Hub Group - Q2 2013
July 18, 2013
Transcript
Operator (participant)
Hello, and welcome to the Hub Group Incorporated Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project. Actual results could differ materially from the projected in the following forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Yeager, CEO for Hub Group. You may now begin.
David Yeager (Chairman and CEO)
Thank you, and welcome to Hub Group's second quarter earnings call. We're now halfway through 2013, and we're pleased to report that all of our business lines are displaying healthy growth. Intermodal continues to expand while maintaining solid margins. Truck brokerage has continued to display strong volume and margins since our successful realignment last year. Unyson Logistics experienced rapid growth, having added several new customers during the quarter, and Mode celebrated its second anniversary as a Hub Group company by posting strong top-line and bottom-line results while also expanding its agent network. With that, I'd like to turn it over to Mark to discuss the details of our quarter by business line.
Mark A. Yeager (COO)
Thank you, Dave, and good afternoon, everyone. We're pleased to report continued growth this quarter with solid improvement on a tough comparable. The main theme this quarter was solid execution in all four of our business lines. Logistics had outstanding performance, with 34% revenue growth and margin improvement. Truck brokerage delivered 5% revenue growth and solid margins in a challenging truck market. Pricing and operating discipline enabled us to grow intermodal volume modestly, expand margin, and continue to execute on our strategy. Mode demonstrated terrific results, improving operating income 71%. Now, turning to more details on each business line. Intermodal volume grew 2% with improved margin despite a tough competitive environment. We saw most of the growth in Local West, with a 10% volume increase. Transcon was flat for the second quarter, and Local East declined 1%.
Pricing remained very competitive during bid season, particularly in the Local East and transcontinental backhaul markets. While our continued focus on pricing discipline undoubtedly cost us some volume, we held our own and remain confident that growth at Hub will re-accelerate in the second half of the year. Our confidence in demand led us to increase this year's fleet plan to include an additional 1,000 new containers on top of the previously planned purchase of 3,000 units. With the retirement of 2,000 older aluminum containers currently in progress, we expect our fleet to reach 26,000 containers during the upcoming peak season. Our fleet utilization continues to excel, with a 10 basis point improvement over last year, despite a larger fleet. It was 13.1 days for the quarter, compared to 13.2 days for Q2 of 2012.
Rail service remains solid, with a 1% improvement in on-time performance. Our Comtrak drayage operations continue to grow. Since year-end, we added 212 drivers, ending the second quarter with 2,686 drivers. We have aggressive growth plans for Comtrak and are looking to open 3 additional terminals by year-end, including Salt Lake City, Portland, and Kalamazoo. Comtrak is currently handling 68% of Hub's available freight, and we continue to perform more drays for Mode Transportation. Through June, we have performed 83% more drays for Mode in 2013 than in 2012. This tremendous growth, coupled with the ramp-up in short-haul highway moves, or street freight, as we call it, is part of the reason why we are not seeing more progress towards the goal of handling 75% of Hub dray by year-end.
Our investment in customer service continues to pay off. Over the course of the quarter, we were honored to receive several customer and industry awards, including Truckload and Intermodal Logistics Partner of the Year and Kaizen Challenge Trophy from Toyota, Intermodal Carrier of the Year awards from both Church & Dwight and Cascades, and the Outstanding Customer Service Award from Guitar Center. Despite the somewhat sluggish truck environment, truck brokerage continued to progress, growing volume 8%. On a segment basis, successful cross-selling efforts produced retail growth of 17%, consumer products growth of 6%, and growth of 78% in the much smaller chemical segment. Growth in these segments more than offset declines in durables and the much smaller paper segment. While project work was down for the quarter, core volume, revenue, and margin were all up, indicating that our new structure continues to perform well.
Unyson Logistics revenue grew an outstanding 34% year-over-year. Driving this growth was the successful onboarding of a number of new customers. We expect growth to continue throughout the year as we prepare to onboard additional new business during the third quarter and grow organically with our existing customers. The Unyson pipeline remains strong as we continue to successfully market our 3PL capabilities. Mode Transportation produced top-line growth of 5% in the second quarter and delivered operating income growth of $2.1 million. Particular strength was exhibited in Intermodal, with volume growth of 13%. In addition, Highway was back in positive numbers, with a volume increase of 2%. Several new significant wins were recorded by independent business owners throughout the quarter. For the quarter, Mode added 2 new IBOs and 6 new sales agents to the network.
Overall, we had a solid quarter and feel we are well-positioned for the second half of the year. I'm now going to turn the call over to Terri for financial highlights.
Terri Pizzuto (CFO)
Thanks, Mark, and hello, everyone. We had a record second quarter, and I'd like to highlight three points. First, we saw revenue and gross margin growth in all three Hub service lines and at Mode. Second, Logistics had an awesome quarter, with record new customer growth. And third, we had a 9% increase in earnings per share. Here are the key numbers for the second quarter. Hub Group's revenue increased 8% to $837 million. Hub Group's diluted earnings per share was $0.50 this year, compared to $0.46 last year. Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $645 million, which is an 8% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 4%.
This change includes a 2% increase in loads. Price and mix were up, but were partially offset by the impact of lower fuel. Again, this quarter, retail was the leader, with loads from these customers increasing 14%. Loads from paper customers were down 29%, and loads from consumer products customers were down 1%. Both customer segments were down, due primarily to holding our ground on pricing in a tough market. The benefits of the restructuring in truck brokerage continue to pay off, with revenue increasing 5% due to 8% volume growth. Prices were up, while fuel and mix were down. The average length of haul for a truck brokerage shipment decreased 7% to 590 miles. 11 of our top 50 growing customers in truck brokerage are new. Logistics growth accelerated to 34%, due mostly to growth with new customers.
