Welcome to the Hub Group fourth quarter 2018 earnings conference call. Dave Yeager, Hub's CEO, Donald Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, Hub's CFO, are joining me on this call. At this time, all participants are in a listen-only mode. A brief question-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words believe, except, anticipate, and project, and variations of these words. Please review the cautionary statements in the release.
You should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin.
Good afternoon, and thank you for participating in Hub Group's fourth quarter earnings call. We had another very strong quarter and a record year in 2018 as we continue to increase revenue while reducing expenses in our network. We put a significant amount of effort into improving service and profitability in all of our business lines, resulting in a 72% increase in operating income for the year. This focus, coupled with the strategic investments we're making in our Elevate technology, provides a platform for continued profitable growth. Intermodal had a stellar quarter as volume was up 5%. Peak season intermodal exceeded our expectations as pricing and volume were strong through year-end. The intermodal team had a solid operating plan that was extremely well executed. We are bullish on our intermodal plan for 2019.
We believe prices will increase in the mid to high single digits while volumes will continue to grow as Hub continues to provide best-in-class solutions to our customers. Another highlight of the fourth quarter was our closing the acquisition of CaseStack on December 3rd. CaseStack is non-asset-based, focusing on the growing warehouse consolidation market and LTL brokerage markets. CaseStack's strong retail and consumer products focus is very complementary to Hub, where those segments represent 70% of our business. We are pleased with the synergies we've captured and have a robust pipeline of future opportunities. CaseStack has a very talented workforce, a solid management team, and we welcome them to the Hub Group family. With that, I'll turn the call over to Don to talk about the performance of our other business lines.
Thank you, Dave. As Dave mentioned, we are pleased with our 2018 performance and feel confident in our ability to deliver strong results in 2019. Now let's talk about the business. We had a challenging quarter in truck brokerage as our spot business declined due to higher contractual rates, which locked in more committed capacity in the market and lowered the amount of volume offered as spot. In addition, as I mentioned on our last call, we are transforming this business to better position our services to reflect three distinct lines, transactional truckload and LTL, contract, and special services. We have made great progress in restructuring our operations, bringing in new leadership, rolling out our new technology into pricing and operations, and adjusting our compensation models to drive more aggressive sales and procurement efforts.
Our strategic accounts value these services. We are bringing process, technology, and resources to better position this business for sustainable future growth. Logistics. We continued to gain momentum as we replaced logistics contracts lost early in 2018 and focused our efforts on improving yield. During the back half of 2018, we onboarded two new accounts while also implementing contract price increases with many of our clients. As I mentioned on previous calls, in 2018, we focused our efforts on implementing our Oracle TMS standardized solutions to drive efficiencies and scale and will continue on that same path in 2019. We have a very strong pipeline that will set us up well in the back half of the year. Also, with the addition of CaseStack, we can now offer a full end-to-end solution that will further enhance our position with our customers and in the marketplace. Dedicated.
Revenue increased 40% as we continued to assimilate the new accounts onboarded earlier this year while also taking a measured approach with new onboardings. Our focus this past quarter and into early part of 2019 is on operational discipline, yield improvement, and cost control. We believe we've made great strides during the quarter and are now starting to see the results of those actions. Our sales pipeline remains robust. We are focused on ensuring strong returns throughout 2019 and in the future for this business. I will now turn it over to Terri to review the numbers.
Thanks, Don. Hello, everyone. I'd like to highlight three points for the quarter. First, we closed on the purchase of CaseStack on December 3rd, further diversifying our multimodal solutions. Second, gross margin as a percentage of sales at 13.6% is the highest we've seen all year and the highest fourth quarter since 2007.
Operating income was an impressive 4.7%. Let's take a more in-depth look at our performance in the fourth quarter. All the numbers that I'll be talking about exclude Mode, since we sold it at the end of August. Hub Group's fourth quarter revenue increased 12% to $1 billion due to growth in intermodal, logistics, and dedicated, partially offset by a decline in truck brokerage revenue. Hub Group's diluted earnings per share was $1.46, which includes earnings per share of $1.01 from continuing operations and $0.45 of earnings per share from the additional gain on sale of Mode. This is compared to an adjusted 2017 diluted earnings per share of $0.74 from continuing operations that uses a 25% effective tax rate. That's a solid 36% increase.
Each quarter, we'll report amortization expense related to acquisitions and compensation expense associated with restricted stock awarded to CaseStack management in connection with the purchase. Amortization expense in the fourth quarter of 2018 was $1.9 million, compared to amortization in the fourth quarter of 2017 of $1.1 million. Compensation expense associated with restricted stock issued to CaseStack management was $200,000 in the fourth quarter of 2018. Adjusted fourth quarter earnings per share from continuing operations for these items is $1.05, compared to an adjusted 2017 earnings per share of $0.77 or a 36% increase. Taking a closer look at a few of our key metrics, Hub's gross margin increased $32 million, or 30%, due to growth in intermodal, dedicated, and logistics, partially offset by a decline in truck brokerage. The logistics and truck brokerage service lines include CaseStack for the month of December.
