Hub Group, Inc. (HUBG) Q2 2015 Earnings Report, Transcript and Summary

Hello and welcome to the Hub Group, Inc. Second 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. 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 this call represent our best good-faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate and project. Actual results could differ materially from 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. David P. Yeager - Chairman & Chief Executive Officer: Thank you, and good afternoon. We appreciate you joining Hub Group's second quarter's earnings call. Second quarter business levels continued the positive momentum we experienced in February and March. Intermodal volumes increased and pricing continue to be strong. And although still below historic norms, rail service is showing incremental improvement. Unyson Logistics did take a slight step back due to the loss of a large customer, but our sales pipeline has strengthened and we look for that business unit to regain its footing in the second half of the year. The highway business has posted growth that was better than forecasted despite the current difficult truck brokerage environment. And last but not least, Mode continues their streak of increasing revenue and margin. So overall, we had a solid quarter that reflects positive momentum in our various businesses. And with that, I'm going to pass the call on to Mark to guide you through the specifics. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Thank you, David, and good afternoon everyone. I'm pleased to report that while we still face challenges, we made real quantifiable progress on a number of fronts this quarter starting with intermodal. This quarter consolidated big-box intermodal volume increased 6%. Hub segment volume grew 6% with our strongest growth coming in the local East market, where volume was up 14%. Local West volume was up 3%, while transcon volume was down 3%. We continue to see good growth in Mexico with 35% volume growth in Q2. Despite the industry slowdown, we remain confident that the Hub segment will hit the previously discussed 3% to 7% volume growth range for the year. Most volume was up 9% in the second quarter with growth in transcon and local West and a slight decline in local East volume. As predicted, rail service has yet to fully recover. While LOGs improved sequentially for our Eastern partner, they deteriorated in the West. Rail on-time performance followed a similar pattern with sequential improvement in the East and sequential deterioration in the West. Thus far, July numbers are more encouraging showing sequential and, for the first time in quite a while, year-over-year improvement in on-time performance for both of our rail partners. In addition, we maintained on-time performance in the mid-90%s for our customers throughout the quarter and into July. We continue to see success with pricing in the second quarter. Interestingly, pricing improved the most in local East where we also grew volume and the least in transcon where we experienced volume declines. We've maintained pricing discipline, consistently secured increases with existing customers and improved mix. With about 70% of the bid season completed, we are pleased with the results thus far. Fleet utilization came in at 15.1 days for the quarter, 0.5 days better than Q1, but 1.4 days worse than Q2 of 2014. Progress continues with satellite tracking. We have now installed the devices on over 5,000 of our containers. They've performed well and the majority of our fleet should be similarly equipped by the end of the year. Driver count closed out the quarter at 2,724, a net decline of 16 drivers as the hiring environment continued to be a challenge. We have stabilized the situation in California and our dray sourcing initiative is helping us achieve the most cost-effective mix of in-house and outside power for our network. We are currently rolling out this initiative in other critical markets and should have the implementation completed in time for peak. Our truck brokerage division, Hub Highway demonstrated strong performance with 14% volume growth. We are seeing positive results across the board, including an increase in our core business, an uptick in high value-added work and even stronger spot volumes despite a somewhat lackluster demand environment. The team's commitment to carrier development, its more focused marketing efforts and its improved execution are producing solid performance as highway continues to make progress. Units and logistics experienced a slowdown in the quarter with an 8% revenue decline. While we anticipate continued onboardings and have a number of opportunities in the pipeline, we are likely to see decelerating revenue, but solid bottom line contribution from Unyson for the remainder of the year. We are happy to report that Unyson has once again been selected as one of the top 10 North American logistics companies by Inbound Logistics. This is the seventh year in a row that Unyson has received this honor. We remain bullish on Unyson's growth prospects over the long term. As a result, this year, we will be investing further in our transportation management technology. This investment will enable us to enhance our analytical and executional capabilities, create a more scalable and responsive product and further differentiate our services in the marketplace. Mode Transportation continued its solid performance in the second quarter. Despite a somewhat sluggish industry environment, Mode delivered a quarterly revenue increase of 1% and posted a 12% growth in operating income. All product lines including intermodal, truckload, LTL and international experienced volume growth versus the prior year. Mode added 289 new customers, onboarded five new independent business owners and brought in three new sales agents. Existing IBOs also continue to expand, adding 12 salespeople to their organizations. And with that, I'm going to pass the call on to Terri for financial highlights. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Thanks, Mark, and hello everyone. As usual, I'd like to highlight three points. First, Hub Group's gross margin as a percentage of sales improved 30 basis points and gross margin increased $3.1 million. Second, Hub truck brokerage had a strong quarter with growth in volume, revenue and margin. And, third, Mode continued its solid performance with the 12% increase in operating income. Here are the key numbers for the second quarter. Hub Group's revenue increased 1% to $900 million. Hub Group's diluted earnings per share was $0.51 which is the same as 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 $686 million, which is a 1% increase compared to last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 2%. Intermodal volume was up 6%. Price and mix were also up. These increases were partially offset by a decline for fuel. The price increase this quarter was slightly higher than last quarter. Loads from durable goods customers were up 24%, loads from retail customers were up 7% and loads from paper customers were up 20%. Truck brokerage revenue was up 8%. Truck brokerage handled 14% more loads, and fuel mix and price combined were down 6%. Logistics revenue decreased 8%. This decline is due to losing a customer in May and one customer taking a portion of their business in-house. Hub's gross margin increased by $1.5 million. Gross margin as a percentage of sales was 10.5% or 10 basis points higher than the second quarter of 2014. Intermodal gross margin increased because of a 6% increase in loads, price increases and more favorable mix. We're excited about this margin expansion since it's the first time in two years that Intermodal margin has grown. We overcame headwinds including utilization being 1.4 days worse than last year costing us $2 million and loaded miles deteriorating slightly. These headwinds caused intermodal gross margin as a percentage of sales to be down 10 basis points. Truck brokerage gross margin increased because of growth with targeted customer accounts which included some seasonal business. Truck brokerage gross margin as a percentage of sales was up 60 basis points due to more value-added services, price increases and better purchasing. Logistics gross margin decreased due to loss of business. Logistics gross margin as a percentage of sales was up 40 basis points due mostly to purchasing more cost effectively. Sequentially, the Hub segment gross margin as a percentage of sales increased 70 basis points. Intermodal gross margin improved 90 basis points and truck brokerage increased 60 basis points. Hub's costs and expenses increased $3.7 million to $50.1 million in 2015 compared to $46.4 million in 2014. The increase relates to a $3.2 million increase in salaries and benefits and a $400,000 increase in general and administrative expense. Salaries and benefits are up because of higher head count, annual employee raises and an increase in commission. General and administrative costs are higher because of software maintenance expense and personal property taxes. Finally, operating margin for the Hub segment was 3.2% which was 40 basis points lower than last year's 3.6%. Now, I'll discuss results for our Mode segment. Mode had a solid quarter with revenue of $234 million, which is up 1% over last year. The revenue breakdown is $118 million in intermodal which was up 4%, $83 million in truck brokerage which was down 4% and $33 million in logistics which was up 6%. Mode's gross margin increased $1.7 million year-over-year due to growth in all three service lines. Gross margin as a percentage of sales was 12.6% compared to 12% last year due mostly to a 70 basis point improvement in intermodal yields and a 60 basis point improvement in truck brokerage yields. Mode's total costs and expenses increased $860,000 compared to last year because of an increase in agent commission. Operating margin for Mode was 3.2% compared to 2.9% last year. We're proud that this is the first time Mode's operating margin has been north of 3%. Turning to head count for Hub Group, we had 1,575 employees excluding drivers at the end of June. That's up 20 people from the end of March. 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. This guidance has been adjusted to exclude the one-time costs in the first quarter. We think we'll have 36,100,000 weighted average diluted shares outstanding. Our goal is to improve gross margin as a percentage of sales from the 11% that we had in the first half of the year. We anticipate rail service will improve and that utilization will be about a half a day better in the second half of the year. We expect gross margin as a percentage of sales for the second half of this year to be between 11.3% and 11.8%. The main drivers for improvement are 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 $75 million a quarter for the rest of the year. Our tax expense this quarter was approximately $400,000 lower than normal because of a change in Missouri income taxes. We expect our effective tax rate to be about 38% in the last half of the year. Turning now to our balance sheet and how we used our cash. We ended the quarter with $157 million in cash and $117 million in debt including capitalized leases. We spent $9 million on capital expenditures this quarter. This includes $7 million for tractors, which we funded with debt. This brings total year-to-date capital expenditures to $24 million. We expect our capital expenditures to range between $85 million and $95 million in 2015. We committed to purchase at least 300 tractors for $43 million. We also have an option to purchase another 75 tractors. We're purchasing 1,000 containers and investing in technology projects, including transportation management systems and satellite tracking. We intend to fund the 2015 tractor and container purchases with debt. And to wrap up on a positive note, in July, we paid $4.4 million to purchase 114,352 shares of stock. We have $39.1 million remaining on our share buyback authorization. Dave, over to you for closing remarks. David P. Yeager - Chairman & Chief Executive Officer: Great. Thank you, Terri. To sum up the call, the second quarter built on the positive momentum of Q1, the pricing environment continues to be moving in the right direction of both our intermodal and highway volumes are showing signs of improvement. Lastly, we continue to see incremental service improvement by rail partners and look for that trend to continue for the remainder of this year. And at this point in time, we'll open up the line to any questions.