Several new large logistics customers were onboarded during the second quarter. Hub's gross margin increased by $6.6 million due to growth in all three of our service lines. In order of magnitude, Intermodal gross margin was up the most, followed by Logistics, and then Truck Brokerage. Intermodal gross margin increased due to volume growth, improved street operations, and modest price increases. Comtrak is 66% of our drayage work this quarter, compared to 63% last year. Logistics gross margin grew due primarily to new customer growth. Truck brokerage gross margin is up because of an increase in the number of loads, higher prices, and better purchasing. Hub's gross margin as a percentage of sales was 11.1%, a 20 basis point improvement over the 10.9% in the second quarter of 2012.
The biggest driver of the increase in the gross margin percentage was Intermodal, which is up 50 basis points. Because of disciplined pricing, we walked away from some very low-profit business during bids, which was a big contributor to our yield improvement. Truck brokerage gross margin as a percentage of sales was up 15 basis points due to solid execution. Logistics gross margin as a percentage of sales was down 50 basis points due to the fee structure of the new business that we onboarded. Hub's costs and expenses were $46 million in 2013, compared to $40 million last year. Salaries and benefits grew by $3.6 million due to $2 million more in bonus, higher headcount, and pay increases. General and administrative expense is up $2.6 million, due primarily to higher professional fees, rent, and insurance.
During the quarter, we spent about $1 million on professional fees associated with due diligence on an unsuccessful acquisition. Finally, operating margin for the Hub segment was 3.9%, which was 30 basis points higher than the first quarter, but lower than last year because of the additional costs that I just mentioned. Now I'll discuss results for our Mode segment. Mode had a strong quarter, with revenue of $204 million, which is up 5% over last year. The revenue breaks down as $95 million in Intermodal, which was up 11%, $79 million in truck brokerage, which was down 3%, and $30 million in Logistics, which is up 11%. Mode's gross margin increased $1.5 million year-over-year.
Gross margin as a percentage of sales was 11.8%, compared to 11.6% last year. Mode's total cost and expenses decreased $600,000 compared to last year because of lower general and administrative costs. We continue to see the benefits of the integration. Operating margin for Mode was 2.4%, compared to 1.5% last year and 1.9% in the first quarter. More good news for Mode is that we think operating margin will be over 2% for the rest of the year. Turning to headcount for Hub Group, we had 1,420 employees, excluding drivers, at the end of June. That's up 20 people compared to the end of March. Now I'll discuss what we expect for this year.
We're comfortable that our 2013 diluted earnings per share will be within the current analyst range of between $1.95 and $2.10. We think we'll have 37 million weighted average diluted shares outstanding. Our costs and expenses will probably range between $67 million and $69 million a quarter for the rest of 2013. While not all rail cost increases have been finalized yet, we believe we'll be able to maintain the Hub segment 11% gross margins that we had in 2012. Because of a change in the Pennsylvania income tax law last week, our effective tax rate is going up. We're estimating that the effective tax rate in the third quarter will be about 40%, compared to the 38.4% in the second quarter.
Now, turning to our balance sheet and how we used our cash. We ended the quarter with $72 million in cash and $9 million in debt. During the quarter, we spent $30 million on capital expenditures, which brings year-to-date capital expenditures to $39 million. We think capital expenditures for 2013 will range between $105-$115 million. As Mark said, we increased our new container order this year to 4,000, and we're buying 4,200 containers that are coming off lease. The total cost for the containers will be about $61 million. We bought 80 new tractors that were financed with $9 million of debt. We'll spend between $30-$32 million to finish our new corporate headquarters. The remainder of the capital expenditures are technology projects.
$13 million remains on our share buyback authorization. To wrap it up for the financial section, we're happy with our performance this quarter. We'll stay focused on growing all of our service lines while maintaining price discipline. Dave, over to you for closing remarks.
David Yeager (Chairman and CEO)
Great, thank you, Terri. In conclusion, we experienced a solid second quarter, having delivered a 9% increase in earnings per share, with growth in all of our business lines. We remain focused on managing each of these business segments to consistently deliver profitable growth and shareholder returns, and look forward to continued success in the second half of 2013. With that, Terri, Mark, and I are happy to take your questions.
Operator (participant)
Ladies and gentlemen, if you have a question, please press star, followed by one on your phone. If your question has been answered or you'd like to withdraw your question, please press star two. Once again, please limit your inquiries to one primary and one follow-up question. The first question comes from the line of John Barnes with RBC. Please proceed.
John Barnes (Wall Street Analyst)
Hey, good afternoon, guys. Hey, your comment about just the competitive environment and, you know, having to walk away from a little bit of business, can you just talk about, you know, kind of what you saw from the competitors in terms of, you know, the behavior on pricing and things like that? Maybe give us a little bit of context around maybe the magnitude of what you were experiencing.
Mark A. Yeager (COO)
Sure, John, this is Mark. Yeah, I think it certainly was a competitive environment throughout the bid season. I would say that the bid season opened very competitively. We saw a number of particularly consumer products companies that the business was hotly contested, and this was particularly true in local East markets and backhaul transcontinental markets. Obviously, our biggest competitor, you know, is always a factor in those, in that environment. You know, at the same time, we did see some traditional IMCs who were also competing with a rail-based product pretty aggressively for some of that business. You know, as the bid season wore on, I think we saw what we expected to see.
We didn't see things get, you know, significantly more aggressive, stayed competitive, but we were able to secure increases in most instances.
John Barnes (Wall Street Analyst)
Okay. All right. Very good. And then, as a follow-up, you know, it seems like maybe some of the truck conversion activity during the quarter maybe slowed down a little bit. You know, we get the sense in talking to the truckload carriers that that shippers don't perceive a capacity shortage, and then obviously, you had a little bit of a decline in diesel fuel prices. Do you feel like you experienced the same thing during the quarter, and, you know, is that just maybe a breather before that longer-term trend kind of kicks back in?
