Hub Group Inc (HUBG) 2011 Q2 法說會逐字稿

Good afternoon and welcome to the Hub Group second 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 remarks 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. (Operator Instructions).

Comments made by Dave, Mark or Terri during this conference call 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. Please proceed.

Thanks, Crystalyn, and thank you all for joining us this afternoon. I want to begin by covering three main things. First, we had great top-line growth in both intermodal and logistics. Second, we were more efficient with street operations which improved our bottom line. Third, we are on track with the Mode integration and believe we have laid the groundwork to unlock material value.

Here are the key numbers excluding one time expenses of $750,000. For the second quarter, Hub Group's diluted earning per share increased 54% to $0.40. Hub Group's revenue increased 66% to $760 million.

Now I will discuss details for the quarter. As you know, on April 1 we bought Exel Transportation Services, Inc. and renamed it Mode Transportation. We will now report two distinct business segments, Hub and Mode. The Mode segment includes only the newly acquired business. The Hub segment includes all business other than Mode. When we say, "Hub Group" as opposed to just Hub, we are referring to the consolidated results for the whole Company, including both the Mode and Hub segments.

First I will talk about the Hub segment financial performance and then I will talk about what happened in the Mode segment.

The Hub segment generated revenue of $560 million, which is a 22% increase over last year. Taking a closer look at Hub's business lines, intermodal revenue increased 24%. This change includes a 12% volume increase and a 12% increase for fuel, price and mix. 60 basis points of the volume increase came from fleet boxes sold to Mode agents.

We are excited that this was the sixth straight quarter of double digit intermodal volume growth where we increased market share. The major reasons for this growth include success in bids, focus on strategic accounts and customers converting freight from truck to intermodal. A large part of the truck conversion freight is in the local east market which was up 22%. Because of the growth in this market, our average length of haul went down by 3%.

We've successfully passed along the rail cost increases to our customers as planned. That's always our goal. We've decided to report fuel, price and mix together going forward. That's because it's getting harder to accurately quantify the impact of each of these individual pieces.

Truck brokerage revenue was up 4%, due mostly to fuel. Gross margin as a percentage of sales was 130 basis points higher than last year. Again this quarter, we focused on yield and restructuring the truck brokerage organization. We recently announced that we are shutting down truck brokerage operations in five offices. We recorded $400,000 of severance for the affected employees this quarter. Making these changes will ultimately put us in a stronger position where we are able to compete more effectively. A transition team is working to ensure that these changes will be seamless for our customers.

Logistics revenue was 45% higher than last year. We are now seeing the full benefit of the customers that we on-boarded during the last year.

Hub's gross margin increased by $12 million or 24% due to growth in all three of our service lines. Intermodal margin grew the most followed by truck brokerage and then logistics. A large part of our success in growing intermodal margins comes from doing more of our own drayage, reducing empty dray miles and better matching of in-bound and out-bound loads. We added 65 drivers this quarter and we're up 442 drivers over last year at this time.

Hub's gross margin as a percentage of sales was 11.2%. That's up 20 basis points compared to last year's 11% margin, and it's down 60 basis points compared to the first quarters 11.8%margin. There are three main reasons why the margin percentage is down from the first quarter. First, fuel is a higher component of revenue and cost. Second, truck brokerage margin is down 140 basis points. And third, there was a mix impact because truck brokerage, which is our highest margin business, is now a smaller piece of the revenue pie.

Hub's costs and expenses were $40 million in the second quarter of 2011 compared to $34.9 million in 2010. The biggest piece of the increase in cost and expenses is bonuses and salaries which are up a total of $3.1 million. Salaries include the $400,000 of severance related to truck brokerage that we classified as a one-time cost. Finally, we are proud of operating margin for Hub which was 4% this year versus 3.4% in 2010.

Now, I will discuss results for our Mode segment. Mode revenues were $202 million. The sales breakdown is $85 million in intermodal, $81 million in truck brokerage and $35 million in logistics. Compared to last year, revenues at Mode were up 10.2% We are delighted that we haven't lost any agents since the purchase, which is very important to us.

