Hub Group - Q2 2014
July 17, 2014
Transcript
Operator (participant)
Hello, and welcome to the Hub Group Inc. second quarter 2014 earnings conference call. I'm joined on the call by Dave Yeager, Hub's CEO, Mark Yeager, our President and COO, and Terri Pizzuto, our CFO. 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 presented are best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate, and project. Actual results can differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to our host for today, Mr. Dave Yeager. You may now begin.
Dave Yeager (CEO)
Good afternoon, and welcome to Hub Group's second quarter earnings call. Like the rest of the industry, we continue to recover from the severe winter weather. We are pleased to report that for the second quarter, all of our business lines experienced year-over-year revenue growth. The one ongoing issue that persists from the winter is that we continue to experience substandard rail service. Hub is fortunate that our chosen rail partners are suffering less than their competitors, but currently, all rail on-time performance trails historic norms. On a separate note, we are steadily making progress with our margin enhancement efforts, and Mark will provide more color on these yield initiatives in his commentary. With that, I'll turn it over to Mark to discuss our operating results.
Mark Yeager (President and COO)
Thanks, Dave, and hello, everyone. I'm going to take you through our operational highlights by business line, starting with intermodal. Consolidated big box intermodal volume was up 2%. Hub segment volume was flat year-over-year, while Mode's volume was up an impressive 19%. Hub Local West volume was up 8%, Transcon volume was down 2%, and Local East volume was down 8%. Mode saw a 20% volume growth in Local West, 15% growth in Local East, and 10% growth in Transcon. Although we saw a slight sequential improvement in fleet utilization, utilization at 13.6 days was about a half a day worse than last year due to ongoing rail service issues. The pricing environment continues to be competitive, but we remain focused on maintaining pricing discipline.
We've refined our pricing processes to focus more precisely on network strengths and implemented a more rigorous and expansive increase plan. This discipline has cost us some volume, but we believe it's the right course of action for Hub. Deploying a more disciplined approach to pricing this year will ultimately allow us to recover cost increases and develop a more stable business base. We've completed about 70% of bids and remain confident that we will see intermodal margin expansion in the second half of 2014. Throughout the second quarter, we continued to make progress with our yield initiatives. As you may remember from our last call, we changed our sales commission structure to focus on margin over volume. We're bringing on new analytical tools to help us price with a better understanding of market dynamics and network needs.
Load acceptance processes and equipment prioritization criteria have been refined to help ensure operational efficiencies and to maximize network contribution. Work continues on OneSystem, our new load planning and dispatch tool, which is designed to help us reduce empty miles and improve equipment utilization. We anticipate that it will be completely deployed by Q1 of 2015. We are currently in the process of onboarding 3,500 new steel containers for a net increase of 1,500 units in 2014. We've received 418 of the new containers, and the deliveries will continue throughout peak season, with an expected year-end fleet size of approximately 27,500 units. We reduced our container order by 500 containers as we await the resolution of the anti-dumping container dispute, filed by Stoughton against our supplier.
As you know, we placed an order for 300 trucks. We expect to receive 118 tractors this month, with the remainder before the end of the year. Last quarter, we installed 500 satellite tracking devices as part of our pilot program. This satellite tracking system will be installed in an additional 4,500 containers later this year. We expect to have our entire fleet outfitted with tracking devices by the end of next year. Hub Group Trucking continued to grow, with volume up 6% for the quarter. Hub Group Trucking moved 72% of Hub drays during the quarter, compared to 66% last year and 70% in Q1. We also did 44% more moves for Mode Transportation.
While driver recruitment continues to be a challenge, we were able to add 76 drivers in Q2, bringing the total driver count to 2,914 at the end of June. Hub's truck brokerage division was able to counteract some of the headwinds faced from a tight capacity environment by increasing high-value-added services and improving mix. Although volume declined 10%, revenue and margin increased. Mode's truck brokerage volume declined 7%, but they also produced similar revenue and margin increases through mix improvement. Moving on to Unyson Logistics, we saw top-line growth of 24%. We remain focused on our pipeline, seeking full outsource and target savings initiatives. This quarter, Unyson was named a Top 50 Global and Domestic 3PL by Supply Chain 24/7, and a 2014 Best Places to Work in St. Louis, where Unyson is headquartered.
We are very proud to see Unyson flourish as a leader in the logistics industry. Mode's logistics business also continues to expand, with 5% growth this quarter. Mode Transportation produced solid top-line growth of 14% in the quarter. Mode continued to grow its network, adding six new IBOs and two new sales agents during the second quarter. We received several customer awards for outstanding service this quarter, including Guitar Center's 2013 Outstanding Performance Award, and the 2014 Partners in Transformation Award from Sears. At this time, I will pass the call on to Terri for the details of our quarterly results.
Terri Pizzuto (CFO)
Thanks, Mark, and hello, everyone. As usual, I'd like to highlight three points. First, gross margin as a percentage of sales improved sequentially in all three Hub business lines. Second, Mode delivered a best-ever 2.9% operating margin. Third, Unyson Logistics had another strong quarter with 24% revenue growth. Here are the key numbers for the second quarter. Hub Group's revenue increased 7% to $894 million. Hub Group's diluted earnings per share was $0.51, compared to $0.50 last year. Now I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $682 million, which is a 6% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 1%. Intermodal volume was flat, and price was up slightly.
Loads from retail customers were up 7%, while loads from consumer products customers were down 3%, and loads from durable customers were down 10%. These declines resulted primarily from pricing actions we took to improve freight mix. Truck brokerage revenue increased 6%. Price, fuel, and mix combined were up 16%, but were partially offset by a 10% decline in volume. Length of haul increased 8% to 681 mi. Logistics revenue increased 24%. The increase is due primarily to growth with customers that we onboarded last year. Hub's gross margin decreased by $728,000. Intermodal gross margin was down because of unfavorable timing of cost increases and worse equipment utilization due to rail service issues, partially offset by a modest increase in price.