Mark A. Yeager (COO)
You know, we still are pretty optimistic about the conversion opportunities that are out there. We think that they're significant. We think that very few shippers are at their optimal usage levels of the intermodal product. Actually, throughout the quarter, on a same-day basis, we saw demand increase, so we certainly didn't see it decrease or lessen. Obviously, cheaper fuel does have the effect of narrowing the gap between intermodal and truck, but at the same time, most of our customers are still looking for a long-term way to reduce their costs. As a result, most of them are trying to continue to explore where they can use intermodal more frequently.
John Barnes (Wall Street Analyst)
All right. Very good. Thanks for your time, guys.
Operator (participant)
The next question comes from the line of Ben Hartford with Robert W. Baird.
Ben Hartford (Senior Equity Research Analyst)
Good evening, everybody. Could we talk a little bit about Terry, your comment at the end in with respect to Hub margins? You said that you hope to maintain 11% Hub gross margins in 2013, hold them flat relative to 2012. I think last quarter, the comment was you hope to improve upon it. That change in language, I'm curious to know how deliberate it is, one, and two, how much of it is it a function of a slightly more aggressive intermodal pricing environment versus maybe some mix shift within the business with respect to logistics growing quickly here? Can you talk through that logic?
Mark A. Yeager (COO)
Sure. First of all, right, we haven't—that's exactly right, what you said, that we hope to maintain the 11% gross margins that we have. We have not finalized all the rail cost increases yet. It was a difficult pricing environment, but we got price, and we got enough price that we think that we can cover the cost increases. So, that's part of it, the tough pricing environment. And then the other part of the reason that we maintain the margin percentage is due to logistics, because logistics grows so much. While that's great for gross margin dollar growth, it does bring down our yield a touch, and we grew tremendously in logistics, and we think we'll continue to grow logistics in the next two quarters, quite a bit. So, that's impacting the yield as well.
Ben Hartford (Senior Equity Research Analyst)
Okay, so it is, it is a change in language, one, and two, it is a function of both of those dynamics. Is that right?
Mark A. Yeager (COO)
Correct.
Ben Hartford (Senior Equity Research Analyst)
Okay. And then if I look at the volume, intermodal volume growth in the first half of the year at 2%, you know, it would seem to lag the IANA figures. And I'm just wondering, but you're confident that volume growth will improve in the second half of the year. You know, if you look at the business in the broader context, do you think that 2013 is just a period of, you know, you guys really focusing on yields, maybe at the expense of volume growth or share on the margin, and that you can go into 2014 and beyond and be either one that grows at market levels, if we're talking about intermodal specifically, or even a share gainer on the intermodal side?
Can you talk a bit strategically about how you see the Intermodal product here and the positioning of the product in 2013 and beyond?
David Yeager (Chairman and CEO)
Okay, Ben, this is Dave. As, as far as 13 in the first half, we did have an awful lot of low-margin business in which we were the incumbent. And so as with that, you always have a fair amount of risk and more downside than upside as far as increasing volume. We did hold our ground. We did lose some share with some of the lower-margin consumer products companies, and as a result of that, we saw our volume tail off. Now, that was for the first quarter in that bid season. We since then have been, I would say, not necessarily on a roll, but we've been much more successful in gaining share.
If you look at it sequentially, our volume change per business day has increased throughout the second quarter, and we're starting out July of this year with a very similar, very similar to how June and the increases in volume were. Over the longer term, I mean, we always believe that intermodal is going to, the growth of it is going to outpace that of GDP. We do believe that we should outpace intermodal's growth in the aggregate.
You know, there's going to be spots and quarters and months when we do not, but we do believe over the longer term, our business model, having the fleet, having the drayage operations, and also having access to the rail equipment, puts us in a very good, solid, strategic position to continue to grow faster than the intermodal market.
Ben Hartford (Senior Equity Research Analyst)
Okay, that's helpful. Thanks.
Operator (participant)
Your next question comes from the line of Justin Long with Stephens.
Justin Long (Managing Director and Equity Research Analyst)
Hi. Thank you. Good afternoon. Could you talk about how demand and intermodal played out over the course of the quarter? Maybe just touching on the month-to-month trends that you saw, and also going forward, you know, what you're hearing from your customers today as it relates to an outlook for peak season.
Mark A. Yeager (COO)
Yeah, I think as Dave just alluded to, you know, we saw... You sort of have to look at it on a same business day basis, right? Because there are some, you know, number of days per month, and those kinds of things really do affect volume. So as you look on a per business day basis, we actually saw our growth accelerate over the course of the quarter. So June was our strongest, so April, May, and then June. You know, so we saw growth building over the course of time. Based on what we know about demand for the remainder of the year, we think domestic intermodal is going to continue to post solid results. Rail service has been good.
We believe there will be a peak season. I'm not sure exactly how robust and how early that will start, but we're certainly preparing for that. So you know, I think when you look at the growth of domestic intermodal over the course of the last, say, three years or so, it's been a solid story, and we think it's likely to continue that trend. It's probably not gonna be 2004, you know, or 2007, but we do think that domestic intermodal will have a solid growth year, which will include a good second half.
Justin Long (Managing Director and Equity Research Analyst)
... Okay, great. That's helpful. And then maybe on brokerage, last call, you mentioned the month of May being a pivotal indicator on, on how demand progresses the rest of the year. Would you say, you know, in terms of demand, things played out as you expected in the quarter?
Mark A. Yeager (COO)
Well, I mean, I, I would say that I don't think we saw the kind of tightness of supply that we were looking for in the month of May. You know, the previous two years, we had seen a spike up, and a bit more tightening in May. That then dissipated throughout the rest of the year. But I would say, based on the indexes that we've seen, that has not been the case, which indicates that, you know, right now, we aren't seeing an environment where demand exceeds supply. We have seen some pockets of tightness, particularly around produce season, but we haven't seen consistent tightness, throughout any period of the quarter, including May.