Mode's gross margin was $22.2 million. Gross margin as a percent of sales was 11%. About 3% of Mode's intermodal loads were shipped in Hub fleet containers. We saw this number ramp up as the quarter progressed. Mode also started using Comtrak for drayage. We think this is a big opportunity. We continue to work on synergies including better purchasing of transportation services and assisting Mode agents with logistics sales opportunities.

Mode's total cost and expenses were $20.9 million. Included in these costs are one time expenses totalling $350,000 that relate mostly to IT.

To summarize our one-time costs, we have the $400,000 of severance costs at Hub and the $350,000 of mostly IT related cost at Mode for a total of $750,000.

Operating margin for Mode was 0.6%

Turning now to our head count. We had 1,316 employees, excluding drivers, at the end of June. That includes 1,121 Hub employees and 195 Mode employees. Hub's head count increased by 11 since March.

Now, I will discuss 2011 full year earnings guidance. For 2011, we are comfortable that our diluted earnings per share, excluding one-time costs, will be within the current analyst range between $1.53 and $1.68. Our weighted average diluted shares for 2011 are estimated to be $37 million.

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

Turning now to the balance sheet and how we used our cash. We ended the quarter with $18 million in cash, and no debt. During the quarter, we spent $10.4 million on capital expenditures, $9 million of this $10.4 million was for containers. We think we will spend between $65 million and $70 million on capital expenditures during 2011. $46 million is for containers and the rest is for technology investments.

On April 1, we paid $90 million in cash to buy Mode based upon an estimated purchase price. We are finalizing the purchase price adjustments now and estimate that the final purchase price will be $82 million. At the end of June, we had an $8 million receivable from the seller. Of course, we always continue to look for acquisition opportunities.

To wrap it up for the financial section, the healthy 52% increase in operating income this quarter has created an energy that motivates us. And now, you will hear from our CEO, Dave

Great. Thank you, Terri. As we look back on the first half of 2011, it remains our view that this year represents a more traditional shipping cycle versus the surge of 2010.

Following a depressed 2009, we had anticipated a slow 2010. However, February of that year business kicked into high gear and the accelerated pace of trade continued through the end of the fourth quarter. We believe that this year will be a more traditional demand cycle with peak strengthening through the third quarter and lasting until early December.

The bid season is finally winding down and we are pleased with the outcome. We held our own with incumbent customers and were successful in adding several new large shippers. A favorable pricing environment supported our ability to achieve rate increases allowing us to cover our increases in vendor costs. Additionally, we continue to make progress on several fronts this quarter, including our Mode integration efforts, growing Comtrak's driver base and the restructuring of our truck brokerage division.

From a capacity perspective, we continue to execute this year's fleet plan with the projected peak fleet size of 23,000 containers. As of today, we have received just under 2000 new containers out of the 4,000 container builds planned for this year. The deliveries are coming in as expected with the manufacturer adhering to the original delivery schedule.

There has been a great deal of discussion in the press about rail service. While we have seen somewhat slower transit times, our customer on-time performance has not been impacted. Our rail partners have stayed ahead of the weather issues by proactively investing in potential areas of disruption. A good example of that is the Union Pacific successfully raised their tracks and bridges in preparation for the floods on the Missouri river in the greater Omaha area. As a result, our customers experienced minimal disruptions despite extensive flooding. As yet another indicator of decent on-time rail performance, we have seen steady fleet utilization numbers of 13.3 days over the course of the quarter.

One of Hub's major focuses has been on securing more driver capacity. As a result of our efforts, we have continued to grow our driver base, ending the second quarter with 1,819 drivers. Comtrak handled 53% of Hub drayage during this quarter versus 40% last year. Although we have allocated significant resources to driver recruitment, we are facing a headwind due to a much more competitive market characterized by growing demand for drivers coupled with a shrinking pool of drivers.

Another mechanism we are deploying to increase our driver base is opportunistic acquisitions. In June, we announced the acquisition of Domestic Transport, an intermodal dray carrier with 22 drivers. This acquisition gives us a presence in the Pacific Northwest and enables us to better service our customers in that region.

As many of you are aware, our truck brokerage performance has not met our expectations. This past quarter showed further decline in volume. In an effort to kick start results for this operating unit, we have made organizational changes that centralize some of the operations. We continue to believe that truck brokerage is a very important component of our core offering. The structural modifications we have made will allow us to service customers in a much more efficient way with more shared resources.