Truck brokerage gross margin increased because of customer price increases and more value-added services. Logistics gross margin increased due to growth with customers we onboarded last year. Hub's gross margin as a percentage of sales was 10.4%, or about 70 basis points lower than the second quarter of 2013. Intermodal gross margin as a percentage of sales was down 120 basis points because of a change in mix of business from the second quarter of 2013 and unfavorable timing of cost increases. Logistics gross margin as a percentage of sales was up 25 basis points due to more cost-effective purchasing. Truck brokerage gross margin as a percentage of sales was up 100 basis points as a result of more favorable mix, shedding some unprofitable business and customer price increases.
Gross margin as a percentage of sales increased sequentially by 50 basis points. All of our service lines improved. Intermodal gross margin as a percentage of sales was up 30 basis points, and both logistics and truck brokerage were up 90 basis points. Hub's costs and expenses increased $400,000 to $46.4 million in the second quarter of 2014, compared to $46 million in 2013. Salaries and benefits were up about $800,000 due to wage increases and higher headcount. This was partly offset by a decline in commissions. Finally, operating margin for the Hub segment was 3.6%, which was 30 basis points lower than last year's 3.9%. Now I'll talk about results for our Mode segment.
Mode had a strong quarter, with revenue of $232 million, which is up 14% over last year. The revenue breaks down as $114 million in intermodal, which was up 19%, $87 million in Truck Brokerage, which was up 10%, and $31 million in Logistics, which was up 5%. Mode's gross margin increased $3.8 million year-over-year due to growth in all three service lines, with the largest growth coming from intermodal. Gross margin as a percentage of sales was 12%, compared to 11.8% last year. Mode's total cost and expenses increased $2.2 million compared to last year, due primarily to an increase in agent commissions.
Operating margin for Mode was 2.9%, or 50 basis points higher than last year's 2.4% operating margin. Turning to headcount for Hub Group, we had 1,481 employees, excluding drivers, at the end of June. That's up 14 people compared to the end of March. Now I'll discuss what we expect for 2014. We project that our 2014 diluted earnings per share will be between $2 and $2.10. We think we'll have about 36,850,000 weighted average diluted shares outstanding. Our goal for 2014 is to improve gross margin as a percentage of sales from the 11% that we had in 2013. We remain very focused on margin enhancement initiatives and improving our network.
Headwinds include the difficult first quarter and the mix impact from growth in logistics, since it's our business with the lowest gross margin as a percentage of sales. Gross margin as a percentage of sales in the last half of the year should improve sequentially and year-over-year, because the majority of customer price increases take effect in the second half of the year. Our costs and expenses will probably range between $68 million and $70 million a quarter for the rest of the year. Turning now to our balance sheet and how we used our cash. We ended the quarter with $73 million in cash and $51 million in debt, including $20 million of capital leases.
We spent $13 million on capital expenditures this quarter, including $8 million for containers that came off lease, $3 million for technology investments, and $2 million for the building. That brings total year-to-date capital expenditures to $46 million. Estimated capital expenditures for the last half of 2014 are between $85 million and $95 million. Approximately $39 million is for tractors and $38 million is for new containers. We intend to finance these purchases with debt. That wraps up the financial section, and I'll turn it back to Dave for closing remarks.
Dave Yeager (CEO)
Great. Thank you, Terri. Again, thank you for your participation on this call. We are continuing to make progress with our initiatives, and we're looking forward to improved profitability in the second half of the year. At this time, Mark, Terri, and I are happy to take your questions.
Operator (participant)
Ladies and gentlemen, if you have a question, please press star followed by one on your telephone. If your question has been answered, or you would like to withdraw your question, please press star two. Once again, please press star one to begin. Your first question comes from the line of John Barnes with RBC Capital Markets. Please proceed.
John Barnes (Managing Director)
Uh, a-
Dave Yeager (CEO)
Hi, John. I'm afraid the first call will not come from John Barnes. Okay.
Operator (participant)
The line of Mr. John is open. Mr. Barnes, you may begin.
John Barnes (Managing Director)
Hey, can you guys hear me okay?
Dave Yeager (CEO)
We can now, yes, John.
John Barnes (Managing Director)
All right. Sorry about that. I don't know what that was. Hey, thanks. Good afternoon. Hey, so we obviously heard out of CSX, you know, yesterday and then and J.B. Hunt earlier in the week about, you know, the continued continuation of the rail service issues. And, you know, CSX obviously talked a little bit about increased headcount and CapEx, and the other rails have as well. Can you talk a little bit about, you know, when do you think, you know, rail service will begin to improve meaningfully? And do you think the forecasted increase in resources by the rails is sufficient enough to get you back to where you need to be?
Dave Yeager (CEO)
Hi, John, it's Dave. There is unfortunately no quick fixes on this. This is something that will take a bit of time. You know, there's really two broad areas that the rails are attacking right now. One is increasing the available resources, the other is efficiency to more efficiently route the traffic. So with the first, with the resources, they are hiring new crews, acquiring new locomotives where available, and returning stored locomotives to service as well as accelerating increases in intermodal terminal capacity. You know, all of those, you know, take. That's not something you do in a week or a day. It's more like months and possibly quarters.
Some of the things that are a little bit quicker fixes is that they are trying to more efficiently route their traffic and avoid the bottleneck with of Chicago for non-intermodal trains. So they might go through Peoria or St. Louis or some other area. So we do think that that'll help. And plus, I think that they're taking a real hard look at, as you know, summertime is maintenance time, not just in the city of Chicago, but also on the railroads. I think they're looking at how they're planning that maintenance to do the right maintenance, but maybe try to make it so it's not as disruptive to service.