Justin Long (Managing Director and Equity Research Analyst)
Okay, great. And one last one, if you don't mind. You mentioned you evaluated an acquisition. I was wondering if you could comment on the activity you're seeing in the M&A market today as it relates both to the number of willing sellers, but also the level of competition and aggressiveness you're seeing from other bidders.
David Yeager (Chairman and CEO)
There certainly does seem to be more assets that are on the market for sale. We obviously, we've always committed to our shareholders that we'll do two things. One, that it will be, any acquisition we make will, not be a fixer-upper, and, probably primarily, also that it will be accretive, to our earnings. So we're seeing some good companies that are being brought to the market. We're going to evaluate them to see if, in fact, they're a strategic fit for Hub. This particular one, it was, an auction, that we did partake in, and, we just couldn't get to the EBITDA multiple of where the private equity firm finally ended up.
So we are seeing a lot of private equity money in there, as well as this point, in addition to your normal strategic buyers.
Justin Long (Managing Director and Equity Research Analyst)
Okay, thanks. That's helpful. I appreciate the time.
Operator (participant)
The next question comes from the line of Kevin Sterling with BB&T Capital Markets.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Good evening.
David Yeager (Chairman and CEO)
Evening, Kevin.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Dave, are you seeing any shippers coming to you, maybe looking for capacity now in light of hours of service, or is it still too early, given that hours of service is implemented in a slow freight month and before peak season?
David Yeager (Chairman and CEO)
Sure, Kevin. You know, it probably is too early to really see the impacts of hours of service. It's, again, it's only been several weeks, and we haven't really seen any impact. We didn't foresee that with contract it was going to have any impact on us, just because of the number of hours our drivers are on the road and because we are a local drayage for the most part. You know, I do think that over the longer term, and this is probably over a series of years, as onboard tracking devices are on all tractors, and if they're mandated, that hours of service when strictly adhered to will have an impact.
But right now, it's really only the larger carriers that are being checked on the regulatory new regulations, and I think we're all in compliance to begin with. So, but as it's expanded with onboard computers, et cetera, I think that then we'll see that change, and there will be somewhat of an impact, but that could be over years.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Okay, great. Thank you. And switching gears here, the growth that we saw in the second quarter from Unyson Logistics, which was very good, and I think you mentioned the pipeline is still full with some new customers. How should we think about growth for the back half of this year from Unyson Logistics? Should we extrapolate what we saw in the second quarter, or maybe tone it down a little bit? Just like to get your thoughts for logistics.
Terri Pizzuto (CFO)
That's a good question, Kevin. Yeah, we had some phenomenal new customers with a lot of growth, and we think that the growth that we had in the second quarter will probably continue, maybe dial it back a touch, but it should continue in the second half of the year.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Okay, great, Terri. That's very helpful. Thanks again for your time this evening.
Operator (participant)
Your next question comes from the line of Tom Wadewitz with JPMorgan.
Tom Wadewitz (Managing Director and Equity Research Analyst)
Hey, good afternoon. I was wondering if you could talk a little bit about intermodal capacity, what you're seeing in the marketplace, because obviously, the markets are conducive enough for you to have increased your order of containers. But, you know, at what point, given that pricing is getting more difficult, do you say, you know, "Enough, enough, we need to kind of hold off for a little bit as an industry," or, you know, is all of this in anticipation of the growth on the Crescent Corridor that, you know, you're willing to put up with a less favorable pricing environment for a short period of time ahead of that volume growth?
David Yeager (Chairman and CEO)
Yeah, I think that right now, you know, we're seeing a fairly fluid equipment environment. I wouldn't say that it's tight. We've seen some periodic episodes of tightness in some areas like the Southeast. We are not seeing tightness off of the West Coast, as of yet. You know, however, the industry itself is not adding anywhere near the capacity this year that it did last year, or certainly not the year before.
So we feel like, given the service levels that we're receiving and the utilization that we've been able to maintain with at 13.1 days with the fleet that we have, in order to properly serve our customers' needs as demand does pick up, it's in our best interest to add those additional boxes. So I don't think it's a tight capacity environment. We are anticipating some tightness off the West Coast.
Mark A. Yeager (COO)
... during peak, as is normal. But at the same time, we also don't believe we're gonna have a situation in which we'll have excess capacity. We've had our fleet fully deployed all year, and I would certainly anticipate that to be the case for the remainder of the year.
David Yeager (Chairman and CEO)
Right. Maybe you can help me with, you know, how some of the math works here, because it seems like you have, on a year-over-year basis, your container capacity is gonna be up more than 10% with the addition of 3,000 boxes? So-
Terri Pizzuto (CFO)
We're adding 4,000 new boxes, but 2,000 net after we retire-
David Yeager (Chairman and CEO)
Right.
Terri Pizzuto (CFO)
the two that we've got.
Mark A. Yeager (COO)
It's under 10%.
Terri Pizzuto (CFO)
Yeah.
Tom Wadewitz (Managing Director and Equity Research Analyst)
Okay, it is under 10%. Okay, but in first half, you're seeing volumes in the intermodal side for the core Hub business around 2%. Mode is smaller, but it's growing faster. So how should we think about how the containers are being allocated? And, you know, just, this is kind of getting to the idea that you should see a material step-up in the pace of volume growth in second half based on these additions, assuming, of course, there's no change to utilization rate.
Mark A. Yeager (COO)
Yeah, I mean, I think what we've said is that we felt that volume growth would reaccelerate in the second half of the year. Everything we've seen from the bid results thus far, about 70% of our business has repriced, and we remain confident that we will see growth levels in the mid- to high-single digits in the second half of the year. And I think that was the guidance we gave at the end of last quarter, and based on everything we know, we're still confident in that.
Tom Wadewitz (Managing Director and Equity Research Analyst)
Okay. That's very helpful, guys. Thanks a lot.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.
