Hub Group Inc (HUBG) 2014 Q2 法說會逐字稿

Hello, and welcome to the Hub Group, Inc second-quarter 2014 earnings conference call. I'm joined on the call by Dave Yeager, Hub's CEO; Mark Yeager, our President and Chief Operating Officer; and Terri Pizzuto, our CFO.

(Operator Instructions)

Any forward-looking statements made during the course of the call presented are best, good-faith judgment, as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as "believe," "expect," "anticipate," and "project". Actual results can differ materially from those projected in these forward-looking statements.

As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to our host for today, Mr. Dave Yeager. You may now begin.

Good afternoon, and welcome to Hub Group's second-quarter earnings call. Like the rest of the industry, we continue to recover from the severe winter weather. We are pleased to report for the second quarter, all of our business lines experienced year-over-year revenue growth.

One ongoing issue that persists from the winter is that we continue to experience substandard rail service. Hub is fortunate that our chosen rail partners are suffering less than their competitors, but currently all rail on-time performance trails historic norms. On a separate note, we are steadily making progress with our margin enhancement efforts, and Mark will provide more color on these yield initiatives in his commentary. With that, I'll turn it over to Mark to discuss our operating results.

Thanks, Dave, and hello, everyone. I'm going to take you through our operational highlights by business line, starting with intermodal. Consolidated big-box intermodal volume was up 2%. Hub's segment volume was flat year-over-year, while Mode's volume was up an impressive 19%. Hub's local west volume was up 8%, trans-con volume was down 2%, and local East volume was down 8%.

Mode saw 20% volume growth in local West, 15% growth in local East, and 10% growth in trans-con. Although we saw a slight sequential improvement in fleet utilization, utilization at 13.6 days was about a half a day worse than last year, due to ongoing rail service issues. The pricing environment continues to be competitive, but we remain focused on maintaining pricing discipline.

We have refined our pricing processes to focus more precisely on network strengths, and implemented a more rigorous and expansive increase plan. This discipline has cost us some volume, but we believe it's the right course of action for Hub. Deploying a more disciplined approach to pricing this year will ultimately allow us to recover cost increases, and develop a more stable business base. We have completed about 70% of bids, and remain confident that we will see intermodal margin expansion in the second half of 2014.

Throughout the second quarter, we continued to make progress with our yield initiatives. As you may remember from our last call, we changed our sales commission structure to focus on margin over volume. We're bringing on new analytical tools to help us price, with a better understanding of market dynamics and network needs.

Load acceptance processes and equipment prioritization criteria have been refined, to help ensure operational efficiencies, and to maximize network contribution. Work continues on One system, our new load planning and dispatch tool, which is designed to help us reduce empty miles, and improve equipment utilization. We anticipate that it will be completely deployed by Q1 of 2015.

We are currently in the process of onboarding 3,500 new steel containers, for a net increase of 1,500 units in 2014. We have received 418 of the new containers, and the deliveries will continue throughout peak season, with an expected year-end fleet size of approximately 27,500 units. We reduced our container order by 500 containers, as we await the resolution of the anti-dumping container dispute filed by Stoughton against our supplier.

As you know, we have placed an order for 300 trucks. We expect to receive 118 tractors this month, with the remainder before the end of the year. Last quarter, we installed 500 satellite tracking devices, as part of our pilot program. This satellite tracking system will be installed in an additional 4,500 containers later this year. We expect to have our entire fleet outfitted with tracking devices by the end of next year.

Hub Group Trucking continued to grow, with volume up 6% for the quarter. Hub Group trucking moved 72% of Hub drays during the quarter, compared to 66% last year, and 70% in Q1. We also did 44% more moves for Mode Transportation. While driver recruitment continues to be a challenge, we were able to add 76 drivers in Q2, bringing the total driver count to 2,914 at the end of June.

Hub's truck brokerage division was able to counteract some of the headwinds faced from a tight capacity environment by increasing high value-added services, and improving mix. Although volume declined 10%, revenue and margin increased. Mode's truck brokerage volume declined 7%, though they also produced similar revenue and margin increases through mix improvement.

Moving on to Unyson Logistics, we saw top-line growth of 24%. We remained focused on our pipeline, seeking full outsource and target savings initiatives. This quarter, Unyson was named a Top 50 Global and Domestic 3PL by Supply Chain 24/7, and a 2014 Best Places to Work in St. Louis, where Unyson is headquartered. We are very proud to see Unyson flourish as a leader in the logistics industry. Mode's logistics business also continues to expand, with 5% growth this quarter.

Mode Transportation produced solid top-line growth of 14% in the quarter. Mode continued to grow its network, adding six new IBOs and two new sales agents during the second quarter.