Thank you. And our first question comes from John Barnes with RBC. Please go ahead.

Hey. Thanks, guys. Hey, Mark, your commentary around box turns on the quarter, can you talk a little bit, is that 1.4 day difference year-over-year, did it cost you anything from a revenue perspective that you would have been able to pick up? Was there enough volume out there to serve that you got the box turns a little bit better? And if you get that 1.4 day pick up back to, say, flat year-over-year, what do you think that does? Does it push the margins north of where you finish this quarter? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Well, John, there certainly is a cost associated with the decline in utilization. I don't think that the demand environment was tight enough that it really cost us revenue. We didn't have a lot of markets where we were turning loads away. We did have some loads, and if we would have been able to get the boxes into the right locations, we may have had slightly more volume within the system. But I think more than anything, there definitely is an expense associated with losing that 1.4 days. Obviously, it's a very expensive asset for us to have in place and not to be able to turn those boxes has a pretty significant cost. I think every one day of utilization for us is $6 million? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Right. So we estimated for the quarter that it cost us $2 million because our box turns were 1.4 days worse than last year. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Right. And...

And that's on cost, that's $8 million – or $2 million on cost? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Right, because it was 1.4 days worse than last year. It's the cost of the chassis and the box. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Right. So obviously if we can get that back to more historic norms, it will definitely help our margin performance in the intermodal sector.

Okay. And then just a follow-up on that line of questioning on assets. How much of this – that 1.4 day is pure rail service versus other things? And of that, what can you control like drayage or something like that? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Well, I think certainly a fair amount of it was attributable to rail service. The other major factor was slowness out of the West Coast. Any time you've got a critical point like Los Angeles that is a little bit slow, it's hard to get a lot of velocity out of the fleet. We would certainly anticipate that even if the economy is a little bit sluggish, we're not going to run into a situation where we would see excess capacity building up in Southern California. That would take a significant downturn in the economy for that to occur. So even under fairly normalized economic conditions, we think that that dynamic, the market is should sort of fix that. There's also undoubtedly some things that we can do from improving our load planning processes. And as we get more and more boxes with satellite tracking, we can do a better job of getting those boxes back into the flow more quickly. So I would say, certainly rail service has had an impact. It is improving. As we said in July, we're hopeful that that trend continues. And combine that with a little bit better process discipline, we should be able to start working that 1.4 days down over the second half of the year.

Very good. Thanks for your time, guys. Nice quarter.

And our next question comes from Todd Fowler with KeyBanc Capital Markets.

Great. Thanks. Good afternoon and a nice quarter. Dave, I just was – I was wondering if you could just speak to what your impression of the overall volume environment is? The 6% volume growth here is nice, but I know that you've got some easier comps, particularly in the East from the second quarter a year ago. And I think that there's a lot of moving parts right now in the transportation space about just how solid demand is and particularly demand for intermodal. So any sort of general comments you have and then particularly about expectations maybe, for a peak in the back half of the year? David P. Yeager - Chairman & Chief Executive Officer: Sure. Well, I think – well, as we pointed out, we believe that we should continue with intermodal volume between 4% and 7% for the entire year. In the truckload market, we are seeing a bit of softness. There is more supply than there is demand right now and we're certainly, as a result, seeing that in our truck brokerage business. We have not seen the trucking industry being overly aggressive with large amounts of diversion from intermodal at this point, but we certainly do believe again that even with fuel being as low as it is today, that there's a lot of inherent advantages and cost advantages with intermodal on – even up to the 750-mile length of haul. So overall, I think that it seems like it should be a normalized peak. I haven't gotten anything contrary from any of our retailers that we speak with. If anything they do get a – seems like they did get a little bit more inventory in their networks in the second quarter than they had expected, but we don't think that's going to really appreciably impact peak.

