Hub Group, Inc. (HUBG) Q1 2015 Earnings Report, Transcript and Summary

Hello, and welcome to the Hub Group, Inc First Quarter 2015 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO; Mark Yeager, our President and Chief Operating Officer; 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. [Operator Instructions] Any forward-looking statements made during the course of the call represents 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 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 your host, Dave Yeager. You may now begin.

Thank you, good afternoon and thank you for joining Hub Group’s first quarter earnings call. The quarter started out very slowly with the port strike negatively impacting our volume, as well as creating network imbalances. As the quarter progressed and the port strike ended we saw improvement in both volumes, as well as our network becoming more fluid. The pricing environment is as strong as we've seen in many years. While we have only completed about 30% of our customer bids, we are confident in our ability to secure increases in the market and encouraged by the results. The first quarter of last year was the best serviced quarter for the rails in 2014. Rail services for the first quarter of 2015 declined year-over-year although it did improve somewhat sequentially. We do believe that we will see marginal improvements in rail performance in the second quarter and more normalized service by the second half of this year. Despite the ongoing rail service issues our on-time performance to our customer did see sequential improvement in the first quarter as we continue to focus on meeting our customers’ requirements. With that I will turn over the call to Mark to fill you in with the details.

Thank you, David and good afternoon everyone. While this quarter presented many challenges I am pleased to report that we came through with modest volume growth, positive pricing momentum, and stabilizing costs. Consolidated big box intermodal volumes grew2% in the first quarter of 2015. Hub segment volume was up 1% for the quarter. Local west volume was up 3%, and local east volume grew 1%, a substantial turnaround from the 10% and 8% declines we saw in the third and fourth quarter of 2014. Transcon volume was down 6%. From a regional perspective, our biggest intermodal grower was freight in and out of Mexico, which grew a healthy 38%. Mode intermodal volume was strong once again, up 19% for the quarter. Rail service continues to be a challenge, while there was sequential improvement in on-time performance, it remains below last year and deteriorated as the quarter progressed. The number of containers left on the grounds, what we call LOGs followed a similar pattern. LOGs were lower than Q4, which is positive, but higher than last year. Like on-time performance, LOGs got worse as the quarter progressed. We remain bullish on the long-term prospects for intermodal and supportive of our real partner’s efforts to improve service. At this time based on current trends we don't anticipate seeing significant rail service improvement until the back half of the year. Despite service challenges we were able to continue to improve our own on-time performance for our customers. Getting the mid-90s and inching closer to acceptable levels. This improvement has not gone unnoticed, this quarter we received the intermodal carrier of the year and Platinum Service Awards for LOGs for achieving their highest service standards. Utilization was 15.6 days for the quarter, 1.8 days worst than the first quarter of 2014. Rail service and the west coast port disruption were the primary drivers behind this deterioration. Our current fleet size is 28,335 containers. This year we will be adding 1,000 new containers to the fleet. We anticipate these containers will arrive in time for this year’s peak season. We are also continuing to make progress with satellite tracking. We currently have over 3,000 containers equipped with the devices. They are performing well, we are on-track to have the majority of the fleet ousted by the end of 2015, the remainder will be installed by early 2016. As more devices come online, and our systems are configured to take advantage of the more précised and timely data, we will be able to optimize container movements, accelerate utilization, and improve visibility. Hub Group Trucking moves 64% of Hub trade’s during the quarter compared to 70% last year. We ended the quarter with 2,740 drivers, a net loss of 82 drivers over the last quarter. While turnover improved sequentially, we slowed the hiring of new drivers in several markets as we reassessed our driver model and our drayage outsourcing strategy. This produced fewer driver adds and a negative net number of quarter. This process is now complete and we are actively recruiting drivers in all markets, streamlining our onboarding practices and launching a multi-media marketing campaign to reverse this trend. We have also successfully conducted and implemented outside dray sourcing events in two markets. We are in the process of deploying the sourcing model in other strategic markets to ensure that we have enough committed and cost effective dray capacity to meet our customer’s needs. On a positive note, loaded miles improved as the quarter progressed as did HGT financial performance. Many of you are undoubtedly curious about the pricing environment. We continue to see healthy pricing trends in the domestic intermodal market. We are having success acquiring business at acceptable pricing levels and retaining existing business while increasing price. We rationalized non-compensatory business last year through targeted pricing action making room in our network for higher return business. We are experiencing renewed strength in the local east market and continue to have success in the west. Our price optimization tool is fully implanted and guiding us towards better pricing decisions. The newly introduced sales compensation program is also driving new business growth and an organizational focus on a marginal enhancement. Our brokerage division reported solid growth despite the less than ideal market conditions. Volume increased 3% for the quarter and improved sequentially as the quarter progressed. Our strategy of focusing on target accounts and developing more committed carrier relationships is beginning to pay dividend. Units and Logistics posted a decline of 1% in revenue as one of our larger accounts opted to insource a portion of their transportation spend. While we anticipate some continued onboarding’s and we have a number of opportunities in the pipeline. We anticipate decelerating revenue with solid bottom-line contribution from units for the remainder of the year. Mode transportation grew revenue by 2% for quarter and operating income by 11%, this March the 13th consecutive quarter of revenue and margin growth for mode. As previously mentioned, intermodal is once again the key driver of this success with 19% volume growth for the quarter. Mode also continued to expand its use of the Hub fleet and Hub Group Trucking. During the quarter mode onboarded one new independent business owners and five new sales agents. Existing IBOs also continued to expand adding 21 sales people to their organization. This unique model continues to generate new business. In total, mode added over 169 new customers in the quarter. With that I am going to pass the call onto Terri for financial highlights.