John Barnes (Managing Director)
Okay. All right,
Dave Yeager (CEO)
But to answer your question, we're looking at quarters. I would say, hopefully by year-end, we'll begin to see some gradual improvement within the service parameters.
John Barnes (Managing Director)
By year-end?
Dave Yeager (CEO)
By year-end, yes. And those are the railroads that we [load base is on]-
John Barnes (Managing Director)
Okay.
Dave Yeager (CEO)
- which is the Union Pacific and Norfolk Southern.
John Barnes (Managing Director)
Sure. Okay. All right. And then, my other question is the two internal initiatives that you talked about, number one, increased internal drayage, and then, you know, obviously, the improved utilization of your boxes. Where do you believe those metrics will be by year-end? And, you know, what do you need to do further to improve those metrics as you go into 2015?
Mark Yeager (President and COO)
You know, well, the first one is greater use of Hub Group Trucking for handling our internal drayage. And as I said in the script, you know, we're around 72% right now versus 66% last year. We think that our goal has been to get to 75% by year-end. We think that that's attainable. It will be challenging, and obviously, the big difficulty there is with driver recruitment and retention. It's an issue that I think everyone is aware of. It's become, you know, more challenging, if anything, this year, and we would anticipate that that's gonna continue to be a significant challenge for us. But we think the 75%'s attainable.
You know, our long-term, long-term goal is to get up to around, 85%, which we think, we can do, but it'll probably take us a couple years, to get to that level of penetration. In terms of utilization, you know, as we said, we think the rail service issues probably cost us about a half a day, in the second quarter. We would anticipate that we're probably gonna see a similar headwind, throughout the year.
But, but certainly, having utilization back to more historic levels in the mid-13s, you know, should be achievable, particularly in the third quarter, which we would anticipate because the demand is normally, gonna be, a pretty good opportunity from a utilization perspective. So much of that is dependent on any progress that we're able to see from a rail service perspective. So I would say that that's the big variable there, at this point in time.
John Barnes (Managing Director)
Very good. All right, I really appreciate your time today, and nice quarter. Thanks.
Mark Yeager (President and COO)
Thank you, John.
Operator (participant)
Your next question comes from the line of Ben Hartford with Baird. Please proceed, sir.
Ben Hartford (Senior Research Analyst)
Hey, good morning, guys. Okay, good evening. Sorry. Good evening. Long day. I just wondering how you guys feel in totality. I know that, the network has been an issue for everybody in the first half of the year. It sounds like the system implementation, and correct me if I'm wrong, maybe it's pushed back a little bit. You guys have been hoping to get that in by peak. Now it sounds like year-end, and you won't have the entire fleet with the devices in place until year-end 2015.
In totality, if you adjust for the service issues here in the first half of the year, do you feel any less confident in terms of what you've been able to do during bid season, improve the mix of business in terms of driving gross margins and this kind of accelerated expected accelerating pace here in the back half of 2014 and into and through 2015? I'm looking for something in totality, I guess, trying to normalize for the issues here in the first half of the year outside of your control.
Mark Yeager (President and COO)
Sure. I think that, you know, the OneSystem initiative is behind schedule a bit, no question. We are up and running in two terminals right now. But we are gonna take a, you know, deliberate approach to rolling it out. And so while we had initially hoped to get it in time for peak throughout the network, we don't wanna be going through an installation process during peak. So we'll really do it in two segments, and that means that it won't be until the first quarter of next year that we're really up and running, and I think realizing the full benefits of OneSystem at that point in time. The satellite tracking really is on schedule as we had thought.
Once again, we're doing it in groupings so that we can really observe the technology, make sure it's working, make sure it's bringing the kind of benefits that we want. We also don't want to disrupt container supply at this point in time by bringing them in to have the devices installed. You know, the issues with the rail service, I think, are more prolonged than we would have anticipated at the beginning of the year, and even when we had our last conference call, I think we felt that the rail service issues would be resolved more quickly. It appears they are more complicated in nature and of a longer term. We're dealing with them well.
You know, our on-time performance for our customers remains in the 90s, but it's definitely a challenge, and it's forcing us to jump through a lot of hoops. Nonetheless, I don't think anything has changed in our beliefs about the ability to run the network efficiently and you know, expand intermodal margins in the second half of this year and going forward. As we get into another pricing cycle, I think there's an opportunity to get closer to more historic norms from a margin perspective. So nothing's changed to make us deviate from the plan at this point.
Ben Hartford (Senior Research Analyst)
Okay, so you've got the service issues, they've taken longer than expected, but in terms of the results that you can control, and in terms of the results, I guess, from the pricing, the bid results to date, you don't feel like that the cadence of gross margin expansion is any different, or is that the question? Do you feel like that the cadence of gross margin expansion is any different?
Mark Yeager (President and COO)
No, we really don't. You know, a lot of it depends on what materializes from an award into actual business and what kind of mix we end up with at the end of the day. So certainly, not the time to declare victory, but, but we do feel that we are, at this point in time, on pace to accomplish the goals that we talked about, at the outset of the year.
Ben Hartford (Senior Research Analyst)
Okay. And then as you look into next year, you get through this year with regard to some of the culling initiatives, do you feel like that there's a share opportunity given some of the issues with the competing Western line and some of the truck tightness that we've seen year-to-date? Is there more of an opportunity from your own competitive positioning and from intermodal broadly, that allow you some line of sight to kind of normal mid- to upper-single-digit volume growth as you head into next year?
Mark Yeager (President and COO)
Yeah, I mean, I think that, there definitely is that opportunity. You know, we hope that the rail service issues don't go on too long, because that's the biggest vulnerability to the service, you know, not continuing down the market share path or the gains that they've realized. So, as long as we start to see improvement in rail service, I think that the positive momentum of conversion from the truck market, because of the challenges that the truck market is undoubtedly facing, will continue. We think there certainly is some conversion opportunity in the West. You know, we did grow Local West 8% on the quarter. Some of that was undoubtedly conversion from the Burlington Northern. So I think we're realizing some of that benefit, and we would anticipate that as the year goes on, we will continue to see that develop in the West.