And even with the softness in the truck side and the lower oil prices, no discernible impact on intermodal demand? David P. Yeager - Chairman & Chief Executive Officer: Not thus far. No, intermodal demand...

Okay. David P. Yeager - Chairman & Chief Executive Officer: ...continues to be very strong, and we continue to seek some amounts of conversion freight at this point.

Okay. And just for my follow-up, Terri, just to be clear on your comments on the guidance, the $1.85 to $2, it is that – are you effectively increasing that by the $0.04 of the one-time costs in the first quarter? Is that what you're basically saying in the treatment of the one-time costs from 1Q and the full year guidance at this point? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: We had assumed that when we gave the first quarter guidance because we knew that we would have the one-time cost. So it's not really – it's leaving our guidance as it was.

Okay. So you're saying that operationally you don't have the $0.04 from 1Q in the full year guidance at this point? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: We do have it in there, it's been adjusted.

You do have it. Okay, I got it. That makes sense. That clears it up. Okay. Thanks for the time, guys. Nice quarter. David P. Yeager - Chairman & Chief Executive Officer: Thanks, Todd.

And our next question comes from Kelly Dougherty with Macquarie. Kelly A. Dougherty - Macquarie Capital (USA), Inc.: Hi. Thanks for taking the question. Just a quick question on the level of confidence in the margin outlook for the back half, I think you previously said you expected more of the normalized rail service and 5% utilization improvements in there. Just wondering kind of the moving pieces in there, how comfortable you are with what you know for your rail cost versus what you know about pricing and then how service has been trending to get you toward the higher low end of that guidance? What's the most important pieces of that? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Okay. Let me try to take part of that, Kelly. To get to the high-end of the range of our guidance, which was the $2, four things would have to happen: first, the volume that customers have estimated in the bids would have to materialize; second, rail service and utilization improvement, and we estimate about a half-a-day improvement of utilization; third, reducing our dray spend through the sourcing event and initiatives to improve our street operations; and, fourth, truck brokerage and Mode continue their strong growth. Kelly A. Dougherty - Macquarie Capital (USA), Inc.: Okay, great. Thank you. And actually just following up on that, my next question was about the dray initiatives. I know there are some, I guess, changes in strategy about whether it needs to be done internally versus externally. Just wondering if you can give us any indications of cost savings you're doing so far or maybe more markets where you're thinking of changing the employee owner-operator model, anything to kind of give us some milestones on how things are going on the drayage side of things? And if that's something that we see near-term or that's kind of a longer-term initiative? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Sure. We're encouraged by the improvement that we've seen. Our goal is to have the right mix of Hub and third-party drayage service while we maintain good service for our customers. And so the mix is going to vary based on the market and the cost dynamics. Our focus is reducing our dray spend and we are happy with the results thus far. We've implemented the results of the sourcing event in several key markets and we expect to complete the sourcing events in all the key markets before peak season and we'll continue to assess where we can benefit from a sourcing event and conduct them as needed. David P. Yeager - Chairman & Chief Executive Officer: I would suggest also that there's no question that part of this is cost containment and a large part of it's also service. We do our focusing very heavily on making sure that our customer service remains very strong and on time. You had also Kelly ask for the employee versus owner-operator model change, we're not contemplating that any place else at this point. Kelly A. Dougherty - Macquarie Capital (USA), Inc.: Okay, great. Thanks very much, guys.

