Hub Group Inc (HUBG) 2013 Q2 法說會逐字稿

Hello and welcome to the Hub Group Incorporated second-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question.

Any forward-looking statements made during the course of the call represent our best good-faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project. Actual results could differ materially from the projected in the following forward-looking statements. As reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dave Yeager, CEO for Hub Group. You may now begin.

Thank you and welcome to Hub Group's second-quarter earnings call. We're now halfway through 2013 and we're pleased to report that all of our business lines are displaying healthy growth.

Intermodal continues to expand while maintaining solid margins. Truck Brokerage has continued to display strong volume and margins since our successful realignment last year. Unyson Logistics experienced rapid growth, having added several new customers during the quarter and Mode celebrated its second anniversary as a Hub Group Company by posting strong top-line and bottom-line results while also expanding its agent network.

With that, I'd like to turn it over to Mark to discuss the details of our quarter by business line.

Thank you, Dave, and good afternoon everyone. We're pleased to report continued growth this quarter, with solid improvement on a tough comparable. The main theme this quarter was solid execution in all four of our business lines.

Logistics had outstanding performance with 34% revenue growth and margin improvement. Truck Brokerage delivered 5% revenue growth and solid margins in a challenging truck market. Pricing and operating discipline enabled us to grow Intermodal volume modestly, expand margin and continue to execute on our strategy. Mode demonstrated terrific results, improving operating income 71%.

Now turning to more details on each business line. Intermodal volume grew 2% with improved margin despite a tough competitive environment. We saw most of the growth in local West with a 10% volume increase. TransCon was flat for the second quarter and local East declined 1%.

Pricing remained very competitive during bid season, particularly in the local East and transcontinental back-haul markets. While our continued focus on pricing discipline undoubtedly cost us some volume, we held our own and remain confident that growth at Hub will re-accelerate in the second half of the year.

Our confidence in demand led us to increase this year's fleet plan to include an additional 1000 new containers on top of the previously planned purchase of 3000 units. With the retirement of 2000 older aluminum containers currently in progress, we expect our fleet to reach 26,000 containers during the upcoming peak season. Our fleet utilization continues to excel with a 10 basis point improvement over last year, despite a larger fleet. It was 13.1 days for the quarter compared to 13.2 days for Q2 of 2012. Rail service remains solid with a 1% improvement in on-time performance.

Our Comtrak drayage operations continue to grow. Since year-end we added 212 drivers, ending the second quarter with 2,686 drivers. We have aggressive growth plans for Comtrak and are looking to open three additional terminals by year end, including Salt Lake City, Portland, and Kalamazoo. Comtrak is currently handling 68% of Hub's available freight and we continue to perform more drays for Mode Transportation. Through June we have performed 83% more drays for Mode in 2013 than in 2012. This tremendous growth coupled with the ramp-up in short-haul highway moves, or street freight as we call it, is part of the reason why we are not seeing more progress towards the goal of handling 75% of Hub dray by year end.

Our investment in customer service continues to pay off. Over the course of the quarter we were honored to receive several customer and industry awards including the Truckload and Intermodal Logistics Partner of the Year and Kaizen Challenge Trophy from Toyota; Intermodal Carrier of the Year awards from both Church & Dwight and Cascades; and the Outstanding Customer Service Award from Guitar Center.

Despite the somewhat sluggish truck environment, Truck Brokerage continued to progress, growing volume 8%. On a segment basis successful cross-selling efforts produced Retail growth of 17%, Consumer Products growth of 6% and growth of 78% in the much smaller Chemicals segment. Growth in these segments more than offset declines in Durables and the much smaller Paper segment. While project work was down for the quarter, core volume, revenue and margin were all up, indicating that are new structure continues to perform well.

Unyson Logistics revenue grew an outstanding 34% year-over-year. Driving this growth was the successful on-boarding of a number of new customers. We expect growth to continue throughout the year as we prepare to on-board additional new business during the third quarter and grow organically with our existing customers. The Unyson pipeline remains strong as we continue to successfully market our 3PL capabilities.

Mode Transportation produced top-line growth of 5% in the second quarter and delivered operating income growth of $2.1 million. Particular strength was exhibited in Intermodal with volume growth of 13%. In addition Highway was back in positive numbers with a volume increase of 2%. Several new significant wins were recorded by independent business owners throughout the quarter. For the quarter, Mode added two new IBOs and six new sales agents to the network.

Overall we had a solid quarter and feel we are well-positioned for the second half of the year. I'm now going to turn the call over to Terri for financial highlights.

Thanks, Mark, and hello everyone. We had a record second quarter and I'd like to highlight three points.

