Hub Group Inc (HUBG) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to the Hub Group first quarter conference call. We will begin with a discussion of the financial results led by Terri Pizzuto, Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The Company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, Vice Chairman, President, and Chief Operating Officer, will join us for the question-and-answer session.

At this time, all participants are in listen-only mode. Comments made by Dave, Mark or Terri during this conference may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements.

Copies of these SEC filings may be obtained by contacting the Company or the SEC. Now, I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

Thanks, Crystalline. And thank you all for joining us this afternoon. I want to begin by covering three main themes. First, we had strong growth in both intermodal and logistics. Second, gross margin was 11.8% with trends improving as the quarter progressed. And third, we had one-time expenses of $1.7 million, or $0.03 a share, related to the Mode Transportation acquisition.

Here are the key numbers, excluding the one-time expenses. For the first quarter, Hub's diluted earnings per share increased 35% to $0.31. Hub's first quarter operating margin was 3.8%. That is compared to 3.4% in 2010. On April 4, after we paid for Mode Transportation, we had about $30 million in cash and no debt.

Now, I will discuss details for the quarter starting with revenue. Our business generated revenue of $485 million, which is a 16% increase over last year.

Taking a closer look at our business lines, Intermodal revenue increased 17%. This change includes a 13% volume increase, a 7% increase for fuel, and a 3% price increase partially offset by a 6% decrease for mix.

We're excited that this was the fifth straight quarter of double-digit intermodal volume growth where we increased market share. Driving that growth was a 27% increase in loads with retail customers, and a 16% increase in loads with durable goods customers.

Intermodal prices were up 3% this quarter. That is because of the work we started last year in passing along price increases. We're continuing to increase prices. In fact, we're shooting for price increases of between of 3% and 5% in connection with this year's bids. We successfully increased prices last year and we think we can do it again. We've always measured the price increase using business in a shipping lane that matches up in both periods for a specific customer. If we more broadly define our measure of price to look only at shipping lanes, without being customer specific, prices were up 4%.

Mix was down 6% because our average length of haul was down by 70 miles, or 4%. That is due to local lease business being up 26%. Over 60% of our growth in the quarter came from the local leased market. Some of our fastest-growing customers in this market converted freight from truck to intermodal.

Truck brokerage revenue was up slightly. Again, we focused on yield. Given the tightness in the truck brokerage market and increasing costs, we're happy that truck brokerage gross profit as a percentage of sales is up 31 basis points from last year. We were awarded business from some new customers that will start in the second quarter. We're confident that the organizational changes that were recently made will position us for growth.

Logistics revenue was 36% higher than last year. We will be onboarding several new customers in the second quarter with more to come, considering the strong pipeline.

Total gross margin increased by $8.5 million, or 17%, due mostly to intermodal. Intermodal margin growth blazed the trail since we did more of our own drayage, turned boxes quickly, grew loads by 13%, and increased prices. We're bringing on new business at a higher margin than existing business. We think that the bad weather during the quarter hurt margin by about $600,000.

Gross margin as a percentage of sales was 11.8%. That is up 10 basis points compared to last year's 11.7% margin and it is the same as last quarter. The biggest increase compared to last year was from intermodal, due mostly to improved pricing. Just like the fourth quarter, logistics gross yields declined compared to last year. This time, logistics yields was down 241 basis points. That's because most of the growth in logistics came from customers for whom we record transportation, revenue and costs, as opposed to those customers from whom we collect a management fee.

Turning to head count, we had 1,111 employees excluding drivers at the end of March. That is a decrease of 12 people since the end of the year. We're handling more loads with fewer people.

Total costs and expenses were $40.5 million in the first quarter of 2011 compared to $34.6 million in the first quarter of 2010. There are a couple of reasons for the increase in costs and expenses. First, we had higher salaries, commissions, restricted stock, and employee benefits totaling $2.8 million. Second, we spent approximately $1.7 million on one-time costs associated with our acquisition of Mode Transportation. To give you a few more specifics, we spent $1.4 million on legal, financial, and operational due diligence and $300,000 on branding, travel, and miscellaneous items. We think this was money well spent.

