Hello, and welcome to the Hub Group's Second Quarter 2019 Earnings Conference Call. Dave Yeager, Hub's CEO Phil Yeager, Hub's President and Chief Operating Officer and Terry 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. 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 expect, believe, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10 ks 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's now my pleasure to turn the call over to your host, Dave Joerger.
You may now begin.
Good afternoon, and thank you for participating in Hub Group's 2nd quarter earnings call. Today, I have with me Phil Yeager, Hub's President and Chief Operating Officer and Terry Pizzuto, our Chief Financial Officer. At the close today, Hub Group reported a record second quarter as revenue increased by 3%, EPS by 71% and operating income by 60%. Our operating income increased double digits in all business lines except for truck brokerage, which was flat. This increase in profitability is the result of higher prices and also our intense focus on reducing costs while improving service.
Rail service has improved dramatically. The Union Pacific's on time performance has improved by over 1400 basis points, while the Norfolk Southern's on time performance is at record levels. As the rails continue to enhance their operations, we believe we'll continue to see improved service making intermodal more competitive versus truck. The CaseStack acquisition is also moving along extremely well. We're continuing to identify operating synergies with CaseStack as it exceeded their profit forecast for the Q2.
The one disappointing area is that of intermodal volume, which was down 7% for the quarter. There are numerous reasons for this that Phil will elaborate upon. The good news is that the volume declines have flattened and we expect to continue to see sequential improvement through the second half of the year. And with that, I'll turn the call over to Phil to review our business lines.
Thanks, Dave. As Dave said, we are pleased with our Q2 results and the progress we are making in improving our profitability and efficiency, while driving continuous improvement and great service to our customers. We're also proud that we were recently recognized as a top 5 3PL and is one of the country's best places to work. I will now discuss our service line performance. Intermodal volume was down 7% and revenue was up 1% for the quarter.
The volume decline was primarily due to a softening demand environment versus last year, as well as increased truckload intermodal competition. In addition, we saw a 2% volume impact from lane cancellations and weather disruption. However, our team executed extremely well and improved margins as we enhanced our efficiency through a 110 basis point improvement in loaded miles and improved third party purchasing, while maintaining our pricing discipline. We are excited about the improvements we are seeing in rail service, which helped drive a 3 10 basis point improvement in our on time performance to our customers. We believe that with continued economic strength and greater tightness in the truckload market, we will be positioned for a solid peak season.
Brokerage generated an increase in load count of 18%, a 380 basis point improvement in gross margin as a percentage of sales and a 240 basis point improvement in on time performance. This was the result of us onboarding CaseStack and implementing our new operating model, yield management strategy and new technology platform. We are pleased with our progress in transforming the business and see a great opportunity to continue to grow and invest in this service line. Our logistics business posted strong results in profitability and revenue growth. Onboarding CaseStack benefited logistics and we are seeing the results of our improved yield management and continuous improvement efforts, which led to a 540 basis point improvement in gross margin as a percentage of sales.
We were
able to win several new customer engagements during the quarter in both CaseStack and our legacy logistics business that will drive growth in the back half of this year and into next year. With our enhanced talent and operating model, we believe we can continue to grow, bring significant value to our clients and improve profitability. Dedicated increased revenue and profitability with a 7 10 basis point improvement in gross margin as a percentage of sales. We achieved this through our improved operational discipline, winning new business, providing great service and executing on our yield management and continuous improvement strategy. We have an extremely strong pipeline and believe we can continue to grow the business while improving returns.
Overall, we had a great quarter and are performing well. As I've mentioned before, we still see opportunity to improve our efficiency and profitability, while continuing to provide best in class service to our customers. We know these results are not possible without our great team members and we want to thank them for all their passion and effort. I will now turn it over to Terri to discuss our financial performance.
Thanks, Phil, and hello, everyone. I'd like to highlight 3 points for the 2nd quarter. 1st, operating income increased an impressive 60% resulting in operating margin of 4.4%, bringing us closer to our stated 5% goal. 2nd, gross margin grew $31,700,000 or 31% due to growth in all four service lines. And third, EBITDA was $69,400,000 or an increase of 55% over 20 eighteen's $44,800,000 Now let's take a more in-depth look at our performance in the 2nd quarter.