And our next question comes from John Larkin with Stifel. John G. Larkin - Stifel, Nicolaus & Co., Inc.: Yeah. So good afternoon everybody and thanks for taking my question. It was really interesting to see Mode's EBIT margin as a percentage of total revenue improve fairly dramatically and actually match that of the Hub segment at about 3.2%. As you go forward, is the operating – does the operating model at Mode limit you to additional further expansion due to the fact that it's kind of a variable cost agent based model? Or is there still additional margin expansion that can take place going forward? And is it possible that Mode's margin could actually exceed that of the Hub segment's margin? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Hey, John, this is Mark. I mean, I guess anything's possible, right? When we initially acquired Mode, it was well under 1%, and we were thinking that 2% was the upper limit. Now, we've gone past 3%. Is there still further room? Potentially, if the IBOs continue to be price disciplined and successful in the marketplace and really being creative about the business that they're pursuing, we can continue to expand. It is surprising to us. We feel like the gross margin may have been unusually high this quarter and that it's more likely to normalize in the second half of the year, but that's not to say that it's not possible because of the model. There is an aspect to the model because of how the margin is allocated. That makes it more challenging to take sort of quantum leaps beyond where we are at right now. But nonetheless, certainly the improvement has been impressive thus far and there's no reason to think it's totally capped at 3.2%. John G. Larkin - Stifel, Nicolaus & Co., Inc.: Okay. Thanks for that answer. And then, as a second question, you talked about the desire to add a total of at least 300 tractors and maybe as many as 375 tractors to the fleet. Are those all incremental, or are some of those replacements and how does that affect if they are incremental your sort of optimization strategy to sort of make sure you've got the right balance between in-house and outsourced drayage capability? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: To answer the first part of your question, John, of the 300 tractors about 100 tractors are replacements for older tractors, 200 tractors are just additional tractors. And we think that that will help us in terms of our fuel expense as well as our maintenance expense and our claims because these tractors have great collision avoidance technology. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Yeah. And in terms of the second part of the question, obviously we'll only deploy them where the company tractor is the better solution than going to an outside provider. So there are plenty of markets where that is the case. So we won't be taking away from our efforts to find the right mix. There's still a lot of room for that. This will just make the element that is company tractors or owner-operators, that much more efficient. John G. Larkin - Stifel, Nicolaus & Co., Inc.: Are there any common elements of those markets where company tractors make more sense than owner-operators or outsourced drayage? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: It really – no, I can't say – it really depends one market to the next. And certainly, one of the things we've discovered that markets that are more geographically disbursed, for example, you can find a lot of opportunities to outsource where operating from a single terminal with a single solution isn't necessarily the right answer. So I can't say that there's a lot of sort of common elements. The Harrisburg market, for example, is fundamentally different than the L.A. market. So it's a little bit difficult for us. That's one of the reasons it's hard for us to quantify how much we think we'll save as a result of this initiative until we get through at least this initial phase because we won't really understand what the economics of the outside dray purchasing initiative can be if properly executed. So we haven't found any of those commonalities as of yet. But as you might imagine, there are some markets where outside drayage is the less expensive alternative than in others. And typically where it's very expensive and in high demand, you're going to have better economics with a company truck or with an owner-operator. John G. Larkin - Stifel, Nicolaus & Co., Inc.: Thank you very much.

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

Hey. Thanks. Afternoon. So wanted to ask first about pricing. You talked a little bit about some weakness in the truckload market. Is that starting to have any impact on the ability to get intermodal pricing, I guess, is one part. And then, secondly, what does your guidance contemplate for rail pricing or cost increases in the back half of the year and where does that – how does that impact the kind of the upper end and lower end of the guidance? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: We have not seen pricing – the over-the-road softness affect intermodal pricing, certainly, as of yet, it remains a healthy environment from a price perspective. I think we obviously have not been disclosing just how much price we're getting or attempting to get or how much in the way of cost increases we're incurring. What we have said is that we feel confident that we'll be able to secure adequate pricing in the marketplace to offset the additional cost of both rail and drayage expenses, and that our goal is to improve upon that and perhaps expand margin a bit to get back to more historic levels. And thus far, we're pleased with the results and have yet to see any type of fundamental softening in the market for intermodal services. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. So in terms of our guidance, Scott, your second question, as Mark said, we think – we believe we're going to cover our cost increases with our price increases. We took a really disciplined and comprehensive approach to pricing this year. And then, on a daily basis, we review any poor margin freight and development improvement plan. We have really good processes in place to better control our assets OREO cost and improve our recovery of those costs and we feel much better about our base of business. So all that is built into the guidance as well as having visibility to the cost increases for this year, which are also built in the guidance. We have some of the cost increases in this quarter and then we have another cost increase going in, in September, which is built in the guidance. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Right.

And then the guidance of gross margin improvement in the back half of the year, does that assume intermodal gross margin improvement? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: It does.

Okay. And then just maybe one last question if I can. So first off, it's nice that I don't have to ask Terri about higher operating expense guidance this quarter. So I won't. And just – so maybe I'll ask just on the balance sheet. So it looks like you ended the quarter with, I think, record cash on the balance sheet. So I heard the comment around the buyback in July, but do you think there's opportunities to get even more aggressive with the buyback potentially or are you guys thinking more along the lines of acquisitions? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Our first use of cash would be for acquisitions. However, that doesn't mean we wouldn't also buy stock. We have $39.1 million remaining on our share buyback authorization. We intend to execute on that authorization and so really we could do both.