We received several customer awards for outstanding service this quarter, including Guitar Center's 2013 Outstanding Performance Award, and the 2014 Partners In Transformation Award from Sears. At this time, I will pass the call on to Terri for the details of our quarterly results.

Thanks, Mark, and hello, everyone. As usual, I would like to highlight three points. First, gross margin as a percent of sales improved sequentially in all three Hub business lines. Second, Mode delivered a best-ever 2.9% operating margin, and third, Unyson Logistics had another strong quarter, with 24% revenue growth.

Here are the key numbers for the second quarter: Hub Group's revenue increased 7% to $894 million. Hub Group's diluted earnings per share was $0.51, compared to $0.50 last year.

Now, I will discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $682 million, which is a 6% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 1%. Intermodal volume was flat, and price was up slightly. Loads from retail customers were up 7%, while loads from consumer products customers were down 3%, and loads from durable customers were down 10%. These declines resulted primarily from pricing actions we took to improve freight mix.

Truck brokerage revenue increased 6%. Price, fuel and mix combined were up 16%, but partially offset by a 10% decline in volume. Length of haul increased 8% to 681 miles.

Logistics revenue increased 24%. The increase is due primarily to growth with customers that we onboarded last year.

Hub's gross margin decreased $728,000.

Intermodal gross margin was down, because of unfavorable timing of cost increases, and worse equipment utilization due to rail service issues, partially offset by a modest increase in price. Truck brokerage gross margin increased because of customer price increases, and more value-added services. Logistics gross margin increased due to growth with customers we onboarded last year.

Hub's gross margin as a percentage of sales was 10.4%, or about 70 basis points lower than the second quarter of 2013. Intermodal gross margin as a percentage of sales was down 120 basis points, because of a change in mix of business from the second quarter of 2013, and unfavorable timing of cost increases. Logistics gross margin as a percentage of sales was up 25 basis points due to more cost-effective purchasing. Truck brokerage gross margin as a percentage of sales was up 100 basis points, as a result of more favorable mix, shedding some unprofitable business, and customer price increases.

Gross margin as a percentage of sales increased sequentially by 50 basis points. All of our service lines improved. Intermodal gross margin as a percentage of sales was up 30 basis points, and both logistics and truck brokerage were up 90 basis points.

Hub's cost and expenses increased $400,000 to $46.4 million in the second quarter of 2014, compared to $46 million in 2013. Salaries and benefits were up about $800,000, due to wage increases and higher headcount. This was partly offset by a decline in commissions.

Finally, operating margin for the Hub segment was 3.6%, which was 30 basis points lower than last year's 3.9%.

Now, I'll talk about results for our Mode segment. Mode had a strong quarter, with revenue up $232 million, which is up 14% over last year. The revenue breaks down as $114 million in intermodal, which was up 19%, $87 million in truck brokerage, which was up 10%, and $31 million in logistics, which was up 5%.

Mode's gross margin increased $3.8 million year-over-year, due to growth in all three service lines, with the largest growth coming from intermodal. Gross margin as a percentage of sales was 12%, compared to 11.8% last year. Mode's total cost and expenses increased $2.2 million compared to last year, due primarily to an increase in agent commissions. Operating margin for Mode was 2.9%, or 50 basis points higher than last year's 2.4% operating margin.

Turning to headcount for Hub Group, we had 1,481 employees, excluding drivers, at the end of June. That's up 14 people compared to the end of March.

Now, I'll discuss what we expect for 2014. We project that our 2014 diluted earnings per share will be between $2 and $2.10. We think we will have about 36,850,000 weighted average diluted shares outstanding.

Our goal for 2014 is to improve gross margin as a percentage of sales from the 11% that we had in 2013. We remain very focused on margin enhancement initiatives, and improving our network. Headwinds include the difficult first quarter, and the mix impact from growth and logistics, since it's our business with the lowest gross margin as a percentage of sales. Gross margin as a percentage of sales in the last half of the year should improve sequentially and year-over-year because the majority of customer price increases take effect in the second half of the year. Our cost and expenses will probably range between $68 million and $70 million a quarter for the rest of the year.

Turning now to our balance sheet, and how we used our cash. We ended the quarter with $73 million in cash and $51 million in debt, including $20 million of capital leases. We spent $13 million on capital expenditures this quarter, including $8 million for containers that came off lease, $3 million for technology investments, and $2 million for the building. That brings total year-to-date capital expenditures to $46 million.

Estimated capital expenditures for the last half of 2014 are between $85 million and $95 million. Approximately $39 million is for tractors, and $38 million is for new containers. We intend to finance these purchases with debt.

And that wraps up the financial section, and I'll turn it back to Dave for closing remarks.

