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Quality Distribution, Inc. (NASDAQ:QLTY)

Q2 2014 Earnings Conference Call

August 6, 2014 10:00 AM ET

Executives

Robin J. Cohan – Vice President, Controller and Treasurer,

Joseph J. Troy – Chief Financial Officer, Executive Vice President and Head-Investor Relations

Gary R. Enzor – Chairman and Chief Executive Officer.

Analysts

Jack Atkins – Stephens, Inc.

Kevin W. Sterling – BB&T Capital Markets

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Allison M. Landry – Credit Suisse Securities LLC

Operator

Good day and welcome to the Quality Distribution Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Robin Cohan, VP, Controller. Please go ahead.

Robin J. Cohan

Thank you, operator, and good morning, everyone. We’re delighted to have you join us today for our second quarter 2014 earnings call. Our speakers today are Gary Enzor, our CEO; and Joe Troy, our CFO.

Before I turn the call over to Joe, I’d like to caution all participants that comments made by Quality’s employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected or expected in these forward-looking statements.

Listeners are urged to carefully review and consider the various disclosures made by the Company in this conference call and the risk factors disclosed in the company’s Annual Report on Form 10-K for the year-ended December 31, 2013, as well as other reports filed with the Securities and Exchange Commission.

Copies of the company’s Annual Report on Form 10-K and other SEC reports are available on our website at www.qualitydistribution.com, and on the SEC’s website. The company disclaims any obligation to update any forward-looking statements after this conference call. At this time, all participants have been placed in a listen-only mode. The forum will be opened for questions following the presentation.

With that, I’d like to turn the call over to our CFO, Joe Troy.

Joseph J. Troy

Thank you, Robin, and good morning, everyone. Yesterday we reported record levels of revenue during the second quarter of $255.6 million, which was up 6.8% versus last year; and we earned $0.22 of adjusted EPS, which was up 10% versus last year, and at the high end of our earnings expectation range.

We have also been actively improving our capital structure by redeeming $41.7 million of high cost senior and subordinated notes since last quarter. These redemptions will reduce the interest costs going forward, and enhance our position as we evaluate refinancing opportunities later this year.

Excluding the non-operating items mentioned in our release, consolidated operating income for the quarter was $16.7 million or 6.2% above last year. Adjusted EBITDA for the second quarter of 2014 was $23.2 million, which was essentially flat with the second quarter of 2013, and consistent with our expectations.

A large portion of our overall growth this quarter was generated by chemicals, where revenues excluding fuel surcharges rose 8.9% in Q2 versus last year. Our strong driver count increases as well as additional trailer purchases earlier this year provided enhanced capacity to meet continued strong demand from our customers.

We also benefited from new terminal openings and expanded revenues from a business acquired by one of our independent affiliates at the end of March. Chemicals operating income in Q2 was up $1.3 million versus last year after adjusting for items mentioned in our release.

Positive contributions from higher revenues in the quarter were partially offset by incentives provided to affiliates on new business opportunities. While these incentives were a moderate drag on year-over-year margins, we expect them to subside over the next 12 months to 18 months.

And our insurance expense in Q2 improved from the unusually high level in Q1, and on company-wide basis, we’re slightly better than our stated target of 2% to 3% of revenue. At energy, revenues in the second quarter were down 2.5% from the prior-year period as declines in the Bakken and Marcellus pit shale regions were partially offset by increased oil hauling activity in the Eagle Ford shale and Permian Basin as well as revenues from emerging markets, such as Wyoming and Colorado. We generated solid improvement in sequential results; however, we continue to see volatility in the business as volumes dropped off a bit late in Q2, and into early Q3.

Unlike our Chemical and Intermodal businesses, customers tend to shift drilling and production schedules, as well as transportation modes very rapidly. This in turn causes disruptions in driver retention and reductions in asset utility.

However, we’ve been able to offset some of these adverse impacts through our diversified multi-shale footprint, and our shift towards steadier oil hauling activity, which is progressing well. As of the end of the quarter, our oil hauling business represented approximately 55% of our revenues versus 45% at the beginning of the year.

After adjusting for cash and non-cash reorganization costs described in the release, second quarter adjusted operating income at energy was $2.4 million, up $0.3 million over the prior year period, reflecting a lower operating cost and better asset efficiency.