First we saw revenue and gross margin growth in all three Hub service lines and at Mode. Second, Logistics had an awesome quarter with record new customer growth. And third, we had a 9% increase in earnings per share.

Here are the key numbers for the second quarter. Hub Group's revenue increased 8% to $837 million. Hub Group's diluted earnings per share was $0.50 this year compared to $0.46 last year.

Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $645 million, which is an 8% increase over last year. Let's take a closer look at Hub's business line.

Intermodal revenue increased 4%. This change includes a 2% increase in loads. Price and mix were up but were partially offset by the impact of lower fuel. Again this quarter retail was the leader, with loads from these customers increasing 14%. Loads from paper customers were down 29% and loads from consumer products customers were down 1%. Both customers segments were down, due primarily to holding our ground on pricing in a tough market.

The benefits of the restructuring in Truck Brokerage continue to pay off with revenue increasing 5% due to 8% percent volume growth. Prices were up while fuel and mix were down. The average length of haul for a Truck Brokerage shipment decreased 7% to 590 miles. 11 of our top 50 growing customers in Truck Brokerage are new.

Logistics growth accelerated to 34%, due mostly to growth with new customers. Several new large logistics customers were on-boarded during the second quarter.

Hub's gross margin increased by $6.6 million, due to growth in all three of our service lines. In order of magnitude, Intermodal gross margin was up the most, followed by Logistics and then Truck Brokerage. Intermodal gross margin increased due to volume growth, improved Street operations and modest price increases. Comtrak did 66% of our drayage work this quarter compared to 63% last year. Logistics gross margin grew primarily due to new customer growth. Truck Brokerage gross margin is up because of an increase in the number of loads, higher prices and better purchasing.

Hub's gross margin as a percentage of sales was 11.1%, a 20 basis point improvement over the 10.9% in the second quarter of 2012. The biggest driver of the increase in the gross margin percentage was Intermodal, which is up 50 basis points. Because of disciplined pricing we walked away from some very low-profit business during bids which was a big contributor to our yield improvement. Truck brokerage gross margin as a percentage of sales was up 15 basis points due to solid execution. Logistics gross margin as a percentage of sales was down 50 basis points due to the fee structure of the new business that we on-boarded.

Hub's costs and expenses were $46 million in 2013 compared to $40 million last year. Salaries and benefits grew by $3.6 million due to $2 million more in bonus, higher headcount and pay increases. General and administrative expense is up $2.6 million due primarily to higher professional fees, rent and insurance. During the quarter we spent about $1 million on professional fees associated with due diligence on an unsuccessful acquisition.

Finally operating margin for the Hub segment was 3.9%, which was 30 basis points higher than the first quarter but lower than last year because of the additional costs that I just mentioned.

Now I'll discuss results for our Mode segment. Mode had a strong quarter with revenue of $204 million, which is up 5% over last year. The revenue breaks down as $95 million in Intermodal, which was up 11%; $79 million in Truck Brokerage, which was down 3%; and $30 million in Logistics, which is up 11%. Mode's gross margin increased $1.5 million year-over-year. Gross margin as a percentage of sales was 11.8% compared to 11.6% last year.

Mode's total costs and expenses decreased $600,000 compared to last year because of lower general and administrative costs. We continue to see the benefits of the integration.

Operating margin for Mode was 2.4% compared to 1.5% last year and 1.9% in the first quarter. More good news for Mode is that we think operating margin will be over 2% for the rest of the year.

Turning to headcount for Hub Group, we had 1,420 employees excluding drivers at the end of June. That's up 20 people compared to the end of March.

Now I'll discuss what we expect for this year.

We're comfortable that our 2013 diluted earnings per share will be within the current analyst range of between $1.95 and $2.10. We think we will have 37 million weighted average diluted shares outstanding.

Our costs and expenses will probably range between $67 million and $69 million a quarter for the rest of 2013.

While not all rail cost increases have been finalized yet, we believe we will be able to maintain the Hub segment 11% gross margins that we had in 2012.

Because of the change in the Pennsylvania income tax law last week, our effective tax rate is going up. We're estimating that the effective tax rate in the third quarter will be about 40% compared to the 38.4% in the second quarter.

Now turning to our balance sheet, and how we used our cash. We ended the quarter with $72 million in cash and $9 million in debt. During the quarter we spent $30 million on capital expenditures, which brings year-to-date capital expenditures to $39 million. We think capital expenditures for 2013 will range between $105 million and $115 million. As Mark said, we increased our new container order this year to 4,000 and we're buying 4,200 containers that are coming off lease. The total cost for the containers will be about $61 million. We bought 80 new tractors that were financed with $9 million of debt. We'll spend between $30 million and $32 million to finish our new corporate headquarters. The remainder of the capital expenditures are technology projects.