Great, thank you, Terri. Again, thank you for your participation on this call. We are continuing to make progress with our initiatives, and we're looking forward to improved profitability in the second half of the year. At this time, Mark, Terri, and I are happy to take your questions.

(Operator Instructions)

Your first question comes from the line of John Barnes with RBC Capital Markets. Please proceed.

So we obviously heard from CSX yesterday, and then JB Hunt earlier in the week about the continuation of the rail service issues, and CSX obviously talked a little bit about increased headcount and CapEx and the other rails have as well. Can you talk a little bit about when do you think rail service will begin to improve meaningfully, and do you think the forecasted increase in resources by the rails is sufficient enough to get you back to where you need to be?

John, it's Dave. There is, unfortunately, no quick fix on this. This is something that will take a bit of time. There are really two broad areas that the rail is attacking right now. One is increasing the available rail resources. The other is efficiency -- to route traffic more efficiently.

So with the first, the resources, they are hiring new crews, acquiring new locomotives where available, and returning stored locomotives to service, as well as accelerating increases in intermodal terminal capacity. All of those take time that's not something you do in a week or a day. It's more like months and possibly quarters.

Some of the things that are a little bit quicker fixes is that they are trying to more efficiently route their traffic and avoid the bottleneck with Chicago for non-intermodal trains, so they might go through Peoria or St. Louis, or some other area, so we do think that will help. Plus, I think that they're taking a real hard look at maintenance. As you know, summertime is maintenance time, not just in the city of Chicago, but also on the railroads, and I think they're looking at how they're planning that maintenance, to do the right maintenance, but maybe try to make it so it's not as disruptive to service.

Okay. All right.

As for your question, we're looking at quarters. I'd say hopefully by year-end, we'll begin to see some gradual improvement within the service parameters.

By year end.

By year end, yes. And those are the railroads that we are based on, the Union Pacific and Norfolk Southern.

Sure, okay, all right. And then my other question, is, the two internal initiatives that you talked about -- number one, increased internal drayage, and obviously the improved utilization of your boxes. Where do you believe those metrics will be by year-end, and what do you need to do further to improve those metrics as you go into 2015?

The first one is greater use of Hub Group Trucking for handling our internal drayage, and as I said in the script, we're around 72% right now, versus 66% last year. Our goal has been to get to 75% by year end. We think that's obtainable. That will be challenging, and obviously, the big difficulty there is with driver recruitment and retention. It's an issue that I think everyone is aware of. It's become more challenging, if anything this year, and we would anticipate that's going to continue to be a significant challenge for us, but we think the 75% is obtainable. The long-term goal is to get to around 85%, which we think we can do, but it will probably take us a couple of years to get to that level of penetration.

In terms of utilization, as we said, we think the rail service issues probably cost us about a half a day in the second quarter. We would anticipate that we're probably going to see a similar headwind throughout the year, but certainly having utilization to more historic levels in the mid 13s should be achievable, particularly in the third quarter, which we would anticipate, because the demand is normally going to be a pretty good opportunity from a utilization perspective. So much of that is dependent on any progress that we're able to see from a rail service perspective, so I would say that's the big variable there at this point in time.

Very good. All right. I really appreciate your time today, and nice quarter. Thanks.

Your next question comes from the line of Ben Hartford with Baird. Please proceed, sir.

Just wondering how you feel in totality. I know that the network has been an issue for everybody in the first half of the year. It sounds like the system implementation, correct me if I'm wrong, maybe it's pushed back a little bit, you have been hoping to get that in by peak, and now it sound likes year-end, and you won't have the entire fleet with the devices in place until year-end 2015.

But in totality, if you adjust for the service issue here in the first half of the year, do you feel any less confident, in terms of what you have been able to do during bid season, improve the mix of business, in terms of driving gross margins, and this expected accelerating pace in the back half of 2014, and into and through 2015? I'm looking for something in totality, I guess, trying to normalize for the issues here in the first half of the year, outside of your control.

Sure. I think that the one system is behind schedule a bit, no question. We are up and running in two terminals right now, but we are going to take a deliberate approach to rolling it out, and so while we had initially hoped to get it in, in time for peak throughout the network, we don't want to be going through an installation process during peak. So we'll really do it in two segments, and that means that it won't be until the first quarter of next year that we're really up and running, and I think, realizing the full benefit of one system at that point in time.

The satellite tracking is really on schedule, as we had thought. Once again, we're doing it in a grouping, so we can really observe the technology, make sure it's working, make sure it's bringing the kind of benefits that we want. We also don't want to disrupt container supply at this point in time, by bringing them in to have the devices installed.

The issues with the rail service, I think, are more prolonged than we would have anticipated at the beginning of the year, and even when we had our last conference call, I think we felt that the rail service issues would be resolved more quickly. It appears they are more complicated in nature, and of a longer term.

