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Hub Group (NASDAQ:HUBG)
Q1 2019 Earnings Call
April 30, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Hub Group's first-quarter 2019 earnings conference call. Dave Yeager, Hub's CEO; Phil Yeager, Hub's chief commercial officer; Don Maltby, Hub's president and chief operating officer; and Terri Pizzuto, Hub's CFO, are joining me on the call. [Operator instructions] Any forward-looking statements made during the course of the call or contained in the release represent the company's best good-faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project, and variations of these words.

Please review the cautionary statements in the release and in addition you should refer to the disclosures in the company Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, the conference is being recorded. It is my pleasure to turn the call over to your host, Dave Yeager. You may now begin.

Dave Yeager -- Chief Executive Officer

Good afternoon, and thank you for participating in Hub Group's first-quarter earnings call. As usual, with me today is Don Maltby and Terri Pizzuto. I've also asked Phil Yeager, Hub's chief commercial officer, to join us today as much of Hub's margin improvement is the result of the focused effort by Phil and his team working across all of our business lines. We had a record first quarter as we continued to increase revenue while reducing expenses in our network.

Our intense focus on improving service and profitability resulted in a 115% increase in operating income. We're also beginning to see some of the benefits of our investment in the Elevate technology which is increasing productivity and improving efficiencies. As is often the case in the winter, intermodal experienced some surface issues in the first quarter. Volume was down 1% for the quarter as March volume was down 5%.

Much of the fallout in March was a result of significant flooding that took place in Iowa and Nebraska. The Union Pacific took aggressive actions which allowed them to recover quickly, but nonetheless, the flooding did reduce volumes for the month. On a positive note, we're seeing both of our rail partners' on-time performance improve dramatically. Over the last several months, Norfolk Southern has driven their on-time performance to levels that substantially exceed those of 2018.

And the last three weeks has shown significant improvements in the Union Pacific's on-time performance. We expect that both railroads will continue to improve transit throughout the year, and we intend to adjust our customer service expectations accordingly. The CaseStack integration continues to be very positive. In the first quarter, CaseStack's financial results were better than budgeted and their overall revenue growth exceeded expectations.

We'll continue to identify sales synergies and working together aggressively to cross-sell both Hub and CaseStack clients to the new service offerings. As previously mentioned, CaseStack has a very talented workforce and an excellent management team that we're pleased to have as part of the Hub Group family. And with that, I'll turn the call over to Don to talk about the performance of our other business lines.

Don Maltby -- President and Chief Operating Officer

Great. As Dave mentioned, we are pleased with our performance as all of our service lines are hitting stride and we feel confident in our ability to continue to deliver strong results. In truck brokerage, we saw strong performance in a difficult environment as we onboarded CaseStack's LTL brokerage and approved operations to expand margin. Spot demand in pricing was soft but we performed well on our committed business as we implemented our new technology, pricing philosophy, carrier management and purchasing programs.

We continue to secure wins with our strategic customers while growing and diversifying our customer base. Despite the short-term volume challenges that exist in the spot market, we believe we are making the right investments in our brokerage business to achieve long-term profitable growth with extremely high service levels. Logistics had a strong start to the year with 25% top-line growth, as we brought on CaseStack to expand our offering and increase revenue. In addition to the growth we continue to recognize yield improvements from several of our logistics contract renewals and we continue to improve upon our operating efficiencies.

Our pipeline remains strong with onboarding already scheduled for the second and third quarter of 2019. Dedicated had a strong quarter with revenues up 26%. We shed unprofitable legacy business, improved our pricing and continuous improvement methodology, enhanced operational performance and continue to focus on safety and growth with our strategic customers. We are pleased with our results and continue to focus on our profitable growth, improving our operational excellence, and scaling our business.

Now I will turn it over to Terri to review the numbers.

Terri Pizzuto -- Chief Financial Officer

Thanks, Don, and hello, everyone. I'd like to highlight three points for the quarter. First, operating income increased an impressive 115%, resulting in operating margin of 3.8%. Second, gross margin grew $36 million as we continue to improve operational discipline, execute on our yield improvement strategy, and implement new technology.

Third, cash flow from operating activities was $63 million, which was up 91%, resulting in $112 million in cash at the end of the quarter. Now, let's take a more in-depth look at our performance in the first quarter. Hub Group's revenue increased 11% to $933 million, driven by the addition of CaseStack and strong yield improvement processes. Hub Group's diluted earnings per share was a record at $0.71.