Adjusted operating income was up $1.1 million sequentially from Q1. And adjusted EBITDA at energy for Q2 was $4.4 million compared to $4.9 million in the prior year, and was up $1.0 million sequentially over Q1. Adjusted EBITDA margins neared our stated goal of 10% in Q2; however, we will likely see some margin pressure in Q3 due to the softer revenues experienced in July.

At Intermodal, Q2 revenue excluding fuel surcharges were up 6.3%, primarily due to increases in transportation revenues. Revenues from depot services increased 3.9% over the prior-year period, resulting from modest increases in repair and storage business.

Operating income at intermodal in Q2 was $5.8 million in both the second quarter of 2014 and 2013, and up $0.1 million after excluding non-operating items. Margins declined to 100 basis points in the quarter as positive contribution from higher revenues was partially offset by increased maintenance costs.

Additionally, during the second quarter of last quarter intermodal benefited from a strong surge in their higher margin depot service business that was not replicated this year. As mentioned in our release, we took several steps towards reducing our total debt and overall cost of capital thus far this year.

As expected, we exercised our call option on $22.5 million of our senior bonds, and we also opportunistically purchased the entire amount of our sub notes at a 22% discount. The sub note redemption generated nice profit and resulted in overall debt reduction. We were able to fund both redemptions from availability under our ABL facility, and maintain a strong level of liquidity heading into the second half of the year, where we tend to generate most of our free cash flow.

Operating cash flow in the second quarter of this year was $1.1 million, which was down from last year, mostly due to an increase in accounts receivable resulting from growth in our chemical segment.

Our net CapEx spending in Q2 was down significantly versus Q1 due to higher levels of asset sales and due to a heavier than normal delivery of chemical equipment earlier this year to meet our organic growth needs. Our forecasted net CapEx for the full year remains at our previously announced estimate of $10 million to $15 million.

Turning to our expectations for Q3, we expect adjusted EPS to be in the range of $0.19 to $0.23 per diluted share, assuming an effective tax rate of 39% and excluding any impacts from reorganization expenses at energy and other non-operating items.

Taking into account our results, for the first two quarters, performance thus far this quarter and our refined views of the trends for the remainder of the year including headwinds and energy in the back half, we have tightened our full year 2014 adjusted EPS expectation range to $0.72 to $0.78; and we continue to maintain our free cash flow target for the year of $46 million to $50 million.

I will finish up by saying that our focus has not changed. We are allocating capital and free cash to growth opportunities, primarily at chemical and intermodal as well as debt reduction. We are also working closely with our leadership team to not only achieve top line growth, but also improve operating performance, and asset utilization across the company.

That concludes my prepared remarks, and at this point I’ll turn it over to Gary.

Gary R. Enzor

Thanks, Joe. Q2 shaped up well with 9% top line growth excluding fuel surcharge in our chemical segment leading the way among our three businesses to 5% growth overall excluding fuel surcharge.

EPS came in at the top end of our range, and we continue to work diligently to attract and retain drivers with our entire fleet now over 3600 drivers. We are about five weeks into Q2 right now and chemical revenues are running high single digits above last year, Boasso is up mid-to-high single digits and energy is running about flat with last year and a few million below last quarter.

Basically we expect the top line in Q3 to look a lot like quarter, so our guidance is very close to Q2's range. We are currently focused on managing our cash flow and leverage to position us for the potential refinancing of our expensive bonds later this year.

We continue to manage our business to retain an asset light model while taking advantage of our substantial growth opportunities and believe we are well positioned to enhance earnings moving forward and to deliver increased value for our shareholders.

At this time, operator we’re ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Jack Atkins from Stephens.

Jack Atkins – Stephens, Inc.

Good morning, guys. And thanks for taking my question.

Joseph J. Troy

Good morning, Jack.

Jack Atkins – Stephens, Inc.

I guess just to start off, going to the guidance range for a moment, and I guess the incremental data here versus the first quarter call, it sounds like the energy has gotten a little bit tougher in terms of the fundamental there.

Could you maybe walk us through exactly what’s happening, maybe in a little bit more detail, and you talk about a headwind, do you mean a headwind in the terms of year-over-year profitability or are you just talk about a margin headwind, just sort of – how should we think about that language as we think about your guidance?