HubSpot's revenue increased 3% to $921,000,000 driven primarily by logistics. Gross margin as a percentage of sales was 14.4%, the highest that it's been since 2007. Gross margin as a percentage of sales increased 3 10 basis points and every service line was up compared to last year. Operating margin adjusted to exclude acquisition related expenses totaling $4,000,000 was 4.9%. Hub Group's diluted earnings per share was a record at 0 point 18 diluted earnings per share from continuing operations of $0.51 an increase of 71%.
Cash provided by operating activities for the 1st 6 months of 2019 was $135,000,000 Free cash flow totaled $114,000,000 in the first half of this year. That's compared to free cash flow in the 1st 6 months of 2018 totaling $30,000,000 Turning now to our guidance. We believe that our 2019 diluted earnings per share will range from $3.30 to 3.40 dollars Earnings per share in the second half of the year is projected to be very similar to what we projected back in April. We estimate that the Q3 earnings per share will be slightly higher than last year and lower than the Q2 of 2019 earnings per share. We project mid single digit revenue growth for the full year.
We expect gross margin as a percentage of sales to range from 13.9 percent to 14.3 percent in the second half of the year. We believe that our quarterly costs and expenses will range between $96,000,000 $98,000,000 We project that our effective tax rate will be about 25% in the back half of the year. We plan to spend between $100,000,000 $110,000,000 on capital expenditures in 2019 and to fund these purchases with a combination of cash and debt. Through today, we purchased 626,000 shares of stock at an aggregate cost of about $25,000,000 $75,000,000 remains on the current authorization. That wraps up our financial performance.
Over to you, Dave, for closing remarks.
Great, Terri, and thank you. We're very pleased with the strong second quarter and believe we'll continue to have positive financial results for the remainder of 2019. We continue to focus on improving our efficiency and productivity, while delivering best in class service to our clients. With that, we'll open up the line to any questions.
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. Good afternoon, guys.
Good afternoon.
Can you talk about the monthly volume trends in intermodal and then maybe your expectations in second half? And then I know you talked about a more competitive intermodal market. Is this manifesting for you and think in the second half in weaker volumes or less pricing?
I can give you the monthly volume, Scott. It was down 2 in April, down 8% in May and down 11% in June. And then so far in July through yesterday, we're down 4%.
Yes, I would just add that our customers are optimistic on the back half. We're currently in the process of finalizing peak planning. Work compliance is pretty low right now in the 70% range. Typically, we see that around 80%. Now that we're past the weather disruptions and see some sustained improvement in rail service, we're starting to see confidence build up.
I think if you continue to see the consumer economy perform well, truckload will tighten up and that award compliance will come up as well. And that should result in something similar to a 2017 type peak, which was strong.
What do you make of that going from a minus 11 to minus 4, that uptick from June into July? Is that what's driving that? And then maybe to ask more directly on pricing, what pricing trends are you seeing right now on contracts? Yes.
If you look at it on a per business day basis, Scott, June was down about 6.7%. So that was some of it. There was one less day in June last year. And so actually if you look at on a per business day basis, we were up in June sequentially from April May. So we think things did get a little better in June although bogged down by flooding that happened on the rails.
And we think that we picked up off the West Coast. So we think that's a plus right now and we've seen that in month of July. So we think that'll continue. And as Phil mentioned, we're anticipating a pretty good peak assuming that the truck market tightens up a little bit and that we still see the economic strength that we're continuing to see.
Yes, from a pricing perspective, Scott, which was one of your questions, we are we did see it a little more aggressive in the intermodal market, but the plant was very targeted. And we anticipated that we would be towards the middle part of this year at more of the mid single digit increases. It certainly has not gone negative. And as we had forecast originally, the Q1, we were able to get the highest pricing at that point because in 2018, they paid the least. And so you have to look at it over a 2 year basis.
So 80% of our bids are now completed. And I would imagine that those will be probably in the low mid single digits for those clients. And I
would just add, I think we're our TransCon volumes are continuing to perform best within our network. It's really in the shorter haul lanes where we're seeing some increased truck competition. So we anticipate with some tightness in that, that we would see a lot of that volume come back over anyway.
Okay. Terry, can I ask you the gross margin guidance is a lot higher than what you gave us last quarter? Can you just walk us through the pieces of what's causing that upward revision?
Yes, there are a couple of big drivers of that, Scott. Intermodal gross margin as a percentage of sales came in about 100 basis points higher than projected because of our focus on yield management, continuous improvement and cost efficiencies similar to the, low to mile improvement for example that Phil talked about in his prepared remarks. And then secondly, truck brokerage came in about 300 basis points higher than we had forecast due to more efficient operations, better procurement and benefits from our technology platform. So those were the 2 biggest drivers.