Now I will discuss 2011 full-year earnings guidance. For 2011, we're comfortable that our diluted earnings per share will be within the current analysts range of between $1.43 and $1.67. This range excludes one-time expenses. Our weighted average diluted shares for 2011 are estimated to be 37 million.

We think that our quarterly costs and expenses, including Mode Transportation, will range between $58 million and $62 million in 2011 excluding any one-time expenses.

Turning now to the balance sheet and how we used our cash. During the quarter, we spent $4.9 million on capital expenditures. We think that we will spend at least $48 million on capital expenditures during 2011. About $25 million is for containers and the rest is for technology investments. We've decided that financially it's best to buy the first 2,000 containers. At the end of the second quarter, we will decide whether to pay cash or lease the remaining 2,000 containers.

We didn't buy any stock this quarter, and our authorization expired. It is not very likely that we will buy stock for the rest of the year.

Of course, we will always continue to look for acquisition opportunities. To wrap it up for the financial section, the 29% increase in operating income excluding one-time expenses was solid. We're committed to excelling operationally and maximizing the benefits of our acquisition of Mode Transportation while increasing profitability. And now, you will hear from our CEO and Chairman, Dave Yeager.

Great, thank you, Terri. The first quarter of 2011 represented a great start to the year. The positive momentum we experienced in 2010 continues as intermodal volume grew 13% year-over-year. Much of this volume increase was truck conversion freight, as is evidenced from our 26% growth in the local lease market. We believe there continues to be significant upside conversion potential as the economics of intermodal are compelling and transit times are predictable and consistent.

It has been an active bid season for us. While there have been 17% fewer bids as compared to 2010, the bids did contain 10% more volume. During this bid season, we developed some significant new relationships as more customers are looking to diversify their spend. Although it is early, we're pleased with our success rate thus far. Additionally, it is important to note that we have numerous bids that are still in process.

As you know, we have just completed an $83 million acquisition of Exel Transportation Services, now operating as Mode Transportation. To date, it does appear that our due diligence effort coupled with extensive communications planning paid off and the transition is going very smoothly. Having personally met with many of the independent business operators of Mode, we're more excited than ever about this acquisition.

Capacity has been tighter than normal in both the intermodal as well as the over-the-road markets. To manage the growing intermodal demand, we will have 22,500 containers in our fleet by peak. This is an increase of 5,000 containers versus the 2010 peak. The containers will be delivered beginning now through October. We expect the demand for capacity will remain strong throughout the year.

Despite severe weather conditions causing mild rail service deterioration this quarter, we've hit an impressive fleet utilization of [13.5 days] (corrected by company after the call). As always, we keep a close eye on our network needs and work with our customers to keep our container fleet moving.

We continue to grow our Comtrak drayage division. Last quarter alone we added 125 new drivers to bring our driver base to 1,754. Comtrak is now handling 52% of all Hub dray, well on track to our target of 60% for the year.

Although highway brokerage volume was down, gross margin was up from the last year. We are currently implementing structural changes in our highway division in order to build efficiencies and position this operating unit within the newly created supply chain solutions group.

Our Unyson Logistics division had a strong first quarter delivering consistent growth. The new business we secured in 2010 has been fully implemented and is reflected in the financial results. We're optimistic about the pipeline and the future for Unyson growth.

While we're only a few weeks into the Mode acquisition, we are pleased to state that our agent retention efforts have been successful and we've not seen any attrition. During those first few week, the IBOs have shared their excitement about the opportunity to be working with Hub while utilizing our fleet and the street operations of Comtrak.

We're now focused on the integration process as well as supporting rebranding efforts for the Company. Overall, the first quarter results are a good start to 2011. We have great momentum with our volume growth and improving gross margins.

Today is a special day in our Company's history. Hub Group was founded exactly 40 years ago today, on April 19, 1971. As we celebrate and look back at the last 40 years, we're proud of our accomplishments, and are focused on continuing to grow the Company while looking forward to more success in the future. At this time, we will open the line up to any questions.

(Operator Instructions)

Today's first question comes from the line of Ed Wolfe with Wolfe Trahan. Please proceed.

Hey, good afternoon, guys.

Hi, Ed.

The intermodal pricing that you mentioned, Terri, of 3% to 5%, does that include peak surcharges and everything all-in?

It doesn't include peak season surcharges, no. That is just what we're shooting for in connection with this year's bids.