Gross margin as a percentage of sales was 13.6%, or 190 basis points higher than last year. Intermodal gross margin as a percentage of sales was 190 basis points higher than last year. Prices increased year-over-year and sequentially from the third quarter to the fourth quarter. Fourth quarter utilization was up 0.8 of a day at 16.9 days, which negatively impacted our results. About 0.6 of a day was due to slower rail service. Truck brokerage gross margin as a percentage of sales was down 30 basis points because of less spot business than last year. About 28% of our loads were spot in 2017, compared to 17% this year. We partially offset the lower spot business with more value-added services and the CaseStack truck brokerage business.
Logistics gross margin as a percentage of sales was up 290 basis points due to price increases, positive changes in customer mix, purchasing more cost effectively, and the addition of CaseStack. Dedicated gross margin as a percentage of sales increased 390 basis points because of lower insurance costs, new business, and reduced use of third-party carriers, temporary drivers, and rental trucks. Operating margin was 4.7%, or a solid 80 basis points higher than last year. Adjusted operating income, excluding CaseStack and dedicated amortization of $1.9 million and $200,000 of compensation expense related to restricted stock awarded in connection with the CaseStack purchase, is 4.9%. Our EBITDA was $73 million for the quarter and $208 million for the year. Cash flow from operating activities for the year was $211 million, and net capital expenditures were $189 million. I'll discuss what we expect for 2019.
We believe that our 2019 diluted earnings per share will range from $3.10 to $3.30. By service line, we expect 10%-15% revenue growth in intermodal, 15%-20% growth in truck brokerage revenue, 20%-30% growth in logistics revenue, and low double-digit growth in dedicated revenue. We expect gross margin as a percentage of sales for the full year will range from 12.8%-13.4%. We expect gross margin growth of between 20% and 25%, with gross margin increasing in all of our service lines. We believe that our quarterly costs and expenses will be between $98 million and $100 million. We estimate that depreciation will range from $82 million to $92 million.
We project that amortization expense related to the CaseStack and Hub Group Dedicated acquisitions will be approximately $13.5 million, that compensation expense related to restricted stock issued to CaseStack management in connection with the purchase will be approximately $2.4 million. We project that operating margin adjusted for amortization expense and compensation expense for restricted stock will range from 3.8%-4.3%. We project that our effective tax rate will be between 25% and 26%. We expect to spend between $90 million and $100 million on capital expenditures in 2019, primarily for tractors, containers, and trailers, as well as technology investments. We plan to continue to fund purchases with cash and debt. That wraps up our financial performance. Dave, over to you for closing remarks.
Thank you, Terri. Needless to say, 2018 was a great year for Hub Group. We achieved all-time record earnings and continued to achieve high marks on our customer service. Hub divested a non-strategic asset in Mode, while expanding our service offerings with the acquisition of CaseStack, a strategically aligned non-asset-based logistics company. As we look towards 2019, Hub is very well-positioned in all of our business lines, and we look forward to executing upon that opportunity. With that, we'll open up the line for any questions.
Thank you. We'll now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Scott Group from Wolfe Research. Your line is open.
Hey, thanks. Afternoon, guys.
Hi, Scott.
Terri, I just want to confirm, the guidance, the $3.10-$3.30, is that with or without the amortization?
That includes the amortization. That's on a GAAP basis.
Okay. Just so we can sort of calibrate our models, when you report, are you going to be talking about GAAP or adjusted, excluding the amortization? Can you just share how much was the total deal-related amortization in 2018?
The deal-related amortization in 2018, including the restricted stock of 200,000, was about $900,000. Yeah. From the 2017 acquisition of Dedicated, on an annual basis, that's about $4.4 million. Annually, the amortization associated with CaseStack will be about $9.1 million in 2019, and the compensation expense associated with restricted stock will be about $2.4 million. To answer your question about how we're going to report, we have to report GAAP because that's the rule, but we're also going to give you what the adjusted number is, so that you've got both.
Okay. That's helpful. Dave, wanted to ask, intermodal pricing, I think you said mid to high single digits?
That's correct.
Big picture, how long can we be in an environment where intermodal pricing is going up more than truckload pricing? Is it realistic to think we can grow volume in an environment where can we grow intermodal volume if intermodal pricing is going up more than truckload pricing?