This is compared to a 2018 diluted earnings per share of $0.33, an increase of 115%. Acquisition-related amortization expense was $3.4 million compared to $1.1 million in the first quarter of 2018. Compensation expense for restricted stock issued in connection with the acquisition of CaseStack was $625,000 in the first quarter of 2019. Adjusted first-quarter earnings per share for these items is $0.80 compared to an adjusted 2018 earnings per share of $0.36 or a 122% increase.

Taking a closer look at a few of our key metrics, Hub's gross margin increased 40% due to growth in all four service lines. Gross margin as a percentage of sales was 13.6% or 270 basis points higher than last year. Operating margin was 3.8%, or a solid 180 basis points higher than last year. Adjusted operating margin was 4.2%.

This excludes acquisition-related amortization expense of $3.4 million and $625,000 of compensation expense for restricted stock issued in connection with the CaseStack purchase. Turning now to guidance. We are increasing our guidance for 2019. We believe that our 2019 diluted earnings per share will range from $3.25 to $3.40.

We project revenue will increase between 10% and 15% for the year. We expect gross margin as a percentage of sales for the full year will range from 13.1% to 13.6%. We expect gross margin growth of between 22% and 27% with gross margin growth in all four of our service lines. We believe that our quarterly costs and expenses will range between $96 million and $100 million.

Acquisition-related amortization expense for the year is projected to be approximately $13.6 million and compensation expense for restricted stock issued in connection with the CaseStack purchase is projected to be approximately $2.5 million. We expect that operating margin adjusted for this amortization and compensation expense will range from 4% to 4.4% for the year. We estimate that EBITDA will range from $260 million to $275 million, and that total depreciation and amortization will range from $96 million to $106 million. We project that our effective tax rate will be about 25.5%, driven partly by recent tax legislation in Arkansas.

As a result of the legislation we will decrease our deferred tax expense by about $250,000 in the second quarter. We expect to spend between $115 million and $125 million on capital expenditures in 2019, primarily for tractors, containers, trailers, the new building in Oakbrook, 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.

Dave Yeager -- Chief Executive Officer

Thank you, Terri. I believe the quarter pretty much speaks for itself. We continue to see a strong pricing environment in intermodal logistics while being opportunistic in the truckload market. The CaseStack integration is moving forward as planned, creating synergies for all of our business lines.

We believe that 2019 is going to be yet another strong year for Hub Group. With that, we'll open the line to any questions. 

Questions and Answers: 

Operator

[Operator instructions] Our first question comes from Scott Group from Wolfe Research.

Scott Group -- Wolfe Research -- Analyst

Can you give us an update on volumes in April?

Dave Yeager -- Chief Executive Officer

Yes. Volumes for April were pretty much in line with what we did in March, so they were down approximately 2% on a same-day basis.

Scott Group -- Wolfe Research -- Analyst

And so what do you think that is? Is that continued sort of lingering impacts from the weather? Is it demand?

Dave Yeager -- Chief Executive Officer

I think it's a combination of things. It's obviously partially the weather. I think that obviously we, at least here in Chicago, we have not had spring yet. And I think that's impacting a lot of purchasing or restocking, etc.

I do think, also, that Easter, it was very late this year as you're aware. And I just don't know what the impact will be for that. But we actually continue to believe that our volumes will be up low single digits for this coming year, and that's based upon the awards we've received from our clients thus far. And basically the overall positive mood that our customers have.

So you know, it's very early in the year but we do believe it's going to be bouncing back and that we'll see growth in the intermodal volumes.

Scott Group -- Wolfe Research -- Analyst

OK. Can you give us just an update on intermodal bid season, what you're seeing from both a pricing standpoint and a rail cost standpoint? Do you still feel like you can do better in price than what you do in cost? Because it looks like, Terri, you're guiding gross margin 13.1% to 13.6% for the year and we just did 13.6% in the first quarter. So does that tell us that this was sort of the best quarter of the year and things get worse from here? And is that rail cost-related, and how do we think about all that?

Dave Yeager -- Chief Executive Officer

I think that if you look at, for the first quarter, we bid about just under 40% of our business. And we were in the high-single digits from an increase perspective in price. And April, it's a little lower but I mean, it's incidental. It's a couple of basis points.