Todd Fowler (Managing Director and Equity Research)
Great, thanks. Good evening. I guess I just wanted to talk a little bit about the decline in the local East volumes and kind of what your view is as to what changes those dynamics in the market, either from, you know, Hub Group standpoint competitively or with some of the behavior from some of your other competitors.
David Yeager (Chairman and CEO)
Well, Todd, we still view—this is Dave. We still view local East as an enormous opportunity for truck conversion. So number one, we still look that that will be one of our primary growth areas. You know, this past quarter, again, we had some low-margin business, as well as a few instances where some of our competitors were quite aggressive, to levels that we just didn't feel were compensatory. And so, we walked from the business, if you will. So it did cost us some volume, but we're still, again, we believe that the local East, over the longer term, has tremendous opportunities. There's a lot of truck conversion capacity that's there.
The Crescent Corridor, it is growing with our volumes, not as rapidly as we might like, but it is growing well, and we believe that, again, there's just a tremendous amount of conversion capability. So, you know, we lost some low-margin business, but it's not anything that is we think will have a long-term negative impact on us.
Todd Fowler (Managing Director and Equity Research)
I guess, Dave, is some of that, the, the different strategies between, you know, the, the, the two main rail carriers in the East, and does, does something in those dynamics change going forward, or some of it just a growth period until they can fill up the network from some of the, the capacity expansion that they've been doing in the past couple of years?
David Yeager (Chairman and CEO)
Well, both of them, of course, have been adding capacity and building out terminals. So, that definitely does have the... It does create more capacity. At the same point in time, we're, of course, aligned with Norfolk Southern. We believe that their long-term strategic direction fits best with Hub, and that CSX, they have certainly expanded their terminals and some of the new locations, but they are more transactionally focused. And again, we're just better aligned with Norfolk Southern and believe that, with their focus on service, that, well, we have a long-term relationship that'll be beneficial.
Todd Fowler (Managing Director and Equity Research)
Okay. And then for my follow-up, you know, what is the difference between, you know, the growth rate that Mode is showing in the intermodal business versus the legacy Hub Group business? I mean, the 11% top-line growth, and I don't know if you gave any volume numbers for Mode, but what's allowing them to grow faster than what the legacy Hub business is? Thank you.
Mark A. Yeager (COO)
Yeah, I think we did throw a volume number out there. In any event, Mode's volume growth was 13%, on the quarter, which was outstanding. You know, I think what we've got is a few of the larger Mode agents who have really embraced intermodal and are exploring all of their options and using all of their rail and fourth-party options effectively. So they've seen some good success with their existing customers, as well as some good success with some new customers that they're bringing on board. And some of those have been sizable and, you know, big enough to move the needle. They were fortunate enough to not have to walk away from non-compensatory business, so they didn't have that headwind either.
But we think that they're doing a very good job of embracing intermodal, and we're seeing good growth out of a number of those larger Mode agents, and so that's encouraging.
Todd Fowler (Managing Director and Equity Research)
Mark, I guess this is probably a sensitive thing to do, but I mean, do you work then with the Mode agents to, you know, either expand that relationship on the Hub Group side, or how do you kind of look at the growth that they're seeing to the benefit of the overall company?
Mark A. Yeager (COO)
Well, you know, I mean, we think that it's helping us reach a new set of customers and new markets. They're bringing intermodal to their customer base, so that's a good thing. Obviously, we want to do more dray services for them, and we wanna provide more fleet capacity to them when they need it as well. You know, we made a conscious decision with Mode to maintain our pricing disciplines as well. And so, Mode actually shrank in terms of volume with Hub fleet boxes and chose more, you know, more cost-effective alternatives in order to be competitive. So,
Terri Pizzuto (CFO)
... You know, that's a strategy that we'll likely continue to follow, but we want to support them however we can. At the same time, you know, we've made a commitment to the mode agents that they're going to be allowed to make their routing choices, and we're going to continue to stick by that commitment.
Todd Fowler (Managing Director and Equity Research)
Sure. That makes a lot of sense. Thanks a lot for the help.
Terri Pizzuto (CFO)
Great. Your next question comes from the line of Kelly Dougherty with Macquarie
Bill Greene (Director of Research and Managing Director)
Hey, thanks for taking the question. This morning, Union Pacific mentioned on our call that intermodal volumes were down, I think, kind of, you know, driven by an 8% decline on the international side, offset by a 3% growth in domestic. Do you think that the weakness on the international side and, and maybe their eagerness to drive more highway conversions just makes for a more reasonable discussion with you about what's going on on the domestic side of things?
David Yeager (Chairman and CEO)
This is Dave. I think that the UP has made it very clear that they, as we walked away from some low-margin business, most recently, they are willing to also walk away from business, and if I'm not mistaken, they had stated that it's their goal to have a 65 operating ratio by 2015. So, it's certainly our we have a very significant relationship with the Union Pacific. We don't find the price increases that they're looking for to be unreasonable. We think it's something that the intermodal marketplace itself can, in fact, support.
Kelly Dougherty (Senior Analyst in the Transport and Logistics Research)
It seems like there's been a kind of a change in how the rail cost increases have been going, you know, from where they were, maybe in the recent past to where you are now.
David Yeager (Chairman and CEO)
Well, I don't know if I would say that necessarily. I think that we're having better communications and better understandings on expectations both with our rail partners as well as with our clients. And so with the added communication, I think it makes the price increase discussion a lot simpler and a lot more direct.
Kelly Dougherty (Senior Analyst in the Transport and Logistics Research)
Okay, great. Thanks. And then, Terri, maybe just a quick one for you on the logistics side. You know, talk about being able to, to dial back the growth a little bit, but still seeing, you know, pretty strong growth. Can you, can you give us a sense of maybe what the growth will be for the full year and how we should think about it going forward on the logistics side? And then, you know, what this onboarding does to margins? Do they get a bit depressed as you ramp up some of this new business, and then do they improve? And, you know, may- maybe how to think about that.