Yeah, to answer your question, I think, for way too long, intermodal pricing has had a too deep of a discount versus truck. That's been problematic. It's primarily been an intra-intermodal competition, which has driven a lot of that. I think that at this point, we're all looking at the market saying that the variance between truck and intermodal is too great. There's a lot of room to increase price, yet still bring very solid value to our customers. From what we've seen in the bids so far, and granted, it's only about 15% of our business, but what I forecast the mid to high single digits is certainly in play right now. As far as length of time that we may expect to see that, we certainly believe that it's at least through 2019, and again, because we're not taking 20, 15% increases at a time.
It's much more incremental, I do think that the overall tail that we've got to follow up on that could very well extend through 2020.
You look at the price in 2016 and 2017, where prices keep going down as much as they did.
Oh, yeah.
To this point, to Dave's point, the gap between truck and intermodal is still sizable, in some cases up to 40% on transcon business. We think there's a runway there to grow it, and we're going to do it.
At the same time, Scott, to answer the second part of your question, we do believe that we're going to be able to grow volume as well as grow and increase the overall price and get our return on invested capital to a reasonable level.
Is the pricing a lot better in the West than the East? Because I'm guessing the gap's a lot wider there.
The gap is a lot wider there's still a lot of room in the East as well.
We saw growth in the East in January.
Yeah.
Okay.
That's where the truck will tighten up first, right? In that local lease market, and there's still a gap between intermodal and truck.
I do think the ELDs are having an impact on some of those local lease because you can no longer do a Chicago to Harrisburg in a day, at least not running legally. Now that everybody's required to have ELDs, it's changed some of the overall economics for that mid-haul trucking operation. I'm not convinced that there still is not a lot of room to grow pricing within the East as well as gain share.
Okay. I'm going to ask one more, and then I'll get back in queue. Your rail partners, you are right in sort of the heart of 2019 precision railroading. What impact are you seeing at this point? Have you assumed any sort of negative cost or gross margin impact from the changes that the rails are making?
I think thus far we have seen some marginal additional costs, we do believe that we can recover those relatively easily. We have seen some areas where lanes have been shut down, that we have lost volume. Again, we don't believe it's been really a tremendous problem thus far. As I look at the precision railroading, it really focuses on long trains in dense corridors. If we look at our business, 95-plus % of it is in dense corridors. We feel quite good. Obviously, precision railroading is there to take out costs, but it's also there to, longer term, enhance service. We're not at that point yet, although we are seeing improvements in service within both the UP and the Norfolk Southern.
I would suggest to you that it's still early, we are seeing an accelerated amount of changes with precision railroading at this point in time. There's no question the pace of change has increased with both carriers. Thus far, as I said, really nothing that has been overly negative, and we really don't foresee it. Again, the pace of change is increasing. I have to say that both of our partners are really communicating extremely well with us on changes that are being made and giving us some advance notice.
Okay. Thank you for the time, guys.
Your next question comes from Kevin Sterling from Seaport Global. Your line is open.
Hey, good morning, everyone. Good afternoon.
Hey, Kevin.
Hi, Kevin.
Oh, gosh, days are running together here. Dave, let me piggyback on Scott's question about rail service, and Terri, this may be for you as well. I think you said your box turns were up to 16.9 days. That's up 0.8 days. Obviously, that's a negative drag. As rail service improves throughout 2019 and that metric in your utilization improves, how should we think about the impact to, say, gross margin and the financial impact?
Yeah. One day of utilization is now worth about $10 million to us. As the rail service gets better, we expect to improve our utilization. What we've got baked in our numbers, Kevin, is the first half of the year, utilization will be worse than 2018, and the second half of the year, it'll be better. We've got kind of flat utilization in our numbers that we discussed for guidance in the plan.
Great. Okay. Let me just follow up on the pricing discussion here, Dave, because as Scott talked about with truckload pricing, and particularly spot pricing being negative, and while truckload contract pricing is positive. As we think about intermodal pricing, and you're talking mid to high single digits, and we've heard that from other IMCs, how much would rail service play into that too to help keep the pricing discussion at a higher level? If rail service improves, I would imagine that would help make, obviously, intermodal that much more competitive or attractive to truckload. I guess for the first time in a few years, we could actually get some decent rail service, and I would imagine that might help the pricing discussion, or maybe I'm missing the boat there.
Kevin, I think you're right on target. We've been able to increase price in 2018. Of course, that was an unusual market. We do think we're again poised for 2019. The better the rail service gets and the more competitive we are versus truck, certainly that will allow us to convert more and more business from over the road. No, you're right on target. To reiterate, we are seeing the rails begin to improve their service. We're seeing some meaningful improvements. We're very encouraged. As Terri had said, as the year gets on, we do believe that we'll be adjusting some of the expectations of our clients to shorter transit than what we currently are.
Got you. Are you losing any business back to the highway, or you haven't seen that?
Kevin, we really have not seen that. There's no question that the spot market, that there's a lot more capacity but less demand. We think some of that's also because in 2018, a lot of people that just played the spot market put it under contract because spot market pricing went up so rapidly.