Our Unyson Logistics division had a strong second quarter delivering consistent growth year-over-year. Several large clients renewed their commitment and we are excited to see some new customers in the pipeline. We are also extremely proud to have received Logistics Management's Quest for Quality Award for the fourth consecutive year and be ranked as a top 10 3PL by Inbound Logistics for the third year in a row.

With respect to Mode, our integration efforts are going well and we remain confident in Mode's long-term potential. We've now completed the on-boarding of 95% of all sales and operating agents. Through this process, we've made Hub's fleet and Comtrak rates available to the IBOs. As a result, we are seeing Mode Transportation volume starting to move through our network. The Mode acquisition has strengthened Hub Group as we now have added to our service offering a solid network of agents who focus on growing their existing customers and securing new ones. Many of these customers are new to our organization and offer tremendous upside potential.

In conclusion, we continue to focus on our strategic priorities. We are growing our driver base at Comtrak to handle more of our own drayage and maintaining pricing discipline while expanding our market share of domestic intermodal. We are restructuring truck brokerage. We are growing Unyson at a significant rate and moving forward with the integration of Mode. We remain confident that we are well positioned to continue to deliver strong results for this year and over the longer term.

I will now open up the line to any questions you may have.

(Operator Instructions). Today's first question come from the line of Scott Group with Wolfe Trahan. Please proceed.

Hey. Good afternoon, everyone.

Hi, Scott.

Hi, Scott.

So I was wondering if you could start maybe, Dave, with the intermodal volume trends by month and what you are seeing so far into July.

Of course we don't usually talk about the current quarter. The overall volumes were relatively consistent throughout the quarter on a month-by-month basis. And so again, we believe that this is pretty much just a normal shipping pattern. With the cycle that we expect to see increases in volume in mid August, and then have a great deal of demand and with limited supply, hopefully, through the end of November.

So again, I know that there has been a fair amount of companies that have reported some doom and gloom. We don't necessarily see that, particularly within the intermodal space.

So fair to say you are seeing double digit growth continuing?

We really don't want to predict. My history, my track record of predicting volume growth is not very good. So we prefer to stay away from that.

Okay. That's fair. Terri, I understand not wanting to break out price, fuel, and mix any more, but directionally, can you rank them at least? Just so we get a sense -- the trend has been price and mix kind of offsetting each other. Directionally, has that trend continued? I am guessing fuel is a big piece of it as well, this quarter.

That's right. Price and mix are kind of offsetting each other. I guess to answer your question directly on ranking them, fuel was the biggest and then price and then mix.

Mix being a negative?

Right.

Okay. This is the first quarter we have got Mode. Is second quarter a pretty representative quarter of how Mode should look? Or is there something that's seasonally weaker or stronger about Mode in the second quarter?

That's a good question. Mode seasonality is similar to Hub. Yield might decline a bit at Mode as truck brokerage capacity tightens during peak. The agency fees and commissions will change as the margin changes. The salaries and benefits and G&A, excluding one-time costs, should be similar to Q2. We don't expect any significant changes there. And D&A will also be about the same.

Thanks. Next, Dave, what's your thoughts. Are we going to have a pretty normal peak season? Are you expecting peak surcharges either from the rails or to your customers?

No. We don't anticipate that this year.

Why would that be if it's a normal peak?

Well, I think for several reasons. Of course, there was in fact some rail rate increases that took place earlier in the year. That coupled with some of the new initiatives brought forth by the Union Pacific I think will mitigate the amount of the overall peak surcharge for this year.

Okay. And just last one, if I can. You just referenced it. Union Pacific, their network redesigned to try to get more balanced volumes throughout the year. How does that impact your relationship with them at all, either in terms of a capacity standpoint, a pricing standpoint, a service standpoint?

I think the beauty of our network is that we are balanced. In fact, because we are operating, in addition to being the largest user of EMP, one of the largest users of UMAX, our fleet is very well-balanced. As a result of that, many of the things that they are offering with the MCP has always just been common practice with Hub.

So we shouldn't say any impact good or bad from that change from UP?

No. I don't think you will really see any impact from it.

Okay. Great. Thank you for your time, guys.