Ben Hartford (Senior Research Analyst)
Okay, and then last one, if I could. Mode EBIT margin was obviously good, very good this quarter. Can that business, you, you've been fairly conservative in terms of turning that EBIT margin, or at least guiding to that EBIT margin since you've acquired it. Can that business, become as profitable as core hub from an EBIT margin perspective?
Terri Pizzuto (CFO)
Probably not. We think that you're right, Ben. We said that originally we were shooting for the 3% operating margin, and we were at 2.9%, so we're pretty proud of that. It's the best ever that we've done. There's some seasonality to that business, and so you'll see that generally the first quarter and the fourth quarter are lower than that 2.9%. So, to answer your question directly, I don't think it'll ever get to Hub's operating margins, only because it's a different model, and the agents do all the heavy lifting with selling the freight and operating the freight, and we pay them a commission based on gross margin. That being said, it can probably be north of the 3% that we originally anticipated.
Ben Hartford (Senior Research Analyst)
Okay, understood. Thank you.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research. Please proceed.
Scott Group (Managing Director and Senior Transportation Analyst)
Hey, thanks. Afternoon, everyone. So wanted to ask about the guidance for the year, 'cause, you know, obviously, first quarter was tough with weather, the system rollout a little bit delayed, and you got these rail service issues, but you're keeping the guidance unchanged. So wondering if there are things that are going better than expected in other places, or if maybe we should just be thinking towards the lower end of the range. How are you thinking about that?
Terri Pizzuto (CFO)
Well, we're thinking that the biggest factor in improving our intermodal network is pricing right and getting the right business for the network. If we have a strong peak season, that also helps us to get to the higher end of the range. In addition, if we're more successful adding drivers, that would be a benefit. But we're very comfortable with the range that we gave. We're not gonna give guidance within the range. And a few factors that'll impact, you know, the EPS for the rest of the year are the rail service isn't back to normal, which Mark talked about.
Service issues are more prolonged and pronounced than we anticipated, which hurt our service and utilization. Second, it's more difficult to get drivers, and then third, and very important too, is we need to determine if the freight that we were awarded actually materializes. Now is when we see all that freight coming in in the third quarter, and our mix will change.
Scott Group (Managing Director and Senior Transportation Analyst)
Okay. So along those lines, so even with all these rail service issues, the industry actually had—when I look at the rails, they had pretty good intermodal volume growth in the quarter, particularly if you take out BM. So it, it seems like your flat volumes are maybe less or maybe more about, you culling some business or maybe losing some share or however you wanna talk about it. But I, I would have expected to have seen a little bit more improvement on the pricing side. Is there just a lag there, and, and we start to see that in the third and fourth quarter? Is that what you guys are kind of saying?
Mark Yeager (President and COO)
Yeah, Scott. You know, I think that's what we, what we've tried to make clear, you know, in the last call and hopefully, you know, when we're talking with the investment community, is that it's always been our belief that we won't really see the impacts of pricing improvement until the second half of the year. Most of—you know, while most of our business now at this point has been repriced, about 70% of our business, most of that doesn't take effect until the second half of the year. So it's not at all surprising that there isn't more of an impact in Q2 from price. So that is by no means a surprise to us.
Dave Yeager (CEO)
As far as the flatness, Scott, in the overall volumes, that's anticipated. Again, to Mark's earlier point, that is something we've tried to make very clear, is that we remain very, very focused on margin enhancement. A part of that is price, so when you do that, you are going to have some volume erosion. We still believe that over the longer term, we'll be able to grow at a greater rate than intermodal. It's just that I think over the near term, as we continue to focus on our margin initiatives, that we'll continue to lag a little bit.
Scott Group (Managing Director and Senior Transportation Analyst)
Yeah, I know, and given your model, that makes a lot of sense. So just last thing, if volumes though aren't growing, why are you adding containers? And if you're using debt for the CapEx in the back half, any thoughts on a buyback?
Dave Yeager (CEO)
That is something that we will broach with our Board of Directors in our August meeting.
Scott Group (Managing Director and Senior Transportation Analyst)
The first part on why you need to add containers if you're not growing volume?
Dave Yeager (CEO)
We still believe that we will have some containers that are getting a little bit older, that we will begin retiring at some point in the not too distant future. So, it's basically adding them, and we do believe that we will again get back on the growth path.
Scott Group (Managing Director and Senior Transportation Analyst)
Okay. Thanks a lot for the time.
Operator (participant)
Your next question comes from the line of Justin Long with Stephens. Please proceed.
Justin Long (Equity Research Analyst)
Thanks. Good afternoon, everyone. Just wanted to go back to bid season and was wondering if you could provide some more color. You said, you know, you're about 70% of the way through at this point. Based on how things have progressed, do you now have the confidence that you can price at a rate above your rail cost?
Mark Yeager (President and COO)
Yeah, I mean, we, you know, we had said that that was our goal, and, having gotten, you know, through about 70% of it, we do believe that we'll be able to offset the rail cost increases. And, you know, when you combine that with an improved mix, we think that we'll see margin expansion in the intermodal product in the second half. So yes, we do believe that we're getting sufficient price increases in the market to offset the rail cost increases.
Justin Long (Equity Research Analyst)
Okay, great. And as a follow-up to that, I know you don't comment on core pricing and intermodal specifically, but could you just speak to the overall pricing environment you're seeing in the market and how it's progressed over the last, you know, quarter or so? Have you seen an inflection higher? Are things kind of stable? Any color on that would be helpful.