Okay. Thank you for the time, guys.
And our next question comes from Benjamin Hartford, And our next question comes from Benjamin Hartford, Robert Baird. Your line is open.
Hi, thanks for taking the question. This is Andy on for Ben. I wanted to get some additional perspective on the lower CapEx guidance for the full year and what exactly is driving that? Thanks.
Sure. It's less tractors and trailers for hub group dedicated and hub group trucking.
Thanks. And then just to follow-up on that, should we expect 2020 CapEx to be similar to 2019? Should it be higher or lower? What are you seeing there?
That
will probably be a bit higher because on the high end we're at 110 for this year and we think next year we've got a higher truck spend and so with replacement of some trucks and then we've got the remaining piece of the building. So probably closer to maybe $140,000,000 $150,000,000 next year.
Perfect. Thank you very much.
And our next question comes from Justin Long of Stephens. Your line is open.
Thanks. Good afternoon. So maybe circling back to intermodal volumes, I'm sorry if I missed it, but could you give the trend in intermodal volumes by geography? And then also along those lines, Phil, you mentioned a little bit more price competition in the East. But could you give us a sense for what that spread looks like if we look at pricing in the East versus pricing in the West and Intermodal right now?
Sure. I'll give you the numbers and then let Phil elaborate on the pricing. Local East was down 9%, local West was down 7%, TransCon was down 2% and other which is Mexico and Canada was down 11%. Sure. And from a pricing perspective,
I would say, the spread in the East certainly is tightening somewhat. We still think from a market in total, the gap is somewhere around 20%. But when you get into those shorter haul lanes, it can get down to around 10%. But we've also heard with some of the more recent bids, some aggressive truckload pricing that is around intermodal price, right? So we think that's short lived though.
We don't see that continuing for the long term, especially if we continue to see the economy perform well.
Right. But that's kind of aberrational. And historically, we've seen that type of competition when there's an excess of truck capacity, the Chicago Harrisburg, Chicago Atlanta type lanes, LA Dallas. You do see during those periods of a lot of capacity out there, you do see some price competition from the truckers, but it candidly, to Phil's point, it doesn't last long.
Okay. That's helpful. And I know it's still a little early to talk about 2020, but I did want to ask about your high level thoughts regarding intermodal margins as we progress into next year. If we just see a continuation of the intermodal pricing environment that we're currently seeing today, is that an environment where you still think you can improve intermodal margins just as you start to implement some of the changes you're making in your drayage operations, rail service gets better, etcetera. Any thoughts around that?
Sure. I think we have good visibility to our rail cost increases and have room to continue to improve margins. I think there's a few big levers, buying better in the open market, utilizing our assets more effectively, in particular on the operational excellence side. I think from a yield and continuous improvement perspective, we still have a lot of opportunity there to provide great service and save our customers money. And so that's another great opportunity that will help us continue to grow.
I think we can still be more efficient in our organization. We're really focusing on streamlining the organization in both the frontline and back office and focusing on scaling the organization. And then our technology is really starting to take hold as well, which is allowing us to make better frontline decisions. We're integrating our platform and I think the other piece would be that we're automating a lot of our process flows through RPA. So I still think there's opportunities in all of those.
And if the pricing environment continues, I would anticipate we could continue to grow our margins.
Although I would suggest that we do think a lot of what 2020 will look like from a pricing perspective is it's going to relate directly to peak season. And from the discussions we've had with both our rail partners as well as our customers, we're forecasting right now that we're going to have a 2017 type of a peak, which was very strong, but not like 2018, which was kind of operational.
Okay. And one last follow-up on that point. So second half intermodal volumes, could you share what you're assuming for the year over year change? What's getting baked into the guidance?
Flat to down slightly.
Okay, perfect. I appreciate the time.
And our next question comes from David Ross from
Stifel. Talking about the container fleet for intermodal, has there been any changes there with the weak volumes? Is that one of the other things that impacted the CapEx decision? And where do you expect to be on the container side going into next year?
Yes, we are purchasing about 1500 containers this year. So our net adds are only about 300 containers. So we'll end the year with about 38,500 containers. So not much growth there at all.
And then when you talked about the 310 basis point improvement in Hub Group's on time performance for your customers, where is that versus, I guess, where it's been in the past and where you want it to be? Is there still a good amount of room to run there or are you getting pretty close?