Our next question comes from the line of Jon Langenfeld with Robert W. Baird. Please proceed.

Afternoon. This is Ben Hartford in for Jon. I wanted to talk quickly about Mode and the revenue result this quarter. Certainly had the benefit of a full quarter with Mode, but it looks like the run rate is certainly in line to better than what 2010 total revenue for Mode was. So can you talk about the retention of that business, how that has trended relative to your internal expectations? Can you provide a little bit of insight there?

Sure. This is Mark, Ben. I think we are very pleased with the quarter, and the revenue run rate that we are seeing, particularly out of the IBOs. They are growing their revenue nicely, and are hitting the levels that we had anticipated.

As Terri mentioned, we have not seen agent attrition which is critical. We have actually added three agents during that time period. So we are moving in a positive direction in that regard and looking to keep that going throughout the remainder of the year. I would say so far so good at this point.

It sounds as if you are on pace when you think about the accretion that you had talked about at the beginning of the quarter, the high single to low double digit 2012 accretion on pace to meet that. Any bias to the upside to that based on what you have experienced for the first three months?

We certainly think that's possible, that we may end up out-performing those initial projections. It's a little early for us certainly to commit to anything on 2012.

True. I might have missed it. The West Coast intermodal volume number for the quarter, did you provide that number?

No. We didn't. We talked about local east being up 22%, but what we call local west is actually up 11%.

Okay. So it's certainly healthy volume growth from both you guys and Hub this quarter, well above market. And Dave, I think you had mentioned maintaining pricing discipline. Can you talk about the pricing dynamics, generally, in the intermodal market with you guys continuing to gain share? Have you seen any responses from those less favorably positioned in the market as you and the other leader continue to build share?

This is Mark again. It's certainly continuing to be a consolidated market. We were very pleased, I think with the progress we made from a pricing perspective on the intermodal side throughout the quarter. And as Terri mentioned, we felt that we -- or David mentioned, that we thought that we fared well during the bid season. So it's always a challenging competitive environment out there. There is no question about that. It hasn't gotten any less competitive than it was last year. But I would say it hasn't gotten anymore competitive either. Generally speaking, pleased to be able to pass those increases on. We did see increases from both our western and eastern carrier, and despite that, we were able to regain some of the ground that we gave away in 2009. So once again, we are on pace there as well.

Okay.

Some of our growth too was in local east which would be truck conversion freight. So there it's a beautiful thing because intermodal is cheaper, and the transits are reliable. And so we built the price increase in, obviously, but we were competing with truck not another IMC.

Good. One last question on the logistics side, another strong growth quarter out of that segment. The run rate of close to $300 million in revenue. Is that how we should think about this segment going forward? I mean, this 50% type growth rate? How long should this persist and what's a good run rate for revenue and logistics now?

Logistics has a strong pipeline. We do expect good growth for the rest of the year. It gets a little tougher in the fourth quarter.

Okay. Great. Thanks.

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

Great. Thank you. Good afternoon and good evening, everybody. Dave, I was hoping you could talk about sometimes in the second quarter, there is the timing issue where the rails can be out in front and putting through the rate increases and the contractual rates to your customers aren't implemented until late into the third quarter. Is that something you experienced this year? Or were you able to capture a lot of the rail rate increases here in the second quarter with the timing of how your contracts reset?

Actually, the timing worked out pretty well this year, so we didn't see that much of a lag. In fact, we were able to increase our pricing with our clients. We got well out ahead of it, we got a lot of advance information from the rails and were able to get out ahead of it and begin talking to our customers early. That always helps.

So at this point do you have, or at least during the second quarter, all of the new contractual rates were put into place. Are the bids pretty much wrapped up now?

For the most part. We are probably done with over 75% or 80% of the overall bids. Again, we were pleased with the way that we fared. We were able to hold our own with our existing clients, but we are for the most part through with bids for the year.

I will take one more stab at the pricing question, I guess, based on that. I understand not willing to break out maybe specifically here in the quarter, but can you talk about what you are seeing on comparable or same-store sales, contractual bits? Just broadly in the intermodal market? Is that something we are looking at 3% to 4% or anything better or worse than that?