Mark Yeager (President and COO)
You know, I think it's been competitive. You know, it's remained competitive. I wouldn't say that we've seen the phenomenon, maybe that some of the truckload folks are indicating where they're really getting, you know, significant increases. We didn't anticipate that we would. We are certainly testing the market, but what I would say is that what we've seen is that it continues to be a challenging pricing environment.
Terri Pizzuto (CFO)
Yeah, we saw a number of consumer products and durable companies where the business was really hotly contested, and, you know, that was particularly true in the Local East and Transcon markets.
Justin Long (Equity Research Analyst)
Okay, great. And last one, if you don't mind, I just was wondering, any change to the visibility you have on your rail costs for the remainder of 2014, or do you still have pretty clear visibility on that?
Mark Yeager (President and COO)
No, we still have clear visibility on the remainder of the year from a rail cost perspective.
Justin Long (Equity Research Analyst)
Okay, great. I'll leave it at that. Thanks for the time.
Mark Yeager (President and COO)
Great.
Operator (participant)
Your next question comes from the line of Kelly Dougherty with Macquarie. Please proceed.
Kelly Dougherty (Equity Research Analyst)
Hi. Thanks for taking the question. Just maybe to follow up on that last one, you have visibility into this year, but is there any way that you can think about, you know, maybe if, if some money was left on the table on the rail side this year, you know, is there any concern about them trying to catch up next year, or if you've got any kind of visibility into the rail costs beyond 2014? And then, you know, maybe if not, if there are things that you think that you're doing from an operating initiative improvement, that even if there's pressure on the gross margin, maybe you can offset on the operating margin side of things.
Dave Yeager (CEO)
Yeah, we, at this point, don't really have clear visibility in 2015. I think we, you know, we're getting there, but we don't have it as of yet. There is an awful lot of initiatives and market going through quite a few of those that we do think will allow us to enhance our margins, whether it's by moving our boxes faster or handling more of our local drayage ourselves. So it does give us an awful lot of what we've seen in the past has been, in fact, internal efficiencies, and we have no reason to doubt with what we've got going on right now that that won't continue.
Mark Yeager (President and COO)
Yeah, and we don't think that next year, the rails are gonna have any catching up to do.
Dave Yeager (CEO)
No.
Kelly Dougherty (Equity Research Analyst)
Yeah.
Dave Yeager (CEO)
No, that would not be our view, no.
Kelly Dougherty (Equity Research Analyst)
Hopefully, it's not their view either, though. I appreciate the color. Thanks. And, and just wanted to kind of follow up on, on the intermodal volumes. You know, we saw Hunt's volumes, we saw, you know, some of your partners' volumes grow, grow faster than that. I mean, when do we see... You, you said in the near term, you know, there, there still may be some pressure from a volume perspective, from, your pricing discipline. I mean, is that something that we'll start to see grow more in line with the market in the second half, or is it gonna be longer than that as you kind of cycle through some of these unprofitable contracts?
Mark Yeager (President and COO)
Yeah, Kelly, we'll probably be, you know, below market, I would think, in the second half, but we do think it's gonna be a positive number. You know, if you look at the volume issue, it was really somewhat concentrated. You know, we had good growth in the West. Where we really suffered from was a fairly significant loss in Local East, and we don't think that that's a long-term model issue. You know, what really happened there was we lost a fair amount of sort of price-driven, low-margin business we probably shouldn't have been handling in the first place. You know, we also went to the market with a pretty disciplined pricing philosophy and plan, and there were some that didn't necessarily follow as disciplined of an approach.
The third thing that we had, which was really an internal phenomenon, was we had a disconnect between assigned fleet cost and market dynamics that ended up impacting the competitiveness of our pricing in some key lanes. So it was really more of a distorted view of cost in some key lanes that ended up costing us a fair amount of business in Local East. We've got a fix for that in place, so we think going forward, it's a contained issue. You know, the problem is it will continue to be a headwind for us for the remainder of the year.
Kelly Dougherty (Equity Research Analyst)
That, that's helpful. And then maybe just switching gears, can you help us think about maybe the puts and takes from the tight trucking background? You know, all things considered, I imagine it's good for pricing, but maybe a headwind for higher purchase transportation costs, higher dray costs. You know, any color you can give there and maybe what you can do to to mitigate the impact, you know, that would be appreciated.
Mark Yeager (President and COO)
Yeah, I mean, we, as a broker, always hope for a tight truck environment, right? We think that that's the best scenario for a truck broker.
Kelly Dougherty (Equity Research Analyst)
Right.
Mark Yeager (President and COO)
There certainly is pressure on purchase transportation, right? There's no question about that. So you have to be a good buyer to capitalize on that opportunity. You know, I was pleased to see that we saw some margin expansion this year at both Hub and Mode this quarter. You know, 100 basis points was pretty good in a fairly volatile environment. So I think we did a good job of dealing with that truck market, albeit it wasn't as tight as some markets that we've, you know, seen in the past.
But we believe that the arrangements that we, you know, set up with our customers, and the selectiveness that we have when we're looking at opportunities, you know, if you think it's gonna be a tight environment, that's probably a time when you wanna make sure that you're selective, that you have a good core base of carriers that you know are gonna work with you and not try to gouge you, when things do tighten up. So we try to offset that risk with arrangements with good, solid core carriers who are gonna be there when we need them. And so we are actually hoping, I think, for a tight truck environment in the second half.
Kelly Dougherty (Equity Research Analyst)
But was that tightness... Oh, I'm sorry.
Dave Yeager (CEO)
Oh, that's okay. Just maybe to elaborate, is from a dray cost perspective, is that there is no question that there is upward pressure on a truck driver salary and incomes.
Mark Yeager (President and COO)
So yeah.
Dave Yeager (CEO)
That'll be an ongoing issue for us, particularly as we have almost 3,000 owner-operators and company drivers that are working for us. So we had, year-over-year, we're up about, it's about $7 million annually-
Kelly Dougherty (Equity Research Analyst)
Mm-hmm.