Thank you, Mark and hello everyone. As usual I would like to highlight three points; first, mode continues its solid performance with 11% increase in operating income. Second, despite the west coast port disruption and rail service issues which hurt Hub’s financial performance and muted our intermodal volume growth, Hub Group’s gross margin as a percentage of sales improved 20 base points and gross margin increased $400,000. Third, Hub Truck brokerage had a strong quarter with growth in volume, revenue and margins. Here are the key numbers for the first quarter. Hub Group’s revenue decreased 1.5% to $836 million. Hub Group’s diluted earnings per share was $0.28 this year compared to $0.33 last year. This year $0.28 include $1.4 million of Canadian currency translation loss, and $900,000 of severance. The impact of these two items is $0.04 per share. Now I'll discuss details for the quarter starting with the financial performance of the Hub segment. The Hub segment generated revenue of $643 million which is 1.5% decrease compared to last year. Let's take a closer look at Hub's business line. Intermodal revenue decreased 3%; the reason for the decline is lower fuel. Intermodal volume was up 1%, pricing mix were also up. The good news is that the price increase this quarter was the best we've seen in three years. Loads from durable goods customers were up 12% while loads from consumer products customers were down 10%, and mostly the pricing actions we took to improve freight mix. West coast port issues contributed to the 2% decline in modes from retail customers. Truck brokerage revenue was up 6%. Truck brokerage handled 3% more loads and price fuel and mix combined were up 3%. The average length of haul for a truck brokerage shipment increased 9% to 707 miles. Logistics revenue decreased 1%; the decrease is primarily due to one customers bringing a portion of their business in-house. Hub's gross margin decreased by $1.3 million. Gross margin as a percentage of sales was 9.8% or 10 basis points lower than the first quarter of 2014. Intermodal gross margin declined because of increased operational cost associated with the west coast port slowdown, rail service issues and our driver model change in California. The west coast port situation caused networks imbalances and operational inefficiency. Further complicating the situation, rail service deteriorated as the quarter progressed. As a result, utilization was 1.8 days worse than the first quarter of last year which cost us about $2.5 million. Storage cost increased $1.2 million. Loaded miles deteriorated 80 basis points costing us $600,000. Offsetting a portion of the decline in margin was an increase in price and more favorable mix. Intermodal gross margin as a percentage of sales was down 80 basis points because of these increased operational costs. Truck brokerage gross margin increased because of growth with targeted customer accounts including some seasonal business. Truck brokerage gross margin as a percentage of sales was up 90 basis points due to more value added services, price increases and better purchasing. Logistics gross margin increased due to growth of existing customers and purchasing more cost effectively. Logistics gross margin as a percentage of sales was up 150 basis points. The Hub segment gross margin as a percentage of sales increased 80 basis points sequentially, all three of our service lines were better. Intermodal gross margin improved 60 basis points, truck brokerage yield improved a 130 basis points, and logistics was up 110 basis points. Hub’s cost and expenses increased $900,000 to $49.5 million in 2015 compared to $48.6 million in 2014. The increase relates to $2.3 billion increase in salaries and benefits, partly offset by $1.5 million decrease in general and administrative expense. Salaries and benefits are higher because of annual employee raises and $900,000 of severance in connection with consolidating our Los Angeles customer service office. We expect to enhance operational efficiency and provide a better customer experience with the changes we made. General and administrative costs are down because of lower professional services expand. Finally operating margin for the Hub segment was 2.1% which was 30 basis points lower than last year's 2.4%. Now I'll discuss results for our mode segment. Mode had a solid quarter with revenue up $214 million, which is up 2% over last year. The revenue breakdown is $111 million in Intermodal, which was up 10%; $74 million in truck brokerage which was down 5%; and $29 million in logistics which was down 5%. Mode’s gross margin increased $1.7 million year-over-year due to growth in Intermodal gross margins. Gross margin as a percentage of sales was 12.2% compared to 11.6% last year due mostly to 180 basis points improvement in intermodal yield. Mode’s total cost and expenses increased $1.2 million compared to last year because of an increase in agent commission. Operating margin for Mode was 2.4% compared to 2.2% last year. Turning now to headcount for Hub Group, we had 1,555 employees excluding drivers at the end of March that is up 50 people from the end of the year. Now I'll discuss what we expect for this year. We believe that our 2015 diluted earnings per share will range from $1.85 to $2. We think we'll have $36,150,000 weighted average diluted shares outstanding. Our goal is to improve gross margin as a percentage of sales from the 10.4% that we had in 2014. Headwinds include the driver model change in California and continuing rail service issues. Because rail service is not expected to improve until the second half of the year, we've assumed utilization will not improve until the second half of the year. We expect gross margin as a percentage of sales in the first half of the year will range between 10.5% and 11% which is up from the 10% margin we had in the last half of 2014. We expect gross margin as a percentage of sales for the second half of this year to be between 11% and 11.6%. The main drivers for improvement in the second half of the year are more better rail service, customer price increases, savings from the initiatives that we've discussed, and truck brokerage growth. We think that our costs and expenses will range between $73 million and $76 million a quarter for the remainder of the year. Turning now to our balance sheet and how we used our cash. We ended the quarter with $129 million in cash and $116 million in debt, including capitalized leases. We spent $15 million on capital expenditures this quarter; this includes $11 million that we spent on containers and tractors which were funded with debt. We expect our capital expenditures to range between $85 million and $95 million in 2015. We've committed to purchase at least 300 tractors for $43 million. We have an option to purchase another 75 tractors. We're purchasing a 1000 containers and investing in technology projects including the satellite tracking. We intend to fund these 2015 tractor and container purchases with debt. During the quarter we paid $13.4 million to purchase 341,020 shares of stock. We have $43.6 million remaining on our current share buyback authorization. And to wrap it up on a positive note, we've got 70 basis points of sequential improvement in gross margin as a percentage of sales from the last half of 2014, and our bottom-line increased as the quarter progressed. Dave, over to you for closing remarks.