Yes. I think we've improved dramatically. Our team has done a great job focusing on service. This is really the score is related to how our customers actually grade us. So it is a legitimate score and I think we can always be better.
We're certainly pleased with where rail service is at, which is really helping to improve that. And I still think there's significant room to improve and with a more fluid and stable rail network, the opportunity for us to keep improving on that at a planning level is still there. So there's a lot of opportunity left.
And then lastly, just on the dedicated side of things, what's the outlook for that business? Has demand slowed? What does the pipeline look like?
Pipeline is really good. We've still got about $100,000,000 in the pipeline. We continue to bring on new business. We did brought some on near the end of the Q2 and got good pricing, mid single digit pricing. So we're happy with the performance.
Yes. And we're continuing to improve our operational discipline and our pricing discipline as well. So with the business that we're bringing on, we're very pleased with the returns we're going to generate, mainly because we're also investing in systems and talent that are going to help us make that business generate a return for the company as well. But the pipeline is really strong. We're actively out in the market and our customers still want to focus on the long term.
And so there's an opportunity to expand those dedicated fleets.
That's helpful. Thank you.
And our next question comes from Todd Fowler from KeyBanc. Your line is open.
Great. Good evening. Dave or Phil, I just want to get your thoughts on how we think about volume growth versus margin improvement in this environment. When I think back historically, maybe it's been 10 plus years at this point, but there was a time when there was some opportunity to call some low margin freight. Is that kind of the environment that we're in right now?
Or is this more of a function that you've got some capabilities where if the volume is there, you participate and you see that kind of in the numbers that the volume isn't there, you can still improve margins with some of the efficiencies? Just how are you balancing volume growth versus margins right now?
Yes, we have a much deeper understanding of our network now and are very focused on making sure that we're making optimal network decisions in our pricing. So there are certainly areas where we want to continue to compete and we will get aggressive. But at the same time, we are maintaining our pricing discipline. We're continuing to focus on anything that's in our bottom 10% is what we call it. That either needs to be up or out of our network.
And so we plan to continue to focus on that type of yield strategy and continue to price to balance the network and keep a fluid operation.
Okay. And then Dave to your comments on pricing, I think you said that the last 20% of the bids you're expecting to be kind of in the low to mid single digit range. Do you feel that you're above the market or do you think that the intermodal market right now is that that's kind of where pricing is more broadly industry wide?
At this point in the bid cycle, that's kind of where the industry is right now, Todd. Again, the largest increase is just because of the curve from 2018, whereby the clients that took, in fact, increases at this point last year took the largest increases of anybody during 20 18. And so it's just natural that, in fact, that hockey stick had gone down to the right. Okay.
So it's the comps. Okay. And then last one for me. Terry, on the cost side, the last two quarters operating expenses have come in below the guidance. You've got a little bit of step up for the 3rd Q4, but salaries and benefits was actually down a little bit sequentially 2Q versus 1Q.
There's a potential that you can still do better on the cost side in the back half of the year. And can you talk a little bit about kind of what's embedded in the expectations in the step up in costs for the Q3 Q4? Thanks.
Yes, sure. You're exactly right. We beat our forecast this quarter slightly because of salaries and benefits are lower than what we had forecasted. And we've not hired as many people as forecast. We're down 42 people from last quarter.
We're down about 54 from last year at this time and we've scaled our resources to coincide with our performance and we've also benefited from the technology. And in terms of how we get why our costs and expenses are going up, most of the increase relates to increased IT costs. We estimate that IT costs will increase about $3,000,000 from Q2 to Q3 and that the cost will stay flat from Q3 to Q4. So the increase relates to ERP, logistics migrations to our new OTM system and additional planned headcount in IT. And then the bonus will also fluctuate depending on our EPS performance and that too is factored in our guidance.
Sure. Okay. Does the $3,000,000 carry forward into 2020 or is that tail off at some point?
We'll give you that guidance in 2020. I don't have that number here.
Okay. I'll be patient. Okay. Thanks for
the time tonight guys. All right.
And our next question comes from Brian Ossenbeck from JPMorgan.
Hey, good evening. Thanks for taking the question. You talked a little bit about yield management already, but just more generally speaking, it seems like it's a pretty pervasive theme across all the business lines. So maybe you can elaborate a little bit more on what you're doing differently in this cycle versus previous ones, what sort of innings do you think you're in And which segment has the most opportunity to be more disciplined on yield and to stick to have it stick throughout the cycle and into the next one?