Joseph J. Troy

Yeah, so late in the quarter in Q2, as I said in my prepared remarks, we did see some shifts in our customer demand up in the Bakken, as well as some areas in Texas. So we did see a little bit of softening of our revenue opportunities in Q2, and that continued into Q3.

So we’re being a little bit cautious, we have started to see a rebound in both areas, but again it’s just a little bit of our cautiousness about the business, it is – it continues to be a volatile business.

It will have a little bit of pressure on margins, specifically in the Bakken where that’s a company operation, so Jack, our flow through margins in that area of energy have a bigger impact when revenues swing on profitability. So that’s probably the preponderance of us pulling down the top and it’s really sort of due to the energy.

Jack Atkins – Stephens, Inc.

Sure, that makes sense. And I guess, Joe, could you – could you maybe comment just for a moment on where you’re thinking in terms of the remaining energy assets that you have, you need to be affiliated out. If you still expect to have all that completed by the end of this year or do you think maybe that’s going to take a little bit longer than you originally thought?

Joseph J. Troy

Yeah. So, our original expectations was to have, we have really two company stores left, so our original expectations with it was to have our Texas company operation affiliated by this quarter, we pushed that out into Q3, and that could even potentially slip into Q4. The Bakken is really more a 2015 affiliation target at this juncture.

Jack Atkins – Stephens, Inc.

Okay. Okay, that makes sense. And I guess last question from me, I’ll turn it over. You referenced the opportunity to refinance your high yield senior notes. I guess now that we’re getting ever closer to that, Joe, could you may be comment on how you expect that to sort of – to take place – I mean would you expect to be able to have some announcement on that in the next couple of months, and how do you think that will be structured in terms of, would you do a fixed rate debt, would you do it with expanded revolver, just kind of help us think through your different options at this point?

Joseph J. Troy

Yeah, so and I’ll keep it fairly high level, we’re still analyzing the markets, and where we are in the process, but actively engaged with our banks as you would suspect, as we close in on the first call date in November.

Really, the couple of main options that we have is to really refinance the bonds with another bonds or refinance the bonds with a – more like a term loan B type of bank facility. Those markets don’t always move in tandem, they sometimes move against one another. A few months ago, the B loan market was looking better than the bonds, and lately the bonds look better than the B market.

So we’re staying very closely in tune with those through our bankers, but if were to go today, then we probably head towards the bond market, very flexible in accommodating; and the BLO market head backed up a little bit.

So, there’s advantages and disadvantages to each, we’ll just be weighing those over the course of the next couple of months or so, and see where we are, and at the juncture that we were to launch a transaction, then that would give the time when everybody would know.

Jack Atkins – Stephens, Inc.

Okay, Joe. Thanks so much for your time, guys, and once again congratulations on a good quarter.

Joseph J. Troy

All right. Thank you.

Gary R. Enzor

Thanks Jack.

Operator

We’ll take our next question from Kevin Sterling of BB&T Capital Markets.

Kevin W. Sterling – BB&T Capital Markets

Thank you. Good morning, Gary and Joe.

Gary R. Enzor

Good morning.

Joseph J. Troy

Hi, Kevin.

Kevin W. Sterling – BB&T Capital Markets

Congratulations on a really nice quarter.

Joseph J. Troy

Thanks.

Kevin W. Sterling – BB&T Capital Markets

Let me start with your driver count, that was up 6% I think since the end of the year, which is quite impressive, I could think of many a trucking company that would love to have that type of growth. Can you kind of walk us through, maybe a little bit your secret sauce, kind of what’s driving that growth? How you are able to achieve that, and I know you’ve got Randy working really hard, but may be share some insight into your driver growth, and how should we think about that going forward too?

Joseph J. Troy

Yeah, I think Kevin, when you look at our driver program, we did say, we got some benefit from an affiliate acquisition. They packed on and added a decent chunk of drivers in the mid-Atlantic region. But it’s just a lot of hard work, we got a lot of great people in our driver services organization, and they have many programs, but I also think the fact that our length of haul is fairly short. So our market pays better than a lot of the other truckload markets.

So I think between better home time, better pay and they’ve done a lot of creative work, they got a retention program where they’ve had between 5,000 to 10,000 outbound touches to drivers this year. So it’s a lot of hard blocking and tackling across the board.

Our turnover in our space in particular, our company is in the low to mid-40s, so it’s a little easier than if you’re dealing with a 100% type turnover like the general truckload space. So it’s a ton of factors and a lot of blocking and tackling. There’s really no one silver bullet or secret sauce.