$13 million remains on our share buyback authorization.

And to wrap it up for the financial section, we're happy with our performance this quarter. We'll stay focused on growing all of our service lines while maintaining price discipline. Dave, over to you for closing remarks.

Great. Thank you, Terri. In conclusion, we experienced a solid second quarter, having delivered a 9% increase in earnings per share with growth in all of our business lines. We remain focused on managing each of these business segments to consistently deliver profitable growth and shareholder returns, and look forward to continued success in the second half of 2013.

With that, Terri, Mark and I are happy to take your questions.

(Operator Instructions)

John Barnes, RBC.

Your comment about a competitive environment and having to walk away from a little bit of business, can you talk about what you saw from the competitors in terms of the behavior on pricing and things like that? Maybe give us a little bit of context around the magnitude of what you were experiencing?

Sure, John, this is Mark. Yes, I think it certainly was a competitive environment throughout the bid season. I would say that the bid season opened very competitively. We saw a number of particularly consumer products companies that the business was hotly contested. This was particularly true in local East markets and back-haul transcontinental markets. Obviously our biggest competitor is always a factor in that environment. At the same time we did see some traditional IMC's, who were also competing with a rail-based product pretty aggressively for some of that business. As the bid season wore on, I think we saw what we expected to see. We didn't see things get significantly more aggressive. Stayed competitive but we were able to secure increases in most instances.

Okay. All right, very good. And then, now as a follow-up, it seems like maybe some of the truck conversion activity during the quarter maybe slowed down a little bit. We get the sense in talking to the truckload carriers, that shippers don't perceive that capacity shortage and that obviously you had a little bit of a decline in diesel fuel prices. Do you feel like you experienced the same thing during the quarter? And is that just a breather before that longer-term trend kicks back in?

We still are pretty optimistic about the conversion opportunities that are out there. We think that they are significant. We think that very few shippers are at their optimal usage levels of the Intermodal product. Actually throughout the quarter on a same-day basis, we saw demand increase, so we certainly didn't see it decrease or lessen. Obviously cheaper fuel does have the effect of narrowing the gap between Intermodal and Truck, but at the same time most of our customers are still looking for a long-term way to reduce their costs. And as a result, most of them are trying to continue to explore where they can use Intermodal more frequently.

All right, very good. Thanks for your time, guys.

Ben Hartford, Robert W. Baird.

Could we talk a little bit about, Terri, your comment at the end with respect to Hub margins. You said that you hope to maintain 11% Hub gross margins in 2013, hold them flat relative to 2012. I think, last quarter, the comment was you hope to improve upon it. That change in language, I'm curious to know how deliberate it is, one. And, two, how much of it is a function of a slightly more aggressive Intermodal pricing environment versus maybe some mix shift within the business with respect to logistics growing quickly here. Can you talk through that logic?

Sure. First of all, that's exactly right, what you said that we hope to maintain the 11% gross margins that we have. We have not finalized all the rail cost increases yet. It was a difficult pricing environment, but we got price and we got enough price that we think we can cover the cost increases. So that's part of it, the tough pricing environment. And then the other part of the reason that we're maintaining that margin percentage is due to Logistics, because Logistics grew so much. While that's great for gross margin dollar growth, it does bring down our yield a touch. And we grew tremendously in Logistics and we think we will continue to grow Logistics in the next two quarters quite a bit. So that is impacting the yield as well.

Okay, so it is a change in language one and two. It is a function of both of those dynamics, is that right?

Correct.

Okay. And then if I look at the Intermodal volume growth in the first half of the year at 2%, it would seem to lag the IANA figures and I'm just wondering if you are confident that volume growth will improve in the second half of the year. If you look at the business in the broader context, do you think that 2013 is just a period of you guys really focusing on yield? Maybe at the expense of volume growth or share on the margin? And that you can go into '14 and beyond and be either one that grows at market levels if we are talking about Intermodal specifically? or even a share gainer on the Intermodal side? Can you talk a bit strategically about how you see the Intermodal product here and the positioning of the product in '13 and beyond?

Okay, Ben, this is Dave. As far as '13 in the first half, we did have an awful lot of low margin business in which we were the incumbent. And so, as with that, you always have a fair amount of risk and more downside than upside as far as increase in volume. We did hold our ground. We did lose some share with some of the lower-margin consumer products companies, and as a result of that we saw our volume tail off. Now that was for the first quarter and that's bid season. We since then have been, I would say not necessarily on a roll, but we've been much more successful in gaining share.