Terri Pizzuto (CFO)
Sure. Probably growth for the year could range in logistics anywhere between 25%-30%, call it, is what we would guess for the whole year. And then, in terms of how that impacts the margin, logistics, gross margin as a percentage of sales is the lowest of our three different service lines. So that brings the yield down, but certainly it's terrific gross margin dollar growth, because that was our second biggest grower in terms of gross margin dollar growth this quarter. And so, you know, we think overall, we'll be able to maintain the 11% gross margin that we had in 2012, but a headwind in terms of the yield is the logistics.
Kelly Dougherty (Senior Analyst in the Transport and Logistics Research)
Sure. I think my apologies for the confusion, but I guess within the logistics segment itself, though, you know, does the onboarding kind of depress the margins just within the segment a bit, and then, you know, as the business ramps up, you should actually see margins improve?
Terri Pizzuto (CFO)
Yeah, we have a little inefficiency. Sure. There's a bit of a ramp-up cost, and some of them are pretty big engagements, and it just takes a while to be efficient with them, I guess.
David Yeager (Chairman and CEO)
Right.
Terri Pizzuto (CFO)
So you're exactly right, Kelly, we would have a little bit of ramp-up cost in this quarter, so that will be lower, those ramp-up costs as we progress throughout the quarter.
Kelly Dougherty (Senior Analyst in the Transport and Logistics Research)
Great. Thanks very much.
Terri Pizzuto (CFO)
Mm-hmm.
Operator (participant)
The next question comes from the line of Scott Group with Wolfe Research.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Afternoon, guys.
David Yeager (Chairman and CEO)
Hi, Scott.
Scott Group (Managing Director and Senior Analyst)
Just want to clarify one thing. I know you talked about the margin percent may be a little bit lower than what you thought earlier in the year. You didn't, you never gave us margin dollars guidance, but is that going up relative to what you thought earlier in the year just because logistics is doing better?
Terri Pizzuto (CFO)
Yes.
Scott Group (Managing Director and Senior Analyst)
That's right. Okay.
Terri Pizzuto (CFO)
Exactly right.
Scott Group (Managing Director and Senior Analyst)
So, I don't really... I want to understand kind of what the confidence in intermodal volumes getting better. If you walked away from some business and it was low margin, low profit business earlier in the year, shouldn't that continue to have an impact for the full year? And if you're right and intermodal volumes do accelerate, can we also sustain the 3%-4% pricing mix benefit ex-fuel and get better volume? Can we get it all?
David Yeager (Chairman and CEO)
I'll answer part of that. Maybe Terri can answer the last part. Overall, we did see sequentially through the quarter, our volumes improve. And that, coupled with what we know is in the pipeline, maybe possibly not implemented as of yet, some of the new bids and awards we've received, will more than offset the losses that we had with some of the low-margin business. So we certainly do feel very comfortable that we'll be in the mid-single digits for the year. And certainly, that's the way that we're trending as we did in June as well as thus far in July.
Terri Pizzuto (CFO)
Yeah, and then I'll take the second part of your question, Scott. I guess, you know, in terms of this quarter, you talked about price, fuel, and mix. Price was up the most. Mix was also up, and that was partially offset by slightly lower fuel. So it's hard for us. So, you know, we did get price increases. As Dave said earlier, you know, we worked closely with our partners to make sure that we got an increase and walked away from those, you know, lower margin business. So our prices are up, and our mix is up, really driven more by a lot of our growth within the local West market, which is a longer length of haul. So that's why mix is up a bit. And then fuel, it's hard for us to tell what'll happen with that.
I mean, fuel fluctuates depending on whether the price of diesel goes up or down for us.
Scott Group (Managing Director and Senior Analyst)
I guess what I was asking, and maybe a different way of asking it, is: so as the volumes are getting sequentially better, are you maintaining the yields, or are those getting sequential, the pricing, or is that getting sequentially a little bit worse?
Terri Pizzuto (CFO)
We're maintaining the pricing, and it should get a little better.
Scott Group (Managing Director and Senior Analyst)
Okay, great. And then one last thing, if I can. So the operating expenses, if I back out the $2 million of acquisitions costs, was $63 million? Why are they-
Terri Pizzuto (CFO)
It was acquisition costs, actually.
Scott Group (Managing Director and Senior Analyst)
Okay. Why are they going up to $67 million-$69 million in the back half?
Terri Pizzuto (CFO)
The biggest contributor to that would be we're projecting that Mode's gross margin goes up, and when that happens, agent commissions goes up because that's a function of gross margin. So we're thinking that could go up $1 million. That, and then we're also projected to add about 45 more people in the second half of the year, and then we'll have the impact of the 65 people that we added in the first half of the year that are only in there part of the time. So that could be about $2 million for that. And then commission will be up about $300,000 since we expect to grow more in the second half.
Scott Group (Managing Director and Senior Analyst)
Okay, great. Thank you, guys. Appreciate it.
Terri Pizzuto (CFO)
Mm-hmm.
Operator (participant)
Your next question comes from the line of Bill Greene with Morgan Stanley.
Bill Greene (Director of Research and Managing Director)
Hey there. Thanks for taking the questions. I've just a couple of quick follow-ups here on some of the details. Terri, you went through some of those details on the operating costs there, but you've actually been doing quite a bit better in the first half, and you had some one-time, not one-time, but maybe unusual items here in the second quarter as well. So, you went through sort of those items, but the first half's not actually a pretty good run rate to sort of start as a base?
Terri Pizzuto (CFO)
Right. It wouldn't be. If the growth margin for Mode goes up, that's just a cost that we have.
Bill Greene (Director of Research and Managing Director)
Yep.