We're dealing with them well. Our on-time performance for our customers remains in the 90s, but it's definitely a challenge, and it's forcing us to jump through a lot of hoops. Nonetheless, I don't think anything has changed in our beliefs about the ability to run the network efficiently and expand intermodal margins in the second half of this year. And going forward as we get into another pricing cycle, I think there's an opportunity to get closer to more historic norms from a margin perspective, so nothing has changed to make us deviate from the plan at this point.

Okay, so you've got the service issues, they've taken longer than expected, but in terms of the results that you can control, and in terms of the results, I guess, from the pricing, the bid results to date, you don't feel like that the cadence of gross margin expansion is any different. Or that's a question, do you feel like that the cadence of gross margin expansion is any different?

No, we really don't. A lot of it depends on what materializes from an award into actual business, and what kind of mix we end up with at the end of the day. So certainly, not the time to declare victory, but we do feel that we are at this point in time, on pace, to accomplish the goals that we talked about at the outset of the year.

Okay, and then if you look into next year, and you get through this year with regard to some of the culling initiatives, do you feel like that there's a share opportunity, given some of the issues with the competing Western line, and some of the truck tightness we have seen year-to-date, is there more of an opportunity from your own competitive positioning and from intermodal broadly, that allow you some line of sight to normal, mid-to-upper single digit volume growth as you head into next year?

Yes, I mean, I think that there definitely is that opportunity. We hope that the rail service issues don't go on too long, because that's the biggest vulnerability to not continuing down the market share path, or the gains that they've realized. So as long as we start to see improvement in rail service, I think that the positive momentum of conversion from the truck market, because of the challenges that the truck market is undoubtedly facing, will continue.

We think there certainly is some conversion opportunity in the West. We did grow local West 8% in the quarter, some of that was undoubtedly conversion from the Burlington Northern. So I think we're realizing some of that benefit, and we would anticipate that, as the year goes on, we will continue to see that develop in the West.

Okay. Last one, if I could, Mode's EBIT margin was obviously very good this quarter. Could that business -- you have been fairly conservative in terms of turning that EBIT margin, or at least guiding to that EBIT margin, since you have acquired it. Can that business become as profitable as core Hub from an EBIT margin perspective?

Probably not. You're right, Ben. We said that originally we were shooting for the 3% operating margin, and we were at 2.9% this quarter, so we're pretty proud of that. It's the best ever that we've done. There's some seasonality to Mode's business. You'll see that generally the first quarter and the fourth quarter are lower than that, 2.9%, so to answer your question directly, I don't think it will ever get to Hub, only because it's different. Mode's a different model, and the agents do all the heavy lifting, with selling the freight and operating the freight, and we pay them a commission based on gross margin. That being said, it can probably be north of the 3% that we originally anticipated.

Okay, understood. Thank you.

Your next question come from the line of Scott Group with Wolfe Research. Please proceed.

So I wanted to ask about the guidance for the year, because obviously first quarter was tough with the weather. The system rolled out a little bit delayed and you have got these rail service issues, but you're keeping the guidance unchanged. I'm wondering if there are things that are going better than expected in other places, or if maybe we should just be thinking towards the lower end of the range? How are you thinking about that?

Well, we're thinking that the biggest factor in improving our intermodal network is pricing right, and getting the right business for the network. If we have a strong peak season, that also helps us to get to the higher end of the range. In addition, if we're more successful adding drivers, that would be a benefit. But we're very comfortable with the range that we gave. We're not going to give guidance within the range.

A few factors that will impact the EPS for the rest of the year. The rail service isn't back to normal which Mark talked about. Service issues are more prolonged and pronounced than we anticipated, which hurt our service and utilization. Second, it's more difficult to get drivers, and then third, and very important, too, is we need to determine if the freight that we're awarded actually materializes. Now is when we see all that freight coming in, in the third quarter, and our mix will change.

Okay. Along those lines, so even with all these rail service issues, the industry actually had -- when I look at the rails, they had pretty good intermodal volume growth in the quarter, particularly if you take out BN. So it seems likes your flat volumes are maybe less -- maybe more about you calling some business, or maybe losing some share, however you want to talk about it. I would have expected to have seen a little bit more improvement on the pricing side. Is there just a lag there, and we start to see that in the third and fourth quarter? is that what you are saying?

Yes, Scott. I think that's what we have tried to make clear in the last call, and hopefully when we're talking with the investment community is that it's always been our belief that we won't really see the impacts of pricing improvement until the second half of the year. While most of our business now at this point has been repriced, about 70% of our business, most of that doesn't take effect until the second half of the year, so it's not at all surprising that there isn't more of an impact in Q2 from price. So that is, by no means, a surprise to us.