So it's still the high single digits, and we're now up over 50% of our overall bid business for the year. So we'll see how it unfolds, but I would say minimally we expect mid single-digit increases for the year. If you look at it from a price perspective with the rails, with our costs, we have very clear visibility in what our costs are going to be this year, what the increases will be. And we do believe that we will be able to fully cover them, and then some.

Scott Group -- Wolfe Research -- Analyst

So maybe then explain the guidance of why the gross margins get worse throughout the year?

Terri Pizzuto -- Chief Financial Officer

Yes. That was just a range of 13.1% to 13.6%. You're right, we were at 13.6% this quarter. We would expect Q2 might be a little bit lower than that, but not much.

And then Q4 should be similar, so really we've got Q3 just a little touch lower than Q2. And that's just based on projections that we have, and we do have great line of sight to what the rail cost increases are going to be. As you know, we have one that goes in on June 1, and another one that goes in on September 1. And we are planning a peak similar to 2017, so that's why in the third quarter it's not higher.

If peak in '19 is like it was in '18 we could certainly be at that 13.6%.

Scott Group -- Wolfe Research -- Analyst

OK. And if I could just ask one last one. So Terri, if I look, the guidance raise is sort of the same amount as what the beat was in the first quarter. So is there a reason why the strength you saw in 1Q doesn't sort of carry forward into the rest of the year?

Terri Pizzuto -- Chief Financial Officer

We're conservative in terms of what we guide to. We want to make sure that we feel comfortable, that we can meet the guidance and so that would be part of the reason that we didn't go up more. And we actually, as Dave said, we're currently projecting low single-digit volume in intermodal. If you remember, last quarter we had thought we might be up to mid single-digit volume in intermodal.

And certainly as rail service continues to improve, there's a possibility that we could be higher than low single digits. But that's what we're projecting right now.

Operator

Our next question come from Benjamin Hartford from Baird.

Benjamin Hartford -- Baird -- Analyst

Dave, I'm interested, I guess, in your perspective as you see Norfolk service improve pretty meaningfully here recently. As you think about the business and where Hub sits, and where rail service is headed and where it can go, what are your baseline expectations for multi-year eastern load growth on the intermodal side, either I guess both for the market and then what Hub Group is going to be capable of in that context?

Dave Yeager -- Chief Executive Officer

Well, first and foremost, certainly the Norfolk Southern increased enhancements in their on-time performance has been truly dramatic through the quarter, and this past week was actually the best that we -- service that we've seen in probably two years. So one of the things that Phil and his group are doing is looking at the current expectations we set for our clients and contemplating changing those and shrinking the number of transit days, which is very positive because it obviously makes us much more competitive when we're dealing with tight inventory situations. The growth in the east is tremendous, of course, that's an enormous truck market. Large population centers.

I haven't seen any recent surveys, but I don't think that there's any reason to believe that mid single-digit increases within the northeast providing we've got the good, solid service that Norfolk Southern's moving toward, is very possible. Does anybody --

Don Maltby -- President and Chief Operating Officer

No. This is the softest truck market you've seen. And where the growth will come will be in local east, as it gravitates to intermodal, and intermodal service improves. So I think -- I think it's a good story.

Benjamin Hartford -- Baird -- Analyst

Can you give the same perspective out west?

Dave Yeager -- Chief Executive Officer

I think the service has improved quite a bit. Phil, did you want to comment on it?

Phil Yeager -- Chief Commercial Officer -- Analyst

Yes, sure. Service is definitely improving sequentially and we're pleased with that. We think that the results are going to continue to improve, especially as we got through the weather now and a lot of the rationalization of the network has taken place. So we're really excited about the improvement.

I think we have a great service product to offer to the market and we continue to see growth in our transcontinental volumes despite some of those lane cancellations as well. So we feel very good about where the service is, and the path forward.

Dave Yeager -- Chief Executive Officer

And those long lengths of haul are really where the biggest gap is in price between truck and intermodal. And so the opportunities are substantial and I've got to also give kudos to the Union Pacific that they did recover far faster from the flooding than I think most people anticipated. So that was a very positive sign with just how rapidly they were able to get back on track.

Benjamin Hartford -- Baird -- Analyst

And then maybe Phil, you can address this, and David, did you provide an update in terms of what intermodal contract pricing growth looks like for the balance of the year as it stands today? And the context of let's say, assumed further deterioration in contractual pricing on the intermodal side, Phil, what type of offsets do you think you have or further cost opportunities to mitigate any sort of further pricing weakness and in that context, I mean, how do you think about the potential pathway to getting to 5% EBIT margins for the bueinsss?