Yes, Todd, I don't think we want to get into specifics on that. Obviously, we were able to pass increases along. So the vast majority of our business does go out for bid each year. So clearly while it's competitive bid environment, we were able to get increases in place.

Fair enough. Like I say, I just wanted to give it one more shot.

Sure, of course.

Terri, did you mention? I think I caught what the truck brokerage gross margins did compared to last year. Did you give a number for what intermodal gross margins did versus last year?

No, but they were up slightly.

Okay. So up slightly, would that be less than what the truck brokerage margins did on a year-over-year basis?

Yes.

Okay. And then the last one that I have. With the Mode acquisition, I think you mentioned that there was a 3% number. Maybe you can talk exactly about what that was but 3% of I think it's legacy Hubs intermodal revenue in the quarter was related to Mode. Where can that number go based on where your fleet's at from a utilization standpoint? Is that something that over time can get to high single digits, low double digits or is there still a restriction on how much capacity in the legacy Hub fleet to grow inter company revenue piece?

You are exactly right, Todd. We did say about 3% of Mode's intermodal load's were shipped in our fleet. We have a goal for that to be around 15% to 20% of Mode's intermodal loads by the end of the year.

I would suggest with your one statement there, Todd that in fact we do have a bit of a regulator as far as the amount of capacity that we can give to Mode this year. One of our objectives towards the end of the year is to sit down with the Mode agents and get a better idea of where they see the potential is for the fleet and how much additional equivalent we may need.

Right, so part of the fleet expansion into 2012 could be to meet those needs?

Right.

Okay. Great. Thanks so much for the time.

Thanks, Todd.

Our next question comes from the line of John Barnes with RBC Capital Markets. Please proceed.

Good afternoon, guys. Going down that same path that Todd was just talking about, can you just talk about how much of Hub's business was hauled by your own internal dray, and did you make any strides on moving any of the Mode business with your own internal dray during the quarter as well?

We did. 53% of our drayage was done by Comtrak. We did make strides at Mode as well. Comtrak started to handle the Mode agents load drayage.

How much was the total? Do you have a feel for that?

It's not very big right now. We are constrained on the drivers, and so, we are trying to do a lot of our own drayage. As we get more drivers in we hope to share more with Mode.

Okay. All right. Now that you have bought Mode, now that you have owned it, I think you have said in the past that you anticipate now that it's a part of your own business, you are going to be able to do some things on their cost structure.

Can you just talk about maybe as part of the integration what you have been able to address thus far with their cost structure and have you changed your outlook on how quickly you can improve that margin?

Well, what we have accomplished is really letting the Mode agents use our fleet, and use Comtrak drayage. So it's really all purchased transportation, synergy thus far. We still have a lot of room for improvement there in terms of looking at the LTL spend, the truckload spend and getting the purchased transportation synergy. We we have dived into that a bit, but we haven't really done much there.

Yes, we are currently trying to do the analysis just to look at it. We have a $1 billion highway spend now, so there is obviously some synergies that you can derive by the transportation purchasing, but again it's something we are looking at closely and really don't have a final word on it as of yet.

Okay. Alright. Terri, it looked in the quarter like the tax rate was maybe a little bit higher than expected. Can you just talk -- is there something in there that was one-time, or was this level what we should be looking to for the balance of the year?

Yes, you are exactly right. That's a good question. Our tax rate was higher this quarter because Mode increased our state tax rate. So we had to revalue our deferred taxes. It is a one-time cost because Mode does business in states that have higher tax rates. We expect the tax rate to be about 38.3% for the second half of the year.

And pretty consistent in 3Q and 4 Q?

Yes.

Okay. So trending down from -- so this was a little more of a one-time item with the deferred taxes?

Exactly right, John. Yes.

Okay. And then, Dave, could we just talk a little bit about the container plans? So I guess you're anticipating taking 2000 more containers in the back half. You don't see any -- it sounds to us like you are a little bit more optimistic than some of the other carriers out there, just in terms of the back-half outlook.

If things were to slow a bit would you look to try to slow some of that container delivery down, or do you feel like your business, even if things took a bit of a breather, you still feel like you need the containers where you could roll some older stuff out, or something like that?