And if you look at it sequentially, our volume change per business day has increased throughout the second quarter. And we're starting out July of this year very similar to how June and the increases in volume. Over the longer term we always believe Intermodal is going to, the growth of it, is going to outpace that of GDP. And we do believe that we should outpace Intermodal's growth in the aggregate. There's going to be spots and quarters and months when we do not, but we do believe over the longer-term our business model, having the fleet, having the drayage operations, and also having access to the rail equipment, puts us in a very good solid strategic position to continue to grow faster than the Intermodal market.

Okay, that's helpful. Thanks.

Justin Long, Stephens.

Could you talk about how demand in Intermodal played out over the course of the quarter, maybe just touching on the month-to-month trends that you saw? And also going forward, what you're hearing from your customers today as it relates to an outlook for peak season.

I think as Dave just alluded to, we saw -- you sort of have to look at it on a same-business-day basis. Because there are some number of days per month and those types of things really do affect volume. As you look on a per-business-day basis we actually saw our growth accelerate over the course of the quarter. June was our strongest, so April, May and then June. We saw growth building over the course of time.

Based on what we know about demand for the remainder of the year, we think domestic Intermodal is going to continue to post solid results. Rail service has been good. We believe there will be a peak season. I'm not sure exactly how robust and how early that will start, but we're certainly preparing for that. I think when you look at the growth of domestic Intermodal over the course of the last, say three years or so, it's been a solid story and we think it's likely to continue that trend. It's probably not going to be 2004 or 2007, but we do think that domestic Intermodal will have a solid growth year, which will include a good second half.

Okay, great. That's helpful. And then on Brokerage, last call you mentioned the month of May being a pivotal indicator on how demand progresses the rest of the year. Would you say in terms of demand, things played out as you expected in the quarter?

I would say that I don't think we saw the kind of tightness of supply that we were looking for in the month of May. The previous two years we had seen a spike up and a bit more tightening in May. That dissipated throughout the rest of the year, but I would say based on the indexes that we've seen, that has not been the case. Which indicates that right now we aren't seeing an environment where demand exceeds supply. We have seen some pockets of tightness, particularly around produce season, but we haven't seen consistent tightness throughout any period of the quarter, including May.

Okay great. And one last one, if you don't mind. You mentioned you evaluated an acquisition. I was wondering if you could comment on the activity you are seeing in the M&A market today as it relates both to the number of willing sellers, but also the level of competition and aggressiveness you're seeing from other bidders.

There certainly does seem to be more assets that are on the market for sale. We've always committed to our shareholders that we'll do two things. One, that any acquisition we make will not be a fixer-upper and probably primarily also that it will be accretive to our earnings. We're seeing some good companies that are being brought to the market. Were going to evaluate them to see if in fact they are a strategic fit for Hub. This particular one, it was an auction that we did partake in, and we just couldn't get to the EBITDA multiple of where the private equity firm finally ended up. So we are seeing a lot of private equity money in there as well at this point, in addition to your normal strategic buyers.

Okay thanks. That's helpful. I appreciate the time.

Kevin Sterling, BB&T Capital Markets.

Dave, are you seeing any shippers coming to you, looking for capacity now in light of hours of service? Or is it still too early, given that hours of service is implemented in a slow freight month and before peak season?

Sure, Kevin. It probably is too early to really see the impacts of hours of service. Again, it's only been several weeks and we haven't really seen any impact. We didn't foresee that with Comtrak it was going to have any impact on us just because of the number of hours our drivers are on the road and because we are a local drayage for the most part. I do think that over the longer-term, and this is probably over a series of years, as onboard tracking devices are on all tractors and if they're mandated, that hours of service, when strictly adhered to, will have an impact. But right now it's really only the larger carriers that are being checked on the new regulations. And I think we're all in compliance to begin with. But as it's expanded with onboard computers, et cetera, I think that then we'll see that change and there will be somewhat of an impact. But that could be over years.

Okay, great. Thank you. And switching gears here, the growth that we saw in the second quarter from Unyson Logistics, which was very good, and I think you mentioned the pipeline is still full with some new customers. How should we think about growth for the back half of this year from Unyson Logistics? Should we extrapolate what we saw in the second quarter or maybe turn it down a little bit? Just like to get your thoughts for Logistics.

That's a good question, Kevin. We had some phenomenal new customers with a lot of growth and we think that the growth that we had in the second quarter will probably continue, maybe dial it back a touch. But it should continue in the second half of the year.

Okay great, Terri. That's very helpful. And thanks again for your time this evening.

Michael Weinz, JPMorgan.