Right.
No, we are not seeing conversion back to truck at this point.
Okay. Well, that's all I had. Thank you for your time this evening. Congrats on a very nice quarter and a very good year.
Thanks, Kevin.
Thank you.
The next question comes from Benjamin Hartford from Baird. Please go ahead. Your line is open.
Hey, good evening, guys. Dave, just kind of interested in your thoughts, the lay of the land right now. A lot of talk about inbound freight into the West Coast being strong. A lot of uncertainty on the other side of Lunar New Year. Interested in what you guys are hearing and planning for in terms of the seasonal build in March, and then maybe just the cadence through the balance of the year.
Yeah, there's no question that many of our clients did pull forward some degree of inventory in anticipation of the tariffs. At the same point in time, we have seen a little rise in inventory levels, but it's still nothing that is deeply concerning. We do think that a lot of that business, which was pulled forward, may still very well be on the West Coast. There's still a surge that could occur with that. Our January was up 4% in overall volume in intermodal. Candidly, it was stronger than what we had originally budgeted. Part of that could be, in fact, the pull forward. We do believe that Lunar New Year, we always have it. It always has an impact.
We really do believe that the first quarter and through the rest of the year, that we'll have in the low- to mid-single digit volume growth.
Okay. That's great. Terri, if I could come back to your comment on the EBIT margin. The 3.8%-4.3%, that's excluding amortization and restricted stock. I wanted to clarify that, I guess, in that context. When you guys have talked about 4% margins as a waypoint, you've got a healthy pricing environment. This year it seems like you're on that path. When you've talked about 5% margins as kind of a longer-term target, one, is that including or excluding these charges? Two, what's the pathway now forward to get to the five?
Yeah, it would be including the amortization, because we're going to report that as well as the GAAP numbers. We think we can get really close to the four, if not four this year. If we have another mid- to high single-digit pricing year, if the economy cooperates, if our competitors continue to have an orderly bid season, we think we'll be just that much closer to the five next year.
Plus the efficiencies
Okay
in the organization that we're going to gain through leveraging the network.
Yep. The synergies that we'll get from CaseStack in terms of the procurement spend as well as the cross-selling synergies that we'll get.
Okay. Maybe related to that, Don, you'd mentioned the Oracle system specifically on the logistics side, but maybe can you get an update on that rollout more broadly and what the cadence of maybe expenses coming out and savings starting to ramp both in 2019 and longer term?
Yeah, I'll let Terri talk about the numbers. As far as where we're at now, obviously we've invested a lot of time and energy in getting our logistics solutions up and running. We will have that completed in the second quarter of this year. Then we'll start transitioning some accounts that are in our old legacy system into Oracle. While at the same time, over the past few years, we've been working on the overall business. Fleet is now being worked on and rolled out. We'll have all the fleet on our Oracle system by the end of third quarter. Then we're working now on our ERP system, which will be up and in in the second quarter. A lot of progress been made, a lot of investment been made.
We're starting to see the effects of that in our business, obviously on the logistics side first, and now we're seeing it on the fleet. Dave, anything there you want to add to that? No, I think that's right on target. Obviously some of the benefits of the new Oracle system is optimizing how we dispatch our drivers, improve visibility, makes our drivers' jobs easier. There's a lot of really positive aspects from this rollout that we've been working on for now the last year and a half.
Yeah, the total spend for this year is around $65 million. That includes capital as well as expense. One of the other initiatives that we're working on is Oracle Pay for our drivers, which will enhance efficiency in the back office, improve the accuracy of the driver pay. The drivers will have a lot better visibility to their pay details, make them happier, improve retention.
Ben, we look at it as availability of our network, right? As we get further and further involved, without getting into all the detail, it's about how we can use the leverage of our assets across all our business lines to make us more efficient.
Yeah, to improve our profitability.
Okay, great.
Like Dave said, he listed out the benefits for Elevate Fleet. That improves loaded miles, customer on-time performance, loads per driver per day, while always being safe, which in turn leads to enhanced profitability.
Okay, great. If I could get one quick follow-up. Terri, remind me again, what's kind of the upper threshold in terms of the leverage ratio that you guys are comfortable going to?
We're comfortable going up to three times EBITDA. Right now we're only at 0.8 to 1, so we're pretty
Missed a zero, we're out of room.
Yeah.
Yeah.
Oh, there you go.
That's good. Thanks for the time.
Our next question comes from Justin Long from Stephens. Your line is open.
Thanks, and congrats on the quarter. I wanted to circle back to PSR. Are you seeing any impact to your rail costs as a result of PSR implementation? Maybe could you just comment on your level of visibility to rail costs this year, and if those rail cost increases look similar to what you saw last year?