Great, thank you, Terri. As I said in our year end call, Hub’s Management team was very pleased to see 2014 in our rear view mirror. The first quarter of 2015 had some challenges, but we believe overall that it was a good step forward. We are encouraged by these results and optimistic about 2015 for numerous reasons. First, the pricing environment appears to be moving in the right direction. In addition, demand is out stroking capacity in numerous markets while intermodal and highway volumes are showing signs of improvement. Lastly, we believe that we will begin to see incremental service improvement by our rail partners particularly in the back half of this year. So at this point we will open up the line for any questions.

Thank you. [Operator Instructions] And our first question comes from John Barnes of RBC Capital Markets.

Hey, good morning guys or good afternoon. Real quick on the pricing commentary, can you just elaborate a little bit, the truckers are still getting some price but in contractual ways the rates are made under a little bit of pressure recently. Can you just elaborate a little bit as to is that impeding your ability at all, has it slowed the initial pricing environment down at all or is that as strong - is it kind of looked at Hub’s results?

John, this is Mark. Certainly I think when you look at intermodal pricing, it's much more tight to contractual pricing as opposed to the spot market, and particularly in Hub’s case the vast majority of our business is contractual in nature. So we are much closer tied to pricing developments in that segment of the truck market which we think is still pretty positive, we're certainly not seeing carriers back down on contractual pricing at this point in time. That's clearly an easier dialogue to happen with the customer as you're negotiating contractual pricing going forward. We don't want people to get carried away, to be euphoric; we still do business with a lot of very large customers who are good purchasers, transportation, so they are by no means giving away the store. At the same time, we talked for quite some time last quarter about positive trends that we were seeing and nothing that we've seen since then leads us to believe that this cycle is winding down. We're getting increases; we're competing in business compensatory price levels, receiving our share of awards and thus fur it's translating into real volume. So we feel good about the pricing environment at this point in time but once again, it's still early and we certainly don't want people to get too carried away with their enthusiasm in that regard.

John, I'll just add to that a little bit. I think our customers do realize that in fact we do have cost going up certainly, driver wages, certainly rail increases on a regular basis. So we do believe we'll cover those and then some but there is no question that it's a very competitive environment and we will have some…

Good, thanks for that color. And then my follow-up is just as some of the data which recently maybe suggested a little bit of sluggishness whether some of the industrial and economic data pulling in, some of the freight specific stock, have you seen any weakness in a particular vertical in a geographic region that you can point to that might be influencing that or anything that's kind of causing you some concern?

I mean not that we can point to specifically, we - a lot of times our volume story is sort of more specific than general economic conditions, specific as you could see, we did well under both.

So we were up 1% in durables and down 10% in consumer products, that was loss negated pricing action.

Right, and then we were a little slow in the retail sector, probably more attributable to the west coast port disruption than anything else. So I can't see we're seeing any type of particular slowdown and we're not getting a message from our customers that they are pulling back the reins at this point. You always would like to see more freight in the system, we would have liked to see in a bigger surge I think off the west coast when the port situation did get corrected but at the same time I would say that right now we're not seeing any real signs of economic deceleration.

Alright, thanks for your time guys, I appreciate it.

And our next question comes from Ben Hartford with Baird.

Good afternoon everyone. Mark and Dave, could you provide a little bit of perspective on balance sheet. You talked about utilization and your expectations for utilization and gradual improve in the back half for the year but how do you feel about network balance at the moment and does it set you up or does it hurt you or kind of limit your ability to take advantage of some of the disruptions right now that might have developed from the West Coast port situation, I understand the pricing west bound is very healthy right now, maybe a little soft off the coast. So if you could maybe talk about where you are from a network balance standpoint, how long is it going to take for you to get in the balance? And is there an opportunity to take advantage of some of the irregularities as it might relate to some of the bids and flows at the moment?