And as far as the flatness, Scott, in the overall volumes, again, to Mark's earlier point, that is something we tried to make very clear, is that we remain very, very focused on margin enhancement. Part of that is price, so when you do that, you are going to have some volume erosion. We still believe that over the longer term, we will be able to grow at a greater rate than the intermodal market. It's just that I think over the near term, as we continue to focus on our margin initiatives, that we'll continue to lag a little bit.

And given your model, that makes a lot of sense. Just last thing, if volumes though aren't growing, why are you adding containers, and if you're using debt for the CapEx on the back half? Any thoughts on a buyback?

That is something we will broach with our Board of Directors in our August meeting.

And the first part on why you need to add containers, if you're not growing volume?

We still believe we will have some containers that are getting a little bit older, that we will begin retiring at some point in the not-too-distant future. So it's basically adding them, and we do believe that we will, again, get back on the growth path.

Thanks a lot for the time.

Your next question come from the line of Justin Long with Stephens. Please proceed.

Just wanted to go back to bid season, and I was wondering if you could provide some more color. You said you're about 70% of the way through at this point. Based on how things have progressed, do you now have the confidence that you can price at a rate above your rail cost?

Yes. We had said that was our goal, and having gotten through about 70% of it, we do believe that we will be able to offset the rail cost increases. And when you combine that with an improved mix, we think that we'll see margin expansion in the intermodal product in the second half. So, yes, we do believe that we are getting sufficient price increases in the market to offset the rail cost increases.

Great. And as a follow-up to that, I know you don't comment on core pricing in intermodal specifically, but could you just speak to the overall pricing environment you're seeing in the market, and how it progressed over the last quarter or so? Have you seen an inflection higher, are things stable? Any color on that would be helpful.

I think it's been competitive. It's remained competitive. I wouldn't say that we've seen the phenomenon, maybe, that some of the truckload folks are indicating, where they're really getting significant increases. We didn't anticipate that we would. We are certainly testing the market, but what I would say is that what we've seen is, that it continues to be a challenging pricing environment.

Yes, we saw a number of consumer products and durable companies where the business was really hotly contested, and that was particularly true in the local East and trans-con market.

Okay, great. And last one, if you don't mind, I just was wondering any change to the visibility you have on your rail costs for the remainder of 2014, or do you still have pretty clear visibility on that?

No, we still have clear visibility on the remainder of the year from a rail cost perspective.

Okay, great. I'll leave it at that. Thanks for the time.

Your next question comes from the line of Kelly Dougherty with Macquarie. Please proceed.

A follow-up on that last one. You have visibility into this year, but is there any way that you can think about maybe, if some money was left on the table on the rail side, this year, is there any concern about them trying to catch up next year, or if you have got any kind of visibility into rail costs beyond 2014? And then maybe, if not, if there are things that you think that you're doing from an operating initiative improvement, that even if there's pressure on the gross margin, maybe you can offset on the operating margin side of things?

We at this point don't really have clear visibility for 2015. We're getting there, but we don't have it as of yet. There is an awful lot of initiatives, and the market going through quite a few of those, that we do think will allow us to enhance our margins, whether it's by moving our boxes faster or handling more of our local drayage ourselves. A lot of what we have seen in the past has been, in fact, internal efficiencies, and we have no reason to doubt, with what we have got going on right now, that will continue.

Yes, we don't think that next year the rails are going to have any catching up to do.

No. That would not be our view, no.

Hopefully it's not theirs for you, either, though. I appreciate the color, thanks. And just wanted to follow up on the intermodal volumes. We saw Hunt's volumes. We saw some of your partners' volume grow faster than that.

When do we see, you said in the near term there still may be some pressure from a volume perspective, from your pricing discipline. Is that something that we will see grow more in line with the market in the second half, or is it going to be longer than that, as you cycle through some of these unprofitable contracts?

Yes, Kelly, we'll probably be below market, I would think, in the second half, but we do think it's going to be a positive number. If you look at the volume issue, it was really somewhat-concentrated. We had good growth in the West.

Where we really suffered from a fairly significant loss was in local East, and we don't think that's a long-term model issue. What really happened there was we lost a fair amount of price-driven, low-margin business we probably shouldn't have been handling in the first place. We also went to the market with a pretty disciplined pricing philosophy and plan, and there were some that didn't necessarily follow as disciplined of an approach.

And the third thing that we had, which was really an internal phenomenon, was we had a disconnect between assigned fleet cost and market dynamics, that ended up impacting the competitiveness of our pricing in some key lanes. So it was really more of a distorted view of cost in some key lanes that ended up costing a fair amount of business in local East. We have got a fix for that in place, so we think going forward, it's a contained issue. The problem is, it will continue to be a headwind for us for the remainder of the year.

That's helpful. And then maybe just switching gears, can you help us think about maybe the puts and takes from the tight trucking background? All things considered, I imagine it's good for pricing, but maybe a headwind for higher purchased transportation costs, higher dray cost, any color you could give there, and maybe what you could do to mitigate the impact? That would be appreciated.

We, as a broker, always hope for a tight truck environment. We think that's the best scenario for a truck broker. There certainly is pressure on purchased transportation. There's no question about that, so you have to be a good buyer, to capitalize on that opportunity.

I was pleased to see that we saw some margin expansion this year, at both Hub and Mode this quarter. 100 basis points at Hub was pretty good in a fairly volatile environment. I think we did a good job of dealing with the truck market, albeit, it wasn't as tight as some markets that we have seen in the past.

But we believe the arrangements that we set up with our customers, and the selectiveness we have when we're looking at opportunities are a benefit. If you think it's going to be a tight environment, that's probably a time when you want to make sure you're selective, that you have a good core base of carriers that you know are going to work with you, and not gouge you when things do tighten up. So we try to offset that risk with arrangements with good, solid core carriers who are going to be there when we need them. And so we are actually hoping for a tight truck environment in the second half.

Would that tightness? I'm sorry.

Just maybe to elaborate from a dray cost perspective, is that there is no question that there is upward pressure on truck driver salary and incomes. That will be an ongoing issue for us, particularly as we have almost 3,000 owner/operators and company drivers that are working for us. So we are, year-over-year, we're up about -- it's up $7 million annually as far as the increase in driver wage, and that pressure will undoubtedly continue over the near term.

I guess one follow-up on that, and then the other one I'm thinking about, is that selectivity? Is that why you didn't see the volume increase? You would think that in an environment like this, where the value of a broker is heightened, you would have had a volume increase on that side of the business.

Yes, that certainly was part of it. We have changed our strategy somewhat, or modified our strategy somewhat to make sure that we're spending a lot of time up front identifying where we can succeed, and where we can really bring value, and where we've got the customer and carrier base to support the business. And so, there's no doubt that we probably didn't pursue some business we would have maybe more traditionally brought on, but what we end up with is a better book of business, improved margins, and business that we can really build upon going forward.

So that could continue, even in a tight environment? You might see volume declines as you're selective in the brokerage side of the business, like you are in intermodals? Is that fair to think about?

I think it's entirely possible that we could see volume declines, but as lot of these margins moving in the right direction, we're okay with that trade off.

Okay. Thank you very much.

Your next question comes from the line of Bill Greene with Morgan Stanley. Please proceed.

I think in the past, you have mentioned a day of utilization is about $1.5 million. Is that still a fair estimate?

A day of utilization on an annualized basis?

Well, I guess -- yes, sorry. So that was an annual number, not a quarterly? Is that right?

Yes, $6 million for one day of utilization, and that's an annual number.

So when we talk about the half-day utilization here, the impact you estimate from that on your, I guess, it's really EBIT at the end of the day -- should have been about half that number. Is that fair? Is that -- so it's a half-day, half of the number, right? Just simplistically.

Yes, that's about right, $750,000.

Okay. And can we ever go -- so you said the impact was about a half a day this quarter, could we ever go back above those levels? Or are you just saying that's getting to a normal, and it, for long periods of time, runs in that band. In other words, could rail service ever actually be a benefit in the long run to you?

Sure, especially when we get satellite tracking on the containers. That will help, too. That will help improve utilization.

Yes.

Do you feel like in the second quarter -- I mean, I'm sure this probably happened in the first, but in the second quarter do you feel like there was a market share loss to the highway? Because of the rail service problems?

We did see some conversion back to highway, but it was not an overwhelming amount. But there was some, with the service-sensitive clients, yes.

Bill. Okay. And then just one last question. We know, obviously, Pacer is now part of XPO. Can you notice them in the market at all at this point? Are they aggressive? Can you see? Does it create an irrational player from your perspective?

To date, we actually have -- they have not been irrational, and so we have not really seen anything from them, which surprises us at this point. Our traditional competitors, of course, they're pretty aggressive as usual, but that's just part of the game.

Yes. But we don't have a tremendous amount of overlap with Pacer.

No.

We do not.

Okay. Fair enough. All right. Thank you for the time.

Your next question come from the line of Matt Brooklier with Longbow Research.

Terri, question for you -- the total operating expense per quarter number, is that -- that was still $68 million to $72 million, or did that number come down a little bit?

It came down a little bit $68 million to $70 million.

So $68 million to $70 million -- the question being, why has it been revised down a little bit?

Based on our runrate, where we're at, and the biggest factor there would be bonus, and that's predominantly based on earnings per share. We also have an additional $1 million of IT costs in the last half of the year, as compared to the first half of the year.

Okay. Okay, I guess we know rail service levels, they are what they are, doesn't sound like they're going to get much better, maybe until early 2015. You are going through this culling, mix improvement process on the intermodal side, and you're seeing it in the margins. I guess those being headwinds, with respect to volume growth, what are some of the things that you can do in the second half of this year, knowing these two factors, to mitigate those headwind? I don't know if there's anything you can go network-wise in terms of trying to improve utilization or moving some things around. I'm trying to get a sense anything you can do proactively that may add to volume growth in the second half?

Well, we're certainly targeting areas that we saw volume declines, particularly associated with this mismatch between assigned costs and market, so there are certainly some things we can do from a sales perspective to add some volume into the pipeline. What we don't want to do is give up our pricing discipline in order to make that happen.

The other thing that we need to make sure that we're doing is that we're exercising our new equipment allocation and load acceptance discipline as well, and so that we're taking the right freight, and we're feeding the right markets, because we do think that's a critical element. We probably could have squeezed out a little bit of growth if we were able to feed some markets that were deficit throughout the second quarter. So I think we can continue to do a better job with that.

We don't think that we're going to be stuck at the equipment utilization that we're stuck at right now, either, so I think we can capitalize on a little better equipment utilization, even if rail service doesn't improve substantially. We should be able to position the network a little bit.

We're also well-positioned for peak. We feel very confident that we're going to be able to support peak in the PNW and in Southern California, probably better positioned than we were last year. There are some things that I think we will be able to capitalize on, but there's no doubt that rail service will continue to be a bit of a headwind for us in terms of volume growth. But for us, while volume is a good thing, certainly, price is the most important driver.

Okay, understood. Thanks for the time.

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

So just to be clear, the expectation is that the Hub segment intermodal volumes are going to grow in the second half of the year, but it sounds like it might be something below market rates? And then, there's a follow-up to that, I'm curious. The Mode intermodal segment volumes seem pretty strong here in the quarter and I would be curious to get your thoughts on A, what is driving that, and B, how we should think about the sustainability of that into the second part of the year?

Yes, the first part of your question was Hub volume in --

Last half of the year.

Yes. The expectations.

Our presumption at this point in time, we think that we will see positive growth, but it will be probably below the intermodal market. But we do think it will be a positive number. The Mode volumes have been terrific, there's no question about it. Their intermodal volumes have grown tremendously now for a couple of years, and we're very pleased to see that.

What you have at Mode is a few agents that are very committed to the intermodal product. They do a very good job operating it. They've been very successful at bringing on new business, and they look across the spectrum of potential options, and they're picking the best one for their customers. So it's been an appealing model, I think, for the customers, and they have a very good product to sell, and we're trying to help them with our fleet boxes.

And you can see from the numbers that both fleet usage, as well as Hub Group trucking usage are way up, so they can sell a spectrum of options. They can also position themselves as an asset-based carrier, for those that place an importance on that. So I think they've done a very good job.

It isn't the majority of IBOs, right? It's really, like I said, a handful, but they're very good. They're intermodal specialists, and they're doing a very good job of growing the relationships they have with their existing customer base, and bringing on new opportunities.

Yes, and they were fortunate enough not to have to price up and walk away from some non-compensatory business, which we did at the Hub segment. Their business is pretty profitable, and they have done a great job, and that's really encouraging.

Sure, that makes sense. So the answer -- is it fair to say, then, that the revenue growth or the volume growth that Mode had here in the second quarter, that's something that we could see continuing through the back half of the year?

We certainly think they're going to continue to grow intermodal and there's nothing that would appear to us, that would slow that momentum down. I hate to say they can continue on that kind of a track, because that surprised us, as well. But there's no underlying fundamentals that would prevent them from continuing to post really solid intermodal growth, and we're committed to helping them do that.

And nothing unusual, I guess, either on the second quarter that was a one-time, or something like that, that they picked up some share or something, that was service disruption-related or anything?

No, I don't think there was any one-timers or any business that's going away, or anything --

They did have some truck freight convert to intermodal, which is good.

Okay, good. The follow-up that I had, is a high level question, though and it's back to the full-year guidance. And there is a ramp in just what the earnings growth is going to be, taking where you're at mid-year, and looking at the full year. We've got earnings that are going to up somewhere in between the 16% to 25% range. And at a high level, what are some of the things that are going to contribute? it sounds like it's the volume expectations, the better pricing, the gross margin improvements. Is there anything else that we need to think about that's driving the earnings growth now into the second part of the year, relative to the first part, and understanding there was obviously the weather comps in the first quarter?