Okay. And that is just bids, it is not an average of your total rate by year-end? How do we think about that?

Right now, we're in bid season, as Dave mentioned in his prepared remarks. And so in connection with pricing for the bids, we're shooting for price increases of 3% to 5%.

Okay. And roughly, what percentage of your business came up for bid in first quarter and comes up each of the quarters going forward?

It is about 5% came up in the first quarter, and 60% comes up in the second quarter. And then about 25% comes up in the last half of the year.

And then there is 10% that is on some kind of a longer-term contract that doesn't come up?

There is only 5% that is left actually.

I got 5%, 60% and 25%. Am I missing -- did I get that right?

I'm sorry, 10% is in Q1.

Okay. And then 5%, is that spot or is that longer-term contracts that don't really come up?

It is a combination.

So if you are getting 3% to 5%, and we just kind of average it out through the way it comes in, that should give us something slightly below that, but on a run-rate of that by year-end, that's how we should think about it?

Right.

Okay. Just in terms of the impact of mix in the quarter, you mentioned the length of haul. Can you give just a couple more numbers? What was the transcontinental growth relative to the local east?

Transcontinental was up 2%.

That's volume?

Yes, and local east was up 26%.

Okay. And was there anything else in the mix besides just the length of haul, local east versus transcontinental, were there any other pieces to the mix?

I think one of the other factors is that this quarter over 60% of our growth was in the local east market, and that is the highest percentage that it has been in a long time.

What is the 60% relevant to the 26% you just gave me? I'm sorry. Dense.

If you said what was our total growth in the quarter, it would be X number of loads, and if you said how much of that growth was from the local east market it would be over 60% of it.

Okay. And then I just want to make sure I heard you right, Terri. When you talked about the truck brokerage, you were saying the net revenue for truck or the gross profit net revenue being the same terms, interchangeable, grew year-over-year, is that right?

Gross margin as a percent of sales was up 31 basis points, yes. And the dollars were up, too. Slightly.

Okay. And then last question, I will let someone have it, can you talk a little bit about the impact of fuel, because I'm guessing you're able to pass through the surcharge every week or two weeks to your customers, and how often do you -- what's the lag when you have to pay back your rail suppliers?

Well, intermodal revenue was 7% higher due to fuel. Truck brokerage revenue was 6% higher due to fuel. So as fuel price go up, so does our revenue. Fuel hurt margins slightly on a year-over-year basis. But you're right, for the majority of our business, we're on our customers' fuel surcharge schedule that generally adjusts weekly, and overall we don't lose money on fuel. When we evaluate the profitability of our freight, we consider all of the components, which would be fuel, accessorials and line haul. And we like higher fuel costs because it makes intermodal all that more attractive.

Okay. And so what is the -- if it is one week to your customers, what is it to your suppliers that you owe the fuel surcharges? Is it two months?

No, it is pretty much weekly that it adjusts to the vendors as well.

Okay. Thanks, all, for the time. Appreciate it.

Our next question comes from the line of Alex Brand with SunTrust Robinson Humphrey. Please proceed.

Hi, guys. Good evening. I guess I want to start with the 2% Transcon volume growth. Is that a difficult comp issue? Or what, the weather in the quarter? Are you guys a little disappointed with that?

Alex, this is Mark. It certainly trailed the other segments, local east and local west. Transcon became very price competitive during the first quarter. We saw a number of very aggressive moves, and in addition, the West Coast wasn't as robust as it can be. It is normal for it to be somewhat slow in the first quarter.

But we didn't see the kind of activity level out of some of the areas like electronics that we had seen previously. So we would, obviously, love to see all of our corridors growing quickly, but we're not especially disappointed in modest growth in that, given the competitive and economic conditions in those markets.

All right. So when we think about -- there is a lot of concern out there about how you guys manage price increases, and what the 3% to 5% might mean relative to what you have to pay through. Can you talk about whatever indications you might have right now, about which end of that range, which is relatively large, big difference between 3% and 5%, any indications there, and just talk about what the risk is to having to pay a rate through before you get it from your customer?