Phil Yeager -- Chief Commercial Officer -- Analyst

Sure. Again, so we still think that we're going to be seeing mid to high single-digit price increases throughout the remainder of this season, and we are seeing that take hold. But a big focus for us is continuing to focus on efficiency and cost-outs, particularly on the street, utilizing our assets more effectively but also in a way that we're procuring third-party capacity. Dave mentioned we're continuing to see improvements in train speeds and therefore a great opportunity in enhancing our container utilization there.

And we're also continuing to drive balance into our network through our enhanced pricing philosophy. So I think there's significant upside and as we continue to implement our technology, we just see continued upside and we're excited with the preliminary results on that as well. So we're very pleased with the opportunities we have to keep getting better.

Terri Pizzuto -- Chief Financial Officer

And then on the 5% operating margin, we anticipate we could get close to that 5% on an adjusted basis in the fourth quarter of this year, if you add back the compensation expense related to restricted stock of $2.5 million that we issued to CaseStack and if you add back the amortization expense for acquisition-related intangibles at $13.6 million.

Operator

Your next question comes from Justin Long from Stephens.

Justin Long -- Stephens Inc. -- Analyst

Maybe to start with a follow-up on the question about comparing the guidance raise for the full year versus the first quarter EPS beat. Terri, could you share how the $0.71 that you reported this quarter compared to what was baked into the original guidance? I just wanted to get a sense for how your expectations have changed for the remaining three quarters of this year.

Terri Pizzuto -- Chief Financial Officer

Our remaining three quarters are pretty much the same as what we had thought before, other than we brought intermodal volume down a bit. So that was really it. Because we beat compared to where we thought we would be as well. And a couple areas where we beat were in intermodal pricing was higher than we thought it would be.

Dave mentioned that earlier. And then our general and administrative expenses were about $2 million lower than we thought we might be, because we didn't spend as much on IT as we thought we would, and salaries and benefits are also a little lower, about $2 million to $3 million lower than we thought they would be because of the fact that we didn't hire as many people as fast as we thought we would. And then our -- the increases for employees for raises didn't really go in until mid-February, so we only had that in for part of the quarter. So we'll see full quarters prospectively.

Justin Long -- Stephens Inc. -- Analyst

And then on intermodal volumes, any update on how some of the PSR-related lane rationalizations from the Class 1s could impact your intermodal volumes this year? Just curious if that's something that's getting baked into the revised intermodal volume guidance, and if so, what the order of magnitude is?

Dave Yeager -- Chief Executive Officer

It's actually -- and I know that one of our competitors had a sizable number that were negatively impacted by some of the lane closures. But ours was very minimal. It was about 14,000 loads overall that we couldn't find another way to be able to cover effectively. So it was very small, and again, I think that these lanes just did not have the density nor the cost structure for the rails to continue to allow them.

Phil Yeager -- Chief Commercial Officer -- Analyst

I would just add on the interline changes in particular, that was the cancellation of steel wheel service. So we are still rubber-wheeling that volume and it'd been really lost volume in our network. So although there are rationalizations of those lanes, it's not impacting.

Justin Long -- Stephens Inc. -- Analyst

OK. Great. And if I could sneak one last one in? Dave, you mentioned earlier some of the things that Phil's done from a margin perspective and I wanted to specifically ask about intermodal margins and if we set kind of the pricing dynamics aside, and what's going on with rail costs, what do you think are the best company-specific opportunities for intermodal margin improvement going forward?

Dave Yeager -- Chief Executive Officer

I'll let Phil address that.

Phil Yeager -- Chief Commercial Officer -- Analyst

Yes, I would -- I think our street efficiency, driving out cost in our drayage network, especially in our Hub Group trucking fleet, as well as with our third-party carriers. Those are significant opportunities for us. I still think that we have room to run on assessorial management and recovery, and as we mentioned, as rail service improves, we think we're going to be able to enhance our utilization of our containers and really improve yield through that. So those internal dynamics are significant for us, and have big upside.

I think what can continue to drive improvement in that, is technology as well, and we're really pleased with the results we're seeing preliminarily as we roll out that technology.

Operator

Your next question comes from David Ross from Stifel.