Dave Yeager (CEO)
as far as the increase in driver wage, and that pressure will undoubtedly continue in the over the near term.
Kelly Dougherty (Equity Research Analyst)
I guess one follow-up on that, and then the other one, I was just thinking about, is that selectivity, is that why you didn't see the volume increase? I mean, you'd think that in an environment like this, where, you know, the, the value of a broker is, is heightened, you would've had a, a volume increase on, on that side of the business.
Mark Yeager (President and COO)
Yeah, no, that certainly was a part of it. You know, we have, you know, changed our strategy somewhat, or modified our strategy somewhat to make sure that we're spending a lot of time upfront identifying where we can succeed and where we can really bring value, and where we've got the customer or the carrier base to support the business. And so, there's no doubt that we probably, you know, turned away from some business we would've maybe more traditionally brought on. But what we're, what we end up with is a better book of business, improved margins, and something we can really build upon going forward.
Kelly Dougherty (Equity Research Analyst)
So that could continue? You know, even in a tight environment, you might see volume declines as you're kind of being selective in the brokerage side of business, like you are in Intermodal. Is that fair to think of?
Mark Yeager (President and COO)
Yeah, I think it's entirely possible that we could see volume declines, but, you know, as long as margin's moving in the right direction, we're okay with that trade-off.
Kelly Dougherty (Equity Research Analyst)
Okay. Thank you guys very much.
Operator (participant)
Your next question comes from the line of Bill Greene with Morgan Stanley. Please proceed.
Bill Greene (Managing Director and Senior Transportation Analyst)
Yeah. Hi there. Good evening. Thanks for taking the question. I think in the past, you've mentioned that a day of utilization is about $1.5 million. Is that still a fair estimate?
Terri Pizzuto (CFO)
A day of utilization for, on an annualized basis is-
Bill Greene (Managing Director and Senior Transportation Analyst)
Well, I guess... yes, sorry. Sorry, that, so that was an annual number, not a quarterly, is that right?
Terri Pizzuto (CFO)
Yeah, $6 million for one day of utilization-
Bill Greene (Managing Director and Senior Transportation Analyst)
Right.
Terri Pizzuto (CFO)
And that's an annual number. Mm-hmm.
Bill Greene (Managing Director and Senior Transportation Analyst)
Okay. So when we talk about the half-day utilization here, the impact you estimate from that on your, I guess it's really kind of EBIT at the end of the day, should have been about half that number. Is that fair? Is that... so it's half day, half of the number, right? I mean, just supposedly.
Terri Pizzuto (CFO)
Yeah, that's right.
Bill Greene (Managing Director and Senior Transportation Analyst)
Yeah. Okay. And could we ever go, so you say, the impact was about half a day this quarter. Could we ever go back above those levels, or you're just saying that's getting to a normal, and it, for long periods of time, runs in that band? In other words, could rail service ever actually be a benefit in the long run to you?
Terri Pizzuto (CFO)
Sure, especially when we get the GPSs on the containers. That will help, too.
Bill Greene (Managing Director and Senior Transportation Analyst)
Okay.
Terri Pizzuto (CFO)
That will help improve utilization.
Mark Yeager (President and COO)
Mm-hmm. Yep.
Bill Greene (Managing Director and Senior Transportation Analyst)
Do you feel like in the second quarter, I mean, I'm sure this probably happened in the first, but in the second quarter, do you feel like there was a market share loss to the highway because of the rail service problems?
Dave Yeager (CEO)
We did see some conversion back to highway, but it was not an overwhelming amount.
Terri Pizzuto (CFO)
Right.
Dave Yeager (CEO)
But there was some that, with the more service-sensitive clients, yes.
Bill Greene (Managing Director and Senior Transportation Analyst)
Yeah. Okay, and then just one last question. We know, obviously, Pacer is now part of XPO. Can you notice them in the market at all at this point? Are they aggressive? Can you see, does it create an irrational sort of player from your perspective?
Dave Yeager (CEO)
To date, we actually have. They have not been irrational, and so we have not really seen anything from them which surprises us at this point. Our traditional competitors, of course, they're pretty aggressive as usual, but that's just part of the game.
Bill Greene (Managing Director and Senior Transportation Analyst)
Yeah.
Mark Yeager (President and COO)
But we don't have a tremendous amount of overlap with Pacer.
Dave Yeager (CEO)
No.
Terri Pizzuto (CFO)
No.
Dave Yeager (CEO)
We do not.
Bill Greene (Managing Director and Senior Transportation Analyst)
Yeah. Okay, fair enough. All right, thank you for the time.
Operator (participant)
Your next question comes from the line of Matt Brooklier with Longbow Research. Please proceed.
Matt Brooklier (Senior Equity Research Analyst)
Hey, thank you. Good afternoon. Terri, question for you. The total operating expense per quarter number. Is that, that was still $68-$72, or did that number come down a little bit?
Terri Pizzuto (CFO)
It came down a little bit, $68-$70.
Matt Brooklier (Senior Equity Research Analyst)
Okay, so $68-$70. I, I guess the question being, why has it been revised down a little bit?
Terri Pizzuto (CFO)
We based on our run rate and kind of where we're at, and the biggest factor there would be bonus, and that's predominantly based on earnings per share. But that was in there to begin with. So really, it's just based on run rate, kind of where we're at. We also have an additional $1 million of IT costs in the last half of the year as compared to the first half of the year.
Matt Brooklier (Senior Equity Research Analyst)
Okay. I guess we know rail service levels, they are what they are. It doesn't sound like they're gonna get much better, maybe until early 2015. You guys are going through this, you know, culling, mix improvement process on the intermodal side, and you're seeing it in the margins. I guess those being headwinds with respect to volume growth, what are some of the things that you can do in the second half of this year, knowing these two factors, to kind of mitigate those headwinds? I don't know if there's anything you can do network-wise, in terms of trying to improve utilization or moving some things around. I'm just trying to get a sense for if there's anything you guys can do proactively that may add to volume growth in the second half.