Well, obviously, as Terri mentioned, we have a lot of our business coming up for bid in this second quarter. So we don't feel that is a tremendously large range. 3% to 5%, we're confident we're going to be able to get there. We're also confident that that is going to enable us to offset any margin squeeze. We aren't anticipating seeing a timing issue where we would see increases in our costs ahead of increases in our ability to recover from a rate perspective. So at this point, we feel that we're going to be able to pass those increases on without seeing a margin squeeze or a timing issue.

Let me ask it a little bit different way then. Strategically, is there a focus on driving gross margin higher? Because I felt like last year, you guys talked a lot about that. It kind of didn't materialize, like we thought. Is there a focus on driving leverage with price? Or is the focus more on volume growth at this point?

Well, I think certainly, we are focused on growing our overall volumes, but no, we're very focused on the margins, and we continue to be very focused on an account by account basis. Again, if we look at back where we were in 2009, and I think as we had said, that as far as our operating income, that it was going to take some time to get the percentages back up to where they were pre-meltdown. And you can't just take the increases in one fell swoop. So, again, as these annual increases come up, we do think that we can, in fact, increase some pricing and get some marginal impact, positive impact on our gross margins.

Yes, and I think, we did get 3% last year. That was better than our publicly-traded competitors. And we felt like that was a good effort. But we're committed to continuing to push it forward to get back, to get back to where we were prior to the recession which is what we had articulated earlier. That it would take two pricing cycles and we think that is still correct.

Fair enough. I'm just -- there is a lot of noise in your gross margin. It is not a clean intermodal number. So I'm just trying to get to the bottom of the gross margin trends over two or three quarters here.

One more question. Terri, I thought last quarter you had talked about that you guys were kind of understaffed at this point with all of the volume growth and really were going to have to invest in adding people this year, yet you're shrinking. Can you just give some color on that? We shouldn't think about adding people anymore?

Oh, we will add some people because Dave has some approved head count adds out there. But we are very scalable in intermodal. And the reason that our head count is down 12 people is because of highway. We did some reorganization in highway, and so we will hire some of those people back, just in different locations.

And the other area that we were down a little bit, people-wise, was logistics. So as that business ebbs and flows, and it is a lot more people intensive, than intermodal or truck brokerage. So as we bring on these new engagements, we will probably add a few people in logistics as well. But it is not going to be any massive head count add.

I got you. Thanks for the time, guys.

Okay, Alex.

Our next question comes from the line of Todd Fowler with KeyBanc Capital. Please proceed.

Thank you. Good afternoon, everybody. I guess, picking up on the gross margin question, Terri, did you give what intermodal gross margins did on a year-over-year basis in the first quarter?

I did not but they were up.

And do you want to give some color?

The gross margin as a percentage of sales? Is that what you're talking about, Todd?

Yes, that's exactly what I'm talking about.

It was up about 70 basis points.

Okay. And then, I guess, with some of the questions here, and then with some of the moving parts with the acquisition, as we get into the next couple of quarters, can you put any parameters around what gross margins for the Company should look like? And, I guess, I hear some of the commentary about gross margins improving sequentially during the quarter. Some of the pricing commentary, should the expectation be then that gross margins from where they are here in the first quarter build off of these levels as we move throughout the year?

Yes, we expect yield for the year to be between 11% and an 11.5%. Excluding Mode Transportation, we would expect yield for the year to be better than our 2010 yield that was 11.6%. Probably the lowest yield will be in the second quarter, and then it will improve from there. And we fully expect to pass along all of our cost increases as Mark mentioned.

So that expectation for the 11% to 11.5%, I'm sorry, that includes Mode for the full year?

Correct.

Okay. That is helpful.

It includes Mode for the nine months of the year.

That's right, that's right. So Mode beginning in the second quarter.

Yes.

And then I think I caught the numbers on the guidance from a pricing expectation. With the expansion of the fleet, with some of the expectations with the bid activity and the strength in intermodal volumes, Dave, do you want to hazard a guess then what we should think about from an intermodal volume growth number for 2011?

Well, I was fortunate enough to actually hit it right this past quarter so now I'm batting 100%. I think we can continue. We've got a lot of wind behind our sails right now, I think. And so we feel very confident that we can continue through this year with the types of increases we've seen.