I was wondering if you can talk a little bit about Intermodal capacity, what you're seeing in the marketplace. Because obviously the markets are conducive enough for you to have increased your order of containers. But at what point, given that pricing is getting more difficult, do you say enough is enough, we need to hold off for a little bit as an industry? Or is all of this in anticipation of the growth on the Crescent Corridor that you're willing to put up with a less favorable pricing environment for a short period of time ahead of that volume growth?

Yes, I think that right now we're seeing a fairly fluid equipment environment. I wouldn't say that it's tight. We've seen some periodic episodes of tightness in some areas like the Southeast. We are not seeing tightness off of the West Coast as of yet. However, the industry itself is not adding anywhere near the capacity this year that it did last year, or certainly not the year before. So we feel like, given the service levels that we're receiving, and the utilization that we've been able to maintain at 13.1 days with the fleet that we have, in order to properly serve our customers' needs as demand does pick up, it's in our best interest to add those additional boxes. So I don't think it's a tight capacity environment. We are anticipating some tightness off the West Coast during peak as is normal. But at the same time we also don't believe we're going to have a situation in which we'll have excess capacity. We've had our fleet fully deployed all year and I would certainly anticipate that to be the case for the remainder of the year.

Right. Maybe you can help me with some of the math work here. Because it seems like you have, on a year-over-year basis, your container capacity is going to be up more than 10% with the addition of 3,000 boxes.

We're adding 4,000 new boxes. But 2,000, net, after we retire the 2,000 that we've got.

So it's under 10%.

Okay, it is under 10%, okay. But in first half you're seeing volumes in the Intermodal side for the core Hub business around 2%, Mode is smaller but it's growing faster. How should we think about how the containers are being allocated? And this is getting to the idea that you should see a material step up in the pace of volume growth in second half, based on these additions. Assuming, of course, there is no change to utilization rate.

Yes, I think what we said is that we felt that volume growth would re-accelerate in the second half of the year. Everything we've seen from the bid results thus far, about 70% of our business has repriced. And we remain confident that we will see growth levels in the mid- to high-single-digits in the second half of the year. I think that was the guidance we gave at the end of last quarter and based on everything we know, we're still confident in that.

Okay, that's very helpful, guys. Thanks a lot.

Todd Fowler, KeyBanc Capital Markets.

I just wanted to talk a little bit about the decline in the local East volumes and what your view is as to what changes those dynamics in the market, either from Hub Group standpoint competitively or with some of the behavior from some of your other competitors.

Todd, this is Dave -- we still view local East as an enormous opportunity for truck conversion. So number one, we still look at that to be one of our primary growth areas. This past quarter, again, we had some low-margin business as well as a few instances where some of our competitors were quite aggressive, to levels that we just didn't feel were compensatory. And we walked from the business, if you will. It did cost us some volume. But, we believe that the local East over the longer-term has tremendous opportunities. There's a lot of truck conversion that's there in the Crescent Corridor. It is growing with our volumes, not as rapidly as we might like, but it is growing well. And we believe that, again, there is a tremendous amount of conversion capability. We lost some low-margin business but it's not anything we think will have EBITDA long-term negative impact on us.

And I guess, Dave, some of the different strategies between the two main rail carriers in the East and does something in those dynamics change going forward? Or some of it just a growth period until they can fill up in that workforce some of the capacity expansion that they've been doing in the past couple of years?

Both of them of course, have been adding capacity and building out terminals. So that definitely does create more capacity. At the same point in time, we are of course aligned with Norfolk Southern. We believe that their long-term strategic direction fits best with Hub. And then CSX, they have certainly expanded their terminals and some of the new locations. But they are more transactionally focused. And again, we're just better aligned with Norfolk Southern and believe that with their focus on service, that we have a long-term relationship that will be beneficial.

Okay. And then for my follow-up, what is the difference between the growth rate that Mode's shown in the Intermodal business versus the legacy Hub Group business? The 11% top-line growth and I don't know if you gave any volume numbers for Mode, but what's allowing them to grow faster than what the legacy Hub business has? Thank you.

Yes, I think we did throw a volume number out there. In any event, Mode's volume growth was 13% in the quarter, which was outstanding. I think what we've got is a few of the larger Mode agents who have really embraced Intermodal, and are exploring all of their options and using all of their rail and fourth-party options effectively. They have seen some good success with their existing customers as well as some good success with some new customers that they're bringing on board. And some of those have been sizable and big enough to move the needle. They were fortunate enough to not have to walk away from non-compensatory business so they didn't have that headwind either. But we think that they're doing a very good job of embracing Intermodal and we're seeing good growth out of a number of those larger Mode agents. And that's encouraging.