We do feel as though the intermodal demand is going to be very strong this year. So we will have received all 4,000 containers by the end of October and we have not really discussed if in fact we should slow that down. At this point, as we view, that we are going to need them during the peak period.

Okay. All right. Like I said if things were to slow down, is there any mechanism allowing you to slow that delivery schedule down?

We could slow it down if, in fact, we wanted to, yes. We could. And then it wouldn't defer it long. It would only defer it a few months.

Okay. Very good. Thanks for your time, guys.

Thanks, John.

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

Thank you. Good evening. Terri, you mentioned the severance in the quarter relating to truck brokerage. Do you anticipate any more severance in the next couple of quarters, or do you think we are done?

In terms of truck brokerage?

Yes.

We are done with that for right now. We are probably going to have some one-time costs for truck brokerage to the tune of $200,000 or $300,000 related to lease termination costs. We couldn't book those this quarter because of the accounting rules. That will come through most likely in the third quarter.

Okay, and Dave, you talked about Union Pacific really doing a great job managing the difficult weather conditions. So it really sounds like you guys did not have much of an impact from weather particularly having containers stay out of position. Is that right?

Yes, we have been very fortunate, again. Our underlying partner in the West has been very proactive on that.

A little bit on the truck conversion opportunities, it sounds like you are still seeing a lot of truck conversion opportunities on the East Coast. Do you think that will continue, or are you starting to see it slow a little bit, or is it picking up?

Kevin, this is Mark. No, we definitely feel like there is still a tremendous amount of potential in that truck conversion market, particularly in the east. There is definitely opportunity in the west as well. But there is a lot of conversion opportunity in the east, and we think that's going to continue for quite some time.

I mean we still have yet to see a lot of the benefits of the Crescent Corridor and some of those other things that are going to really, I think, even further accelerate the pace of conversion. We think we are still in the early innings of this.

Okay. Terri, could you repeat what your CapEx guidance is for 2011? I'm sorry. I didn't get that.

Of course. It's $65 million to $70 million.

Okay. And what was the operating cost that you are anticipating on a quarterly run rate?

$58 million to $62 million.

Okay.

That excludes any one-time costs.

Right. Okay. That's all I had. Thanks so much.

Sure.

Thanks, Kevin.

Thanks, Kevin.

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

Hey, good afternoon. I guess to start I was wondering if you could talk a little bit about the differences between utilization rates of the containers in the legacy Hub business and what you are using in Mode.

Well, we wouldn't really track them separately. Right? Because we still manage it as a single fleet. So the capacity that we are giving to Mode is managed as a part of our aggregate fleet. If I were to guess, I would say that it's very similar. If anything, it tends to be a little bit more fragmented, doesn't tend to be as pool-oriented as a lot of Hub business. Utilization is probably a little bit quicker. I would say it's in all likelihood comparable to what we see in the rest of the fleet.

Yes. I figured that. If the 13.3 you had mentioned was for the entire fleet then that makes sense.

It is.

Can you talk a little bit about how your network's changed now that you have this additional Mode business in there? Do you see better load balancing in terms of fewer empty movements in the network, or is it something that could change over time?

I think that's something we would like to see, but that's something that's going to be evolutionary. I think as we can identify opportunities where we can bring value to the agents and at the same time benefit the network, I think that will evolve towards that, but we are still in the early stages.

I think that will apply not just to fleet too, but it will apply to our drayage network with Comtrak and ultimately would be our goal to have it apply to our joint highway spending.

Okay. I guess another question for you is on the margin differential between Mode and Hub, is there anything there that is substantial, or a more modest differential in terms of using your equipment versus one of the shared fleets?

It would be relatively ambivalent as to whether it was a Hub load or a Mode load. It's neutral.

Right.

There are certain advantages that we could enable the Mode agent to achieve better margin performance by better street operation, and some of the advantages for business that is high utilization that can move more favorably in a fleet box.

Okay. Okay. Yes, I figured it would have been a bigger deal than it is, I guess. Let me see. On long-term, where do you expect to try to get the in-house drayage on Mode to be? Would it be a similar rate targeting like 75%, or what are you targeting? 85% now for your in-house drayage over time?