Okay. And I guess the last one that I had tonight is in the press release there was a number on 2011 revenue guidance exceeding $2.5 billion. When I think about 2010 being $1.8 billion, the revenue that is coming from Mode, that doesn't leave a lot of additional revenue coming from what I would call the Legacy businesses at this point. Can you talk a little bit about the thought around that $2.5 billion number? Is that a starting point? Is that a number that you just think that you are going to exceed? What is the thought process with that number?

It is a number we think we will exceed.

Okay. So we shouldn't take that, I guess, as revenue guidance per-se for 2011?

No, that would be extraordinarily disappointing.

Okay. That's what I thought. All right. Thanks a lot for the time tonight.

Our next question comes from the line of Kevin Sterling with BB&T Capital Markets. Please proceed.

Thank you. Good evening, and happy birthday to Hub Group.

Thanks, Kevin. (laughter)

I promise I won't sing. (laughter)

We appreciate that.

I think everyone else does, too. Could you go back, Terri, you talked about how many containers you plan to add this year. Could you tell us, is it 4,000, 5,000? I missed that number.

It is 4,000 in total. So we will buy the first 2,000 and then the 2,000 that we get after this summer, we'll decide whether we lease or buy them.

Okay. Great. And, Mark or Dave, I believe you talked about capacity being tight. Do you anticipate it getting tighter? Do you think 4,000 will be enough? It seems like you're looking for a very strong growth to continue for the rest of this year.

That's a very interesting question. I do think -- right now, it is tight throughout our network. I think there might be one or two locations where we actually have somewhat of a surplus. We see no signs of that slowing down, at least near-term. It has been particularly strong. And it has been building over the quarter.

So all of that leads us to believe that the 4,000 containers, well, you certainly don't want to build the church for Easter Sunday, but we are hoping that the 4,000 will give us adequate capacity. It certainly will give us enough capacity for the commitments we intend to make. That is one thing that we do pride ourselves on, is when we commit to a client, and we work a very intensive plan together on our network, when we make a commitment, we live by it and we make sure that they receive the equipment that we committed to during the peak season and, of course, in the off-season as well.

Okay. Thank you. And along those lines of the capacity tightening up, and now we've got the weather issues behind us, how you would describe rail service?

Well, I mean I think that like as an example in our Monday meeting last week, service was very strong. We did have some service disruptions over the quarter. But they were very slight. I think the major problem with them was that it caused some imbalances within our fleet, with containers getting stuck in certain areas. But, no, it is much improved and back to normal now. And so I would say that it has improved and improving.

Okay. Thanks. That's all I had this evening. Thanks for your time.

Our next question comes from the line of Michael Weinz with JPMorgan. Please proceed.

Hey, good afternoon, everyone. I guess to start, do you happen to have the break-out of the chart brokerage segment in terms of price, mix, fuel and load growth?

Sure, truck brokerage volume was down 9%. Fuel was up 6%. And price and mix were up 4%.

Okay. There is no way really to break that down any farther?

I can tell you included in that 4% for price and mix, mix was actually down. But it is hard for us to measure price.

Okay. But directionally, that helped.

Price would be up more than the 4% because mix would be down.

Right. Okay. I guess -- okay, so from new customers coming online, and some of your negotiations that you're going through with your existing customers, are you hearing more concerns about truckload and intermodal capacity issues in the back half? Or are some of these discussions, I guess, more towards the new customer side of things from higher fuel prices? To rephrase, is it higher fuel that is driving a lot of these discussions or is it just capacity concerns?

I think it is probably both. We're certainly seeing a lot of shippers who in 2010 experienced significant capacity shortages that were existing intermodal users at the time. And they want to make sure that does not happen again in 2011. Certainly, from the volume levels that domestic intermodal has enjoyed year to date despite significant additions of capacity there is every reason to think that there will be shortages in the second half of the year.

So shipper community is definitely concerned about that. But they are also concerned about what they see as rising prices in the truck sector. And that's related to fuel. It is also related to the new regulations, to the driver shortages, and just the various cost components that are driving truck further up.

So I think shippers who are trying to plan their supply chain for multiple year periods are realizing that they're more likely to see a stable environment in intermodal than they are in the truck sector. So I think shippers have both concerns. And I think both are justified.

Okay. And the rail vendor services here, have you seen -- I guess, Union Pacific has a -- was it a roughly 6% increase in their pricing that went into effect April 1. Were there similar increases to Norfolk and CSX?