And, Mark, I guess this is probably a sensitive thing to do, but do you work then with the Mode agents to either expand that relationship on the Hub Group side? Or how do you look at the growth that they're seeing to the benefit of the overall Company?

We think that it's helping us reach a new set of customers and new markets, as they're bringing Intermodal to their customer base. So that's a good thing. Obviously we want to do more dray services for them and we want to provide more fleet capacity to them when they need it, as well. We made a conscious decision with Mode to maintain our pricing disciplines. And so Mode actually shrank in terms of volume with Hub fleet boxes and chose more cost-effective alternatives in order to be competitive. That's a strategy that we'll likely continue to follow, but we want to support them however we can. At the same time, we've made a commitment to the Mode agents that they're going to be allowed to make their routing choices. And we're going to continue to stick by that commitment.

Sure. That makes a lot of sense. Thanks a lot for the help.

Kelly Dougherty, Macquarie.

This morning Union Pacific mentioned on their call that Intermodal volumes were down, I think driven by an 8% decline on the international side, offset by a 3% growth in domestic. Do you think that the weakness on the international side and maybe their eagerness to drive more highway conversions just makes for a more reasonable discussion with you about what's going on the domestic side of things?

This is Dave. I think that the UP has made it very clear that they, as we walked away from some low-margin business most recently. They are willing to also walk away from business. And if I'm not mistaken, they had stated that it's their goal to have a 65% operating ratio by 2015. We have a very significant relationship with the Union Pacific. We don't find the price increases that they are looking for to be unreasonable. We think it's something that the Intermodal marketplace itself can in fact support.

It seems like there's been a change in how the rail cost increases have been going, from where they were in the recent past to where you are now.

I don't know if I would say that necessarily. I think that we're having better communications and better understandings on expectations, both with our rail partners as well as with our clients. And so with the added communication, I think it makes the price increase discussion a lot simpler and a lot more direct.

Okay, great, thanks. And then, Terri, maybe just a quick one for you on the Logistics side. Talk about being able to dial back to growth a little bit, but still seeing pretty strong growth. Can you give us a sense of what the growth will be for the full year and how we should think about it going forward on the Logistics side? And then what does on-boarding does to margins? Do they get a bit depressed as you ramp up some of this new business? And then do they improve? And how to think about that.

Sure. Growth for the year could range in Logistics anywhere between 25% and 30%, call it. That's what we would get for the full year. And then in terms of how that impacts the margin, Logistics gross margin as a percentage of sales is the lowest of our three different service lines. So that brings the yield down, but certainly it's terrific gross margin dollar growth. Because that was our second biggest grower in terms of gross margin dollar growth this quarter. And so we think overall we'll be able to maintain the 11% gross margin that we had in 2012, but a headwind in terms of the yield is the Logistics.

Sure. Apologies for the confusion but within the Logistics segment itself, though, does the on-boarding depress the margins within the segment a bit? And then as the business ramps up you should actually see margins improve?

Yes. We have a little inefficiency, sure. There's a bit of a ramp-up cost and some of them are pretty big engagements and it just takes a while to be efficient with them.

right.

You are exactly right, Kelly. We would have a little bit of ramp-up cost in this quarter. So that will be lower, those ramp-up costs, as we progress throughout the quarters.

Great. Thanks very much.

Scott Group, Wolfe Research.

Just want to clarify one thing. I know you talked about the margin percent may be a little bit lower than what you thought earlier in the year. You never gave us margin dollars guidance, but is that going up relative to what you thought earlier in the year because Logistics is doing better?

Yes.

That's right, okay.

Exactly right.

So I want to understand what the confidence is in Intermodal volume getting better. If you walked away from some business and it was low-margin, low-profit business earlier in the year, shouldn't that continue to have an impact for the full year? And if you are right and Intermodal volumes do accelerate, can we also sustain the 3% to 4% pricing mix benefit ex-fuel and get better volume? Can we get it all?

I'll answer part of that and maybe Terri can answer the last part. Overall we did see, sequentially through the quarter, our volumes improve. And that coupled with what we know is in the pipeline, maybe possibly not implemented as of yet, some of the new bids and awards we received, will more than offset the losses that we had with some of the low-margin business. So we certainly do feel very comfortable that we'll be in the mid-single-digits for the year and certainly that's the way that we're trending as we did in June, as well as thus far in July.

And then I'll take the second part of your question, Scott. In terms of this quarter we talked about price, fuel and mix. Price was up the most, mix was also up, and that was partially offset by slightly lower fuel. We did get price increases, as Dave said earlier. We worked closely with our partners to make sure that we got an increase and walked away from that lower-margin business. Our prices are up and our mix is up, really driven more by a lot of our growth within the local West market, which is a longer length of haul, so that's why mix is up a bit. And then fuel, it's hard for us to tell what will happen with that. Fuel fluctuates depending on whether the price of diesel goes up or down for us.