As far as the rail costs, your second question, we have clear visibility. We feel very comfortable we'll be able to cover those with price increases, and then some. We have very clear visibility to us, and feel very good about that and being able to move forward. As far as any impact on rail costs, or costs in general for business that we're handling, when in fact some aspects of PSR are implemented, we've seen some minor costs, as an example, on some of the interchange lines. Instead of steel wheeling freight, we've had to cross-haul it via rubber tire at the interchange points. There's some expense associated with that, but it hasn't been too burdensome as of yet. UP did just announce that they're closing the Las Vegas ramp. That'll be some business probably lost because there's really no other way to get there.
It's such a small market again. I think that's again, as the UP and Norfolk Southern are looking at the lanes and implementing PSR, I think that they're saying that there's just not enough density. Thus far, no. We have not had or minimal amount of rail cost increases. They've all been very manageable.
Okay. That's helpful. Maybe secondly, this is probably one for Terri. I know you don't give specific quarterly guidance, can you help us think about the quarterly cadence of EPS, even if from a high level, just as we layer in CaseStack and think about seasonality? Just curious what you're baking into that 2019 guidance. Also wanted to ask you about the incentive comp impact that you're expecting this year.
Sure, yeah. Our comps, of course, get tougher as we progress throughout the year. We'd expect significantly more growth in earnings per share in the first half of the year as opposed to the back half of the year. If we were to swag it, we'd guess maybe 40%-50% growth in earnings per share in the first half of the year and between 8% and 12% in the back half of the year.
Okay. That's helpful. Incentive comp, what's the year-over-year impact you're expecting?
We're expecting it to be down about $10 million in total.
Okay. Lastly, I wanted to ask about free cash flow. If I think about the reduction in CapEx and the improvement in cash earnings, it seems like it should be a really good year for free cash flow. Did you have an expectation on what that free cash flow number looks like? Maybe it would be good to get any color on working capital changes you anticipate this year.
Our working capital should improve because with the divestiture of Mode brought our DSO up and our days payable up as well. That should only help working capital. You're right, it should be a good year for cash flow generation. I could tell you that in terms of EBITDA, we mentioned in my prepared remarks that it was $208 million for a full year this year. We would expect that EBITDA will be between $255 million and $270 million this year.
Okay. Very helpful. I appreciate the time.
Thanks, Justin.
Great.
Thanks, Justin.
Our next question comes from Todd Fowler from KeyBanc. Your line is open.
Great. Good afternoon. Dave, I just wanted to circle back on the intermodal pricing conversation. It seems like maybe there's a little bit of a misconception. If intermodal is still 20% or 25% below truck, if intermodal pricing on a percentage basis goes up high single digits and truck goes up mid single, you're really not closing the gap. Is that kind of the message on intermodal pricing? It's don't be so focused on high single digit versus mid single digit or something different for truck. It's that there still is that gap and that value that somebody's getting with intermodal, and that's really where the pricing opportunity is going forward.
Todd, you are right on target there and expressed it, I think, more eloquently than I did. No, that is the fact that the gap is such that we're going to see truck prices continue to increase. We may be higher by 200, 300, 400 basis points in pricing than over the road, but it still has a very large delta between the two costs. That's right on target.
Well, no, that's helpful, and I think it's just been one of the things that people are trying to get their arms around as we move into 2019 because that's a different paradigm than what we've seen historically. It seems to make sense when you think about just the gap between the two, that's helpful. Then, Terri, just following up on Justin's questions about the guidance. You gave us a lot of metrics, and we can back into a lot of things. I guess just conceptually thinking about you doing what's called roughly $1 here in the fourth quarter. It sounds like that there still is the expectation that even though you've got tough comps, you'd see some growth in the back half of the year.
Is there something That makes it that where you wouldn't see something maybe stronger than what you guided to, just given the run rate where you're coming off of in the fourth quarter. Was it that 4Q was unusually strong because of some of the pull forward? If you could quantify some of that could be helpful. Are there other things that we need to be thinking about from a conservatism standpoint into 2019?
Yeah. Well, pricing is a big lever for us. We got a lot of pricing in the fourth quarter. We hope next year, in the fourth quarter, we'll get as much for some of our surge capacity solutions.
Okay.
If it's as tight next year as it was this past year, there's a lot more opportunity to have that growth be higher in the last half of the year. We don't want to assume that into our guidance.
Okay.
The other big factor is our competitors all say they're having an orderly bid season, so if that continues like it is, that could be upside as well.
Okay. I'll pass it along, but maybe just again, Terri, for clarification, I know that we did talk about this. It sounds like that the expectation is the analyst community should be modeling to a GAAP number, and that that's what you'd expect from our estimates, even though you'll be talking about a GAAP versus non-GAAP. I'm asking just because I think it would be helpful that everybody's doing something consistent. Obviously, we can model what we want to, but it sounds like you're going to be reporting GAAP, but you're also going to be breaking out these costs. From a consistency standpoint, I'm just curious what your view is.
