for the right freight that's going to help us create more balance.
The only thing I think I'd add to that is that the consistency of the rail service right now is very, very good. And so it makes us much more truck like and truck competitive. So and again, just with the intermodals overall with we do have better costs for the most part, environmentally more friendly. And if you have the consistent service, I think that we will begin to see some conversions as the tight truck market tightens.
All right. One last quick one for Terry. Can you just give us an update on what you expect for the buyback program, maybe some parameters after having seen it step up this last year, but kind of take a pause in the last quarter? Thank you.
Sure. Yes, we expect to use our cash to reinvest in the business through capital expenditures and acquisitions first. We do talk about share buybacks at every Board meeting. There's one coming up in the next week or so. So we'll talk about it then.
And as you said, we did execute $25,000,000 worth of stock this year this past year. So it's something that we look at routinely.
Okay. Thank you for the time. Appreciate it.
And our next question comes from Jason Seidl from Cowen and Company. Your line is open.
Hey, guys. This is Adam on for Jason. I just wanted to ask first of all, with the coronavirus now, I want to ask if this has had any impact that you guys have seen in terms of supply chains, whether you're hearing anything from port contacts or from people in China about potential slowdown in supply chain or in volumes?
Sure. This is Billy. Coming out of the Lunar New Year, typically you see a pickup in demand. Obviously, that's going to be delayed with the coronavirus. We are staying in close contact with our customers, contacts overseas, the ports on demand forecast.
We do believe there will be a delay in import shipments, but we don't know the exact magnitude of that at this time. We're staying very close once again to our shippers and our customers to make sure that they have all the information they need and that we're sharing what those forecasts look like. We do so as I mentioned, we do anticipate a little bit of a bottleneck being created here, somewhat of a surge of demand, which could actually drive a spring peak as well if it is prolonged even beyond say 2 weeks to a month of additional delay. So that would be where we're at right now. And once again, we're staying very close to it and just looking at that impact.
So basically, it could be a short term headwind, but longer term it could be a bit of a tailwind as you could see a large surge in business coming as demand is certainly there. And obviously, like I believe it was Hyundai that just closed down several plants as a result of negatively impacting their supply chain.
Got it. Appreciate the color there. And just as a follow-up, I wanted to kind of revisit the PSR conversation that we were having before. You mentioned that from what you've seen, PSR has kind of been successfully implemented thus far. But obviously, this has happened in an environment with volumes down, mid to high single digits, down 7.5% in 4th quarter.
And so I wanted to ask kind of what gives you confidence that the PSR implementation will kind of continue to be successful and service levels will continue be improved once and should volumes come back?
Yes, this is Dave. I would say that the way that the railroads have gone about the PSR implementation is such that this is sustainable and also repeatable. I think that they've really studied their networks. They have taken out costs. They've improved their overall transit and their turns on the intermodal equipment.
So could we see some hiccups with the volume increasing? I think as long as it's within 10% or less at any given time that the consistency will be there. I don't see any downturn in the overall service levels. 10% historically rails have had some issues. But again, I think with just the efficiency and the way that they've gone about changing the way their networks operate, I really think that they can take on a lot more volume without having any negative service impact.
Got it. Appreciate the color there. Thank you.
And our next question comes from Bhaskar Mitra with Susquehanna. Your line is open.
Yes. Just to clarify, does your guidance anticipate that you will raise intermodal pricing more than your rail inflation this mid season?
It's certainly something we're going to work towards. Obviously, in the pricing environment right now, I would say no, but we do believe that the pricing environment throughout the year will improve and we'll be able to get to the low single digits by in the second half. So but if it just stays like it is today, the answer would be no.
So when you say low single digits, you mean the full year on average or in the second half explicitly?
2nd half.
Thank you. And Terry, can we walk through some of the cash flow implications here? Can you give us a look at what cash from operations roughly would look like or free cash flow or both, assuming your CapEx? And on the building investment, that extra $35,000,000 in your CapEx budget, is there any more of that in 2021 or is this it?
No, this is it. The building will be completed in the fall of this year, so we should be done with that. So I can tell you that we think that EBITDA for the year will range from $290,000,000 to $295,000,000 Our free cash flow, we're guesstimating could be between $110,000,000 $130,000,000 We're going to have a little more CapEx this year than we had last year, about $25,000,000 more and then we have a little bit higher cash taxes. So that's our best guess at the current time.
And you made a comment earlier about funding your capital budget with a mix of debt and cash on hand. It looks like you've got $120,000,000 $30,000,000 excess cash now. You just think you're going to generate over 100,000,000 dollars this year. Just curious about that financing decision and the implications there? And that's all for me.
Thanks.
Yes. Well, we are paying cash for our building, because we do have $169,000,000 in cash at the end of the year, you're correct. And then we look at every purchase and see if it makes more sense to finance it or to just pay cash for it. And we'll do what is best for the company.