I guess what I was asking, and maybe in a different way of asking it is, as the volumes are getting sequentially better are you maintaining the yields? Or are those getting sequential -- the pricing, or is that getting sequentially little bit worse?

We're maintaining the pricing and it should get a little better.

Okay, great. And one last thing, if I can. The operating expenses, if I back out the $2 million of acquisitions cost, was $63 million.

$1 million of acquisition cost actually.

Okay, so why are they going up to $67 million or $69 million in the back half?

The biggest contributor to that would be we're projecting that Mode's gross margin goes up. And when that happens agent commissions go up, because that's a function of gross margins. So we're thinking that could go up $1 million. And then we're also projected to add about 45 more people in the second half of the year. And then we'll have the impact of the 65 people that we added in the first half of the year that are only in there part of the time. So that could be about $2 million for that. And then commission will be up about $300,000 as we expect to grow more in the second half.

Okay, great. Thank you, guys. Appreciate it.

Bill Greene, Morgan Stanley.

Just a couple of quick follow-ups here on some of the details. Terri, you went through some of those details on the operating cost there. But you've actually been doing quite a bit better in the first half. And you had some one-time -- not one-time, but maybe unusual items here in the second quarter as well. You went those items, but the first half is not actually a pretty good run rate to start as a base?

It wouldn't be. If the gross margin for Mode goes up, that's just a cost that we have. We've got agent commissions so --

All right, yes, no, I get it. When I hear the discussion on the pricing, you want to stay disciplined and whatnot, but your competitors are being a bit aggressive. I would think, well, maybe there is something that they can do then on the costs, such that you could actually say, well we can match whatever price you want because we can stay better than you on cost. That's kind of where I was thinking that maybe there's something here in the cost structure, you'd say we should try to attack that to get that down. But maybe that's not thinking about it right.

That's a good question. Most of the employees that we would be adding would really be for Logistics and a little bit of Comtrak. And as Comtrak grows for us, that's good for us, because were doing more of our own drayage and we save money. Those are really the headcount adds. It's not in Intermodal per se.

Yes, okay. And then on the full-year guidance range, you took out the top and a little bit. Is that just all this tax rate increase? Because I think you had $2 to $2.15, if I'm not mistaken.

No. The new analyst range right now is $1.95 to $2.10.

No, that's true. But I thought the prior commentary on guidance had been more like $2 to $2.15.

Yes, because that was the analyst's range at the time.

Okay, so you're just saying where the range is. You weren't trying to take down guidance.

Correct. We feel comfortable within the analyst range.

Okay. I just wanted to get that clarified. Okay, thanks for the time.

David Tamborino, Stifel.

I was wondering how much of your business in the West with the rails, actually across the nation with the rails, is left to be repriced? I believe you mentioned that there was some, but didn't really quantify what percentage had been repriced so far this year.

I think Mark said 30% is going to be repriced in total. And 70% has ready been repriced.

I may not have picked that up earlier. And then your confidence in the back-half ramp of Intermodal, I believe you said mid- to high-single-digits for the last couple, so that evens out to about mid-digits for the year. What lanes do you anticipate seeing the most growth in?

I think that we're likely to see an ongoing pattern of what we've seen. We think that local West will probably continue to lead our growth. Hopeful to see that the TransCon will get back in positive numbers and the same with local East. But I would say that in all likelihood, particularly given the fact that we've had a lot of success in the retail sector, it is likely to see the preponderance of our growth being in the local West market.

Okay and then last one on Hub Brokerage. You said there was a margin expansion for the quarter. Was that a result of price coming up or better procurement in terms of trucks?

It's really a combination of both. You're right, our prices were up. Fuel and mix were down for us. And our team has done a great job of purchasing.

If you had to attribute that one way or the other or are you just splitting it down the middle?

Hard to do, really. It's hard for us to measure, to be quite honest. So I'd probably split it down the middle.

Right, yes.

Okay, well thank you for your time.

Matt Brooklier, Longbow Research.

Nice to see Mode's growth picking up, and I think someone mentioned earlier in the call that you've added some salespeople and sales agents. I'm was curious to get your thoughts on 5% growth in the quarter, how much was that potentially attributed to the headcount additions? And then maybe potentially you could talk to what was organic growth for Mode during the quarter.

Hey, Matt, this is Mark. Almost all of that growth came out of existing agents. By and large it was our larger agents who posted the significant growth. We did add two new IBOs and six sales agents over the quarter, so that's a good thing. But it typically takes them some time to ramp up and really start to generate enough revenue to move the needle. So most of our growth came organically.