Yeah. Because we've got to report GAAP, and because you're right, everybody was kind of all over the board. We said we're just going to report GAAP numbers because that's what we have to do, but we'll also give you the adjusted numbers, which include the amortization and the compensation expense to get you more to a cash flow number.
You can get a clear line of sight, because we know that some of our competitors do, in fact, focus more on non-GAAP. We wanted to just give you all the numbers so that you can see exactly how we're performing.
Yeah.
Perfect. Yeah, no, that's helpful. The EBITDA guidance is helpful as well because that adjusts for a lot of that. Hey, thanks so much for the time, everybody. Nice year this year.
Thanks, Todd.
Our next question comes from Brian Ossenbeck from J.P. Morgan, your line is open.
Hey, good evening. Thanks for taking the questions. Terri, just to follow up, we were talking about the competition and the orderly bid season. We've seen some changes in your competitors over, I guess, the last year or so. One's got arbitration with a revenue share agreement. The other one has put some new chassis in place and improved margins. You even got a smaller one that's getting a little bit more competitive based out west. What's the expectation given all those changes? Do you still think it'll be more of an orderly bid season, or do you expect there might be a little bit more competition or friction on the fringe?
We expect it to be more orderly and.
Yeah. from what we've.
far it.
seen thus far.
Yes
It has been an orderly bid season. We've seen nothing within the market, within the pricing environment that would lead us to believe anything other than that.
Yeah. That's what we saw for the freight that priced in the fourth quarter that's running right now, and we have that high single-digit pricing on that.
Brian, what we do as an organization is try to sense what's going on in the market, obviously, as we do our bids, and usually in December, we're all sitting there going, "Okay, what are the competitors doing?" To Dave's point, it's orderly.
Right.
Okay. Thank you. On the drayage market, I think you guys managed that pretty well considering you had third-party exposure last year when the driver pool was pretty tight. Granted, there's going to be some PSR disruptions, as you mentioned, some of the ramps closed, and you got maybe haul it a little bit further. Is that an overall potential tailwind for this year as the truck market starts to loosen up? Do you expect to see a benefit on the drayage side, or is that still going to remain pretty tight?
Well, we are, of course, very focused on productivity enhancements with our drivers on reducing empty miles. We've made some headway on that. I think there's a lot more headroom there for us to continue to become more productive. If we look at it for, we do still use about 50% third-party draymen, and they did last year go up in the high single digits from a price perspective. I think that, again, we're working with them. We understand they have increased costs. We don't expect them to be going up as substantially as they did last year, that will be somewhat of a tailwind for us.
Yeah, we've got modeled in low to mid-single digit increases for the third-party dray costs.
Okay. Got it. Just one last housekeeping on CaseStack. I know it's only been a couple of months since you closed the deal, but is that still kind of in, I think the last we spoke was like $0.40-$0.45 accretion ex the items. Is that still where you expect it to be in 2019?
Yeah. Things haven't changed from what we thought when we announced the deal. Mm-hmm.
Okay. Thanks for your time.
Okay, thank you.
Thank you.
Your next question comes from Bascome Majors from Susquehanna. Your line is open.
Yeah, thanks for taking my question here. Going back to the beginning of last year, I think the initial outlook for the year ended up coming in about 25% higher by the time the year-end. Clearly last year was an exceptional year.
What degree of upside, downside risk do you see to the GAAP kind of 320-ish range that you're guiding now? Is it rail pricing? What are the levers to get us above or below that if something moves from the way you budgeted the year as of today? Thanks.
Well, we could have upside for rail service. Rail service impacts our volume, our utilization, our loaded miles, our customer service, and accessorial. As Dave mentioned earlier, PSR could certainly help us to improve the reliability and consistency of the rail service. We've assumed kind of flat utilization. If it's better than we think, then that is certainly upside. Downside risk would be for our truck brokerage margin and revenue growth since we have headwinds related to customer mix and spot business that we intend to replace with committed business. Downside risk could also be an economic downturn. We don't anticipate that, but we never know. Upside could be pricing being higher than we are projecting right now.
Okay. Can you talk a little bit more about the cadence? You seem pretty constructive on the first half of the year. Is there any way you could kind of help us quarter to quarter, just given the difference in magnitude between the first half and the second half as far as earnings growth?
Yeah. Well, we are anticipating that we've got strong comps get tougher because pricing got higher as the year went along in 2018. As we're repricing the business that we priced in the first half of 2018, that is naturally going to be at higher prices than perhaps we'll get later in the year as we reprice the business, the price later that was higher, if that helps you.
All right. Thank you.
Sure. Thanks, Matthew.
