Hub Group, Inc. (HUBG) Q1 2016 Earnings Report, Transcript and Summary

Hello, and welcome to the Hub Group First Quarter 2016 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO; Don Maltby, 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 the call represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate and project. Actual results may 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, and thank everyone here for participating in Hub Group's first quarter earnings call. I'm joined today by Don Maltby, Hub's President and Chief Operating Officer, and Terri Pizzuto, our Chief Financial Officer. We had a strong first quarter with slight declines in volume in January and March and solid increases in February. Historically, we've seen a spike in business out of the southeastern part of the U.S. each spring. That did not occur this year as our customers' inventories continue to be larger than normal and truck load demand remains muted. On our last call, we talked about the internal changes within Hub as we realigned Intermodal operations to be managed by our Account Management team. This change has already reaped benefits as Hub's on-time performance with our customers was up 430 basis points during the first quarter and has improved 200 basis points versus 2013 when rail service was at its best. The realignment is also creating significant reductions in our operating costs with further enhancements on the drawing board. On the acquisition front, we're actively pursuing several potential candidates. As we discussed previously, Hub intends to use its balance sheet to continue to invest in our core business, but also to diversify our service offerings to our clients. And we feel the best way to diversify is through acquisition. I'll now discuss the Intermodal results for the first quarter. This will be followed by Don, who will provide the details on truck brokerage, Unyson and Mode. For the first quarter, our consolidated Intermodal volume increased just over 3%. Local East was down 7%, while Transcon grew 8%, and Local West was up 9%. Mexico continues to show positive growth with a volume increase of 24% for the first quarter. Thus far in April, we are down slightly in Intermodal volume as a result of less demand from our clients as well as a highly competitive price environment. Despite an industry slowdown and the aggressive pricing environment, we remain confident that our Intermodal volume will continue to grow between 2% to 4% for the remainder of this year. Overall, rail service continues to be very strong. For the first quarter, rail on-time performance improved 27% on a year-over-year basis and 8% sequentially. Fleet turns improved by six-tenths of a day to 15 days on average. We believe there's still room to enhance our utilization and we'll continue to focus on that area. Our fleet size is currently 29,000 containers. We intend to purchase 4,000 units this year, of which 3,300 will be replacements and 700 will be additions to the fleet. 1,500 of the container order have already arrived in the U.S., and I would add that we do have the ability to flex up our container order if market conditions improve. Pricing is very competitive this year in the truckload market. Given the low price of fuel and the plentiful truck capacity, we've seen more Intermodal volume convert to truck than in previous years. There's also been a lot of pricing pressure from our modal competitors in this soft freight market. Last year's pricing environment was the strongest we have seen in many years. This year's pricing environment is much more challenging. But we do believe that Hub's service and price value proposition will allow us to continue to grow despite the competitive market conditions. And with that, I'll pass the call on to Don to guide you through the specifics of our business segments. Donald G. Maltby - President & Chief Operating Officer: Great. Thank you, David. I would now like to shed some additional light on our results and some insight into our business units. Obviously, we are pleased with the results along with the progress we are making with our 2016 initiatives that are focused on growth, margin enhancement and operational improvements across all our lines of business. Our Account Management leadership team along with our Intermodal business unit have done a very good job in streamlining our processes, which has reduced our operating costs and improved our overall service to our customers. In fact, our overall service performance is at the highest level in years. With these improvements combined with a better aligned sales structure, we are now better positioned to grow share across all of our business lines. In addition, we have also started our next phase of improving our technology platform by identifying key drivers of success and workflow enhancements. We are in the early stages of this project, but expect to start implementing our streamlined process improvements over the next few quarters. In addition to the workflow enhancements of our Intermodal product, we have also made some very nice progress with the implementation of our multi-modal account