Well, this is Dylan. I think continuing to have dry powder for acquisitions is an important priority for us And our continued diversification strategy, we think continuing to offer our customers a more robust suite of solutions is adding value. And so we plan to continue to utilize the cash on hand for those investments and acquisitions as well.
Thank you.
And our next question comes from Tom Wadewitz from UBS. Your line is open.
Hey, this is Mike Troiano on for Tom. So I mean, could you just run through the timing of intermodal bids in 2020 just in terms of how many are coming up for bid in 1Q, 2Q, 3Q?
Sure, we can. In the Q1, it's about 33%. In the Q2, it's about I'm sorry, in the Q1, 39%, 2nd quarter, 44%, 3rd quarter, 6%, 4th quarter, 11%.
And we're 7% through at this point.
With 19% in progress, Yes.
Okay. And did you provide intermodal volume growth number for January? Sorry if I missed it.
We did not. It was down about 7%.
Down 7%, okay.
The good news on that is that for the week 5, the 1st week of February, it was actually up 2.2%, although you have to take the polar vortex out. So it was down about 4.2% when you account for that. So the trend we're seeing is positive. We're still in the negative territory, but it certainly is positive and we also are running across will be shortly running across lower comparables.
Okay. And just to go back to the margin opportunity discussion, I mean, how long do you think it will take to get the margins in the trucking segments to where you want them to be, assuming that the macro cooperates? I mean, are we a 1 year out, 2 years out? How should we think about that?
Sure. With dedicated, I think we're early stages. I would say in 2021, I'm anticipating being at a very competitive operating margins within that segment. With intermodal, obviously, the drayage is a significant piece of our cost structure, somewhere between 30% 40% of any load. And so we are very focused on reducing that cost and we think that that will obviously improve our overall intermodal operating margin as well, although we have continued to improve that significantly.
But I would tell you, given a good pricing environment for truckload and intermodal, we will see the operating margins expand once again. And with dedicated though, we feel very good about the progress we're making. I would say that's more a 2021 story as well.
Okay. Thanks. Appreciate it.
And the next question comes from Justin Long from Stephens. Your line is open.
Thanks for taking the follow-up. Wanted to actually follow-up on that question about the cadence of bid season. So it sounds like in the first half of the year, over 80% of your bids are going to be repricing. And I know you said pricing should get better in the second half, but that's really not going to impact a lot of the bids, it sounds like, based on that cadence. So could you just speak to what your all in assumption is for intermodal pricing for 2020 as a whole?
Yes. Overall, it's flat to down slightly, is what our assumption is. And so it's because like you say and also one element of pricing is what happens during peak season. And we've been pretty realistic there. And so we hope we might have some upside in 2020 compared to 2019 and we assume similar peak season pricing to 2019 in our guidance.
There should be a much better peak in 2019 and obviously that is a big driver. I would also tell you that there are larger bids in the second half that take place. So if we do see a solidifying of the market, there is an opportunity to raise pricing on some pretty significant pieces of the book of business. And then the other piece I would just highlight is there was a pull forward or a break in contractual terms on some of these bids. And so with those, if the market does turn, we will have an opportunity to discuss those rates with some of those customers who decided to pull forward, right?
And so we do anticipate making sure that we're participating in the market, but that we're on customers where that happened, we're having discussions on what the market is telling us.
Okay, that's really helpful. And then maybe a couple of things just quickly on the guidance, Terry. For the EPS cadence, you talked about flat trends year over year in the first half. Could you talk more specifically about the Q1? It's just a little bit challenging, I guess, to model that quarterly cadence with the pipeline in logistics and brokerage and not knowing the timing of when that's rolling on.
So any color on the Q1? And then I also wanted to ask if share buybacks were contemplated in the 2020 guidance?
Yes. Share buybacks are not contemplated in the 2020 guidance because we're going to hold our cash for an acquisition and we're expecting to be successful in 2020 and getting a great acquisition. We expect in terms of your first question, what do we expect for the Q1? We expect gross margin as a percentage of sales to be down compared to the 4th quarter, maybe 20 to 40 basis points due to seasonality. We did see a peak in the Q4, although not as significant as 2018.
We'll also have some cost headwinds at CaseStack and we expect Intermodal pricing to be flat to down in the first half of the year. And finally, the insurance and claims costs are projected to increase compared to 2019. But we do believe we'll realize the savings from our profit improvement initiatives that will help to offset some of those headwinds. So that's why overall we think that it could be down 20 to 40 basis points from the 4th quarter.
And this concludes our question and answer session. I'll now turn the call back over to Dave Yeager for closing remarks.
Okay. Again, thank you very much for participating on Hub's quarterly earnings call. As always, Terry, Phil and I are available if additional questions come up. But again, thank you for participating.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.