Terri Pizzuto (CFO)
We've got agent commissions, so-
Bill Greene (Director of Research and Managing Director)
All right. Yeah, no, I get it. I just, I kind of, when I hear the sort of the discussion on the pricing, and you want to sort of stay disciplined and whatnot, but your competitors are being a bit aggressive, I would kind of think, well, maybe there's something that they can do then on the cost, such that you could actually say, "Well, we can match whatever price you want because we can stay better than you on cost." That's kind of where I was sort of thinking, that maybe there's a, maybe there's something here in the cost structure you'd say we should try to attack that to get that down, but maybe that's-
Terri Pizzuto (CFO)
Yeah.
Mark A. Yeager (COO)
not thinking about it right.
Terri Pizzuto (CFO)
Yeah, that's a good question. I guess, and most of the employees that we'd be adding would really be for, you know, logistics and a little bit of contract. And contract grows for us, and that's good for us because we're doing more of our own drayage, and we save money. So those are really the headcount adds. It's not in Intermodal, per se.
Bill Greene (Director of Research and Managing Director)
Yeah. Okay. And then, on the full year guidance range, you took out the top end a little bit. Is that just all the tax rate increase? 'Cause I think you had $2-$2.15, if I'm not mistaken.
Terri Pizzuto (CFO)
No, the new analyst range is right now $1.95-$2.10.
Bill Greene (Director of Research and Managing Director)
No, that's true, but I thought the prior commentary on guidance had been more like $2-$2.15.
Terri Pizzuto (CFO)
Yeah, that was the analyst range at the time.
Bill Greene (Director of Research and Managing Director)
Okay, so you're just saying where the range is. You weren't trying to sort of take down guidance?
Mark A. Yeager (COO)
Right. No.
Terri Pizzuto (CFO)
Right.
Mark A. Yeager (COO)
No, we feel comfortable-
Terri Pizzuto (CFO)
We've never done that.
Mark A. Yeager (COO)
- within the, analyst range.
Terri Pizzuto (CFO)
Yeah. Mm-hmm.
Okay. Okay.
Mark A. Yeager (COO)
Down guidance.
Okay, I just wanted to get that clear. Okay, thanks for the time.
Operator (participant)
Your next question comes from the line of David Tamberino with Stifel.
Great, thanks for taking my questions this late in the call. I was wondering how much of your business, in the West, with the rails, actually across the nation with the rails, is left to be repriced? I believe you mentioned that there was some, but didn't really quantify what percentage had been repriced so far this year.
Terri Pizzuto (CFO)
I think Mark said 30% is going to be repriced in total, and 70%'s already been repriced.
Bill Greene (Director of Research and Managing Director)
Okay, I might not have picked that up earlier. Then your, your confidence in the back half ramp of of Intermodal, I believe you said mid- to high-single digits for the last couple, so that, that evens out to about mid-digits for the year. You know, what lanes do you anticipate seeing the most growth in?
Mark A. Yeager (COO)
Well, I think that we're, you know, we're likely to see an ongoing pattern of what we've seen. I mean, we think that local West will probably continue to lead our growth. Hopeful to see that transcon will get back in positive numbers and same with local East. But I would say, in all likelihood, particularly given the fact that it's, you know, we've had a lot of success in the retail sector, it's likely to see the preponderance of our growth being in the local West market.
Terri Pizzuto (CFO)
Yeah.
Bill Greene (Director of Research and Managing Director)
Okay, and then maybe just last one on Hub brokerage. You said there was a margin expansion for the quarter. Was that a result of price coming up or better procurement in terms of trucks?
Terri Pizzuto (CFO)
It's really a combination of both. You're right, our prices were up. Fuel and mix were down for us. And then our team has done a great job of purchasing.
Bill Greene (Director of Research and Managing Director)
... If you had to attribute that one way or the other, if, or you're just splitting it down the middle?
Terri Pizzuto (CFO)
Hard to do, really. Hard for us to measure, to be quite honest. So I'd probably put it split down the middle.
Mark A. Yeager (COO)
Right. Yep.
Bill Greene (Director of Research and Managing Director)
Okay. Well, thank you for your time.
Operator (participant)
The next question comes from the line of Matt Brooklier with Longbow Research.
Matt Brooklier (Analyst)
Thanks. Good afternoon. Nice to see Mode's growth picking up, and I think someone mentioned earlier in the call that you've added some salespeople and sales agents. I was just curious to get your thoughts on, you know, 5% growth in the quarter. How much was that potentially attributed to it, attributed to the, you know, the headcount additions, and then maybe potentially you could talk to, you know, what was organic growth for Mode during the quarter?
Mark A. Yeager (COO)
Hey, Matt, this is Mark. Yeah, almost all of that growth came out of existing agents. By and large, it was our larger agents who posted the significant growth. We did add 2 new IBOs and 6 sales agents over the course, so that's a good thing, but it typically takes them some time to ramp up and really start to generate enough revenue to move the needle. So most of our growth came organically.
Matt Brooklier (Analyst)
Okay, that's good to hear. Then, are the expectations, and I think Terri talked about it, you're adding some headcount in the second half of this year. Are we planning to add incremental IBOs or incremental, you know, sales headcount to Mode, or are you more focused on, you know, kind of continuing this momentum of organic growth?
Terri Pizzuto (CFO)
Oh, we're always wanting to add more IBOs and sales agents, and we'd love to sign more up. So we've got our recruiting team is working on that, doing a good job, and we're focused on it, but we have more control over how many people we add at Hub, the Hub segment, really. And so those headcount adds that I mentioned were at the Hub segment.
David Yeager (Chairman and CEO)
Right. And those, most of those are within logistics with the new onboardings, also.
Terri Pizzuto (CFO)
Mm-hmm.