management teams as we are currently on pace to have the majority of our business under this model by year's end. We also onboarded additional Unyson customers to our new technology platform which continues to provide us insight into the future state across our enterprise. Our focus remains on growing each of our business lines through directed selling efforts, improved cross-selling and refining our operational efficiencies to improve service levels. Now let's talk about the business units. Mode Transportation produced gross margin growth of 13% in the first quarter and delivered operating income of 24%. These results constitute the sixteenth consecutive quarter of year-over-year gross margin and operating income growth. Consistent with the way that 2015 closed, Mode again saw strength in all service lines. Intermodal led volume growth with 9%, and truckload was also strong with 6% growth year-over-year. Mode is off to a strong start toward its growth plan for 2016 with several new business implementations that are currently underway. Additionally in the quarter, we added four new IBOs to the network, and we continue to aggressively work a strong pipeline for agent candidates. Truck brokerage. Our truck brokerage division continued to show positive signs of growth. Hub Highway was able to grow 5% in spite of a soft truckload market. The focus remains on targeting customers for growth opportunities and integrating our value-added services. Our Highway team is successfully navigating through a very tough market by increasing cross-selling opportunities, targeting customers and markets while leveraging the carrier relationship to source capacity at profitable levels. We remain quite focused on continuing to grow this business unit and expect that 2016 will continue to offer both challenges and opportunities. We remain optimistic about our ability to continue to grow in this very important service line. Logistics. During the quarter, logistics again demonstrated margin and bottom-line growth through our margin enhancement initiatives along with efficiency gains. As we expected, logistics revenue declined 10% for the quarter, largely due to a loss of a sizable account in May of 2015. Our logistics service offering remained strong as we continue to provide creative logistics solutions that optimize transportation to produce significant customer savings while also enhancing our margin. In the first quarter, we onboarded several new customers and have additional onboardings scheduled in the second quarter. These new customer onboardings and aggressive organic growth plan and a strong sales pipeline have positioned our logistics division to grow the top line in the second half of 2016. Now, I'll turn the call over to Terri for the financial discussion. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Thank you, Don, and hello, everyone. As usual, I'd like to highlight three points. First, despite the tough freight market, we had another amazing quarter with every business line from both segments contributing to our best ever first quarter earnings per share. Second, through the day, we've completed 60% of our $100 million share repurchase authorization. And third, as the quarter progressed, we saw more challenging environment for Intermodal volume and pricing. Here are the key numbers for the first quarter. There are several one-time costs that I will explain. First, in connection with shutting down our Hub Group Trucking terminal in Los Angeles, we incurred severance and other costs totaling approximately $3.1 million. $2 million of these costs are included in purchased transportation and reduced gross margin. Second, we incurred approximately $1 million of severance cost in connection with management changes. In the first quarter 2015, we had one-time costs totaling $2.3 million, which included $900,000 of severance and $1.4 million of Canadian currency translation loss. All the numbers that I'm going to report today have been adjusted to exclude the $4.1 million of one-time costs in 2016, which represent $0.07 per share, and the $2.3 million of one-time costs in 2015, which represents $0.04 per share. Hub Group's revenue decreased 4% to $806 million due to lower fuel revenue. Hub Group's diluted earnings per share increased 81% to $0.58. Now, I'll discuss details for the quarter starting with the financial performance of the Hub segment. The Hub segment generated revenue of $615 million, which is a 4% decline compared to last year. Taking a look at our business lines, Intermodal revenue was down 2%. The revenue decline was due to lower fuel revenue. Partly offsetting the decline was a 1% increase in Intermodal loads. Price and mix were also up. The volume growth was driven by a 7% increase in loads from retail customers and a 22% increase in loads from automotive customers. These increases were partially offset by a 4% decline in loads from durable goods customers. Truck brokerage revenue was down 9%. Truck brokerage handled 5% more loads, but fuel price and mix combined were down 14%. Logistics revenue decreased 10%. This decline is due primarily to losing a customer in