Norfolk Southern also had similar increases that are effective April 15. CSX has a little different pricing model that relies more on dynamic pricing. So to the extent they're looking for increases there, they're building that in to route specific dynamic pricing.

Okay. And historically, you've been pretty successful in passing along these rates to your customers. Has there been a lot of push-back in this most recent round? Or has it been pretty clean?

I think that the customers were better prepared this year for price increases. I think the strength of the economy and the shortage of capacity last year, I think, caught everybody a little bit off guard. So I do believe that they've budgeted differently. It certainly is never an easy discussion, but I do think, again, that people have budgeted for price increases within their transportation and so that does make the discussions a lot easier.

Right. Okay. And let me see. Historically, I guess, you've tried to use about 70% of loads using your own containers. How should we think about that changing with the significant increase in the amount of containers you're buying this year? I mean are you still going to be trying to target 30%, being rail owned assets, or is that number going to be going down?

We are the largest user of EMP and CSX equipment, the UMAX fleet, so we do believe that we will be able to continue to grow that in addition to the growth in the size of our fleet. So it is fully our intention. We very much support the rail's neutral fleets. We think it is a good thing for the industry. And so there are no plans to really change those ratios at this point.

Okay. And the last question, on container turns, the 12.5 times that were you talking about in first quarter was pretty impressive. How sustainable is that? And is there a difference in the container utilization rates of your own Hub Group containers versus the rail fleet assets?

We are -- have certainly made great strides in utilization. Our utilization was three-tenths of a day better this quarter versus first quarter of 2010 when we had really solid utilization numbers as well. We think that we can continue. It is, being first quarter, it was at 13.5, as opposed to 12.5, which is where we were able to get to in the fourth quarter.

But that is an outstanding number for the first quarter, particularly given some of the weather issues that we experienced. We feel like we get the best utilization in the industry. Certainly, the rails have been doing a much better job spinning their boxes, but generally speaking, the Hub fleet moves faster than the rail fleet does, and we think that is sustainable. We've put a lot of operational disciplines behind that and are making significant investments in our street operations to make sure that those kind of numbers are sustainable.

Great, thank you for the time. And happy birthday.

Thanks.

Our next question comes from the line of George Pickral with Stephens. Please proceed.

Hey, good morning, good afternoon, everybody.

Hi, George.

A question, maybe ask Ed's question about the peak season surcharges a different way. Is it a fair statement to say last year the rails put through a peak season surcharge and you weren't able to pass through all of it to all of your customers, and you got squeezed a little bit? Is that a fair statement to begin with?

No.

No, I don't think so, George. I mean, I think we were very successful at passing through the peak season. We were very disciplined about it. Not all actors in the market were putting in a peak season surcharge. But despite that, we feel that we were successful in passing that along to our customers. And I don't believe we experienced a squeeze as a result of it.

Okay. So not to say it doesn't matter, but if, you don't need to have anything written in contracts that would allow you to more quickly pass through surcharges, if they even occur, this year?

No, we don't feel like we would need a different type of agreement with our customers to deal with the market conditions.

Okay.

And we do get a lot of notice from the rails when they're considering a peak surcharge. So it is something where we have a dialogue. So it is not like we're springing it on our clients three days before. We're aware of it. We talk to them about it. And that's why I think we're able to execute pretty well with passing on the surcharge.

Yes, the peak season surcharge last year went into effect in August. And so that would have been in the third quarter, and that's when our margins were actually their highest at 12%. So we pass it through.

Okay. Fair enough. Secondly, you mentioned UP, Norfolk and CSX on underlying rate increases, but have you gotten anything, or not gotten anything from the BN, on rate increases this year?

Well, I don't think we're on their mailing list.

(laughter)

We don't --

Have you heard of --

Currently we don't have an intermodal relationship with our dry-van fleet. Mode Transportation does utilize the BN for its [Temstar] fleet. I don't -- in all honesty, I'm not aware of any increase notice that they've gotten in regard to that.

Okay. So if they haven't, do you think that is kind of impacting the market overall, if they're not raising rates, and everyone else is?

It certainly -- raising rates when others are not is more of a challenge. There is no question about it. And it is not entirely clear just exactly what their position is on raising rates in the marketplace, or how much control they have over raising rates through their channels.