Kevin W. Sterling – BB&T Capital Markets

Gotcha. I know Randy is working very hard. And Gary, let me touch on, you talked about driver turnover; you’re in the 40s plus, which is more than half of, less than half of the general trucking space and your driver retention. And I know that’s been a focus you guys, are you doing anything special there to really maybe continue to drive that down and really focus on driver retention in addition to driver growth?

Gary R. Enzor

Yeah, I talked about our touchpoint program, which is something that we’ve really reemphasized this year, and again we reached out to particularly the newer drivers, but all of them, and we’ve had between 5,000 and 10,000 touch points this year. So I think there’s a lot of programs in the retention space, I don’t want to give them all away, but we worked real hard on the retention as well as on the recruiting side.

Kevin W. Sterling – BB&T Capital Markets

Yeah, great. And then, you guys touched a little bit on the incentive program with your affiliates, that appears to be working, you expect to get your margins backup as we work through that in the next 18 to 24 months. Can you maybe give us a little bit more of an update on that program.

And in particular, kind of the reaction by affiliates, it seem like affiliates have bought into that, am I reading that right, just kind of the reaction from your affiliates, it’s related to those incentive program to grow the business?

Joseph J. Troy

Yeah. Again on that incentive program which is running three or four points lower than our typical margin that we would take for our affiliate fee, basically, the majority of them really like that and embrace it, and view it as a good reason to grow, because they add $10 million of revenue, they make another $300,000 or $400,000 of margin. And I would say, the majority of our affiliates are getting that now, and are doing a good job, and find that incentive helpful.

Gary R. Enzor

I would also tag on to that, Kevin. The affiliate acquisition that was done by one of our affiliates, we did do a nice incentive for them as well. We assisted them as they were working through the acquisition and gave them a nice incentive.

So that lasts for roughly 18 months or so, and we’ll be working through that overtime, but it was the right incentive to provide to get them, because in the early stages of any acquisition, there is integration issues, and we wanted to make sure that they had a footprint to grow.

Kevin W. Sterling – BB&T Capital Markets

Got you. It makes sense, thank you guys. And Joe, the subordinated promissory notes that you guys paid off this quarter, are there anymore debt instruments out there like that or do you kind of wipe out all those type of notes?

Joseph J. Troy

No, they’re pretty much all done. The one-off facilities, we do have one facility, but it’s tied to ABL, it’s a little bit higher priced than the ABL, where we took some other assets and plunged into the banks, but it’s relatively small, and might get redone in a potential refinancing, we’ll just have to see.

Kevin W. Sterling – BB&T Capital Markets

Got you, okay. Thank you. And my last question here, Joe, I think you said, oil is about 55% of your energy revenue mix, if you had your crystal ball or maybe what you would consider and optimal percentage mix between oil and water, what would that be?

Joseph J. Troy

We had talked about that in the Investor Day in the 70:30 type mix. You probably would broaden that out if you were to include production model, which is also pretty steady, but we tried to keep it simple and straight oil versus water, and so I’d say 70:30.

Kevin W. Sterling – BB&T Capital Markets

Okay, great. Gentlemen, thanks so much for your time, and once again congratulations on a nice quarter.

Joseph J. Troy

Thanks.

Gary R. Enzor

Thanks, Kevin.

Operator

And we’ll take our next question from Ryan Cieslak from KeyBanc Capital Markets.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

The first question that I had is on the chemical business, and really nice growth there. And I know you said it’s looking up high single-digits again here in the third quarter. Gary, I just was curious to know, maybe just some color around the underlying chemical demand that you are seeing in this space, and how bad that actually is trending, maybe relative to where we were at the beginning of the year, and just maybe sort of your outlook as we get into 2015?

Gary R. Enzor

Yeah, Ryan, I think probably like a lot of parts of trucking, every driver we can add, we can give freight to, so the demand particularly for us as a market leader given that we tend to see every opportunity is really driver dependent. As we can add more drivers, we can give them freight.

So, it’s hard for me to say, I don’t think it’s changed throughout the year for us, it’s just as many drivers as we can get, we can add freight to, and less accounting changes in the overall economy with the continued driver tightness, and the supply/demand trends and particularly as some of the low cost natural gas begins to come online, maybe more in 2016 than 2015, I don’t see any trends shifting other than something happening with the economy, which I can’t call.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay, fair enough. And then, I’m also trying to get a sense of, when you look at your revenue within chemical here in the quarter, you know how much, maybe just directionally was actually tied to the incentive that you guys put in place earlier this year, and then based off of that, I guess what I’m trying to get to is, Joe, when you look at margins, here in chemical at the low 11% range, does that continue to trend down into back half? I know you said it will gradually recover over the next 18 months or so, but I’m just trying to get directionally, is that the right level, what will you be thinking about at this point going forward?

Gary R. Enzor

So, Ryan, I would say as we talked about, one of our affiliates did a small tuck-in acquisition. I don’t have the exact split off the top, but if you take nine points, I would say you probably got a couple of points of rate, and a couple from the tuck-in, and then the other half is primarily volume with our existing affiliate.

So I would attribute substantial portion of that to the growth incentives and the program. They are growing, and I think the incentive helps. And what was the second question? I apologize, maybe Joe, got it.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Yeah, a bit more on just the margin level in chemical going forward. I know you guys said, that should gradually recover over the next 18 months, but I’m assuming depending on the mix of that incentive going forward, that could still have an impact in the next couple of quarters. Just trying to get a sense of 11.3% in EBIT margin and the right level to think about it going forward?

Gary R. Enzor

Yeah, what I would say is, we’re starting to see the signs of the margins stabilizing a bit. So I’m not going to say that, there couldn’t be another 20 basis points type of degrade like we had this quarter on a year-over-year type basis.

But we are seeing some stabilization, but I would also say we’re going to continue to provide incentives for new terminal openings, and if our affiliates have other acquisition opportunities, we just want to make sure that we are properly positioned as these new plants get built and having additional capacity available for the uptick in demand that really we foresee couple of years down the road or so. So I do want to put a little bit of caution around that commentary.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Fair enough. Okay. And then on energy, I’m just curious, obviously still some volatility there, on the top line, obviously though, I just wanted to get a sense of your expectation in a normalized environment of when you sort of get through some of the things you’re doing internally.

What the top line should be growing at, and then obviously you guys announced a leadership appointment with Chris Broussard a month ago or so. And I just was curious to know, what you’re expecting, I guess over the intermediate term in terms of top line growth there organically?

Gary R. Enzor

Yeah. I think Ryan, we said it's a fairly small business, so it doesn’t take a whole lot to move the needle, but I would call it over the medium term we would expect high single digits. We would probably be more conservative, and say while there are still moving pieces around and get everything fixed, we may want to say mid single in the 2015 timeframe, but it should have high single digit potential over the medium term.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay. And then the last question I had, Joe, on the free cash profile, certainly looking like it’s going to accelerate in the back half. And then as you get into next year, it seems like you should still be pushing off some decent free cash, particularly as you get the interest savings from the refi?

Just wanted to get sort of the priority of the use of free cash, I’m assuming it’s still debt reduction, and how do we think about the balance sheet as you get through the refi, does it give the opportunity maybe to take a bigger slug out of the debt going forward, or just trying to get the sense of – again the use of cash, and how the balance sheet might shape up into next year?

Joseph J. Troy

Yeah, and again I would take it very high level. We are right now very focused on debt reduction. But we’re also looking at opportunities for growth specifically in chemical and intermodal. So as we see those opportunities like the independent affiliate acquisition, we did assist them in that financing arrangement, so we did deploy some capital to that transaction and we will continue to do that.

But I’d say right now the priority continues to be debt reduction, we do have the leverage in mind that is below where we are today. So, we do want to continue to knock down leverage in the next couple of years or so.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay. And then, Joe, I know the refi obviously potentially is going to be later this year, but is any savings baked into the current guidance for the full year?

Joseph J. Troy

We did have some savings built in mostly from the bond redemption that we did in July.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

But no savings from the potential refi later this year?

Joseph J. Troy

No.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay. Thanks guys.

Joseph J. Troy

Thank you.

Gary R. Enzor

Thanks, Ryan.

Operator

(Operator Instructions) We’ll take our next question from Allison Landry from Credit Suisse.

Allison M. Landry – Credit Suisse Securities LLC

Good morning. Thank you. I was wondering if you could elaborate on your remarks in the press release that rapidly changing customer requirements are impacting demand in the energy segment. And in particular, if you could comment on, may be the nature of the shifting requirements, whether it’s broad-based or occurring in certain shales? And then lastly, how do you plan to stay in front of these changes?

Joseph J. Troy

Yeah, so that’s a lot of questions, but I’ll try to remember them all. But I think we’re focused around essential theme, which is our customers do tend to change their plans rather rapidly, and I’d say, specifically and I’ll just use the example in the Bakken shale, where we have a couple of primary customers in the fresh water side of our business that we’re highly dependent on their fracing schedules.

And for potentially the reasons unbeknownst to us, they will shift those fracing schedules, and they may be planning on doing a multi-pad development in one particular month and then shifted out for two months, and we will have no place necessarily for our drivers to go immediately our equipment to be deployed immediately. And so we start to scramble and try to figure that out.

We do our best and I think our guys do a pretty good job trying to stay ahead of that. But the customers don’t always share exactly what their plans are and maybe even the local folks that we deal with don’t know exactly what maybe the corporate guys are deciding with respective to their own capital deployment.

So it's a bit of a challenge. I can tell you this that just spending a little bit of time with Chris Broussard, he is more knowledgeable than I certainly about managing through these types of ups and downs and we will be looking forward to him to help us figure out how do even more stabilization in that business from that perspective.

Allison M. Landry – Credit Suisse Securities LLC

Okay. And maybe just a follow-up to the fracing schedule comments. We’ve been hearing and I think there has been some talk about that demand for frac is outpacing supply, do you think that’s potentially one of the drivers?

Joseph J. Troy

It could be. I would say, it could be maybe in the Bakken but I don’t think that has particularly impacted the other shales where we operate.

Allison M. Landry – Credit Suisse Securities LLC

Okay.

Joseph J. Troy

So, but I couldn’t respond with a high degree of accuracy.

Allison M. Landry – Credit Suisse Securities LLC

Okay.

Gary R. Enzor

Allison, it’s Gary, I mean, one of your question was kind of how do you mediate some of the shifting and as the mix is now 55% oil plus there’s produced water which is very stable revenue. So it’s at least two thirds more stable revenue, but there are things you can do contracting as well.

As you look at a new business opportunity, we’ve pursued a lot of opportunities to build out our business. But going forward, we may not deploy assets unless we have significant enough contractual commitment to make sure those assets are utilized. So even if something shifts to pipe from truck, they are obligated to take or pay. So there are a lot of things and a lot of ideas Chris Broussard has on how to improve and mediate and stabilize the business model.

Allison M. Landry – Credit Suisse Securities LLC

Okay. That’s great. Thank you for that. And my second question in terms of purchase transportation, it looks like the inflation year-over-year was unusually high during the second quarter. Was there any particular reason behind this? And how should we think about modeling this going forward?

Gary R. Enzor

Yeah, there is certainly inflation on the purchase transportation line because it’s primarily in the chemical space, 85% of revenue that is paid-out to the affiliate. So when that line moves around, it’s usually because we’ve either done a conversion that a terminal year ago was a company store and now it’s an affiliate model.

So usually you would see an offset in compensation and fuel supplies and maintenance when that line moves. Or as Joe mentioned, if we’re helping them with a start up, it may get popped temporarily as we grant some concessions or start ups to help them improve, but that line generally does not have inflation.

Allison M. Landry – Credit Suisse Securities LLC

Okay, thank you for the time.

Gary R. Enzor

You’re welcome.

Joseph J. Troy

Thanks.

Operator

We’ll take our next question from Jack Atkins from Stephens.

Jack Atkins – Stephens, Inc.

Yeah, guys, thanks for taking my follow-up. I’m just curious as it relates to – I know the plan that you talked about the Analyst Day around using intermodal for your long haul capacity. Could you maybe give us an update on how that’s progressing in an effort to add some additional capacity to your network?

Gary R. Enzor

Jack, I’m sorry. Just a bit more clarity on long haul capacity additions to the network primarily in a chemical space, is that what you’re saying?

Jack Atkins – Stephens, Inc.

I’m just curious on the use of intermodal capacity for your line haul – in the long haul portfolio?

Gary R. Enzor

Okay. Okay, and that’s something the chemical segments working diligently on, and they’ve got their intermodal offering ready to go just finalizing with one remaining rail operator. But what I think will happen is, we have plenty of opportunities for our drivers, so let’s say that we’re able to move 5% of the volume in the chemical business, call it $30 million, $35 million, $40 million.

We would view that as helping us add revenue, because the intermodal offering will provide a good value proposition and savings to our customer and at the same time we would expect to have other freight to be able to redeploy the drivers on. So we view it as net incremental revenue to us, I don’t know if that answers it, but...

Jack Atkins – Stephens, Inc.

No, it does. It does. I think that would be an interesting way for you guys to sort of add some capacity to your network, and let your drivers become more active in I guess more of the local, regional markets. So I think I guess I’m pretty curious about when you guys can sort of get that offering ramped up, it sounds like it’s fairly close to happening.

Joseph J. Troy

It’s getting pretty close to getting off the ground. Randy and his team has done a really good job for rallying all the resources. So I wouldn’t be baking it into the model right now but we would have an expectation that in the latter half, the second half of the year that we’d start to see some business flowing.

Jack Atkins – Stephens, Inc.

Okay, okay. And then just a clarification on the driver count growth, could you may be break down that 6% growth between organic driver count expansion and what you were able to add through the acquisition with the affiliate?

Gary R. Enzor

Yeah, I’m looking to see if I have that in front of me.

Jack Atkins – Stephens, Inc.

And maybe Gary, while you’re looking for that, Joe, I guess my last follow-up would be, what’s the correct sort of run rate, interest expense in the third quarter given the redemptions and refis that you’ve executed in June and July?

Joseph J. Troy

Yeah. Let me let Gary answer this question, and I’ll give you a general answer.

Gary R. Enzor

Yeah, Jack, I’d say the affiliate to added, it’s probably about half and half, they added roughly 100 drivers on that deal. So…

Jack Atkins – Stephens, Inc.

Okay. That’s great. Thanks, Gary.

Gary R. Enzor

Okay.

Operator

And we’ll take our next question from Ryan Cieslak from KeyBanc Capital Markets.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Hey guys, thanks for taking my follow-up. I guess really two quick questions. One on the terminal expansion that you’ve had here in the first half of the year within chemical, some nice traction there, are you expecting, are there additional opportunity for additional terminal expansion in certain metro areas into the back half of the year? Or how should we be thinking about that going forward?

Gary R. Enzor

Yeah, I mean like I said, we sort of forecast this business as a mid single-digit grower and said it’s been growing at high single digits right now. So I don’t want to jack up that any further, but I would say they do have a few more markets they’re pursuing right now and they’re working on three or four more. They’re going to keep pushing the envelope to get us position.

So as more and more these chemical plans either get expanded or added, we want to – we’re already the market leader, but we want to make sure we capture more than our current market share when those new opportunities come online.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay, fair enough and then Joe just two housekeeping questions. One, I think in the press release you called out some maintenance costs within the Intermodal in the quarter. I guess it would be curious to know – I guess how impactful that was? How much roughly that was in the quarter, if it was meaningful at all, and then is that something that’s ongoing, or is that actually just more of a one-time settle down?

Joseph J. Troy

Yeah, I can’t give you an exact number on it, but we are looking – it was mostly revolved around our loaded list where we lift the ISO containers onsite, I mean we’re going to be looking to upgrade part of that fleet, so we would expect that to – to start to decline over the next couple of quarters or so.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Okay. Okay. Fair enough. And then, just to go back to Jack’s, I guess, other question on the interest expense, just to what – how should we be thinking about that from a run rate going forward with the redemptions that you guys had in July? Thanks.

Joseph J. Troy

I don’t know if Jack is still listening, so some time we got put-off before I get answer, but it’s going to be somewhere in that very high $6 million, low $7 million range, so I’d say $6.8 million, $7 million range for the quarter.

Gary R. Enzor

It sounds like Ryan.

Ryan Cieslak – KeyBanc Capital Markets, Inc.

Yeah. Good guys. Thank you.

Gary R. Enzor

Okay. Thanks, Ryan.

Operator

That concludes today’s question-and-answer session. I would like to turn it back over to Gary Enzor, CEO and Chairman for closing remarks.

Gary R. Enzor

We would like to thank everybody for participating in our Q2 call and we’ll talk to you next quarter. Thank you.

Operator

This concludes today’s conference. Thank you for your participation.

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