May of last year and customers' business levels being down. Hub's gross margin increased by $18 million, or 29%. Gross margin as a percentage of sales was 13.2%, or 340 basis points higher than the first quarter of 2015. Intermodal gross margin increased because of price increases, improved accessorial management and lower drayage cost. Rail cost increases partially offset some of this improvement. These same factors drove a 400 basis point improvement in Intermodal gross margin as a percentage of sales. Truck brokerage margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales was up 340 basis points due to value-added services and better purchasing. Logistics gross margin increased due to improved customer mix. Logistics gross margin as a percentage of sales was up 140 basis points due to operational efficiencies, customer mix and more cost-effective purchasing. Sequentially compared to the fourth quarter of 2015, the Hub segment gross margin as a percentage of sales increased 60 basis points. Intermodal gross margin improved 50 basis points, truck brokerage increased 80 basis points and logistics was up 70 basis points. Hub's costs and expenses increased $6 million to $55 million in the first quarter of 2016 compared to $49 million in 2015. The increase relates to a $4 million increase in salaries and benefits and a $2 million increase in general and administrative expense. Salaries and benefits are up due to higher head count, annual employee raises and an increase in commission. General and administrative costs are higher because of an increase in IT costs, including costs for our new transportation management system and satellite tracking unit. Finally, operating margin for the Hub segment was 4.3%, which was 200 basis points higher than last year's 2.3%. Now, I'll discuss our Mode segment results. Mode had a strong quarter. Revenue was $209 million, which is down 2% from last year due to lower fuel revenue. The revenue breaks down as $113 million in Intermodal, which was up 2%; $67 million in truck brokerage, which was down 9%; and $29 million in logistics, which was up 2%. Mode's gross margin increased $3.3 million year-over-year due to growth in Intermodal and truck brokerage. Gross margin as a percentage of sales was 14% compared to 12.1% last year due to a 170 basis point improvement in Intermodal yield and a 315 basis point improvement in truck brokerage yield. Mode's total cost and expenses increased $2.1 million compared to last year primarily because of an increase in agent commission. And finally, operating margin from Mode was 3% compared to 2.4% last year. Turning now to head count for Hub Group. We had 1,638 employees, excluding drivers, at the end of March. That's up 41 people from the end of December. Now, I'll discuss our expectations for the year. We believe that our 2016 diluted earnings per share will range from $2.15 to $2.30. This guidance excludes one-time costs in the first quarter and includes the impact of expected share repurchases. We anticipate rail service will continue to improve and that utilization this year will be one day better than last year. We expect gross margin as a percentage of sales for the year to range from 11.7% to 12.7%. The main levers to get to the high end are the level of price increases, growth in truck brokerage and at Mode, and increased operational efficiency. We think that our quarterly costs and expenses will range between $79 million and $83 million. Turning now to the balance sheet and how we used our cash. We ended the quarter with $200 million in cash and $140 million in debt, including capitalized leases. We spent $5 million on capital expenditures this quarter for IT projects and satellite tracking units. In 2016, we expect to purchase 4,000 containers. We've already received 1,500 containers that will be financed with debt. We're also investing in technology projects, including transportation management systems and satellite tracking. We haven't decided if we'll finance the remaining 2,500 containers using debt or operating leases. If we finance with operating leases, we estimate our capital expenditures will range from $45 million to $55 million. If we finance with debt, we estimate our capital expenditures will range from $70 million to $80 million. And to wrap it up on a positive note, we purchased 1,213,082 shares of stock for $42.4 million during the quarter. Through today, we've purchased 1,667,811 shares of stock for $60 million, and we intend to aggressively execute on the $40 million that remains on our share repurchase authorization. Dave, over to you for closing remarks. David P. Yeager - Chairman & Chief Executive Officer: Great. Thank you, Terri. In conclusion, we're very pleased with our first quarter results. Yet again, every business line contributed to the earnings growth. We remain focused on providing our customers with an excellent value proposition of price and service in what is a very competitive environment. Ultimately, this focus will allow Hub to continue to grow with existing clients and in securing new relationships. And with that, we'll open the line for any questions.