Our next question comes from Diane Huang from Morgan Stanley. Your line is open.
Hi. I think you touched on this briefly earlier, but can you just expand on if you have seen any impact or spillover from your western peers' ongoing arbitration process?
Are you questioning if we're picking up additional business because of the arbitration issue with our competitor?
Yes. Whether you kind of expect the dynamics to impact your pricing or volumes going forward.
Yeah. I don't think that we've seen any amount of business that has come over to us as a result of the arbitration. That was something that was very public, and as much as actually taking place for well over a year, probably 18 months. We really haven't seen any fallout from it, nor have we seen any direct benefits from it as well. I think it just continues to reinforce, it's just one of many items that I think that all of us that are in the intermodal industry, that we need to continue to focus to get an adequate ROIC in order to reinvest in our physical plant so that we can offer our clients the proper services they expect.
Good.
Okay, great. Thank you.
Our next question comes from Jason Seidl from Cowen and Company. Your line is open.
Hey, guys, this is Adam on for Jason. Just a quick one for me. I just maybe wanted to ask a little bit from a higher level perspective about the integration of CaseStack. How has that been so far? I know it's been about two months so far. How has that been? Maybe has the process of acquiring CaseStack changed your acquisition strategy or your approach to looking at potential acquisition targets in the future? Thanks.
Okay. I would say, number one, the integration's going extremely well. When we went into this, we really weren't looking for headcount synergies, things such as that. This was a value-added product that we felt as though has scale within their market and a unique niche that is something that we could capitalize on and help them to grow and prosper. That's really what we've been focused on. We have found some cost synergies and as much as able to reduce some of their line hauls and that type of thing. Again, I think the most exciting thing, which really it's going to take a little longer than just a couple of months, is the sales synergies. I think that we obviously have relationships with significantly sized CPG customers that do in fact ship LTL at times into some of the very large retailers.
There's a lot of upside opportunity from a sales synergy perspective. All in all, I would say that we feel very, very positive about it. As far as how does it impact our future acquisitions, I would say to you that this one with the due diligence, it puts us into a different market, which is exciting for us. While it's a different market, it is aligned to what our core is. I think that continuing to focus and look for acquisition opportunities such as this is really what our playbook will be made of.
If you think about it allows us to offer a full end-to-end solution, and it allows us to enter into a market that we couldn't do before.
Right.
Got it. Thank you guys for the time.
Thank you.
Our next question comes from Thomas Wadewitz from UBS. Your line is open.
Yeah, good afternoon. You really haven't gotten much on the brokerage side. I'll offer one up on that. I guess intermodal is performing so well, that's taken all the attention. Can you, I guess, give a little more perspective on the, I don't know if turnaround is a fair characterization, but the improvement effort at brokerage, how long you think that takes to implement and maybe some more perspective on what specifically you're doing with some of the incentive changes?
Yeah. It's a business that we've been very proud of, and are very proud of, on the results we've had over the years. We had a three-legged stool, if you think about it, going to market, but we really didn't act like a broker. We acted like a carrier manager, a logistics manager. We did spot business, and then we did special services, which we're very good at. We really took a look at ourselves internally and said, "What market share can we grow?" It really is the contracted business. The ability to go to market and buy and sell. To do that, we need to re-engineer the whole process. We needed to put process to it. We need to put technology to it. We need to put leadership to it. I would consider it, the fair word would be is under construction.
We've made great strides, especially in the last quarter. I think you'll start to see positive results and a turn on volume probably in the second half of the year. Continue on our path that if market gets tight, we have this transactional option that we can provide our customers. Of course, the special services that we're very strong on. When we look at re-engineering this, we look at the ability to grow with our existing customer base that we're under-penetrated on, our top 100 customers that we're under-penetrated on the brokerage business.
What's the target mix in the future? Do you try to go to a more kind of conventional 50/50 spot contract split?
I think we're 60/40-ish, roughly.
70/30.
Yeah, 70/30. I see us being in that game still. It's just a matter of turning the volume up in that transactional side of the business. Excuse me, in the contractual side of the business. It's buying and selling is what we're trying to do better.
You're going to stay skewed towards contract at 70% and just execute it more effectively, I guess?
It could be. It could be 65%, depending on how we grow that business. We see upside in that. Even though it's 65, 70% now, there's an ability to really explode.
Right. Okay. Maybe a quick one on the M&A side. It sounds like things are going well with CaseStack. I understand that kind of opportunity on the sales cycle that takes some time. What do you think about your capacity to do another deal in 2019, your level of interest, or is that something that you say you've got enough on your plate that you'd look a little further out in terms of other deals?