David Ross -- Stifel Financial Corp. -- Analyst

I wanted to talk first about just general customer conversations around the modal decision between intermodal and truckload. Have people been coming back to the rail from the road or are people moving more to the road from the rail still? How do those conversations look when you talk to people about optimizing their own network?

Dave Yeager -- Chief Executive Officer

That's a really good question. In fact, we did see during some of the service delays that we had with the flooding and just the polar vortex and all, we did see some diversion albeit small, back to over the road. We do anticipate that that will convert back to intermodal and we believe that the more sophisticated clients continue to look at intermodal as really the future mode for them. The economics are compelling.

Providing the service product is predictable and consistent. I think that we'll continue to see a lot of conversion from over the road to intermodal. And that's pretty much how our discussions go with our clients.

Phil Yeager -- Chief Commercial Officer -- Analyst

And service improves for shrinking transits, which is going to make us more competitive, I think, as well and give us opportunity to convert more of it.

David Ross -- Stifel Financial Corp. -- Analyst

And on the freight brokerage side, I think you mentioned new technology, change in pricing philosophy, better carrier management, improved purchasing, are all areas you're attacking. What's most important and where are you in I guess that holistic revamp of the business?

Phil Yeager -- Chief Commercial Officer -- Analyst

I would say we're early stages, but we're making significant progress. I certainly think our pricing philosophy, getting that in place, is going to be very impactful in improving our margins. But we really need to focus on enhancing purchase transportation costs and ensuring that we're giving a really good service and building trust with our customers. We now think we have those right incentives in place and the technology's going to make us more efficient.

So we think there's great opportunities in the market and we're seeing that start to take hold with sequential volume improvements and expansion in our yield. But I would still say we're early there, or very early stages, and there's great upside. I don't know if anybody would --

Don Maltby -- President and Chief Operating Officer

We've got, you know, share of wallet with our top 100 customers is we're underpenetrated and we see opportunity that could really grow that business. We are very good at the special projects and value-added services, so really focusing in on our contract business is going to allow us to really grow.

David Ross -- Stifel Financial Corp. -- Analyst

And can you remind me how much of that is contract versus spot business in the brokerage side?

Terri Pizzuto -- Chief Financial Officer

About 85% is contractual or committed.

Operator

Our next question comes from Todd Fowler from KeyBanc.

Todd Fowler -- KeyBank Capital Markets -- Analyst

Just on the gross margin guidance raised, the 13.1% to 13.6% from the 12.8% to the 13.4%, it sounds like most of your base assumptions are really still in place for this year with the rail cost increases and the pricing expectations from the customers. So is the right way to think about that, that most of that's something that's company specific and something that's within your control, or are there other moving parts that are impacting the gross margins for the rest of the year from where you started the year?

Terri Pizzuto -- Chief Financial Officer

So it's all within our control and very predictable, and have line of sight to it. So you're right. And you know, a lot of the margin enhancements that Phil talked about, some of them are in there. Not a lot, especially on the utilization.

We're assuming our utilization is very similar to what it was in 2018 but with the improved rail service, with the revised transit that Phil and his team have given to our customers, hopefully we're able to improve utilization more than we have in the forecast. And every one day is $10 million annually. Some of --

Todd Fowler -- KeyBank Capital Markets -- Analyst

I'm sorry, I didn't mean to interrupt.

Terri Pizzuto -- Chief Financial Officer

No, I was just saying that a little bit goes a long way and we don't -- we're assuming it's pretty much flat with 2018.

Todd Fowler -- KeyBank Capital Markets -- Analyst

Got it. OK, so that's helpful. And you know, I'm not trying to get guidance or kind of a thought, but I guess as I think about gross margins now there was a period of time if we go back where gross margins were higher than where they had been, and then they kind of bottomed out through '13, '14 and '15. Do you have a sense of -- I don't know if you want to talk about where you think you're at from kind of the ability to improve the gross margins from what you're doing internally, or where we can think about where they could go with some of the initiatives that you have in place, but how do we think about the opportunity that you could have on the gross margin side?

Dave Yeager -- Chief Executive Officer

I think one of the key elements to the enhancing the gross margin is just that the intermodal players themselves, I think, have looked at ourselves and candidly, we between ourselves, the industry, brought pricing down to a level where the overall margins and the return on invested capital was just subpar. And we're very focused on getting to a level that our ROIC is at an acceptable level. And so that time we're at right now with having a very level playing field and being able to participate in a market that's rational makes a tremendous amount of difference. Phil, did you want to address some of the other internal issues that we have?