Mark Yeager (President and COO)
Well, we're certainly, you know, targeting areas that we saw volume declines, particularly associated with this kind of mismatch between assigned costs and market. So there's certainly some things we can do from a sales perspective, to add some volume into the pipeline. What we don't want to do is give up our pricing discipline, in order to make that happen. You know, the other thing that we need to make sure that we're doing is that we're exercising our new equipment allocation and load acceptance disciplines well. And so that we're taking the right rates, and we're feeding the right markets, 'cause we do think that that's a critical element.
We probably could have squeezed out a little bit of growth, you know, if we were able to feed some markets that were deficit throughout the second quarter. So I think we can continue to do a better job with that. We don't think that we're gonna be stuck at the equipment utilization that we're stuck at right now either. So, I think that we can capitalize on a little bit better equipment utilization.
Even if rail service doesn't improve substantially, we should be able to position the network a little bit. We're also well positioned for peak. We feel very confident that we're gonna be able to support peak in the PNW, and in Southern California, probably better positioned than we were last year. So, there are some things that I think we'll be able to capitalize on, but there's no doubt that rail service will continue to be a bit of a headwind for us, in terms of volume growth. But for us, while volume is a good thing, certainly price is the most important driver.
Matt Brooklier (Senior Equity Research Analyst)
Okay, understood. Thanks for the time.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.
Todd Fowler (VP and Equity Research Analyst)
Great, thanks. Good evening, everyone. So just to be clear, the expectation is that the Hub segment intermodal volumes are gonna grow in the second half of the year, but it sounds like it might be something below market rates. And then as a follow-up to that, I'm curious, you know, the Mode intermodal segment volumes seem pretty strong here in the quarter, and I'd be curious to kind of get your thoughts on, A, what's driving that, and B, you know, how we should think about the sustainability of that into the second part of the year.
Mark Yeager (President and COO)
Yes, the first part of your question was Hub volume in
Terri Pizzuto (CFO)
The last half of the year.
Mark Yeager (President and COO)
Yeah, a little below.
Todd Fowler (VP and Equity Research Analyst)
Yeah, the yeah, expectations.
Mark Yeager (President and COO)
Our presumption at this point in time, we think that we'll see positive growth, but it'll be probably below the intermodal market. But we do think it will be, it will be a positive number. The Mode volumes have been terrific. There's no question about it. Their Intermodal volumes have grown tremendously now for a couple of years, and we're very pleased to see that. What you have at Mode is, is a few agents that are very committed to the intermodal product. They do a very good job operating it. They've been very successful at bringing on new business, and you know, they look across the whole spectrum of potential options, and they're picking the best one for their customers.
So it's been an appealing model, I think, for the customers, and they have a very good product to sell, and we're trying to help them with our fleet boxes. And you could see from the numbers that both fleet usage as well as Hub Group Trucking usage are way up. So they can sell not just, you know, sort of the spectrum of options. They can also position themselves as an asset-based carrier for those that place an importance on that. So I think they've done a very good job. It isn't the majority of IBOs, right? It's really, like I said, a handful, but they're very good. They're Intermodal specialists, and they're doing a very good job of growing the relationships that they have with their existing customer base and bringing on new opportunities.
Terri Pizzuto (CFO)
Yeah, and they were fortunate enough not to have to price up and walk away from some non-compensatory business, which we did at the Hub segment. Their business is pretty profitable, and they've done a great job, and that's really encouraging.
Todd Fowler (VP and Equity Research Analyst)
Sure, that makes sense. But is it fair to say then that either the revenue growth or the volume growth that Mode had here in the second quarter is something that we could see continuing, you know, through the back half of the year?
Mark Yeager (President and COO)
Yeah, we certainly think that they're going to continue to grow Intermodal. And there's nothing that would appear to us that would slow that momentum down. I hate to say they can continue on that kind of a track, because that surprised us as well. But I don't think-
Todd Fowler (VP and Equity Research Analyst)
Okay.
Mark Yeager (President and COO)
There's no underlying fundamentals that would prevent them from, you know, continuing to post really solid intermodal growth, and, you know, we're committed to helping them do that.
Todd Fowler (VP and Equity Research Analyst)
And nothing unusual, I guess, either in the second quarter, that was a one-timer or something like that, that they've picked up some share or something that, you know, was service disruption related or anything?
Terri Pizzuto (CFO)
No.
Mark Yeager (President and COO)
I don't think, yeah, I don't think there was any one-timers or any business that's going away or anything.
Terri Pizzuto (CFO)
They did have some truck freight convert to Intermodal, which is good.
Mark Yeager (President and COO)
Right.
Todd Fowler (VP and Equity Research Analyst)
Okay, good.
Terri Pizzuto (CFO)
Mm-hmm.
Todd Fowler (VP and Equity Research Analyst)
Just the follow-up that I had is kind of a high-level question, though, and it's back to the full-year guidance. And, you know, there is a ramp in just what the earnings growth is going to be. You know, taking where you're at mid-year and, you know, looking at the full year, I mean, we've got earnings that are going to be up or somewhere in between the 16%-25% range. And I guess at a high level, you know, what are some of the things that are going to contribute? It sounds like that it's the volume expectations, the better price, and the gross margin improvement. Is there anything else that we need to think about that's driving the earnings growth now into the second part of the year relative to the first part and understand there was obviously the weather comps in the first quarter.