Ben, this is Dave. I would say there is no question that the port strike definitely had a major impact on our network. And while we have in fact, we've seen it improve with some of the balance, we still do have an accessible capacity on the West Coast but we have been able to get a lot more boxes back in these, back to little bit of west, so we are seeing in fact some improvement with that, certainly through February it was a little bit corky and just unusual with the flows. Now I think that it's getting back in balance, it's probably going to take another 30 to 60 days I'd say to really get there but it certainly is moving in the right direction and we have had some tightness of capacity in certain markets in the gateways in the southeast but for the most part we'll be unable to supply our customary requirements at this point.

Okay, that's helpful. And then we hear you on the pricing front here in 2015, obviously crude is in a different spot today than it was a year ago but it is up from the lows, I wanted to get your take on where in the model fits from an all end load price perspective relative to truck here at current levels of crude and kind of put 2015 aside if you could, kind of think through 2016 and I'm looking for any sort of perspective you might have from shippers. How are shippers looking at intermodal in the context to some of the service disruptions that we have seen and with crude down, let's say 40% from a year ago, and any appetite to convert over the road on the margin as we look beyond 2015. Can you provide some perspective there?

Sure, absolutely Ben. I think that most of our shippers are convinced that over the long term intermodal has a sustainable and significant cost advantage over the road. No doubt that the price of crude, coming down has narrowed that gap somewhat, particularly in some short hall lanes but by and large they are still a fairly significant savings associated with using intermodal. So real question is can they live with the service and right now with the service issues that we're seeing it's probably preventing some people from converting business from over the road to intermodal, but almost any time we've seen a conversion back from intermodal to over the road, it's been much more service driven than price driven. I think if you look at domestic intermodal, in 2014 when we had some pretty significant service challenges, the industry still grew by 6%, and if it could grow and take share in that service environment at those crude prices I think there is reason to believe that as we move forward, as truck costs go up, sort of irrespective of the price of crude, it's likely that that gap, if anything widens, and I think most shippers believe that sustainable advantage that intermodal has makes it worthwhile exploring all the opportunities to use the product where they can.

Okay, that's helpful. And then if I could get one - maybe from Terri, what is the mix of intermodal business east/west and trans-continental, we've gotten that breakdown in a lot of while. Is that something that you can share what it was in 1Q 2015 and then maybe compare to what it was a year ago?

Sure, local east was 32.5% in both first quarter 2015 and first quarter 2014. Local west was 38.7% in the first quarter of 2015 and it was 37.8% in the first quarter of 2014. Transcon was 18.5% in the first quarter of 2015 and 19.9% in the first quarter of 2014, then other which is Mexico and Canada was 10.3% in the first quarter of 2015 and 9.7% in the first quarter of 2014.

Okay, that's helpful. Thank you. I appreciate the time.

And your next question comes from Todd Fowler of KeyBanc Capital. Please go ahead.

Great, thanks and good afternoon, everyone. I guess I'm starting with the guidance, Terri, the ranges that you gave for the gross margins, the updated ranges are little bit above where they were at the fourth quarter for both the first half and the second half and the earnings per share guidance hasn’t changed. Is the higher gross margin expectations, does that reflect something maybe on the fuel side and some of the impact of fuel going through on the revenue side or is there something else that is restricting the higher gross margins from dropping down to the bottom-line?

Part of it is fuel but that is really hard to measure because that's kind of included in our rate sometimes and we've got customers that have all different fuel scheduled program which are generally tied to mileage whereas under cost side it's tied to our fuel cost vary as a percentage of the cost. So it's kind of disconnected there but for this quarter you're right, it was higher than we projected, that was because of the fact that truck brokerage gross margins were higher than we thought that they would be. We were happy with that and then going forward, we know what kind of price increases we're getting, we know what kind of cost increases we're getting and we're building in that better rail service like Dave talked about in his remarks. So that goes a long way in helping to make us more efficient, we've assumed for our guidance that utilization improved 0.6 days in the third quarter and 1.3 days in the fourth quarter.

Okay. So then I guess the message more to high level you do feel better about the gross margins and the pricing and as far as keeping kind of the full year guidance the same, it's acknowledging some of the moving parts and some of the risks that are still out there with regards to rail service and some of the other things that can impact the numbers on a full year basis?

Yes, that's a good summary.

Okay. And then just for the follow-up, Mark or Dave, can you talk a little bit about - there were some comments in the prepared remarks about the truck strategy and some changes in the percent of dray that you're handling yourself and you're looking at using more third parties. I guess if maybe you can give us an update on what the strategy is, going into 2015 kind of what's changed and what's behind that?

Sure, absolutely. You've heard a lot of them from us in the past about updating the percentage of dray that we wanted to perform on our own, and I think what we saw was - as we got into the numbers, particularly with this California dray situation was that we may have had the wrong emphasis organizationally. It shouldn't really be about handling more of our own dray, it should be about creating the best mix of business, the most efficient dray mix, the lowest cost dray mix for our customers so that we can compete more effectively. Many times that involves using HDD [ph] but what we found was it also can involve a more thoughtful approach to how we purchase drayage on the outside. And in certain circumstances actually increase the amount of drayage that we want to purchase on the outside. So in some markets we may want to be handling a substantially smaller portion of our own dray and working closely with a few selected partners and creating an intelligent mix of drayage going forward. We've conducted sourcing events now in two pretty significant markets, we're in the middle of conducting the event in the third market and we're very encouraged with the results and I think at the end of the day what we end up is a lower dray cost. And in some markets more of our own dray being handled and they need to hire more drivers, and in some markets less of our own dray being handled than we had initially assumed. So it's a little bit of a different philosophy on how we manage dray, it's an evolving philosophy and until we've really gone out to all the markets we don't know exactly what the net results be but we do know that the gold shouldn't be as simplistic as trying to get to 85% of our own dray, we got to try to optimize our dray spend better and that's what this effort is all about.