Phil Yeager -- Chief Commercial Officer -- Analyst

Sure. Yes. I would just say we've done a great job of getting our yield management processed and continuous improvement philosophy into the business. There's still great upside on that operational excellence, making sure we're maximizing our assets, improving our purchase transportation and driving out waste.

I once again think the technology has huge upside for us and we also from a just bottom-line margin expansion have a great opportunity to continue to build a scalable organizational structure so as we grow we're improving that bottom-line contribution. So we think there's still significant opportunities to improve from a gross and bottom-line.

Don Maltby -- President and Chief Operating Officer

Yes. I think to Phil's point, it's about a disciplined approach to the market and how we approach our customers. We're very targeted. And then the underlying cost in managing through that, right? So we have efficiencies on the street that we were going after, we have efficiencies in our organization.

And I think we're positioned very well. So if you look at the prior years, in the last few you've seen a very focused approach on how we go to market.

Todd Fowler -- KeyBank Capital Markets -- Analyst

And just my follow-up on the dedicated side, there was good growth here this quarter. I think previously you had guided dedicated to grow low single digits from a revenue standpoint. Terri, do you have an update for that? And then from a capital standpoint, do you need to add capital to that business to support the growth? That's what I've got. Thanks.

Terri Pizzuto -- Chief Financial Officer

Yes. We've got low single-digit growth planned for the whole year for dedicated, although I will say we do have a very strong pipeline so there could be upside there if all those materialize. And in terms of your capex question, not significant capex growth for dedicated this year, at all. Very minimal.

Dave Yeager -- Chief Executive Officer

As part of what we did do, Todd, was we looked very closely at the dedicated business and candidly, we had about $50 million of revenue that was losing money. And so we were pressed upon prices. Some of those clients have chosen to go elsewhere, so that obviously, just their departure actually adds to our net income and it also frees up those assets for a customer that's more productive.

Operator

Our next question comes from Bascome Majors from Susquehanna.

Bascome Majors -- Susquehanna International Group -- Analyst

J.B. Hunt a couple of weeks ago said that their bid compliance in their intermodal business was as low as it's been in years. I'm wondering if you guys are seeing that, and if you have any -- if so, if you have any report from your customers, kind of why that is and whether or not it should reverse? Thank you.

Dave Yeager -- Chief Executive Officer

Sure. It's a couple of things I think, is that first and foremost I do think it was the weather that we did receive various business awards. But some of it just couldn't be converted because of the transit that we were experiencing. And not only just the length of the transit time, but also the lack of consistency.

As I said, that is changing very rapidly with the rails, the on-time performance is increasing at dramatic levels. And so I do believe that those bid awards that we've received in the past will convert back to intermodal as we can prove that the on-time performance is there for our clients.

Bascome Majors -- Susquehanna International Group -- Analyst

OK. And Terri, you gave us an update on EBITDA up I think $5 million or so from what you looked at last. You gave us a few other items. I believe capex was up a little bit on the building investment that you guys are making.

Net-net of that and anything that may have changed on cash taxes or anything between those items, what's a reasonable range for free cash flow expectations this year?

Terri Pizzuto -- Chief Financial Officer

Probably -- well, assume EBITDA and then assume we'll have capex of $125 million, you know, it should be close to $100 million or more.

Operator

Our next question comes from Jason Seidl from Cowen.

Jason Seidl -- Cowen and Company -- Analyst

I wanted to circle back on sort of the growth out of the east. The conference call made an interesting statement. They said they were going to be testing the limits of market-based pricing, so in other words, let's see how high we can push it up. Do you think in the near term that will deter a little bit of intermodal growth and then sort of one day find their feet and figure out where they need to be, you can grow a little bit more beyond that?

Dave Yeager -- Chief Executive Officer

We have a very clear understanding of where our prices are right now in the market in the east and where they're going. And in all candor, there may be some promoting to increase the prices. But again, we feel very comfortable with where the rails, that Norfolk Southern is at, at this point in time and believe that at the levels that we currently have and we see that we're going to be increasing to, we will be very competitive in the market. I think that Norfolk Southern understands the market very well and is actively pursuing to optimize their value.

Jason Seidl -- Cowen and Company -- Analyst

And as you look and talk to your customers looking out there in the marketplace and we see some of the improvements here from PSR, how important is that in attracting new intermodal business?