Terri Pizzuto (CFO)
Yeah, kind of as Mark mentioned earlier, all the bid results kick in in the second half of the year. So you've got the price increases in for basically all of Q3 and all of Q4. You didn't have much of that price increase in during Q2 or Q1 at all. And so, as well, but the mix of freight changes because the customer has awarded us a certain block of business, and so we're onboarding that all right now. And so that's where we have the opportunity to mix up and replace lower margin freight with higher margin freight. The awards are just that. They're an award based on what the customer estimates, you know, our volume's going to be, and so we have to make sure we get all that volume, and that's what we're waiting for to materialize.
Mark Yeager (President and COO)
And we've built some improved processes to track that and make sure that upfront, we're getting the business that helps our network, the business that we priced to secure.
Todd Fowler (VP and Equity Research Analyst)
So with the weaker volumes here in the second quarter and some of the sounds like internal pricing issues and being able to maintain the outlook for the back half of the year, and sounding a lot of that's being predicated on the price, is the pricing better than what you were expecting, maybe at the end of the first quarter call or on the first quarter call?
Dave Yeager (CEO)
It's pretty much in line with our expectations, Tom.
Todd Fowler (VP and Equity Research Analyst)
Okay. Okay, guys, thanks a lot for the time.
Operator (participant)
Your next question comes from the line of Matt Young with Morningstar. Please proceed.
Matt Young (Senior Equity Analyst)
Good afternoon, guys. Thanks for fitting me in. Just a quick question on Unyson. I'm wondering where you see the key growth opportunity at this point for kind of the outsourced managed transportation space. Are you generally targeting the smaller, the mid-sized shippers, those, I don't know, call it, A few million in annual transportation spend? Or is there, do you think there's still opportunity with the larger, perhaps Fortune 500 companies with tens of millions of transport spend? Just getting a, trying to get a feel for who's outsourcing at this point, where those opportunities are.
Mark Yeager (President and COO)
Yeah. You know, for us, we don't really try to go after the very large engagements. We don't think that we bring, you know, nearly as much value to those engagements. It's also very hard to make a return on those engagements. A lot of those have you know, proved to be, you know, unmanageable and non-compensatory for the folks that take those on. So that's never been our sweet spot. We've always gone for the sort of smaller and mid-tier. We have taken on some engagements that are bigger than that, you know, that are tens of millions of dollars. We like to see an engagement that's over $5 million, right? But typically, to go north of $50 million would be very unusual for Unyson. But we do have a few that are in that sweet spot.
We love growth companies, you know, companies that are really growing rapidly, because typically, they haven't maybe had the time or the resources to really get their supply chains as under control as they want to get it. And so for us, there's a great opportunity for us to bring a lot of value by helping them, you know, digest the growth and build a really solid, a really solid supply chain. So we think we bring, you know, we bring a lot of value there, and it's a customer that, as they grow, you know, of course, our engagement grows. So, so that's been the biggest area of, of, success for Unyson thus far. But we believe that, that outsourced transportation is, is going to continue to be a really, you know, strong and growing trend in North America. It's still in its early stages.
Matt Young (Senior Equity Analyst)
That, that's good color. Thanks. And I guess the last question on that was, do you think there are a lot of brokers and/or freight brokers talk about managed transportation as well, but do you sense there's a lot of competition for, in that niche, for the small and mid-sized type, customers in outsourced transport, or do you think there's only a handful of capable kind of 3PL, so to speak, so including you guys?
Dave Yeager (CEO)
In the market we play in, I think there's only a handful. I mean, it's easy to talk about, but you have to have the systems to back it up. You have to have people that can operate the analytics, and it's a lot more complex to find and train logisticians who can help companies manage their supply chains than candidly to do truck brokerage.
Mark Yeager (President and COO)
Yeah, and one of the unique things that we bring, I think, to the table is most of our customers are people who've done business with us in intermodal or in highway that are familiar with our organization. You know, outsourcing is a risky proposition, and you don't want to just bring in a complete stranger and turn over your supply chain to them. So I think we really have an advantage in that we have, you know, thousands of relationships built up over many years. And I think that gives us an ability, an entrée into the process.
Bill Greene (Managing Director and Senior Transportation Analyst)
Great. Appreciate it. Thanks.
Operator (participant)
Ladies and gentlemen, just as a reminder, if you wish to ask a question, please press star one on your touch-tone telephone. Your next question is a follow-up from Mr. Ben Hartford. Please proceed.
Ben Hartford (Senior Research Analyst)
Good evening again. Just last question, you talked about addressing the buyback in the board meeting in August. Where do you stand in terms of acquisitions? What does the pipeline look like? And I guess more specifically, how are you thinking about now the balance between potential acquisitions and share buybacks? You guys obviously have the capacity on the balance sheet, and free cash is going to accelerate presumably here in 2015. So what are your thoughts there?
Dave Yeager (CEO)
Well, we continue to prefer acquisitions versus buybacks. And so we do think that it brings more shareholder value over the longer term. We have looked at several potential candidates. And in fact, there's an accrual in the second quarter of a fair amount of due diligence. Terri, the number's about...
Terri Pizzuto (CFO)
$850. Yeah, Ben, we had about $850,000 of professional fees-
Ben Hartford (Senior Research Analyst)
Okay.
Terri Pizzuto (CFO)
- in the quarter related to due diligence for an unsuccessful acquisition.
Dave Yeager (CEO)
Right. So we, we continue to look, we continue, you know, we do have some discussions underway with some potential candidates, and... but again, we also understand share buybacks and the value that it can bring to our shareholders as well. And certainly, that's gonna be a long discussion at our board meeting in August.
Ben Hartford (Senior Research Analyst)
Okay, thank you.
Operator (participant)
Ladies and gentlemen, that concludes our question and answer session for today. I would now like to turn the call back to Mr. Dave Yeager. Please proceed.
Dave Yeager (CEO)
Well, again, thank you for participating in our second quarter earnings call. As always, if there are any additional questions, please feel free to contact Mark, Terri, or I. Thank you again.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.