Okay. Thank you so much for the time, everybody.

Our next question comes from the line of Matt Brooklier with Piper Jaffray. Please proceed.

Good afternoon. Question regarding intermodal volume growth in the quarter. 13%, well above what the industry grew at. More like a [9%-ish] number.

If you could talk to the components that enabled Hub to grow its volumes above that number, we understand the utilization was better in turning the boxes at a quicker rate, but maybe the three components that enabled you guys to grow above -- to grow above market at a much greater extent this quarter versus last?

We were very pleased with the market share gains that we experienced. Clearly, we put a lot of emphasis from a sales perspective on specific corridors, including local east, right, which has been a tremendous success for us, and a lot of that is about really enhancing the work we're doing with our customers on conversion. So that has enabled us to make the pie bigger and capture a lot of share there. I think we've really improved our street operations and the efficiency of our street operations which makes us more cost competitive, as well. So that is a 25% to 30% cost component in the intermodal industry and by becoming more efficient there, I think we're better able to compete with the well-run networks that are out there. And I think we've made a lot of improvements in terms of our ability to develop new and sizable relationships with large shippers. Our enterprise sales group is performing extremely well, and is really bringing a lot of new opportunities to bear for the Company, and that's enabling us to bring in some share.

Okay. So a mix of getting more efficient on the utilization front, and, I guess, market share gains, and just getting bigger with some customers. Looking at your equipment count during the first quarter, and you guys haven't taken delivery of, I guess, the tranche of boxes that start flowing into the network in 2Q and 3Q,. But where are you able to go out and, I guess, service this incremental market share that you've gained thus far, and maybe talk a little bit about the equipment numbers if you could, intermodal boxes, owned and what you utilize on the rails at the end of the fourth quarter, and what generally those numbers look like at the end of the first quarter 2011.

Well, of course, as far as the overall fleet of equipment, both the EMP boxes, which is the UP and Norfolk Southern, have a significant add of about 5,000 containers that they're adding on at this point. And then the UMAX fleet is increasing by about 7,000. So we have access to all of those fleets. So we have access to almost 90,000 containers. So that does help us a great deal with being able to source capacity when we've made significant commitments to existing and also new clients. So I think that you're seeing all of the parties invest the additional capital to make sure that we've got the capacity necessary for the -- what we foresee as a very strong peak season.

Yes, I think the other thing to take into account as you look at first quarter this year over first quarter last year is our fleet is about 2,500 boxes larger. Our fleet was about 16,000 units in the first quarter of 2010. And it is 18,000, just under 500, units in this first quarter of 2011. So that has enabled us to absorb fairly significant growth. As we bring the 4,000 on, that should enable us to continue year-over-year growth.

Right, so the 16,000 to 18,500, the majority of those additions are coming from the rail fleets versus, I guess, the containers that you guys own or lease or how should I look at that?

Those are actually units that we purchased and brought online between April and October of last year.

Okay.

That would be part of our fleet.

Okay.

But we've got more boxes now than we did at this time last year. And that will continue to be the case as we bring on the new boxes that lap over the 2,500 that we brought on previous year.

Right. Okay. So if we're at 18,500 is kind of the run rate, and we should be adding in the additional 4,000 over, I guess, the next two quarters, What is the timing of those 4,000 boxes coming into Hub's network during the second and third quarter? Is it split even or is it -- maybe you can talk to when you anticipate receiving those boxes. You're getting them now, are you getting them in May? Maybe talk to that.

Well, we've already got 50 of them in. We're supposed to get 200 in April, 500 in May, 800 in June, 800 in July and 800 in August. 400 in September and 500 in October.

Okay. So it is spread out relatively evenly. I will have to go, I guess, back over the numbers. And final question. Your underlying rail suppliers introducing incremental costs, or passing through rate in the second quarter, it sounds like sequentially, that could have a little bit of a negative impact on your gross yield. What is the average, I guess, rate increase that you anticipate to incur from your rail providers in 2Q?

You know, it depends on the market because the price increases are different depending on the market. So we haven't computed an overall average yet.

Okay. All right. Thank you for the time.

Thanks.

Our next question comes from the line of Michael Bruchet with Wells Fargo. Please proceed.