Got it, okay that makes a lot of sense. So don't be so focused if it's 64% of internal dray or 70%, there is some evaluation of that going on internally.

That's right, it's really about cost, how we lower that dray cost, what's the best solution.

Okay, good. Thanks for the help tonight.

And our next question comes from John Larkin with Stifel. Please go ahead.

Thanks for taking the questions this afternoon. Dave, as I think back to the fourth quarter earnings call, you had a fair amount of detail described the progression of rail service and I think you said that it had bottomed out in November but was looking relatively encouraging in December/January, maybe even into early February. And then evidently something happened and service got worse as the weather was getting better which is a little counter intuitive, yet we're still thinking that in the second half of the year service is going to be approaching normal. Did the downturn in the second half of the first quarter give you pause in terms of how you put your guidance together with respect to service getting better in the second half?

Yes John, I think that there is no question that we did start to see some normalization and improvement in December - in the November but then it did begin to deteriorate somewhat as we reached December and then unfortunately sequentially did get worse. We are seeing a little bit of improvement in April but again most of the lot of this is from our discussions with the rails on some of the improvements they are making, they are beginning to see within their own network some incremental improvements which - they are saying we will begin to see more and more as the quarter progresses. And again, we check with them on a regular basis and they - it's not going to be normalized service in the second half of the year but I do think it will better service than we've received in the second half of the year. It's probably in all candor, I don't really even have an idea of the exact timing for when it will be back to what we would call normalize but certainly it's going to be - I would think no earlier than 2016.

Was it the return to normal at the port on the west coast that more or less caused the deterioration in service in the second half of the first quarter did you think or was there something else out there?

John that's a good question, I don't believe it was the port strike because it wasn't strictly the western carriers that suddenly got buried and all, it was across the board, both of our partner rail roads. So I think it certainly the port strike created a lot of havoc within all networks, it certainly did within ours, and it certainly did within the rail networks themselves just displacing where boxes should be and it does take a little bit of time to get your footing back on that and have your networks still little bit more normalized as I indicated in the earlier question, we really even today - our balance, our flows are not normalized, we're working towards that end but it's going to take a little bit more time.

And maybe just one for Mark to wrap up my questions, you talked a little bit about the container tracking program and the technology that you are very excited about, could you give us just a rough feel for the cost benefit of that, are there significant enhancements in box turn times that you are anticipating, maybe lower empty miles perhaps improvements in service levels that would support higher pricing that you're thinking might be possible in 2016 and beyond once the whole fleet has been installed with this technology?

Yes, sure John, I mean I think the most concrete and the most immediate benefit is in the utilization side. A day for us is about $6 million in terms of annualized benefit, and we know for a fact that there is right around a 24 hour lag between the container being emptied by our customers and are being notified of that fact. So we believe that that segment alone carries a potential day’s benefit and there is also a number of other things that having better visibility into the location of equipment will enable us to do among them reducing our empty miles for our drivers. So there is a number of potential, very concrete benefits that we have estimated publically, I think at around $6 million on annualized basis once the entire fleet is up and running, I think we stated something like $1 million or $1.5 million this year that we were likely to see in terms of mostly utilization benefit. We also think there is a marketing advantage, especially for customers that are very concerned about the integrity of their load and very concerned about visibility. Having these devices on all of our containers will enable the customer, particularly say a food customer, who is concerned about the load integrity will have full visibility and will have a complete history of that load. So every time the door opens on that container that shipper will know about it, and that shipper will always know exactly where that container is. So if you are very concerned about being able to trace the history of a particular shipment and know exactly where it is at any given time, we think it brings a real benefit for those types of customers. Can we get a higher rate for that, I'm not quite sure but I think it brings a lot more value, especially to those kinds of service sensitive, load condition sensitive customers, and as we're talking about conversion freights, those are the kind of folks that we have to be able to go after.

I'd like to just add one other item and that's for our drivers it will be a great benefit because they will be able to with a lap identify where the container is, in a yard, not enough rail yards, they can be pretty fast and they can waste a lot of time looking for single container. So, we think there is real advantage as far as keeping our truckers happy as well.

Got it, thanks very much.

And our next question comes from Bill Greene with Morgan Stanley.

Good evening guys, it's Alex Spacio [ph] in for Bill. David or Mark, would you be able to provide us with how the Hub intermodal volume growth rates had trended through the quarter sequentially and then maybe how April is looking so far?

Sure. The volumes actually trended - kind of not completely sequentially positively because we did see a drop off in volume in February as a result mostly of the port strike, clearly a lot of things were disrupted during that time period but we finished the month or the quarter very strong. So we started off slightly negatively and had a little dip in February and then March was very strong. So we feel like we've got a lot of positive volume momentum and through April so far our volumes are running well as well. So we feel that that's kind of moving in the right direction and based on the awards that we've seen in the bids thus far we feel like we're on target to hit our forecast of 3% to 7% volume growth for the year.