Sure. So I think there were
a few questions in there, so
I'll try to address them. But generally, I would say we've taken a philosophy where we want to be find mutually beneficial opportunities with our customers, where we're going to provide them great service and savings and we're going to be able to generate a strong return. And so we've really focused in intermodal on building a fluid network that is very balanced. That is a big focus for us. In truck brokerage, we have gotten a much deeper understanding of the market and where we can purchase more effectively and built out really a lot of density to do that.
Within dedicated, I think we have a much better understanding of cost structure now and where we can compete once again in those areas of density that we have, where we actually have a better cost structure can generate a strong return. And then finally logistics, there's still a great deal of opportunity. But I would say once again, we know the value we're bringing to our customers and the savings we can provide and we're pricing to ensure that we maintain strong profitability. I would just say lastly, we've inserted a lot of processes across all those service lines to manage our bottom performing business and ensure that we are moving that business up from a return perspective very quickly.
Okay, great. Thanks for that Phil. And on that topic, the new truck brokerage initiatives, I think you started them a couple of quarters ago, new operating model, again, yield management in the tech platform. It sounds like you're getting some traction on that, but maybe if you could give a little bit more detail on what you've seen kind of fall through to the bottom line and then what's still left to come?
Sure. For me, it was we had to start with the foundation of service to our customers and build trust with them that we could perform. I think we've done that. Now that we're getting our better purchasing and processes and pricing in place, that's really helping us as well. And the next piece is ensuring that we improve that purchasing, become more efficient in our headcount through the technology platform that we've rolled out and we're really start we're in the early innings of that.
I think there's still a lot of opportunity there. So think we're building that customer trust. We're seeing the wins come on. And so we feel very good about our ability to grow this business and we're ramping up great wins right now that we're excited about.
Okay. And last quick one for me, just to clean up on the dedicated side. Lost business, I know that was something you mentioned last quarter as well. I just wanted to make sure that was the same thing kind of carrying forward or if you'd seen any other changes in the dynamics there?
No, that's still carrying forward. As I mentioned earlier, we did onboard some new business at the tail end here of the 3rd Q2 that will carry over into 3rd Q4. We've got $100,000,000 pipeline. We're optimistic about that. But net net, when we're done, we still expect low to mid single digit sales growth in dedicated for the full year.
Okay. Thank you for the time. I appreciate it.
And our next question comes from Bascome Majors with Susquehanna. Your line is open.
Yes. Thanks for taking my questions here. You said earlier that big compliance was in the 70 something percent range, more normally into 80%. In the outlook for some improvement in the second half sequentially, are you assuming that you get back to a normal big compliance range in your modal awards? And if so, is that because you rebid with lower volume commitments?
Or is it because your customers are telling you that the freight is coming?
We haven't built it all in our guidance, Bascome. We have built in as Dave mentioned, it's about 70% right now. And normally it's more like 80% bid compliance. So to get to the high end of the guidance, we have built in recovering some of that, but not all of it.
But our customers are telling us that in fact to expect a strong peak. Again, not 2018, but more closely aligned with 2017, which was still a very, very strong peak with a lot of demand.
Thank you for that.
I'm sorry, just to elaborate a little bit further. And Terry earlier had mentioned that we're beginning to see some tightness in
So we think we're very
realistic with our guidance.
Well, I appreciate that color. And if I guess a lot of the questions today have it feels like people are looking back at the last time intermodal demand and pricing surprised the downside 2 years ago. And it's happening market wide this year, but you're having much better bottom line outcomes. And I appreciate Phil going through a lot of the initiatives that you guys are doing at the company level to improve that. Without walking through all of those again qualitatively, maybe can we talk a little bit about what inning you are in some of these processes and other improvements that you're doing?
I mean, is there more for us to see on structural margin improvement into 2020? Thanks.
I think we still have room to improve. There's always going to be room to improve. I believe we're middle of the game here and we've made a lot of progress. I'm really proud of what our team has done, but we still have room to go. We haven't gotten the full benefit of our technology investments, which I think will be substantial.
So we have the processes now to take advantage of that. But really becoming more efficient and intelligent through the technology, I think is going to be a big shift for us as an organization. So I would say we're still middle of the game and feel like there's upside for the organization going forward.