Hi, it is Anthony Gallo. The first question, on Mode Transportation. Can you remind us what their growth profit margin is? And then, if you will, prioritize for us where you see the opportunity to improve the overall margin?

Sure, Anthony. Their gross margin as a percent of sales for 2010 was a little over 11%. In the first quarter of 2011, it looks like the gross margin from Mode Transportation was about 10.8% for the quarter. So where we think there is opportunity is in the purchasing power that we have together on the truck brokerage side of the house, and then in intermodal, we think we can improve their gross margin by having the agents use our fleet and take advantage of using Comtrak as their Drayage operation.

Okay.

In particular, I think the big bang for the buck, if you will, is within the street operations. We think that that is, obviously, a key cost component for us. And then I think the way that we manage that, is one area that I think we can provide a lot of efficiencies for our agents with Mode.

Is that something you attack methodically over time? Or is that not something that is cured in sort of one fell swoop with --

Anthony, you're exactly right. We do it over time. You analyze the data and lay it over our existing network to see where, in fact, the opportunities lie.

Okay. And second question on Mode, now that you've had the opportunity to actually talk openly with them about the transaction, and meet with, I guess, a lot of the top agents face to face, just share with us what their couple of main concerns were, and then what their couple of items of excitement were. Thanks.

Great. Well, I think that as they've had a chance to digest this, that a couple of the main things that they're very excited about are our fleet and are dray operations, And they struggled in 2010, in many cases, to obtain capacity, and they continue to struggle to make their street operations more efficient. So we can definitely help them in those two areas. The other bit of feedback we got from them was that they were excited that a transportation company is now the parent organization.

Not DHL.

Well, right. And they are a fine company, DHL.

I know what you're saying.

A fine company but it is not their core. So they don't necessarily understand the challenges of the marketplace. So I think that they're excited about that. In terms of concerns, they very much want to remain and maintain their autonomy. That's very important to the agents.

They're independent business owners and they very much want to stay that way. And so I think that we've made it clear to them that that is how we intend to operate the business and provide their autonomy. Their other area of concern is that they continue to receive the resources that enable them to be effective in the marketplace. And so they want to make sure that they're both autonomous but yet properly resourced, and I think we've made the commitments to make that happen. They're feeling good about it right now. But the reality is we are going to have to prove it through our actions.

Great. Thanks. Congratulations on the quarter.

Thanks.

Thank you.

(Operator Instructions)

And our next question comes from the line of Art Hatfield with Morgan, Keegan. Please proceed.

Hey, thank you. Good afternoon, and congratulations on a strong 40 years. Most of my questions have been answered, but just a couple of things I want to go over. Terri, I think you had said that your capital expenditure plans for this year, was it $42 million?

$48 million, Art. And that includes buying 2,000 of the 4,000 containers. We're going to decide about the remaining 2,000 this summer, and whether we will lease or buy them. So that number could go up, depending on what our decision is.

Right. That is helpful. That's the clarification I was looking for. And then finally, just if we can -- help me think about this on the go-forward. The impact that the growth in the local east business has had on the negative impact on the mix, obviously, as that business gets bigger the growth related to it will have a lessened impact on that mix. Is there any way to think about how that could occur over the next several quarters, the next couple of years, when that kind of diminished impact on the length of haul, and the mix will occur?

We think there is still a lot of opportunity in local east, so it will continue to grow. So it is hard to say when that would slow up and not negatively impact mix. That's only because the revenue per load on a local east move is lower because the length of haul is lower than transcontinental.

And the thing is so many of these corridors were just newly opened up, if you will, as the Norfolk Southern was able to clear tunnels, et cetera, for double stack, so a lot of these areas never even had intermodal service, let alone the very efficient and consistent service they're receiving now. So we feel as though the opportunity for truck conversion within the local east remains very strong. A tremendous amount of upside, candidly probably for years to come. So it will continue to have some impact as far as the mix.

Right, no, that's very helpful. Thanks for your time this afternoon.

There are no further questions. I would like to hand the call back to Mr. Dave Yeager for closing comments.

Thanks, Crystalline. Well, again, thank you for joining us, taking the time to join us on our conference call. If you do have any further questions, certainly Terri, Mark or I would be readily available. So thank you again.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation.