Hub Group Inc (HUBG) 2016 Q2 法說會逐字稿

Hello and welcome to the Hub Group second quarter 2016 earnings conference call. Dave Yeager, Hub's CEO; Don Maltby, our President Chief Operating Officer; and Terri Pizzuto, our CFO, are joining me on the call.

(Operator Instructions)

In order for everybody 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 and 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 may differ materially from those projected in those forward-looking statements.

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

Thank you, Eric. Good afternoon and thank you for participating in Hub Group's second-quarter earnings call. I'm joined today by Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer.

We had strong financial results in the second quarter despite a soft freight environment. All of our business lines contributed to the earnings growth as we continue to press forward with segment specific initiatives.

Our corporate development initiative continues to have good traction as we are exploring several potential acquisition targets. There are some very interesting opportunities that would assist Hub in diversifying our service offerings while adding earnings and bringing strategic value.

Now I will address the details of our Intermodal business. The increased profitability of Intermodal occurred despite a slight decline of 3% in consolidated Intermodal volume. June was Intermodal's best month increasing by 1.5% year-over-year. In fact, the last week of June was the second largest Intermodal volume week in Hub history. The improvement is the result of bid awards, marketing initiatives and reaping the benefits of our operational realignment.

For the second quarter, local east volume was down 11%, local west was flat, and transcon was up 6%. Despite the volume decline in the second quarter, we are still forecasting and 2% to 4% volume growth for the full year.

We continue to realize benefits from our realigned Intermodal operations and account management group. Our on-time performance with our customers was up 560 basis points year-over-year while our accessorial costs were reduced by over 51%. The pricing environment continues to be very competitive. However Intermodal's gross margin was up 14% as a result of modest price increases coupled with the significant improvements that we've seen in reducing our operating expenses.

Rail service continues to be very strong. For the second quarter, rail on-time performance improved 25% on a year-over-year basis and 1% sequentially. Fleet turns improved 1/2 of a day to 14.6 days on average. GPS installations in our container fleet, now at 90%, will help us make yet further improvements with our fleet turns.

Hub's current fleet size is 28,500 containers. We previously stated that we intend to acquire 4,000 containers this year of which 3,300 will be replacements and 700 additions to the fleet. As a result of our most recent award activity, we've increased our container order by 2,000 units, bringing our total to 6,000 for this year. The additional 2,000 containers will allow us to meet the increased demands of our customers and provide excellent service.

And with that I'll pass the call over to Don to go through the specifics of our other business segments.

Thank you, Dave. Good afternoon, everyone. We are very pleased with the quarter results as we continue to focus on areas of growth, margin enhancement, internal efficiencies and overall performance across all our business lines. This quarter we again made several service-level improvements and can report that we have the highest on-time performance in our Company's history.

With our improved service levels combined with a better aligned sales and account management structure, we are seeing an increase in our multimodal account onboardings and an increased share of wallet with our existing customers. And multimodal account management teams are still on pace to have the majority of our business under one model by the end of the year with full implementation scheduled for the first and second quarter of 2017.

Our focused approach has delivered the results we are seeing now as we remain steadfast in our efforts to take costs from our network while improving our overall service levels. We will continue to focus on our overall growth strategy while at the same time looking at operating efficiencies and margin enhancement opportunities.

Now let's talk about the business lines. Truck brokerage. Our truck brokerage division grew volume by 2% in the quarter in spite of a challenging market in overall sluggish demand. The focus remains on strategic customers for targeted multimodal growth opportunities and integrated value-added services to our customers. During the quarter we continued to add a number of core carriers to our portfolio for specific markets strengthening our network capacity. We believe we will continue to see a challenging marketplace for the remainder of the year, however, we are well-positioned for growth and opportunities.

Unyson. During the quarter, logistics revenue declined by 1% which was anticipated due to softer volumes from our key customers. However, it continued to deliver strong net results due to improved internal efficiencies and mix of customers along with improved network solutions to support our growing customer base. The revenue decline for the quarter was due to softer volumes from our key customers.

Our logistics service offering remains strong and is poised for growth contributions in the second half of the year. The pipeline of new business was robust and the second half of the year will benefit from multiple onboardings. In addition to the new onboardings, we remained focused on expanding our solutions with our existing customers to improve overall yield and provide cost efficiencies for our customers. Finally, we continue to onboard new customers onto our new TMS technology platform that will further strengthen our logistics service offering.

Mode. Although overall revenue was down by 1%, Mode Transportation generated solid volume growth for the quarter of 4.1%. In spite of the overall decline in revenue, Mode's truck brokerage volume grew by 18% for the quarter due to a new multimodal onboarded customer along with increased cross-selling across their network. Our team remains focused on delivering operational excellence with our new customer onboardings while driving results for the remainder of the year. Finally during the quarter, one new IBO was added to the network along with 12 new salespeople and our pipeline for new IBOs remains strong. We believe that Mode's volume growth and expansion of its salesforce in the second quarter leave it well-positioned to capitalize on freight capacity when freight levels recover in coming months.

Now I'll turn it over to Terri to go over the financials.

Thanks, Don, and hello, everyone. As usual, I would like to highlight three points. First, despite the tough freight market, we had an outstanding quarter with 16% operating income growth contributing to our best-ever second-quarter earnings per share. Second, by the end of the quarter, we had completed 85% of our $100 million share repurchase authorization. And third, as expected, we continue to see a challenging environment for Intermodal volume and pricing.

Here are the key numbers for the second quarter. Hub Group's revenue decreased 5% to $856 million primarily due to lower fuel revenue. Hub Group's diluted earnings-per-share increased 20% to $0.61.

Now I will discuss details for the quarter starting with the financial performance of the Hub segment. The Hub segment generated revenue of $649 million, which is a 6% decline compared to last year. Taking a look at the business lines, Intermodal revenue was down 6%. This decline was due to lower fuel revenue and a 2% decrease in Intermodal loads. Price was up, partly offsetting the decline. The volume decline was driven by a 7% decrease in loads from Consumer Products customers and a 3% decrease in loads from retail customers. These decreases were partially offset by a 20% increase in loads from automotive customers.

Truck brokerage revenue was down 11%. Truck brokerage handled 2% more loads but fuel mix and price combined were down 13%.

Logistics revenue decreased 1%, due mostly to lower fuel revenue. We are excited about new customer onboardings and expect strong revenue growth in logistics in the back half of the year.

Hub's gross margin increased by $10.9 million or 15%. Gross margin as a percentage of sales was 12.8% or 230 basis points higher than the second quarter of 2015. Gross margin increased in all three of Hub's business lines.

Intermodal gross margin increased because of price increases, improved accessorial management, better utilization and lower dray costs. Rail cost increases partially offset some of this improvement. These same factors drove a 210 basis point improvement in Intermodal gross margin as a percentage of sales.

Truck brokerage margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales was up 320 basis points, due to value-added services and better purchasing.

Logistics gross margin increased due to growth with new and existing customers. Logistics gross margin as a percentage of sales was up 250 basis points due to improved customer mix, operational efficiency and more cost-effective purchasing.

Sequentially, compared to the first quarter of 2016, the Hub segment gross margin as a percentage of sales decreased 40 basis points. Intermodal gross margin deteriorated 90 basis points, while truck brokerage increased 40 basis points and logistics increased 100 basis points.

Hub's costs and expenses increased $5.7 million to $55.8 million in the second quarter of 2016 compared to $50.1 million in 2015. This increase relates to a $4.5 million increase in salaries and benefits and a $1 million increase in general and administrative expense. Salaries and benefits are up due to higher headcount, annual employee raises and an increase in bonus expense.

General and administrative costs are higher because of an increase in IT costs, including costs for our new transportation management and human resource systems and satellite tracking.

Finally, operating margin for the Hub segment was 4.2%, which was 100 basis points higher than last year's 3.2%.

Now I will talk about our Mode segment financial performance. Mode's revenue was $232 million, which is down 1% from last year due primarily to lower fuel revenue. The revenue breaks down as $117 million in Intermodal which was down 1%; $81 million in truck brokerage, which was down 2%; and $34 million in logistics, which was up 2%.

Mode's gross margin increased $1.8 million year-over-year due to growth in truck brokerage. Truck brokerage loads increased 18%, primarily due to growth with existing customers.

Gross margin as a percentage of sales was 13.5% compared to 12.6% last year due to a 260 basis point improvement in truck brokerage yields as a result of purchasing more cost effectively.

Mode's total cost and expenses increased $2.2 million compared to last year, primarily because of an increase in agent commissions.

Operating margin for Mode was 3.1% compared to 3.2% last year.

Turning now to our headcount for Hub group. We had 1,671 employees, excluding drivers, at the end of June. That's up 33 people from the end of March.

Now I will discuss what we expect for this year. We believe that our 2016 diluted earnings-per-share will range from $2.20 to $2.35. This guidance excludes one-time costs in the first quarter and includes the impact of expected share repurchases. We expect that utilization in 2016 will be about a half a day better than 2015.

We project gross margin as a percentage of sales for the second half of the year to range from 12% to 12.5%. We believe that our quarterly costs and expenses will range between $85 million and $87 million.

Here are the levers to get to the high-end of our EPS guidance. In logistics we have some significant new business awards and deals in the pipeline that could provide upside to our forecast if they come to fruition. In Intermodal, the opportunities are exceeding our goals on cost savings initiatives, customer bid awards fully materializing and a robust peak season. In truck brokerage, we'd have upside if we can maintain the yields we had in the first half of the year.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $164 million in cash and $145 million in debt including capitalized leases. We spent $20 million on capital expenditures this quarter for containers, IT projects and satellite tracking. This brings year to date total capital expenditures to $25 million.

In 2016 we expect to purchase 6,000 containers and 25 tractors. By the end of June we'd received 1,500 containers that were financed with debt. We intend to fund the purchase of the remaining 4,500 containers and the tractors with debt. We are also investing in technology projects including transportation management and human resources systems and satellite tracking. Capital expenditures are expected to range from $95 million to $105 million for the year.

And finally, to wrap it up on a positive note, through the end of June we purchased 2,305,874 shares of stock for $85 million, completing 85% of our share repurchase authorization. We intend to aggressively execute on the $15 million that remains on the authorization.

Dave, over to you for closing remarks.

Great, thank you, Terri. In conclusion, we're very pleased with our second-quarter results. Yet again, every business line contributed to the earnings growth. We believe that we're well-positioned for growth in the second half as we continue to drive out unnecessary costs and gain market share.

And with that, we will open up the line for any questions.

(Operator Instructions)

Ben Hartford is on the line.

Good afternoon, everyone. I guess I'm interested in your take here and now on the Intermodal side. Obviously the bulk of the bid season is done, so maybe a two-part question. First, what would you estimate the market is running right now in terms of pricing growth on a year-over-year basis as we get into July, first. And second, what are your expectations for 2016's peak season?

Okay, great, Ben, I can answer that, this is Dave. From a pricing growth perspective in the latter half of the year, you're right, we are about 70% of the way done with the bid season, a couple major bids are in process. We will know the status of that in the next week or so. I would say we are looking at flattish. It's slightly up, and some are slightly down.

We continue to see a lot of competitive pressures downward overall with pricing, so we are not anticipating that in fact we are going to see much upside from a pricing perspective this year. From a peak perspective, I think it depends upon, if you look at it for the industry. We think it is going to be flattish.

We don't think that there's going to be a tremendous peak season this year.

From Hub's perspective, we do expect a very strong peak. That is why we made the decision for the additional 2,000 containers and as we said in the prepared remarks, that's mainly just due to the recent awards and we anticipate a very strong second-half from the Intermodal volume perspective.

Okay, good. And then, Terri, just to clarify, when you talk about aggressively executing what's left on the share repurchases, is it safe to assume that you will have that done by the end of the third quarter?

That's a good assumption, yes.

Great, thank you.

Justin Long

Thanks and good afternoon. Dave, I just wanted to ask about your strategic approach to this bid season that was clearly a very challenging and competitive environment. It seems like you were a little bit more focused on growing market share with certain shippers, and this seems to be a change versus the strategy over the last couple of years where you were more willing to lose business due to price. Is that a fair assessment of your strategy shift? And if so, can you just talk about the rationale behind this change?

Justin, you are spot on. We were very focused on specific clients and specific markets where we felt as though we had either a competitive advantage or we had a lot of velocity that we would be able to sustain business at a decent margin candidly at a lower price.

So that was our focus. I think that in the past we were too focused on just raw gross margin and margin per unit. So I think this more focused approach is going to allow us to grow this year our volume while also, at the same point in time, be able to increase our margins overall.

Right.

In addition to that, we also, with our realignment, what put us in such a good position to do that is we've been able to take out a lot of unnecessary operating expenses. And obviously, from the salary numbers that Terri read off, it's not from headcount reduction. It is from taking out costs such as railroad accessorials, storage, detention, this type of thing, which just took an operational focus in order to be able to reduce them substantially. So you are right on target as far as how we changed. And why we changed is we are of the opinion you cannot shrink to prosperity and if you select the markets and the clients to grow with, that you can grow volume while at the same time enhancing margins.

Network balance is of critical importance, so that's why Dave talked about the specific markets. The other areas where volume helps is with improving our empty miles, so that we have more loaded miles. And volume helps with utilization.

Justin, I will add it is a disciplined approach to the market. We did not take a broad brush cut prices. We knew the pressure that's out in the marketplace and we selectively targeted markets and customers to be able to grow the business.

Okay, great, that's all really helpful color. And maybe secondly, these are probably more questions for Terri, but a couple on the guidance. Is there any color you could provide on the expectations that you have for gross margins in the Hub segment specifically in the back half of the year? Then overall when we look at the EPS guidance, could you speak to the cadence between the third and the fourth quarter? Should it be split pretty evenly or could some of the pricing pressure late in the bid season pressure 4Q EPS a little bit more than 3Q?

In terms of the Hub segment gross margin as a percentage of sales for the last half of the year, we'd expect it to be between 11.3% and 11.8%. In terms of the cadence of gross margin as a percentage of sales, is that what you are asking, Justin, for the consolidated group?

It was actually more on EPS, but if you have the answer for consolidated gross margins as well, that would be helpful.

In terms of the consolidated gross margins, as a percentage of sales, we are expecting them to be about the same in Q3 and Q4. In terms of what our operating income is going to be, we would expect operating income to be lower in the last half of the year than it was in the last half of 2015.

Okay. But between the third and fourth quarter should it be pretty even, it sounds like, at least from a margin standpoint looking at consolidated gross margins it will be?

Yes, pretty close, exactly.

Okay. Perfect, that's very helpful, I appreciate the time.

Thanks, Justin.

Todd Fowler.

Great, good afternoon. I guess, Dave, if you could maybe just help me think about the volumes here in the quarter and then the volume guidance, the 2% decline in the quarter, was that a function of the difficult comparisons last year or the sluggish market? And in maintaining the two to four percent on the full-year basis, was that more success than what you were expecting in the bid season? And I guess really what I'm asking is have volumes trended the way you were expecting through the year or were you more successful in the bids than what you were initially expecting with your guidance earlier?

Yes, Todd, as far as the overall comparables for the second quarter of this year, there were very high volume levels last year with the ending of the port strike on the West Coast. So it was a pretty high hurdle. There is no question about that. As far as we're thinking, I wish we were that prescient to be able to predict the volumes and how we're going to come out of bids. But again, I think we went into this bid season, particularly in the latter half of the first quarter and through the second quarter, just very focused on specific markets, the clients, and we were very pleased with the outcome and how we've been able to drive the volume and the awards forward.

Now, of course, there's always the question of will the awards actually live up to what we believe will come about. But we feel pretty confident in those numbers for the second half of the year and I think that strategy has definitely paid off for us.

Okay, that helps. And just reconciling the volume expectations with the change in the full-year guidance. You bumped it up modestly at the low and the high-end and you also had the operating expenses going up.

I'm just trying to think about the main change here in the guidance. It seems like the gross margins are a little bit better than what you were thinking, the volumes are in line. What is the difference between the full-year guidance now versus where you were at the end of the first quarter?

You are right, Todd, we raised it about a nickel. And why we did that was Q2 results came in slightly higher than our expectations and in addition we have more clarity now on awards in logistics and our Intermodal bids results.

Which are the big numbers now, Todd, so.

Then in terms of our cost and expense guidance, were you asking about that as well?

Yes, Terri, that would be helpful. I'm just a little bit curious about the stepup. A lot of the comments in the prepared remarks were more about you maintaining expenses but they are moving up sequentially so, yes, any color you have on that would be great.

Right. We increased our cost and expense guidance from $79 million to $83 million, which we had last quarter, to $85 million to $87 million that we have now. We expected the third and fourth quarter cost and expenses to be at the high end of the previous range, which would have been the $83 million. And if you are trying to reconcile from the $83 million to the $87 million that is the high-end now, the biggest drivers of that increase are two things: About $2 million quarterly for higher bonus related to expected earnings per share and personal goal achievement and about $1 million quarterly for expected head count adds primarily in logistics.

Okay. That helps. And, Don, Cleveland is looking pretty good these days.

I'm surprised you didn't introduce yourself as the world champion. (Multiple speakers).

It's odd. After almost 50 years, it is pretty easy to get used to saying that. So thanks for the time tonight, guys.

Take care.

Kelly Dougherty.

Hey, everybody, thanks for taking the question. Dave, I just want to follow up on something you mentioned earlier about seeing how much of the awarded volume actually comes through. Do you guys have any history that 90% or 80% or whatever the number might be of what you get awarded generally comes through in any given year and do you expect this year to be any different for any particular reason?

That's an interesting question. We do track it and we track it mostly based upon specific clients, because it is very client specific. Certain customers are very good with their forecasts and right on. Some always underestimate and some always overestimate. So we know who that is, and if it is a customer that traditionally overestimates the amount, we will cut them back by an appropriate percentage, whether it is 10%, 20%, 30% as far as what we are forecasting from a volume perspective. We have enough history with our clients that we know their forecasting, which may be good, bad or indifferent.

Okay, so that 2% to 4% is already probability weighted for those things?

It is already probability weighted, yes, absolutely.

Okay, thanks. You previously talked about rail cost increase -- covering rail cost increases half with pricing and half with internal initiatives. Looks like pricing might be a little bit weaker everywhere. So just wondering if there's other things you guys have identified on the efficiency side?

And then maybe related to that, you've got a bunch of different IT initiatives going on. Maybe can you help us quantify some of the savings of those things?

Terri, I don't know if you would like to do that?

There are three main areas of cost savings, Kelly. We've got improved utilization, lower dray costs, including selecting the best carrier from a price and service perspective, improving loaded miles, reducing truck ownership costs and reducing insurance and claims costs. Then we also have an initiative where we are trying to lower our accessorial costs and have better accessorial cost recovery.

Our goal is about $15 million of savings for these initiatives for the entire year and the realignment of our operations was a key factor in being able to realize those cost reductions that we have experienced so far. We're seeing renewed intensity and openness to change throughout the organization and we feel pretty confident that we are going to get those cost savings.

In terms of the IT initiatives that we are working on, the transportation management system, has helped us to win a lot of new customers in logistics and we have been very busy with onboarding new customers. It is our highest year ever in terms of onboarding new logistics customers.

And then the human resource management system, is more for internal purposes. We were really doing everything with paper and it is going to help us to be a lot more efficient. And it will help our employees too because we will have better career planning for our people. People are our most important asset.

(Inaudible) a great deal of talent management, which is very important because obviously the hiring environment in the locations we are at has picked up quite a bit. And so we need to make sure we've got good career paths and can identify our higher achieving individuals and progress them through the organization.

Understood.

(Multiple speakers) To Terri's point on the IT side, one other important aspect is the satellite tracking, which is on around 70% of our fleet, is complete. 100% of it will be done by the end of year and that has really helped us managing equipment and improving the dwell time.

Great, thanks, guys. One other quick one, I think you've also previously mentioned you were seeing more conversions back to truck than you have in a long time. Just any kind of update on how that's been trending recently and how you think about it in the back half?

I can answer that. I think that as we look at the decline in local east, probably half of that decline is due to conversion back to truck and the other half is some Intermodal competition that we saw this past quarter. So truck continues to be very competitive.

We are finding some clients also, though, that we've been able to convert from truck to Intermodal. So if I looked at it, we're probably still converting more to Intermodal, but there is no question that trucks, in the very short hauls, continue to be very competitive with this fuel environment and with a very soft freight economy.

Thanks very much, guys.

Thank you.

Kevin Sterling.

Good afternoon. Dave, you obviously talked a lot about the challenging environment and I believe your rail cost increase went into effect June 1. As this environment really muddles along, if you will, are your rail partners willing to work with you at all regarding any price concessions? Have you been talking with them or is it just here is -- it is what it is?

Kevin, we've been in this business long enough to know that rails, on an ongoing basis, have cost increases, whether the market allows it or not. We feel as though our two rail partners have been quite reasonable this year. But, in fact, the cost increases were larger than what we were able to obtain in the market. We were able to make some of that up due to our own internal operational efficiencies, but that's just part of the business.

I mean, the rails, whether they were in a 2009 recession or whether, in fact, we are in the current freight recession where prices are very stagnant, they still have capital requirements and we just expected that there would be price increases. It did outpace what we were able to get in the market with our clients. But again, we just fully understand that and that's the way the business operates.

Yes, okay, thanks. And then, lastly, I believe you mentioned a pretty healthy M&A pipeline. Are you looking at any new verticals possibly or is it just maybe some more bolt-on acquisitions?

There is some bolt-on but the vast majority is new verticals. Part of our acquisition strategy is to, in fact, be able to diversify our service offerings to our clients. We feel as though we are very well-positioned with our Intermodal product and our Unyson as well as truck brokerage, but we feel as though there's other verticals that we should enter in order to have that service to offer to our clients.

Great, okay, that's all I had. Thanks for your time and congratulations on another solid quarter.

Thanks, Kevin.

Scott Group.

Hey, thanks, afternoon, guys. Just following up on that last point about M&A. Dave, I think last quarter or a couple quarters ago you highlighted dedicated as a new vertical. Is that still an area of focus or is it other areas that you are more focused on right now.

Of what is currently active, dedicated is not among them, so we continue to feel as though it is of interest. We feel as though it is going to be the one segment within the regional truckload segment that might be attractive, but we are not currently pursuing anything in that vertical.

So, what kind of areas are you looking at, if you care to share?

Asset light models similar to a 3PL model, that would be one; truck brokerage, if it fit and anything in regards in the logistics space.

Okay. Terri, one thing I wanted to clarify in the guidance, what earnings number are you using for the first quarter, the $0.51 reported or the $0.58 adjusted?

The adjusted numbers.

Okay. Within your gross margin guidance for the back half of the year that implies a pretty big sequential stepdown. Is that more in Intermodal or brokerage or maybe is it just there's mix of Unyson starting to grow more, I don't know?

It's mostly in Intermodal. In our forecast we also have about 100 to 200 basis point decline in truck brokerage yield sequentially. One of the levers to our forecast that I mentioned was if we could maintain the yields we had in the first half of the year, that would provide upside to our guidance. But right now what's baked in the forecast for gross margin as a percentage of sales is being lower for both Intermodal and truck brokerage.

Okay. You gave us the levers to get to the high end, but not the low end. Is that just because you were thinking if you're going to be on one side you were thinking closer to the high end than the low end? Is that a fair interpretation?

Yes, as Dave mentioned we are pretty confident in that 2% to 4% volume growth for the year which does imply high single-digit volume growth in the last half of the year. We have clarity on the bid awards now, we know that. We also have a lot of clarity on the logistics awards. In this quarter we onboarded about $20 million annually of new logistics business. We expect to onboard between $35 million and $45 million annually of logistics business here in the third quarter. Why that is such a big range is we are just ramping up with the customers now and we are not sure what the peak season surges are going to be for those particular customers that we're onboarding. So you know, we feel pretty confident to the middle to the high end of the guidance, I guess, to summarize.

Okay, that's helpful. And last thing, Dave, just big picture. You mentioned the change in maybe strategy heading into bid season this year, but if I take a look at the guidance it does imply lower earnings in the back half than what we just saw in the second quarter. So is your point that if you didn't have a different strategy and you just saw this weak pricing environment, that it would've been even worse or am I missing something here?

A good question, Scott, and I would suggest to you that our volumes would be declining dramatically and that our overall margin, therefore, would also be declining and we would be looking at a much more serious situation in my mind. I think with this, we've been able to grow the business. Granted, yes, the margin per unit may be declining somewhat, but it is this environment and we think that the alternative of just giving up share was not an alternative.

We would have stood still; we would have been eroding margin and volume greater.

Right.

Yes, we're positioned to grow in the future as well once we pass this pricing season.

Right.

Hopefully the market tightens up some next year and we're able to price up more next year. We are providing the best service we've ever provided. That's part of the reason we've got the 6,000 containers, we want to make sure with the significant growth in Intermodal that we're having in the last half of the year, that we can continue that trend. So we feel that we are very well-positioned for the future, not just the second half of this year.

That makes sense, okay. Thank you, guys a lot. Appreciate it.

Sure, Scott.

Tom Wadewitz

Yes, good afternoon. Wanted to see if you could comment a little bit -- I know that Intermodal transit near-term maybe aren't -- don't have the same, I guess, changes necessarily that truck does, but we have heard from trucks about some tightening in the market off a low base and a little bit of improvement in spot market in, say, June July. What are you seeing in July and is that a pickup in the market and is there some tightening that would be supportive potentially from an Intermodal perspective and truck perspective?

Tom, this is Don Maltby. Yes, we saw a tightness the last week or last two weeks of June and over the Fourth of July holiday, which is normal. And it is back to being fluid again. So we are not seeing any tightness out there in the marketplace nationally. You might have a spot here and there but, no, capacity is fluid.

Okay. In terms of the -- I think you were asked one question on the rail pricing, is there -- I apologize if you commented on this, but is there a meaningful difference in terms of the increase you're paying West versus East and does that flow into the pattern you had where you were down quite a bit in the East? I recognize that's more truck competitive (inaudible) to haul, but maybe if you can comment a little bit about is there a big difference in the cost inflation with rail in the East versus West?

We, of course, don't really talk about the contracts specifically for both lines. I think the primary issue that you've got, there are several. Number one, as I said, I thought that the cost increases with the rails were reasonable, if you can consider any increase in this environment reasonable. It certainly was difficult to try and retain our existing margin with trying to pass that on to our clients.

About 50%, as I had said, of the loss in the East was specifically due to truck competition. So it is just a shorter length of haul and with that short length of haul inevitably in this type of environment where you have fluid truck capacity, they are going to be going after that short-haul business. To them it is longer haul, if you will. So less so due to different pricing increases than just different markets.

Yes, I think the truck rates fell quicker in the first half of the year in local East, especially first quarter, and we were following that.

Right. Okay, so what would you expect, given the new bids and the acceleration volumes you are looking at in the second half? Would that mix be similar where it is a pretty big difference in terms of East still being very weak and the transcontinental being the best of the three segments?

Transcon certainly does continue to be very strong. We are looking for a bit of a pickup in the local East as well, as we've been able to find some, if you will, longer haul local East conversion freight. That will be quite significant, so it will increase in both areas but certainly the transcon, it is just a very compelling business case to convert -- to ship via Intermodal on those length of hauls that are anywhere from 1,500 to 2,500 miles.

Right, okay. Makes sense, all right. Thanks for the time.

Thank you.

Brandon Oglenski.

Yes, thanks, everyone, for taking my question, congrats on the quarter. I did want to circle back, Dave or Don, to the comments you made earlier and then Scott's question about effectively the new strategy can improve margins and drive volume growth, but how do we square that again with margins that are arguably going to be contracting in the back half of the year? Was that a comment you were making more about the long term, Dave?

It really is about the long term and that's what obviously we need to focus upon. This market is just not one that you're going to increase your margin per unit or your gross margin on. It is not, but if, in fact, you can gain some market share, you can, to a large extent, make up for that.

Price discipline. Price it as aggressively as you can but without going to the bottom of the tier. So we are seeing, again, our customers tend to be medium to large. It is a bid season every year and we really took an approach of how we were going to grow the business in certain markets with certain customers in certain verticals.

Okay. And, Don, maybe if you can follow up with Terri's discussion of the cost savings, because I think she mentioned a few items that add up to about $15 million of targets that you guys have. But something that was interesting to me was the accessorial charges that the rails might be charging you and how inefficiencies in the system might have been driving higher charges than you were looking at. Is there any way to quantify it? Is that a longer target that you can work even beyond the $15 million or is it not that interesting from a high-level perspective?

No, it is interesting from a high level. And the way I would describe it as the blocking and tackling, where the basic elements of accessorials are storage per diem to our customers and we feel we've got, with this restructuring, and our arms around that cost. We are continuing to bring it out along the way. I think we still have a runway for that. And as I think Terri mentioned, we are -- underlying rail costs have gone up. We know that. And the way to offset some of those, 50% of that, is through a reduction in accessorials.

I think Dave mentioned in his prepared remarks that accessorial costs were reduced by over 51% this quarter. And I echo that. And if you were to say, well, how much was that? It was north of $4 million of savings, in that area alone in the second quarter. Now we had some changes to our operational structure that started last year, so we are not sure the benefit will be that big in the last half of the year because we changed things around a bit in the fourth quarter predominately. That's certainly an area that we continue to focus on and think we have a lot of room for improvement. (Multiple speakers)

-- the biggest drop, though, is it's been sequentially getting better and better.

Exactly.

So with this realignment of our operating group and with our account management -- which took place actually officially on the first of the year, it's assisted us in being able to reduce those costs. They are just not necessary if, in fact, you can put enough attention and focus to them.

We identified the issue in the fourth quarter of last year and in November actually and implemented January 1 with the new structure, so --

Yes, and some in December.

We've got a runway.

Okay. Appreciate it, thank you.

Alex Vecchio.

Good afternoon. Thanks for taking the questions. Dave, what inning would you say you are currently in on these various self-help and cost reduction initiatives, if you can help us think about -- I presume different initiatives are at different stages, but can you help us think about what inning you are in there?

Yes, that's an interesting question and you are absolutely right that different initiatives are at different stages in their lifecycle. We were just talking about the accessorials, that's probably in the third inning or so.

I would say in the aggregate, we are probably still in the early innings on a lot of this. There still is some inefficiencies within the organization and the way we operate that we can, in fact, take costs out, so we are probably in the third, mid-third inning of which I assume the Cubs will win, but that's a different -- so, yes, I would say in that area, if you look at it globally as far as all the initiatives we have ongoing.

Okay. That's helpful. And maybe one for Terri. Terri, do you still expect Unyson revenues to be up mid -- I think it was last quarter you said mid- to high single-digit revenue growth for the full year. Can we see upside to that at this point?

We think for the back half of the year it will be in the mid teens.

Okay. Then just one last housekeeping. What tax rate should we assume for the back half?

38.2%.

38.2%. Okay, that's all I had, thanks very much for the time.

Matt Brooklier.

Thanks. Good afternoon. Could you provide some color in terms of your Intermodal volumes on a month-by-month basis for 2Q?

Yes, we can. In fact, Terri, you have those?

June was the best. Volume change per business day in April was down 3.7%; May down 5.7% and June up 1.5%.

Okay. And where is that tracking in July?

2.3% on a same day basis.

The change in better growth in July, is that a reflection of some of the new business that you've won, is it partially comp driven? Just trying to get a sense for where that number could be headed as we move forward?

I think that's why you have to look at it on the same day basis because the way July 4 falls has a big impact on how it is looking. So, no, this is new business gains, and so directionally, as Terri had said, we are looking at mid to high single-digit growth for the second half with our (inaudible) volume.

Okay. Then just turning to truck brokerage, I think Terri or somebody said it, expectations for your gross margin to contract by, I think, 200 basis points. That was a sequential contraction or you expect your truck brokerage margins to be down 200 basis points year-on-year during the second half?

That was sequential.

Sequential pressure, okay. And I guess what is driving that? It sounds like June got a little bit tight; seasonally it should. Felt a little bit of tightness in the early part of July, but, per Don, things have gotten a little bit looser. I'm just trying to get my arms around why, I guess baked into the guidance, you have this margin contraction sequentially if the market's looser here in July.

Gross margin as a percent of sales in truck brokerage was up 320 basis points year over year in 2Q. So pretty darn high, and because of the way the spot market is we think that our contractual pricing could be pressured. That's the primary reason that we estimated in our forecast that margin could be down sequentially between 100 basis points and 200 basis points.

Okay. Then just one last one in terms of M&A. International forwarding, is that an area of potential interest if you are looking to add services to what you are currently offering?

It is something we've discussed a lot. I think that some of the barriers to entry is if you look at our client base, they are larger, more sophisticated customers. And if you're going to go in there and if we acquire an international freight forwarder to try and compete with the Expediters and the Panalpina and the Kuehne & Nagel, could be quite difficult.

I guess if we could find somebody that is in a particular niche for which they have some kind of a competitive advantage, it may be of interest, but at this point in time that's not high on our priority list.

Okay. Appreciate the time.

Thank you.

(Operator Instructions) Ben Hartford.

Hey, I think everything was addressed. Thanks, guys.

Sure. Thank you.

Standing by for questions. Matt Young.

Good afternoon, guys, thanks. Could you talk quickly here just a little bit about the additional levers you have to improve the drayage costs at this point? What would you say is the biggest opportunity there? Would it be balance of inside versus outside miles or more a function of -- call it the internal network efficiencies at Hub Group Trucking?

I think it is a combination thereof. One of the things that we have been very focused on is selecting the right drayman for the service and price in various markets and that may be our own internal drayage, it may be outsourcing it. And in the past we were too biased, if you will, towards using our own assets instead of looking at other people's networks and seeing if, in fact, we couldn't be more efficient by utilizing them.

So it is a combination thereof of trying to optimize your outside spend while at the same time trying to eliminate as much empty miles internally so that you can spin your drivers and it is a very fine line.

There are certain cases where we will actually give the balanced lane to an outside draymen and then handle the deadhead miles ourselves just because we can be more cost effective. So it is really looking at our volumes in the aggregate and then just coming up with a simple optimization model as far as which way you go providing the excellent service that our customers expect.

Fair enough. In most geographies, are you generally able to find the capacity that you need for the right price? I guess I'm also thinking about LA, since you've closed the terminal, have you found sufficient capacity, sufficient quality?

We have. We are very enthused with the way the Los Angeles has turned out. If you look at it, our on-time performance both from a pickup and deliveries, I don't have the exact number off the top of my head, but it is up significantly versus when we had our own assets on the ground there. And in addition, the business model that we had operating towards the end in Los Angeles was highly ineffective from a cost perspective.

So it is the best of all worlds. We are saving money and, at the same time, we are delivering a lot better service to our clients.

I would add that we did 57% of our own drayage in Q2 this year, which is down from 60% last year in Q2. And slightly lower than the 59% that we did in Q1 of 2016.

Okay. And so that improvement would be a big piece of the gross margin improvement in the Intermodal segment too, right?

It is.

Yes, no question.

Okay, thanks.

We have no further questions. I'll now turn it back over to Dave Yeager for closing remarks.

Once again, thank you for joining us on our conference call. As always, if you have any further questions, please do feel free to contact Terri, Don or myself.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.