I would say that we certainly are looking, we are opportunistic. Our major goal for 2019, you're right on target, Tom, is to make sure that we fully integrate and effectively integrate, further integration with Dedicated also with CaseStack. Those certainly are job one, at the same point, we're not going to forego something that would be strategically important to us. We'll continue to be in the market. Geoff DeMartino and his people will continue to be looking, and we'll be opportunistic if something arises.
Okay. Yeah, great. That makes sense. Thank you for the time and strong, nice results in the quarter.
Thank you.
Thank you.
Okay, our next question comes from Matt Brooklier from Buckingham Research. Your line is open.
Yeah, thanks, and good evening. A couple of CaseStack incremental questions for you. Did you talk to how much revenue contribution we're going to get from CaseStack in 2019? Also, I think we talked to the continuing EPS accretion from CaseStack, what's the GAAP number, if you will?
We don't break out GAAP separately for CaseStack. I can tell you that for 2019, we're projecting about $220 million-$230 million of logistics revenue associated with CaseStack. For the truck brokerage, we're estimating between $60 million-$65 million of revenue from CaseStack related to the LTL brokerage.
That's helpful. You guys have touched on it, you did talk to the potential for sales synergies, the potential, I think, for maybe some cost synergies from CaseStack. I don't know if you want to put a number to it, maybe walk through maybe some of the bigger buckets in both those categories and how those could play out over 2019, if you think it could add upside.
We've got about $10 million of revenue baked in for cross-selling synergies in that guidance that I just mentioned. We've got some procurement side of the house savings, those are not as significant as the cross-selling savings.
Yeah.
Some of the areas that, for instance, being able to substitute intermodal for some of the truck moves they had into some of the warehouses. The whole thing is, though, it's got to be 100% on time, it's got to be very focused. The on-time performance is critical. That kind of limits the amount of conversion we can do, but at the same point in time, there's still enough to make it very attractive and to add to the bottom line.
Okay. That's great. Appreciate the time.
Thanks, Matt.
Our next question comes from Rick Peterson from Loup Capital. Your line is open.
Hi. Thank you. My question is, how do you think the railroads handled the cold snap last week, specifically with regard to the Chicago terminals? Are they back to normal now or still working through freight backlogs? Thanks.
Yes. I think they handled them as well as can be expected. It certainly wasn't just the railroads. They certainly did have some slowdowns from the polar vortex. In all candor, if we look at it, we probably had on the Wednesday and Thursday, maybe 10%-20% of our drivers out on the road. The terminals can get congested with that. I thought the actions they took made a lot of sense so that we didn't get gridlocked. No, I mean, the polar vortex, there's only so much you can do. We don't want to risk our people, our drivers, our personnel during that kind of a period of time and that kind of a deadly cold, nor do the railroads.
I thought some of the ramp walkouts they had, not walkout, but just not allowing freight to come in that's going to Chicago, made a lot of sense, and I thought they communicated it to us very effectively.
Right. Thank you.
As a reminder to enter the queue and ask a question, please press star then 1 on your touch-tone phone. Our next question comes from Scott Group from Wolfe Research. Your line is open.
Hey, guys. Thanks for the follow-up. Terri, if I just took the 40%-50% growth in the first half and like 10% in the back half, you get to closer to like $350 plus of earnings. Were you speaking to sort of adjusted numbers ex the amortization when you gave that 40%-50% and 8%-12%?
I was speaking to consolidated, I mean, GAAP.
Okay. All right. Maybe I do not know. Maybe I am doing the math wrong, but I think it gets you north of the $310-$330 guidance.
I don't know if we have our continuing ops numbers, right? Because we'd sold Mode, I'm just talking continuing ops now, which is old Hub segment, new Hub. I have for Q1 of 2018, our earnings per share were $0.33. In Q2 of 2018, our earnings per share to $0.51. We have the $0.77 we reported in Q3 and the $1.01 that we reported in Q4.
All right. That explains it, and that's helpful, I think probably for everybody.
Oh, good.
The last just quick thing, can you bridge us to the, I think we did $90 million of OpEx in Q4 and bridge us to the 98+ for the forward guide?
Yeah. Most of that change relates to the addition of CaseStack. We only had one month of CaseStack in the fourth quarter, and we'll have a full quarter in each of those in 2019. CaseStack's cost and expenses are about $14 million-$15 million a quarter. That's the biggest jump.
Okay. CaseStack revenue is in brokerage, correct?
Part of it's in brokerage and part of it's in logistics.
Okay.
The $50 million-$60 million is in brokerage is our estimate, $220 million-$230 million is in logistics.
Okay. Perfect. Thank you, guys. Appreciate it.
Thank you.
Thanks, Scott.
We have no further questions. I'll turn the call back over to David Yeager for final remarks.
Great. Well, thank you again for joining us for the earnings call. As always, Terri, Don, and I would be available if you do have any further questions or need any clarification. Thanks again for joining us. Have a good evening.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.