Dave Yeager -- Chief Executive Officer

It's really interesting. In all candor, I wasn't the biggest PSR fan but as I've seen the way that the Norfolk Southern and the Union Pacific have gone about it, I applaud it. They've communicated extraordinarily effectively with us, have been very transparent. We have seen some additional costs, as you may change intermodal ramps on specific lanes.

But it's a very minimal amount of disruption and yet we are seeing again, I'm just going by the track record we've seen thus far in the first quarter. We are seeing dramatic increases in on-time performance by both rail carriers. And that is the key thing and the consistency is also there.

Phil Yeager -- Chief Commercial Officer -- Analyst

Our customers really want a predictable service product that is on time, right? And so that's what we've heard from our customers, and that seems to be the goal of the UP and NS is to deliver that really predictable service. I think they're going through that simplification and rationalization of their network right now, and as Dave said, we're pleased with where things are heading. And I think it's going to really continue to drive conversion to intermodal.

Jason Seidl -- Cowen and Company -- Analyst

My other question is going to be in the brokerage side. We just saw Amazon announce that they're beta testing a couple states here up in the northeast and I guess the word out there is they're offering fairly aggressive price discounts. But it seems similar to what Uber did when they started out. How do you view Amazon as a future competitor, and what kind of a threat might they represent to other brokers?

Dave Yeager -- Chief Executive Officer

Well, Amazon is a strategic top 10 client of Hub that uses many of our services. But we do not handle any of their truck brokerage business at this time. So as I view it, we've been saying for quite some time that the truck brokerage revenue, longer term, will face downward pressures. Just as the industry is heavily invested in productivity enhanced technology, whether it's from the e-commerce providers, the Ubers as you had mentioned.

And we've been investing in that technology to make our people more productive, but we've also been changing some of our strategy and philosophy to be very focused on contractual business versus transactional, which I think will be more at risk. And as well as we've been focusing on developing, maintaining power lanes where we can bring a lot of value to our clients. So for the overall industry, sure, I think that this could be a disruptive event. But we do believe we've got a solid plan for truck brokerage to continue to grow.

But most of all we'll also very closely monitor the situation as it progresses.

Operator

[Operator instructions] Our next question comes from Tom Wadewitz from UBS.

Mike Triano -- UBS -- Analyst

Hi. This is Mike Triano on for Tom. So I wanted to -- I don't know if I missed it in the prepared remarks, but could you provide the year-over-year change in segment margin for intermodal truck brokerage and logistics?

Terri Pizzuto -- Chief Financial Officer

Sure. No. You didn't miss it. Let me give that to you.

Intermodal gross margin as a percentage of sales was up 200 basis points from last year. Truck brokerage gross margin as a percentage of sales is up 250 basis points. Logistics gross margin as a percentage of sales up 570 and dedicated up 140 basis points.

Mike Triano -- UBS -- Analyst

And then just wanted to ask one more on the intermodal volume. So Dave, I think you said mid single digits. I mean, what are the assumptions that underpin that? Do you have some visibility yet on freight potentially improving, or there being some inventory destocking later in the year, or is it more related to the better service you're seeing at the rails and that allowing you to capture a little more share from truck?

Dave Yeager -- Chief Executive Officer

First of all, I do apologize. I did misspeak. I meant low-single digits. I thought I corrected myself.

But just for the record, we do believe that it'll be low-single digits. We had thought it would be high -- mid single digits at the end of last quarter, but just with the slower start we've had we don't believe we'll achieve those levels at the mid-single digits although we would love to be pleasantly surprised. Our level of confidence really comes from several things. One is just based on the bids that we've been awarded, with projected award volumes.

Those have been very positive. We believe that we're going to see more conversion back to intermodal as the service has improved, as well as when we were speaking with our clients, they feel very confident that they will be -- that obviously, we're late with spring, but spring will happen. And we're going to see a lot of restocking as a result of that. And I think lastly but not least is certainly the growth in the overall economy has been very strong.

So while it's still early, we do believe that those low single digit volume numbers are very achievable.

Operator

Our next question comes from Matt Brooklier from Buckingham Research.

Matt Brooklier -- Buckingham Research -- Analyst

I know there's been a lot of focus on intermodal in the call for good reason, but I was curious to hear your thoughts on the truckload market and truckload market pricing for this year, what's kind of anticipated and baked into your guidance in terms of the pricing that you could potentially garner in your -- with respect to contract rates within your truck brokerage and also on the dedicated side of your businesses?