Yes, long-term, we are looking for 85%. That's our goal. I would doubt Mode is going to get to that point. We are going to continue to allow the Mode agent to make the dray selection and make those determinations. That's an important freedom for them to maintain. It would be certainly a multi-year process for them to get up to that type of participation. But we are seeing that there is some real opportunity here, and I think we will continue to grow it as a percentage of their activity for years to come. But it will be a slower process, and one that will just take more time to sell the agent as they make this transition and really take advantage of all of the opportunities of the Hub dray fleet.

With that being said though, we do believe drayage overall, the supply of it, the amount of drivers, et cetera, within the market is going to tighten. And so just the Mode agents having access to a dray fleet such as Comtrak is going to be a major benefit for them.

All right. That leads me to my last question actually. Are you seeing any pressure in Comtrak with respect to driver pay? And you are looking to expand Comtrak, and so are you starting to see issues where driver availability is going to become an issue and a potential headwind, and also costs to attract drivers to the Comtrak fleet?

There is no question that right now that we are seeing driver pay go up, particularly in specific markets. We will answer those types of competitive threats. But there are so many synergies we derive by performing our own drayage that we can withstand a lot of those pressures and still not feel a negative impact. Definitely, the competition to attract drivers right now is far stronger than it was a year ago, and we believe it will continue to be so.

And it makes sense to me. Great. Thanks for your time.

Thanks.

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

Thanks. Terri correct me if my notes are stale, but I had about $58 million of CapEx this year, $33 million of that's from buying containers, and I think you just said $65 million to $70 million. Did you raise the CapEx number?

Yes. You are exactly right, George. We did. And now we are going to spend $46 million on containers. We have decided that we are going to buy that last batch of containers that haven't been delivered yet. We were on the fence earlier as to whether we would lease or buy them and we made our decision.

Got you. So nothing incremental on top of that? Just the lease versus buy decision. Okay. And then going back to one of Kevin's questions about the truckload brokerage. Sorry if you answered this and I missed it, but can you maybe talk about where you are in the turnaround of the brokerage division? I mean, is most of the heavy lifting done? Is this something that's going to take another year? Just some framework there on where you think you stand with that. I guess, Dave, that's for you.

Well, I can certainly answer that. I think Mark was about to.

I would rather hear from Mark anyway.

No. It's early in the process. It's going to take some time. But I think that Don Maltby and his team are making the right moves. We're looking at the business very closely, very aggressively. We are also looking at our operations and how we can be most efficient. So this will be something that will evolve. And it may not be another year, but I would say that we are going into the first quarter of next year before we start to see substantial growth again.

Okay. That makes sense. Thanks for the time, guys.

Thanks, George.

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

Good afternoon. Just to follow up on truck brokerage. This, I guess, turnaround process, what exactly are you attacking, or not attacking, but adjusting, if you will? It sounds like there has been some change in personnel. Is it a freight mix issue? Is it your current geographic structure? Offices, do you need to shrink or grow there? Maybe if you can just provide a little bit more color in terms of what should change over the next, let's say, nine months or so that will kick start growth?

Matt, this is Mark. When you think about it, the concept is to take advantage of our scale and our density. So historically, we have had a lot of very small offices geographically spread out throughout the country. Some were as small as two or three individuals. What we found is you really can't get any scale there. They don't tend to be as efficient. It's difficult to add or take away from the workload. So you really can't get many efficiencies. It's also more difficult for them to purchase from an informed perspective.

What we are attempting to do is to create a network of offices that has scale. So we are still going to be geographically distributed. We are not going to be as many locations as we have been historically. But those locations are going to be larger and they are going to work more closely together as a network than they have historically. So that's the thrust, and we are well underway to getting that done and it is a process, as Dave said. But it isn't a multi-year process. It's something that we are making a lot of strides fairly quickly.

Okay. If I look at your intermodal in the quarter, 12%, good number. You gave the box utilization rates in the quarter. It doesn't sound like weather was an issue or inclement weather impacted Hub. Just given the number of new containers that were added to your network, potentially would have expected a little bit stronger of a growth rate. Was there anything else going on that maybe impeded run rate growth moving forward? Was it potentially the timing of when you accept the containers? Any other noise in the quarter that maybe held back growth?

This is Dave. No, not really. Of the almost 2,000 we've received thus far, I believe that we received about 400 to 600 of the last few weeks in July. But no, there really was not anything that impeded growth during the quarter.