Okay. Thank you, guys.

And our next question comes from Kevin Sterling with BB&T. Kevin W. Sterling - BB&T Capital Markets: Thank you. Good evening. Terri, just a little update on your gross margin guidance of 11.3% to 11.8%. Is that for the full year or is that what you're targeting for the second half of 2015? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: That's for the second half of 2015, Kevin. Kevin W. Sterling - BB&T Capital Markets: Okay. Thank you. And also talked about your box turns and I think you said satellite tracking, Mark I believe you said you have satellite tracking on 5,000 of your containers. Is there any way to quantify so far from satellite tracking, how much improvement that has contributed to your box turns and how that's helping your network or is it too early to tell? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Yeah, Kevin, I think it's still too early to tell. We've only got it on about 5,000. So what that's really doing is enabling us to see the accuracy of the data and also begin to start working with the data, but it's not comprehensive enough for us to really take a lot of the management steps that we will take once we have the containers fully equipped. So we're confident that the technology is going to work. Based on our analysis, we felt very confident we're going to be able to squeeze a day out of utilization as a result of the satellite tracking. We absolutely believe that that's still very realistic, but at the same time I can't say that we're able to, this early in the game, point to real quantifiable savings as of yet. Kevin W. Sterling - BB&T Capital Markets: Okay. Got you. By the end of the year how many boxes do you think you'll have on satellite tracking? What is your goal if you have one? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: We're thinking it'll be about 70%. The fleet will be fully equipped at that point and the remainder we'll get in the first half of next year. Kevin W. Sterling - BB&T Capital Markets: Okay, great. Congratulations on a nice quarter and thanks for your time this evening. Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Thanks, Kevin. David P. Yeager - Chairman & Chief Executive Officer: Thanks, Kevin.

And our next question comes from Justin Long with Stephens.

Thanks and good evening, guys. I was wondering, for my first question, if you could provide any detail on the month-to-month intermodal volume trends that you saw in the Hub segment during the second quarter and also what you've seen so far in July? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Sure. May and June were better than April. David P. Yeager - Chairman & Chief Executive Officer: And so sequentially, if you could take it back from February, March, April, May, June, all were sequentially moving in a positive direction. And then July, it's early yet, but if you look at it as of like the 14th, it's continuing on with the trend from June.

Okay. So sequentially getting better pretty much each month. That's helpful. And I wanted to follow-up on rail costs and some of the questioning there. You mentioned a couple increases that are coming here in the third quarter, but has your expectation on the magnitude and timing of the rail cost increases changed versus what you were anticipating as of the last quarter? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: No, not at all. At that point, we had good visibility into what our increases for the remainder of the year were going to be and that remains the case. And so we've just got – so two of the increases took effect in the first half of the year – actually three of the increases, we had a March – in the East we had, a March and June; and with our Western provider, a June. So then we just have one left in September. But all those cost increases, we were fortunate enough to have good visibility with our rail partners going into the bid season. So that allowed us to set a target, if you will.

Okay, great. That helps clarify that. And last question, I wanted to sneak in, so you talked about pricing in intermodal on a year-over-year basis in 2Q being slightly better than it was in the first quarter. But on a sequential basis, how did intermodal pricing trend from first to second quarter? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: It was up from the second quarter.

And the guidance for the full year anticipates that that will continue in the third and fourth quarter, that sequential increase? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yes.

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

And our next question comes from Matt Brooklier with Longbow Research.

Yeah. Thanks. Good afternoon. So the 6% intermodal growth number in 2Q, pretty big step-up from first quarter. I'm just trying to get a sense for how much of the 6% growth was related to rail service level improvements and things getting a little bit more manageable on the drayage side, and how much of that 6% may have been some market share gains during the quarter? David P. Yeager - Chairman & Chief Executive Officer: This is Dave. There was some share gains, but we also had a very low benchmark sequentially. I mean, the port strikes in Southern California really threw a fit within our network and really that of other – of everyone within the transportation industry. So it's partially that in fact we had a low bar, but it's partially that we have been able to gain market share while maintaining pricing discipline. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And most – a lot of that growth was in the local East market. And if you remember last year, we had big losses in the local East market. So if you compare the volume increase in local East to 2013, it's only up a couple percentage points versus being up 14% over 2014.

Okay. Did any of the West Coast port issues and maybe some spillover from the West Coast port, did that hinder your growth at all during 2Q within intermodal? David P. Yeager - Chairman & Chief Executive Officer: I think in the beginning it did, certainly. It certainly did. Again, our network, it really got out of whack, if you would. And so it takes a while for it to get back to where it's running smoothly and efficiently. We're back there at this point, but it definitely did negatively impact us in the beginning of the quarter.