Okay, that's good to hear. And then are the expectations, and I think Terri talked about it, you are adding some headcount in the second half of this year. Are we planning to add incremental IBOs or incremental sales headcount to Mode? Or are you more focused on continuing this momentum of organic growth?

We're always wanting to add more IBOs and sales agents. And we'd love to sign more up. Our recruiting team is working on that, doing a good job. We're focused on it. We have more control over how many people we add at the Hub segment. And so those headcount adds that I mentioned were at the Hub segment.

Right, and most of those are within Logistics with the new on-boardings. Also Highway as they continue to expand, as well as some Comtrak, as it also is up over 10% in driver count thus far this year.

Right. So the headcount is there to either handle new business or to help make our street operations more efficient.

Okay. And second part of my second question as a follow-up here. I guess the ability to attract IBOs to Mode and having this more recent success, is it a function of stabilizing the business, getting the IT in place? Is it just a function of being more attractive from a platform perspective? Or is it more a function of your efforts of on the recruiting side and really going out into the market and being more aggressive in terms of looking at potential agents?

We certainly hope that it's an attractive platform. I think it's a unique platform, especially for IBOs that are interested in the Intermodal product. We're trying to also do a good job of supporting their LTL efforts and their truckload efforts. And we think we are in a unique position to do that. I think now that we're two years in, we've demonstrated that we're going to allow them to run their businesses, but support them however we can. And so hopefully they're comfortable that that's the case and will be going forward. We got through some systems issues last year. So they have more clarity in terms of the operating systems that they're working with. And I think that that's helping the recruiters give potential agents a view of how they're going to operate their business going forward, as well. So I think all those things are giving the agents more confidence that Mode is a good place to be associated with.

Okay. Thank you.

Ryan Bouchard, Avondale Partners.

The Truck Brokerage segment the second half of last year provides a little bit more difficult comps. Do you think that you can maintain this mid-single-digit revenue growth or should it ticked down a little bit or how do you think about that?

We think we can definitely maintain the mid-single. It might even go up from there.

Okay. And then the Mode operating margin improved quite a bit. You said it should be greater than 2% for the rest of the year. Also, in the second half of last year you get tougher comps. Should it continue to be higher year over year? Or maybe not to the extent that we saw in the first and second quarter?

It will be close to what it was last year, because you're right, last half of the year was above the 2%. We think we can maintain that.

Okay. Just one last one, if I could. Did you talk about, you talked about Mode Intermodal. Could you give us a number on the percentage of Mode Intermodal movements that were done using Hub boxes?

That went down. But it was 13% of their loads moved in our fleet boxes.

Got you. Okay, thanks, guys.

Anthony Gallo, Wells Fargo.

First question, I wanted to clarify, you mentioned that you walked away from some lower-margin business and I'm trying to figure out if that would have shown up in the second quarter numbers, or is that more second-half issue? Because I look at legacy Hub or even on a consolidated basis, margins didn't really improve that much. In fact, I think most of the out-performance came from Mode. So I was just trying to reconcile the low-margin business that was walked away from, and where it shows up, or when it will show up in the numbers.

Let me correct that a bit. Say, walk away. We priced it up and somebody else took it at the lower margin. We didn't walk away, but we tried to increase the price. The customer was unwilling to accept it, and somebody else was willing to operate at those margins. Most of that took place in early bids. We're talking the January, February and so those aren't actually implemented until, it could be as late as mid-second half. It could be June. Because obviously once you go through the bid, they may make awards, but then it takes a while for everybody to be prepared to handle that new network. So no, we feel very good about where we are. A lot of the business that we have been awarded has been kicking in over the last several months. And some of it has yet to be implemented, the business that we did in fact win in bids that may have been held in April and May. So we feel very confident in the numbers.

That's helpful clarification. Thanks, Dave. On the Mode improvement in margins, what were the two or three main drivers of that do you think?

The $1.5 million -- about 60% of it was due to Temstar improvement, which is our refrigerated trailer product that we have. And the rest of it was due to IBO growth.

Thank you very much. Have a good evening.

(Operator Instructions)

Todd Fowler, KeyBanc.

You know what, guys, I'm in good shape. I'll follow up offline later.

Okay thanks.

At this time there are no further questions. I will now turn the call back over to Mr. Dave Yeager for any follow-up remarks.

Great. Well, once again we thank you for having an interest in Hub and participating and/or listening to our second-quarter earnings call. As always, Terri, Mark and I will be available if you do come up with some additional questions or need some clarifications. But thank you for joining us today.

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