Okay, so you do feel good about the 3% to 7% as that was my follow-up there. Even I guess in the light off - it sounds like the pricing is strong but it's not too strong such that you're maybe pushing some volume off the network at this point, I guess maybe can you talk a little bit more about the general customer reception of the pricing, are you getting a lot of pushback on that or fairly kind of they are taking the increases as it comes along?

I think you always get a lot of pushback from your customers about price increases, maybe we aren’t used to having that discussion any longer but I think the reality is that we've been pretty disciplined to customers, are certainly having that conversation with over the road carriers, they understand that our costs are going up and that there is a need for us to get increases to create a reasonable return for us and I think that customers can see and have concerns about long term the capacity environment and they want their freight to have some value. So while it's never a comfortable or easy conversation with the customers, we think they have been more receptive this year than maybe they have in years passed.

Yes, that makes sense. Okay and then, a little bit of housekeeping item here, I think last time you guys had mentioned you expected mode gross revenues to be up in the high single digits for 2015, is that still kind of what you would expecting or maybe a little bit more modest now just given the lower growth in the first quarter?

Yes Alex, we're thinking mid to high single digits now.

Okay, that's helpful. Terri, can we talk a little bit about the balance sheet and just the leverage, you are fairly conservatively levered, is there - what would you say is a good target leverage ratio you guys have either debt-to-EBITDA or debt-to-cap and do you see kind of an opportunity that maybe use a little bit more of the balance sheet and maybe increase the buybacks?

Yes, we would lever up the two times EBITDA if we found the right acquisition. You are right, we don't have a lot of debt, we are going to fund our container and tractor purchases this year with that so that will bring it up; $22 million for the containers and $43 million for the tractors assuming we only buy 300. So in terms of buyback, we're going to buyback opportunistically, we've got $129 million in cash so likely we would use our cash for buyback.

Okay, that makes sense and then just one last small housekeeping, I think the Unison revenue growth decelerated a little bit here and you talked about that one customer, I just wanted to clarify by decelerating revenue growth through the rest of the year could Unison actually be down for the full year in terms of revenue or how should we be thinking about full year revenue growth at Unison?

We do think it could be down slightly.

Okay, great. Thanks very much for the time guys.

And our next question comes from Matt Brooklier with Longbow. Please go ahead.

Thanks and good afternoon. So we talked about the west coast ports being a headwind in the first quarter, I'm just curious to hear how much impact it had on one volume growth, and then secondly, on your consolidated margin?

On the volume growth we think the biggest impact would be in the retail sector, our loads with retail customers were down 2%. We did some high level math and came out with a fact that if the west coast port situation didn't exist, maybe we would be up 3% instead of up 1%. So it hurt us a little bit on that.

I think we were a little bit disappointed there wasn't more of a surge when to resolve, where there is no question of business didn't tick up but I think there are lot of clients because their goods have been delayed so much and coming from overseas that they tried to get expedited truck, whatever, that saw maybe even some more impact shipments as those were getting priority initially to move. So that was a little bit disappointing but again, we did see an increase in volumes and it's become what I think would be more normalized now.

I guess another issue we had is we had too many boxes in Southern California and as a result we ended up repositioning over 500 shipments from the west coast to the gateways where we were short of containers for our customers and those repos are pretty costly, how much that is we're not going to disclose but that was costly, that goofed up our network more than anything, and operational inefficiencies that resulted from the disruption.

Okay, that's helpful. And then any sense in terms of the margin in the quarter like, revenue margin?

We didn't really quantify that, there are so many moving parts with the rail service and the rail service was impacted by the port situation that we didn't try and pull it apart.

Okay. And then I guess the second part of my question here, you've talked in the past about going after empty miles within your drayage operations, I'm just curious to hear maybe what's in the guidance in terms of improving the empty mile percentage at dray and then maybe remind us of the sensitivity in terms of achieving those goals as the year progresses?

We assumed that we would get two percentage points better in empty miles by the end of the year which was the goal that we have from one of our initiatives and we measure that every week and for every one percentage point change in empty miles it's $3 million annually.

Right, and we did see improvement throughout the quarter in empty miles and by the end of March those numbers had come very close to 2014 pre-rail service numbers and actually a little bit better than 2013. So we think empty miles are heading in the right direction and the changes we've made to the processes have helped us start to bring those numbers down and also our dray sourcing event has helped us to bring empty miles down as well and as we bring that out to more markets, we think that the 2% is achievable.

Okay. I appreciate the time, thanks.

And our next question comes from Scott Group with Wolfe Research.

Thanks, good afternoon guys. I'm wondering can you help us think about the timing of rail cost increases this year relative to the timing of the bids getting implemented and is anything was different this year than in normal year, get the pricing from your customers earlier, I don't know if anything has changed but if anything has, I'm curious.

The increased timing is very similar to what we have seen historically. We have agreement with our real partners as to what that's going to be so we good visibility into that. We had a good sense of the range going into the pricing season, going into the bid season, so we understood what our target needed to be and it's a mid-year price increase like it normally is.