Okay. And then on the drayage side of your business, how balanced are you at this point in time? Is there a lot more in terms of potential improvement in the network in second half, or did you do most of that during 2Q and things have kind of normalized from here, or will normalize from here? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: We think that there's definitely some further opportunity for drayage improvement. We really have only implemented our outsourcing event in two markets and we're in the process of two additional markets with several left to go. In addition, we still aren't back to the cost levels we want to get to in the California market. So there is undoubtedly still some room for us to get more efficient from a dray perspective. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And our loaded miles deteriorated slightly too. So we hope to get on track with that as well.

Okay. And then, can you remind us if there is a number in terms of the, I guess, the all-in drayage initiatives that you're looking to implement, if there's a bogey in terms of utilization or cost improvement that you've set and maybe how much of that bogey has been achieved thus far in 2015? David P. Yeager - Chairman & Chief Executive Officer: We're still again very early into it. As Mark had said, we only have actually implemented the outsourcing events in two locations. And more to Mark's earlier points also, each market is very different from a drayage perspective. And we candidly haven't done a sourcing event like this in quite some time. And so we're interested to see how the outcome is, but thus far, we've been very favorably impressed with what we've been able to get done.

Okay. Appreciate the color. Thanks.

And our next question comes from Matt Young with Morningstar.

Good afternoon. Thanks for taking my call. It looks like the Hub brokerage execution has been improving nicely. Looking longer term, how do you feel about your ability to take share in the space, including boosting the mix of the transactional versus contractual business? And I guess along those lines, have your efforts to target more spot opportunities been bearing fruit? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Yeah. We're very optimistic about the highway product and how it's performing right now. We think there's a lot of room for improvement here and we think we can get back to the kind of double-digit growth that we saw during a period between, say, 2004 and 2010. So we think there's a lot of opportunity. We have never really had a focused effort on the spot market, on the transactional market. We've always been heavily contracted. And that's going to continue to be the core of our model. But at the same time, having that transactional capability is a significant opportunity and it's also something that a lot of our customers wanted us to develop. So we put significant resources towards that effort and it's performed very well in the second quarter. It's getting to a point where it's paying for itself and then some, and it's also providing a really good service for our core customers. So there's a lot of upside there, and we think there's also a lot of upside in our more contractual business model as well. Their efforts have been all about focusing on things that they can execute on. And thus far that's produced a lot of benefits and made a lot of progress in an operation that was not performing as well as it could have been.

No, that's helpful. And are you still – in general, would you say that over the last several quarters we've seen a fairly tight capacity environment and maybe over the last two or three quarters there have been spot opportunities for brokers. Are you still seeing a healthy environment for kind of transactional and spot business with tight capacity, or have you seen more of a loosening and less spot opportunities and so forth? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: I think the overall market has been pretty soft. There's been a fair amount of capacity out there. I don't think it's an ideal market by any means for a transactional or a spot player. We're starting from scratch here essentially, but I think they've been successful in spite of the fact that it hasn't been an ideal environment and as capacity tightens up – and we think that will happen over the course of the next several years, the value proposition of this transactional capability will become that much stronger. So we don't think that this is something that the market has pushed the success here, we think it's something that quite to the contrary, if anything, bit of a headwind.

Okay. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And we think for this year, Matt, that we'll have a low double-digit growth for highway for the year.

Okay, great. Thanks for your color.

And our next question comes from Casey Deak with Wells Fargo.

Thank you. Just wanted to piggyback on Matt's earlier question on share gains. How much capacity do you feel that your rail partners have that they could allocate to increased volumes and new business? Where would that kind of cap out and how do you think about that? David P. Yeager - Chairman & Chief Executive Officer: Yeah, I don't – that's all – that's been an age-old question and, of course, the railroads have been reinvesting on a regular basis. And I think, as a network, each of our partners is very well positioned to continue to grow their intermodal business. They both do have challenges in certain markets where they require additional investment in order to grow, but they are undertaking those investments as we speak. And so while it's not unlimited growth, it certainly – we've got a very long runway ahead of us we believe.