Thank you for that. And last one, Terry, just a housekeeping item. You had talked a little bit about EBITDA last quarter. I believe you said $260,000,000 to $275,000,000 What's the translation translating EPS range translate to EBITDA? Thanks.
Yes. We are projecting now $275,000,000 to $285,000,000
All right. Thank you.
Sure. And our next question comes from Jason Seidy from Cowen and Company.
Thanks, operator. Everyone, good afternoon. You mentioned that some of the truckload pricing is sort of at intermodal pricing, but you said it doesn't last long. Historically, how long has it actually lasted?
Well, it lasts generally through the a lot of the economic cycle. So I think that if we begin to see demand go back to a little bit more normalized level, 2017 level even, that you'll see that they'll begin to look at better freight that better fits their networks. These shorter hauls, again, you can kind of monitor how the economy is doing and how the trucking industry is doing just by seeing how aggressive they get in some of these shorter haul corridors. So I can't really pinpoint an exact time, but again, a lot of it's dependent on the economic cycle and the amount of freight that's available out there.
So do you think with your commentary on peak season looking like 2017 linking these two statements together, do you think we'll start to see some of that pricing pressure ease?
Yes.
Okay, great. The other question I had was on acquisitions. We have had a few companies in the transportation space call out the fact that multiples are getting lower and that they're getting interested again. You guys have been acquisitive over the last few years. You generate some good free cash flow.
Should we be looking at anything potentially for 2020? And if so, what are the areas that you'd be interested in?
We are out looking. We would agree. We think that expectations are normalizing. And so we are certainly out looking right now, mostly non asset based types of organizations, whether specialty brokerage or logistics or fulfillment, we would be opportunistic on filling out our geographic footprint in dedicated and intermodal as well. But the main areas of focus are really non asset based companies that can help us drive scale and new solutions for our customers.
Yes. And CaseStack was a great acquisition, so it's dedicated. We're integrating those very well. We had $150,000,000 in cash at the end of the quarter. No borrowings on our $350,000,000 revolver that we've got, so plenty of dry powder as well.
Sounds like you're in a good position. Appreciate the time as always.
Thank you. Thank you.
And our next question comes from Tom Wadewitz from UBS. Your line is open.
Yes, good afternoon. Wanted to go back to the commentary on competition in intermodal. Did you see it seems like you've weathered that pretty well. Do you think some of the decline in Q2 was a function of contracts that moved to a more competitive player in the market? Or was that just weakness in freight?
And I guess in second half, it doesn't sound like you're expecting to kind of lose market share. But I just I guess I wanted to see if you could offer some more comments on impact of the increased competition in intermodal on your volume.
I think a lot of the decline was actually just the compliance issue with the bids. I mean, that's a huge variance from what we anticipated. I mean, we would if in fact we were to build into 80% for the second half, we certainly will or would grow intermodal in the low single digits. So a lot of it's that. We did lose in a few cases, which is normal during the bid process, but we also gained in multiple instances.
So I wouldn't say that we lost share. I think that just the pie is a little bit smaller, and we took a shrink like I think most of the players did.
Yes, the whole domestic intermodal market, Tom, was down 8% and we were only down 7%. So we didn't we don't think we lost share and the competitors were down more than we were.
Right. Okay. How would you Dave or Phil, how would you compare this cycle to the prior cycle? I mean, it seems like you've had clearly some capacity that's coming to the market on the trucking side and truckload side. You've had, I think, some weakness in freight in first half of the year.
I mean, it seems fairly straight forward given the weekly rail volume and cash freight shipments index, if you want to look at that. How do you think this but it sounds like you're pretty optimistic looking forward. So how do you think the cycle is different? Is it just a more narrow period of weakness in freight or more discipline among the intermodal players? Because it does seem like you're not expecting to have this kind of protracted weakness that we had in 2015 2016.
And a lot of that, Tom, I think is driven by the overall economy. That's a key. We've seen many freight recessions before. And again, we did 2018 was such an anomaly that it added a lot of capacity into the market that we'll see, we'll filter through at this point in time. And as it does tighten and as we see the shipments get stronger and a little bit more consistent as well because there was a fair amount of pull forward from the threat of tariffs.
So I think it's going our feeling is that just from talking to our clients again and our rail partners that it's going to be short lived. And this is nothing like some of the severe recessions that we've seen in the past. We do believe that it's in the process of flattening out. And as we have a strong peak like 2017, that will really set up 2020 to be a positive year as well.