With our western partner, with our eastern partner, we thought part of the price increase go in at the later part of the quarter.

And then the others have further adjustment in the back half of the year but very similar timing mechanism to what we're seeing historically.

Okay. So when you talk about the best pricing you've seen in a few years from your customers, is there any way to think about that on a net basis, I mean you're pricing relative to your real cost increases, would you still say that's the best in years or is that not necessarily the case?

Scott I think that at this point in time it's - what would the customer receptivity towards the increases as they are understanding the cost increases. I do think that this has been one of the better years where we're not getting in this, we always get pushed back, it's always a late fight whenever you have a price negotiations. But I think that has been very public, they have seen it from their trucking companies they deal with, price increases they understand the cost increases with drivers and certainly understand rail. So I would say that while it's never easy, particularly this year we think is moving in the right direction.

I don't know if I missed this or not, I know you gave consolidated gross margin guidance for the year but do you think intermodal gross margins would be flat, up or down for the full year?

For the full year probably flat.

Okay. So down 80 in the first quarter, so you think at some point, back half of the year you would expect them to turn positive given the pricing?

Yes, given the pricing in the rail service, correct.

Okay, great. And then just last question, we've talked about this a little bit before but now that you've seen what's happened to the rails over the past year, are there any thoughts of going to a more diversified rail strategy so that you can kind of picking shoes based on where our services is best?

In those case you know Scott, that's where we came from. One of our goals when we were a smaller entity was trying to be the largest IMC on all rail routes. We really think that with the size of our fleet, with the coordination efforts, our drivers, that the best strategy is what we're current deploying, and that's partnering with the major western line and partnering with the major eastern line. So we really have not looked at that and candidly, I don't think that any of the rails are tremendous difference in service from what our partners are providing currently.

Okay, thank you guys.

And our next question comes from Matthew Franco [ph] with Macquarie. Please go ahead.

Hi guys, thank you for taking my question. The first thing I wanted to touch on was the brokerage business, you had mentioned that what I thought was interesting, last quarter you guys mentioned you had a team that you are putting together to focus on more spot opportunities just given with the current hawk environment was like. And Terri you mentioned earlier that you actually saw brokerage helping better than you had expected this quarter. And so I'm curious if that's related to that, and if so - if you will continue to pursue that strategy or would you simply really good pricing and something else?

We are focused on spot opportunities, you are right but that wasn't a big contributor to the increase in the gross margin as a percentage of sales for us. Truck brokerage, it was more from the value added services, the customer rate increases and better purchasing. But we continue to focus on those spot opportunities and we do have resources dedicated to it.

Okay. And the other thing I wanted to ask you was about M&A. Are there types of business that you are eager to grow faster than others, the acquisition is there other things you're looking at, obviously we saw your big brokerage transaction, so I'm just curious what are your thoughts there?

We continue to certainly enlarge truck worker would be attractive, as you saw from that transaction it's a very costly market, and I guess our conservative nature precludes us from entering some of these but I would certainly - a truck broker that would bring technology in particular to us, we think could help us in the future. Certainly the dedicated space is very attractive to us at this point in time. There could even be some IMCs that could be interesting if they have enough scale and more of a diversified business space than we do. So those will be the primary areas, naturally the cross-border business is also very interesting whether it be Mexico or Canada. So somebody that might have a lot of strength in that area would be quite interesting as well.

Okay. Thank you very much.

And our next question comes from Brandon Oglenski with Barclays.

Good afternoon everyone, and thanks for taking my question. David or Mark, how do you think about long term margins in your model business? I mean, probably you generated terrible return today so shouldn't we be thinking that even with the price uptake that you're getting this year and some of the cost pressure, I mean Terri just said in her model gross margin is probably flat for the year, maybe up a little bit in the back half but would you like to grow the business at this level or would you rather see some uptake in margins before you really push the growth ambition?

I think we certainly like to get margins back to their historic levels and that has been a challenge in this environment, we typically have been able to experience margin improvement in intermodal when prices are going up, even though our costs were going up. When prices are going up and the market is supporting price increases that typically is good for our intermodal margins. So we do hope to see a current conditions continue and hope to see what many people have pointed to as constraint capacity market in the over the road sector. We think that would be very favorable for our ability to get margins back. We still generate good returns even at these margin levels but there is no question that it's a challenging margin industry, we do think that there is room for margin expansion, it's going to take pricing discipline on our part, there is no question and we're also going to have to do a very good job of managing not just our rail cost but also our dray cost, and that's why we're taking the steps we are with our dray strategy. We have to be managing all aspects of the intermodal transaction effectively in order to expand our margins but we do think the opportunity is there particularly as we've resumed to more historic service levels for us to get back to the kind of margins that we experienced in 2007, 2008 and prior to that.

I appreciate that response. And during the post mortem on the back half of last year because it sounds kind of similar where we thought pricing was going to be up quite a bit, little bit of margin traction, I know you had your costs issues but just from a gross margin side for intermodal, I mean you did get a little bit of price traction but we didn't see the expansion so what's changed in the confidence this year that it will be better in the back half of 2015?