Yes. Utilization was still really good at the 13.3 days, especially versus other measurement periods. Our comp was against the highest ever.

Right.

We have 30% more boxes at the end of the quarter versus what we had last year at this time.

Keep in mind, we were pretty busy passing on increases, so that probably cost us a few points of growth. But we thought we struck a really good balance between price and growth this quarter.

Okay. It sounds like those rate increases you got through that, the majority of that process per Dave's prior comments during the second quarter and even through that process, your gross yields on the intermodal product were up year-over-year. If we look out directionally from I think it's the 11.2% that you put up, and without incremental costs, i.e. peaks season surcharges, should we expect a better gross yielded as we move out into the second half?

We expect yield for the year to be between 11% and 11.5%. That's for the whole Company. For the Hub segment, excluding Mode, we'd expect yield for the year to be equal to or better than our 2010 yield which was 11.6%.

Okay. If I heard you correctly, the Mode head count in the quarter ended at 195 and I believe when you announced the acquisition, the total employment of Mode was 200? Has there been a reduction there, or are we just talking about different apples to oranges, if you will?

Yes. We had a few people leave. That's right.

Okay. And obviously, they were Company employees versus sales agents if there are in that count?

Yes.

Maybe just walk us through the process. You have on-boarded, I think, 75% to 80% or a higher number of agents at this point in time. Once, you have gotten 100% of the sales agents on board, what's the next step in terms of integrating Mode?

Well it's so far we've on boarded 95%.

Alright. 95%.

There would be several different initiatives. One is on an ongoing basis to be marketing the fleet to them as well as Comtrak, finding where there is areas that we can be of assistance to them.

We are currently continuing to evaluate their systems, that's both their information technology as well as their financial systems. And so we will continue to do that on an ongoing basis and make some decisions shortly thereafter.

Yes on the near-term, we've got a lot of data warehouse work. We can start the process of giving the agents the benefit of some of our reporting capabilities. We have to do a better job of educating the agents about the capabilities of the fleet and the drayage operation as well. Those are all things that are underway this quarter.

There are certain tools that we have from a pricing perspective that they do not have that we can and will make available to the agents. So there is a long list of items that we can help the agents with and educate them.

Yes, and there is some functionality that we are incorporating that they brought to the table. For example, their carrier qualification process is automated, and we think it is going to bring some good efficiencies to Hub.

Yes. So we are hoping to use that. We want to be as cost effective as we can, but it's critical that we maintain agent satisfaction throughout the whole process.

Okay. Thank you.

Our next question comes from the line of Jeff Kauffman with Sterne, Agee. Please proceed.

Thank you. Actually, all of our questions have been answered.

Great. Thanks.

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

Hey, afternoon, everyone. And thanks for taking the time. All of my questions have been answered except one. I don't recall you addressing this on the call. I don't remember you ever talking about this, but going in to the Mode integration, did you model for any attrition of the agents out there? And if so, what can you attribute to the success of having lost none today?

We didn't model in much attrition, to answer your question. Because we put a pretty good plan together, we thought, to keep the agents. We've been lucky at doing that so far. So I would attribute it a lot to our communication efforts with the agents, and the fact that we have a team that on-boards all of the agents to make sure they understand Hub, and how to get around in Hub, and it's easy for them to use the fleet where they need to use the fleet, use Comtrak where they want to use Comtrak. So I think it's been -- professional.

We also -- we maintained the management team. And I think we know the agents, we are trusted by the agents and I think that's been very critical to the retention overall. And I think that these are very bright entrepreneurs, and I think they knew that they were on the block for the most part. That it was going to be sold. Being sold to a transportation entity that can actually bring some value to them, I think, has stimulated a lot of thought, and hopefully anticipation that this, in fact, will be a great benefit for them. That certainly is our intention.

Great. Thanks. That's all I have got. Thanks for the time.

(Operator Instructions). That does conclude our question-and-answer session for today, so I would like to turn it back over to Mr. Yeager for closing comments.

Well, great. Thank you again for taking the time out of your day to listen to our conference call. As always, Terri, Mark and I would be available for any further questions that may come up.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect and have a great day.