David Yeager (Chairman and CEO)
Highway, as they continue to expand, as well as some contract, as it also, is up over 10% in driver count,
Terri Pizzuto (CFO)
Mm-hmm
David Yeager (Chairman and CEO)
- Thus far this year.
Mark A. Yeager (COO)
Right. So the headcount is there to either handle new business or to help make our street operations more efficient.
Matt Brooklier (Analyst)
Okay. And second part of my second question, as a follow-up here, I guess the ability to attract, you know, IBOs to Mode and having this, I guess, more recent success, is it a function of, you know, kind of, stabilizing the business, getting the IT in place? Is it just a function of being more attractive, you know, from a platform perspective? Or is it more a function of your efforts on the recruiting side and, you know, really going out into the market and being more aggressive in terms of looking at potential agents?
Mark A. Yeager (COO)
Well, we certainly hope that it's an attractive platform. I think it's a unique platform, especially for IBOs that are interested in the intermodal product. We're trying to also do a good job of supporting their LTL efforts and their truckload efforts as well, and we think we are in a unique position to do that. I think now that we're two years in, we've demonstrated that we're going to allow them to run their businesses, but support them however we can. And so hopefully they're comfortable that that's the case and will be going forward.
We got through some systems issues last year, and so they have more clarity in terms of the operating systems that they're working with, and I think that that's helping the recruiters give potential agents a view of how they're going to operate their business going forward as well. So I think all those things are giving the agents more confidence that Mode is a good place to be associated with.
Matt Brooklier (Analyst)
Okay. Thank you.
Operator (participant)
Your next question comes from the line of Ryan Bouchard with Avondale Partners.
Ryan Bouchard (Senior Equity Research Analyst)
Yeah, guys. Hey, thanks for taking my question. The truck brokerage segment, the second half of last year, provides a little bit more difficult comps. Do you think that you can maintain kind of this mid-single digit revenue growth, or should it tick down a little bit, or how do you think about that?
Terri Pizzuto (CFO)
We think we can definitely maintain the mid-single. It might even go up from there.
Ryan Bouchard (Senior Equity Research Analyst)
Okay. And then the Mode operating margin improved quite a bit. You said it should be greater than 2% for the rest of the year. Also, in the second half of last year, you get tougher comps. Should it continue to be higher year-over-year, or, you know, just maybe not to the extent that we saw in the first and second quarter?
Terri Pizzuto (CFO)
It'll be close to, you know, maybe close to what it was last year, because you're right.
Ryan Bouchard (Senior Equity Research Analyst)
Okay.
Terri Pizzuto (CFO)
Last half of the year was about the 2%. We think we can maintain that. Mm-hmm.
Ryan Bouchard (Senior Equity Research Analyst)
Okay. And then, just one last one, if I could. Did you talk about... You talked about Mode Intermodal. Did you give us a number on the percentage of Mode Intermodal movements that are, were done using Hub boxes?
Terri Pizzuto (CFO)
That went down.
Mark A. Yeager (COO)
Right.
Terri Pizzuto (CFO)
But it was 13% of their loads were moved in our fleet boxes.
Ryan Bouchard (Senior Equity Research Analyst)
Gotcha. Okay. Thanks, guys.
Operator (participant)
Your next question comes from the line of Anthony Gallo with Wells Fargo.
Anthony Gallo (Managing Director and Equity Research)
... Good evening. Thank you very much for taking the call, the question. So first question, I just wanted to clarify, you mentioned that you walked away from some lower margin business, and I'm trying to figure out if that would have shown up in the second quarter numbers, or is that more a second half issue? Because if I look at legacy Hub or even on a consolidated basis, margins didn't really improve that much. In fact, I think most of the outperformance sort of came from Mode. So I was just trying to reconcile the low margin business that was walked away from and kind of where it shows up and when it'll show up in the numbers.
David Yeager (Chairman and CEO)
Well, Anthony, let me, let me correct that a bit. Saying walk away, we priced it up and somebody else took it, so at the lower margin.
Anthony Gallo (Managing Director and Equity Research)
Yes.
David Yeager (Chairman and CEO)
So we didn't walk away, but we tried to increase the price. The customer was unwilling to accept it, and somebody else was willing to operate at those margins. Most of that took place in early bids. We're talking the January, February, and so those aren't actually implemented until it could be as late as mid-second half. It could be June because obviously, once you go through the bid, they may make awards, but then it takes a while for everybody to be prepared to handle that new network. So no, we feel very good about where we are.
A lot of the business that we have been awarded has been kicking in over the last several months, and some of it has yet to be implemented, the business that we did in fact win in, bids that may have been held in April and May. So, no, we feel very confident in the numbers, and, and we're offering you-
Anthony Gallo (Managing Director and Equity Research)
That's helpful clarification. Thanks, Dave. On the Mode improvement in margins, what were the two or three main drivers of that, do you think?
Terri Pizzuto (CFO)
No, about 60, the $1.5 million? Yeah, about 60% of it was due to TempStack improvement, which is our refrigerated trailer product that we have, and the rest of it was due to IBO growth.
Anthony Gallo (Managing Director and Equity Research)
Thank you very much. Have a good evening.
Terri Pizzuto (CFO)
Sure.
Operator (participant)
Once again, ladies and gentlemen, if you have any questions, please press star followed by one on your phone. We have a follow-up question from the line of Todd Fowler with KeyBanc.
Todd Fowler (Managing Director and Equity Research)
You know what, guys? I'm in good shape. I'll follow up offline later.
Terri Pizzuto (CFO)
Okay, thanks.
Operator (participant)
At this time, there are no further questions. I will now turn the call back over to Mr. Dave Yeager for any follow-up remarks.
David Yeager (Chairman and CEO)
Well, great. Well, once again, we thank you for having an interest in Hub and participating and/or listening to our second quarter earnings call. As always, Terri, Mark, and I would be available if you do come up with some additional questions or need some clarifications. But thank you for joining us today.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.