I think what we are seeing - the key driver for us is price and our ability to get price in the marketplace and our willingness to be selective and the opportunities that we're bringing on. We're going to take on low margin business, we're going to have a low margin business profile. Last year we saw some modest increase in prices but with the rail disruption it made - it took our cost dramatically and we had to deal with a lot of network efficiencies but there is no way we could capture from the marketplace. So I think that what we've seen is, is hopefully service being as bad as it's likely to get so in the improving service environment and an improving pricing environment, it should certainly come to the bottom-line.

I think that coupled with some of our dray initiatives, California had a major impact on this last year and that was something that was temporary, it was an issue that can be fixed and it's not totally resolved as of yet but we continue to work towards it and we've made a lot of steps forward and lot of improvement in that.

Okay. And I know we're already an hour in the call but if I can just get one more in, what's the long term outlook on CapEx levels for this business?

That really depends on how many containers we buy and how many tractors we buy that we're using most of our money for. And we're only buying a 1000 containers this year, we only keep big container adds in the future. And in terms of tractors we'll have a pretty new fleet by the time we get the 300 tractors that we're getting here and then we'll be on a program when we replace them every three or four years. So we don't see it being any different probably then $50 million to $60 million.

Okay. So we're running $40 million to $50 million above a normal run rate this year in CapEx?

Yes because we're buying 300 tractors and we don't know what the price is going to be at the containers, that all will fluctuate depending on what gets resolved with the anti-dumping case.

That's a lot of fund, I appreciate it Terri. I don't want to get involved in politics on this call, thank you.

And our next question comes from Justin Long with Stephens.

Thanks, and good evening guys. I actually wanted to follow-up on that last question on capacity, could you provide an update on the industry container ads you're expecting for 2015? And on that anti-dumping litigation, do you still think that's something that could limit a capacity ends this year?

I'll answer the later while Terri is looking on the fleet ends. There was a hearing last week in front of the international trade commission. We feel as though it went well, we feel as though the case has been made that this is dumping is completely improper but on the last - it was initially imposed the duty. As I understand it about 40% of the initial rulings do get overturned and so we'll just have to see what the outcome. I thought we had - the industry had a very compelling case and I think that the people that were levying the charges did not - but again, we'll just have to wait and see, I believe that we'll know the outcome of it on either May 15 or May 17 but duty is overall that were imposed, if they hold are quite significant I mean, it's 120% plus, correct Terri?

Yes, it makes the price of the container basically double from $11,000 to $20,000.

That's not really a barrier to entry necessarily but it certainly would make an asset base record look very closely as to how much involvement you wanted to get in intermodal and those kind of prices. So that's kind of the status of where it is, so for the second quarter it's almost certainly know exactly where we stand and how we'll be moving forward.

And then to answer your other question, it looks like the industry is adding about 12,000 containers so that will bring the total count up to 248,000 containers by the end of this year.

Okay, great, that's helpful. I know it's been a long call but I wanted to clarify one other thing. You mentioned a pickup in volumes, intermodal volumes in March and April, but I was curious if you could give something on the order of magnitude. Did you see a pick up that was in that 3% to 7% increase range that's come in line with your guidance for the full year?

We did in March.

Okay. Thanks so much for the time, I appreciate it.

And your next question comes from Scott Group with Wolfe Research.

Thanks for the follow-up, it was just one quick thing. So just one the operating expenses, it came in - I saw that better than the guidance I think for the first quarter, what's going up from here to bring it back up a few million or is that potentially went for some conservatism?

Right, I guess I can't answer your questions embedded in there Scott, so you're right, we had cost and expense guidance between $73 million and $76 million and we came in at $70 million this quarter. There is three reasons for that; first, we projected about a million more in agent commissions at mode; second, we projected about $700,000 of higher consultant expense, and then some of that is timing however; and then third, we projected about $1 million of higher salaries and commissions. We expected salaries and commissions will be higher because we thought we have more overlap in employees while we transitioned our Los Angeles customer service to Opera [ph]. And then as Mark mentioned, we have the change in our commission program, we thought that our commission expense was going to be higher than it was with the new sales comp program. And then how we get - your second question was just how we get cost and expense in Q1, $70 million to $73 million, you know the biggest driver of that increase relates to higher agency commissions for Mode which fluctuates with Mode’s gross margin. Historically if you look at it Mode’s commission has been much higher in the second through fourth quarter than it was from the first quarter. Last year you can see it was between $2 million and $3 million higher in Q2 to Q4 than it was in Q1. Another driver is higher IT expense than we had in the first quarter, IT expense is projected to be about $600,000 to $1 million higher in the second through fourth quarter than it was in the first quarter, and that's because we're making investments in technology including new services and upgrades that will allow us to process more efficiently. And finally we did add 50 people on the quarter, some of those people - a good chunk of them actually came in at the tail end at the quarter and we'll have cost associated with those people for the entire quarter prospectively, we estimate that could be $700,000. And then finally because our changing commission plan and because our growth is backend loaded, we think the commission expense could be about $350,000 higher in Q2 to Q4 than it was in Q1.

Do you need more details on that Scott?

Sounds like you're prepared for that question. Alright, thanks, I appreciate it.

And I show no further questions at this time. I will now turn the call back to Dave Yeager for closing remarks.

Well, again, thank you for joining us for the conference call. As always, Terri, Mark and I are available for any further questions or discussion.