Okay. And then you turn to kind of how the customers are approaching it, are the customers frustrated with the rail service to the point of shopping IMCs to a greater extent in the market? Are you seeing them kind of look at you or look at your peers based on the rail provider and the partner that you use? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: I think that there are some customers that are very concerned about rail service and it's been now nearly a year when we've been – since we started having significant service issues. And there are some that are very concerned. Certainly, they're looking to see who the best performing networks are within intermodal. To be honest, we've also seen some customers who have made the decision to convert back from intermodal to over-the-road where they just felt that they couldn't get the service that they needed in order to be comfortable with the product. So we are hopeful and encouraged to see the numbers beginning to improve because we think that over the long term, intermodal is a better solution for most of these customers. But if the service issues were to continue for too long, then there is the possibility that you'd have more significant movement away from intermodal back to truck. There is some shopping among intermodal providers, though the reality is all the rail networks have been suffering since the meltdown last year. So there hasn't been a whole lot of service differentiation, if you will, across the rail system. So there hasn't been a lot of good choices.

Okay. Thank you.

And we have a question from Bill Greene with Morgan Stanley. Alexander Vecchio - Morgan Stanley & Co. LLC: Hi there. Good evening. It's Alex Vecchio in for Bill. So obviously, gross margins are kind of on the upward trajectory here as you're getting better pricing and service at the rails is improving. And your last peaked at around 14% gross margins in, I think, 2007, and I realize there's a little bit of a difference in the mix of business unit seems a bit larger and that might be a little bit of mixed headwind. But assuming kind of rail service gets back to more normalized levels and you're continuing to be able to price above the inflation from the rails, is there any reason you can't kind of get back to that level of gross margin structurally, or is that something we can kind of look forward to in the next few years? And maybe you can – if so, can you kind of give some color as to how long it might take to get back there? Mark A. Yeager - Vice Chairman, President & Chief Operating Officer: Sure. I don't think that there's anything necessarily structural that would prevent us from getting back to historic margin levels. You're correct, in that, the mix to a certain extent certainly plays a big factor there, logistics being inherently a lower margin business than the other sectors. We would need to see highway continue to grow since it's our highest margin line of business. There's no question about that. We also would probably need to see several positive pricing cycles, similar to what we're experiencing this year. If we were to get this for two more pricing cycles, have highway growing well, get our utilization back on track and do a good job of managing our underline dray costs, there's no reason we can't get back to those historic margin levels. Alexander Vecchio - Morgan Stanley & Co. LLC: Okay. That's helpful. And then just a point of clarification, Terri, within your guidance for $1.85 to $2, are you assuming 1Q EPS of the GAAP $0.28 or the adjusted $0.32? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: The adjusted $0.32. Alexander Vecchio - Morgan Stanley & Co. LLC: Okay, great. Thanks very much for the time.

And our next question comes from Tyler Brown with Raymond James. Patrick Tyler Brown - Raymond James & Associates, Inc.: Hey. Good afternoon. Hey, curious if – hey, I was just curious and correct me if I'm wrong here, but the data seems to bear out that the rail controlled market is growing quite a bit faster than the privately owned rail market within the broader domestic intermodal market. I'm curious if you're seeing that or if you have any thoughts as to why that might be? Are the rails pushing that rail control the EMP or UMAX fleets harder out there or is it that the IMCs? David P. Yeager - Chairman & Chief Executive Officer: I'm not sure that that is a correct assumption at all candor. I was under the impression, as an example, for our eastern part and Norfolk Southern that that was relatively flattish and, of course, we had some pretty decent growth on them as well as on Union Pacific with our local West business. So I'm not sure that that's actually accurate at this point. I mean, certainly, the IMCs and we've seen it with Mode, are growing with the intermodal product. But there is nothing that the railroads are tempting to direct for the railroad owned equipment to be growing at a faster pace than what the private market is doing. Patrick Tyler Brown - Raymond James & Associates, Inc.: Okay. That's fair. So you haven't seen any change of pricing behavior on that rail controlled product in the market at all? David P. Yeager - Chairman & Chief Executive Officer: No. The rails change their pricing with the rail controlled product all the time, but it's dependent upon market forces. Patrick Tyler Brown - Raymond James & Associates, Inc.: Okay. All right. Thank you.

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

Hey, guys. Actually my follow-up was asked, so I'm all good. Thank you. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Okay.

And we have no further questions at this time. I will now turn the call back over to Dave Yeager. David P. Yeager - Chairman & Chief Executive Officer: Well, again, thank you for joining us on our second quarter earnings call. And, as always, if you have any questions, et cetera, please feel free to contact Terri, Mark or I. Have a great day.

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