Dave Yeager -- Chief Executive Officer

There's no question that right now the spot market is certainly very, very soft. Now, a portion of that is probably because a lot of the spot business from 2018 was converted to contract as a result of customers not being able to garner capacity except at premium costs. But it is softer. There does appear to be some breaking within the truckload market from a pricing perspective.

So certainly this is a time when a good truck broker can take advantage of that arbitrage between supply and demand and garner some superior overall margins.

Phil Yeager -- Chief Commercial Officer -- Analyst

Yes. And I think with the change in our pricing philosophy and the focus on building out a more dense network, we have some great ability to grow and to continue to drive down purchase transportation costs, and therefore bring our customers some value on cost as well. So we're really focused on that pricing philosophy, making sure that takes hold and building out that density.

Matt Brooklier -- Buckingham Research -- Analyst

OK. But if I'm thinking about price, price to the customer on the contract side, is there a general way to think about contract pricing? I know some of the truckload carriers have talked about low single digits, one talked about mid single-digit contract rate increases. But I'm just trying to get a sense for what, how Hub is thinking about contract rate increases this year on the truckload side?

Phil Yeager -- Chief Commercial Officer -- Analyst

We think flat on contract pricing. Spot pricing is under significant pressure. So that would be our best read at this point.

Don Maltby -- President and Chief Operating Officer

Right. I agree with that, yes. And as we're aggressive with our accounts to try to get in there to sell them a multimodal solution, the ability to grow that will be fine.

Matt Brooklier -- Buckingham Research -- Analyst

Right. OK. Understood. And then Terri, you offered some puts and takes in terms of your operating expenses, the bottom end of that range came down $2 million.

What's that delta, what's driving your costs to potentially be $2 million lower than you'd previously anticipated?

Terri Pizzuto -- Chief Financial Officer

Lower head count.

Operator

We did have one more question. Bascome Majors with Susquehanna.

Bascome Majors -- Susquehanna International Group -- Analyst

Thanks for the follow-up guys, here. I just wanted -- I saw your comments on the building investment and I was just curious, what's driving the need for more space at the headquarters? Is this a consolidation of a couple of places or a net head count growth move? And do you have any estimates, Terri, on what the net impact to overhead is going to be once that's up and running? Thanks.

Dave Yeager -- Chief Executive Officer

It's not consolidation. It actually is head count growth in certain areas. We currently have about 100 people off-site of the building that we began construction in 2012. So it's -- it is for head count increase.

Obviously that's dependent upon the business growing, but with everything that we're seeing right now we believe that there is an ongoing need for it. And in all honesty, I don't know that you've ever been here, but it's helped us attract a lot of young people. And I know you have been here before, I take that back. But it's helped us with our personnel.

I think that they're enthused to come to work. It's structured in a manner that I think all people nowadays like to work collaboratively. So we believe that it's a good investment so that we can continue to attract the right people.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you for that. Any sense on the overhead costs once things are up and running? Just trying to think about what that means for cost and expenses in 2021 or beyond.

Terri Pizzuto -- Chief Financial Officer

Yes, not much. I mean, no more than what we'd normally have for renting the space that we've got. We've got overhead costs associated with that, so it shouldn't be much more.

Operator

And that concludes the question-and-answer session. I'll now turn the call back over to Dave Yeager for closing remarks.

Dave Yeager -- Chief Executive Officer

Great. Well, again, thank you for joining us this afternoon. As always, if there is additional questions you may have, Terri, Don, Phil and I will all be available. So thank you again for joining us.

Have a good evening.

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

Dave Yeager -- Chief Executive Officer

Don Maltby -- President and Chief Operating Officer

Terri Pizzuto -- Chief Financial Officer

Scott Group -- Wolfe Research -- Analyst

Benjamin Hartford -- Baird -- Analyst

Phil Yeager -- Chief Commercial Officer -- Analyst

Justin Long -- Stephens Inc. -- Analyst

David Ross -- Stifel Financial Corp. -- Analyst

Todd Fowler -- KeyBank Capital Markets -- Analyst

Bascome Majors -- Susquehanna International Group -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Mike Triano -- UBS -- Analyst

Matt Brooklier -- Buckingham Research -- Analyst

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