You talked a bit about the view on 2020. I think you were saying that you think rates in Intermodal will be up in 2020. How would you think about it if the kind of truck capacity is an issue and truckload contract rates are down in the 2020 bid season? Would you be able to would you expect to decouple from that and potentially see intermodal rates up? Or is it pretty tough to see intermodal rates be resilient if truckload contract rates are down next year?
Well, it's in fact under the hypothetical that trucking rates are down, would put pressure on the shorter lengths of haul. But I do think, to your earlier point, we've seen a lot more discipline within the intermodal players. Again, I think that we've all looked at a return on invested capital and it hasn't been what it should be. And so we're all working towards individually as far as enhancing profitability. So the truck there's no question that if there's a loose truck market, shorter lengths of haul will be more challenging.
But again, we really don't believe that that's going to be the case at this point. Certainly, I know that I just heard the June results of consumer sentiment was through the roof again and consumers driving off a lot of this economy.
Right. Okay. Yes, great. It seems like your model is working well in the period of weakness in freight and good performance in gross margin. So anyways, thank you for the time.
Thanks, Tom.
And our next question comes from Matt Young from Morningstar. Your line is open.
Thanks. Good afternoon. Just quickly to clarify on last question. So the 10% spread that you're seeing versus truckload on the short haul, I'm guessing that that is meaningfully better than what you guys saw in 2016 the last time truckloads rate truckload rates fell, correct?
Are you talking about the difference between truck and intermodal rates?
Yes. Yes.
I think Phil mentioned 20% actually is the average.
I thought I heard 10% on shorter haul lanes, but
I think it can get that low. Generally, we see around 20%.
Okay. Around 20%. But I'm guessing that that's markedly better than what you guys saw in 2016, the last time truckload rates corrected?
You are absolutely correct.
Okay. And it sounds like just overall demand and pricing conditions for intermodal are also better than they were last time and you guys are in a better position to see that improve in the second half?
Absolutely, yes. Yes, and we are expecting that.
Okay. And then one quick question about on the truck brokerage gross margin. If you ignore the mix shift impact from CaseStack, wondering how the gross margins trended for legacy truckload brokerage operations?
Were those up year over year?
Yes, they were up year over year, about 170 basis points.
Would some of that have anything to do with kind of your internal efforts with IT as opposed to the cycle or both of those?
Yes. I would say both. Yes.
Matt. And next question comes from Matt Brooklier from Buckingham Research.
Yes. Thanks and good afternoon. I wanted to circle back to your dedicated business. Could you remind us what's the average length of contract on that business? I'm just curious as to how we should be thinking about what percentage of your contracts are coming up for renewal over the next 12 months?
Yes, it's typically a 3 year contract. We have visibility the renewals. We work through them every year. So next year won't be outsized versus traditional. Okay, got it.
And then you talked to achieving mid single digit price increases, I think through the first half on your on dedicated contracts on average, are your expectations for the second half similar or do you think that maybe price increases may be a little bit lower than that just given kind of the current state of the broader TL market? Sure. I think driver wage inflation has subsided somewhat. A lot of those renewals were driver wage driven. And we need to make sure we're staying competitive in the market to service our customers in the right way.
I would say the competitiveness has subsided somewhat. So if we do continue to as we look at renewals going forward, I would say you'll continue to see it balance out somewhat. But we are also focused when we are underperforming out of sight and making sure that we can generate a return as well.
Okay, that's all I got. Thank you.
And our next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, thanks for the follow-up. So maybe Terry, if we think that Transcom is going to do better than sort of local East, local West because of this truck competition dynamic. What are the implications of better Transcom on gross margins and margins for you?
It's a longer length of haul. It's our longest length of haul for TransCon. So that's higher margin dollars and gross margin as a percent of sales is really pretty consistent across all of our different geographies. So it's really more dollars. And higher revenue because the revenue per unit is also higher on a contract conduit.
And then op margin?
Similar.
Okay. And then just lastly, the guidance on gross margin for the back half, do you think they're higher or lower in 3rd or 4th quarter?
Gross margins, I think are higher in the 4th quarter. Typically that's due to seasonality and peak season surcharges.
Great.
All right. Thank you, guys.
And that concludes the question and answer session. I'll now turn the call back over to Dave Yeager for final remarks.
Great. Well, again, thank you for joining us for our Q2 earnings call. As always, Terry and Phil and I would be available if there's any additional questions that you may have. Thank you again.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and may now disconnect.