As Mark mentioned earlier, all the bid results kick in, in the second half of the year. So you have got the price increases in, for basically all Q3 and all Q4. You didn't have much of that price increase in during Q2 or Q1, at all. And as well, the mix of freight changes, because the customer has awarded us a certain block of business, and we're onboarding that all right now, and that is where we have the opportunity to mix up and replace lower margin freight with higher margin freight. The awards are just that. They're an award, based on what the customer estimates our volume is going to be, so we have to make sure we get all that volume. And that's what we're waiting for to materialize.

And we have built some improved processes to track that, and make sure that up front we're getting the business that helps our network, the business that we priced to secure.

So with the weaker volumes here in the second quarter, and some of the, sounds like internal pricing issues and being able to maintain the outlook for the back half of the year, and sound like a lot of that's being predicated on the price, is the pricing better than what you were expecting maybe, at the end of the first-quarter call? Or on the first-quarter call?

It's pretty much in line with our expectations, Todd.

Okay. Okay, thanks a lot for the time.

Your next question comes from the line of Matt Young with Morningstar. Please proceed.

Just a quick question on Unyson. I'm wondering where you see the key growth opportunity at this point for the outsourced managed transportation space. Are you generally targeting the smaller, or the mid-sized shippers? Those -- I don't know, call it a few million in annual transportation spend, or do you think there's still opportunity with the larger, perhaps Fortune 500 companies, with tens of millions of transport spend? Just trying to get a feel for who is outsourcing at this point, and where those opportunities are?

Yes, for us, we don't really try to go after the very large engagements. We don't think that we bring nearly as much value to those engagements. It's also very hard to make a return on those engagements. A lot of those have proved to be unmanageable and non-compensatory, for the folks that take those on, so that's never been our sweet spot. We've always gone for the smaller and mid-tier. We have taken on some engagements that are bigger than that, that are tens of millions of dollars, but we like to see an engagement that's over $5 million, but typically to go north of $50 million would be very unusual for Unyson, but we do have a few that are in that sweet spot.

We love growth companies, companies that are really growing rapidly, because typically, they haven't maybe had the time or the resources to really get their supply chain as under control as they want to get it. And so for us there's a great opportunity for us to bring a lot of value by helping them, digest the growth, and build a really solid supply chain, so we think we bring a lot of value there, and it's a customer that, as they grow, of course, our engagement grows, so that's the biggest area of success for Unyson thus far. We believe that outsourced transportation is going to continue to be a really strong and growing trend in North America. It's still in its early stages.

That's good color. Thanks. The last question, do you think there's a lot of brokers, and/or freight brokers talk about managed transportation as well, but do you sense there's a lot of competition in that niche for the small and mid-sized type customers in outsource transport, or do you think there's only a handful of capable 3PLs, so to speak, including you?

In the market we play in, I think there's only a handful. It's easy to talk about, but you have to have the systems to back it up, you have to have people that can operate the analytics. It's a lot more complex to find and train logisticians who can help companies manage their supply chains, than candidly, to do truck brokerage.

Yes, one of the unique things that we bring, I think, to the table is, most of our customers are people who have done business with us in intermodal or in highway, that are familiar with our organization. Outsourcing is a risky proposition. You don't want to bring in a complete stranger and turn over your supply chain to them, so I think we really have an advantage, in that we have thousands of relationships built up over many years, and I think that gives us an ability, an entree into the process.

Appreciate it. Thanks.

(Operator Instructions)

Your next question is a follow-up from Mr. Ben Hartford. Please proceed.

Last question. You had talked about addressing the buyback in the Board meeting in August. Where do you stand in terms of acquisitions? What does the pipeline look like -- and more specifically, how are you thinking about, now, the balance between potential acquisitions and share buybacks? You obviously have the capacity on the balance sheet, and free cash will accelerate presumably, here, in 2015. What are your thoughts there?

Well, we continue to prefer acquisitions versus buybacks, and so, we do think that it brings more shareholder value over the longer term. We have been, we have looked at several potential candidates. In fact, there's an accrual in the second quarter, of a fair amount of due diligence. Terri, the number's about?

$850,000. Yes, Ben, we had $850,000 of professional fees in the quarter related to due diligence for an unsuccessful acquisition.

Right. So we continue to look. We do have some discussions underway with some potential candidates, but again, we also understand share buybacks and the value that it can bring to our shareholders as well, and certainly that's going to be a long discussion at our Board meeting in August.

Okay, thank you.

Ladies and gentlemen, that concludes our question-and-answer session for today. I would now like to turn the call back to Mr. Dave Yeager. Please proceed.

Well, again, thank you for participating in our second-quarter earnings call. As always, if there are any additional questions, please feel free to contact Mark, Terri, or me. Thank you again.

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