Thank you. We will now begin the question-and-answer session. And the first question comes from John Barnes from RBC. Please go ahead.

Hey. Good afternoon, guys. Nice quarter. Just two questions. Number one, can you just elaborate a little bit as to what you're seeing in terms of Intermodal pricing to your customer base, how receptive there you are to rate increases and just the competition you are seeing either from intermodal players or in the truckload market as well? David P. Yeager - Chairman & Chief Executive Officer: Sure, John, this is Dave. There's no question that it's a soft market out there. We're seeing the over-the-road carriers being very aggressive even on what has been traditionally a lot of short haul intermodal lanes, i.e. the local East in particular was where we see most of the aggression. And so with the soft demand right now, the choppy economy, high inventory levels, we're certainly seeing the over-the-road motor carriers (20:42). And as I have said in my formal remarks, we have actually seen greater amounts of conversion back to over-the-road from intermodal than we've seen in many, many years. From an Intermodal perspective, we're also seeing a very competitive environment with the most recent bids. As usual, we're not reacting either downward or upward as quickly or as dramatically as what the truckload sector's doing but there's no question that there is price competition. But we believe that over the course of the year, it'll be up slightly to flattish from an Intermodal perspective. So competitive, yes. But again, we're not feeling the pinch, I don't think, quite as much as the motor carrier industry is.

Was the pricing strong enough to offset the rail increases that you experienced in the quarter? David P. Yeager - Chairman & Chief Executive Officer: You know, it was to a degree. A part of it is, probably about 50% of it is enough. But we're also, as some of Terri's remarks and Don's remarks had indicated, we're working a lot on internal efficiencies as well, whether it's accessorial reductions, speeding up the transit of the overall box. And so, with that, we feel as though we'll still be able to minimally maintain margins and probably more than likely be able to continue to enhance them. So we feel pretty good about the environment and where we are with our rail partners at this point.

All right. So you're saying that 50% of the rail rate increase you were able to cover with your own pricing initiatives, and 50% you were able to cover with the other efficiencies, box turns, drayage, and the like? David P. Yeager - Chairman & Chief Executive Officer: Right. And it's still early. I would point that out. It's still early in the bid cycle. But yes, that is our plan right now. We're not going to be able to cover the entire rail increase with price increases to our clients. It's just not going to happen. Donald G. Maltby - President & Chief Operating Officer: Yeah. David P. Yeager - Chairman & Chief Executive Officer: Not and maintain our overall volume levels.

And is that 50/50, should we think about it – that split covering the rail increases for the balance of the year or does the internal initiatives on box turn and drayage and that kind of thing become more important as the year progresses? David P. Yeager - Chairman & Chief Executive Officer: That's very important, and I think it will become more so important over the course of the year as – again, many of these initiatives are still very young in their infancy but we've seen very strong results very quickly. I'm very, very happy with the excellent progress we've seen in a relatively short time. Donald G. Maltby - President & Chief Operating Officer: Still in the early stages of it. So I think your observation is correct.

Okay. All right. Again, nice quarter. Thanks for the time. David P. Yeager - Chairman & Chief Executive Officer: Thanks, John.

And our next question comes from Ben Hartford from Robert W. Baird. Please go ahead. Ben J. Hartford - Robert W. Baird & Co., Inc. (Broker): Yeah, good afternoon. Thanks. Terri, I'm just curious about the guidance. You're including the share repurchase activity done to date in that number. You had said $2.15 to $2.30, is that right? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: That's correct. Ben J. Hartford - Robert W. Baird & Co., Inc. (Broker): Okay. So the way that you're looking at it, is the outlook here for the balance of the year weaker than expected because of the competitiveness in the environment, which is more than offsetting the upside in the first quarter? Is that a fair way to think about the guidance? It looks pretty straight forward. I just wanted to confirm that. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. Let me give you a little more information on it, John. First, we changed the guidance to include the share repurchases because we've now repurchased $60 million worth of stock and we intend to aggressively execute on the remaining $40 million authorization. So the impact of the share repurchases included in our guidance is about $0.11. We're also bringing guidance down by $0.08 because we've seen a more challenging environment for Intermodal pricing and volume. We're in the middle of this season and in March we saw volume decline and more pricing pressure and we're trying to be realistic about our expectations and will have more insight when we report on the second quarter in July. Ben J. Hartford - Robert W. Baird & Co., Inc. (Broker): Okay. That's helpful. Thanks. And then, Dave, and maybe Don as well, I mean, given the competitiveness on the Intermodal side I don't want to harp too much on that. You guys made great progress in the first quarter. You talked about the ability to flex up the container order, but what would it take for you to flex that down? Are you looking at the adds that you're coming, that you're bringing in as opportunities to fill your own cans at the expense of some of the free running equipment? I would be interested in your perspective in terms of how you're looking at those adds, whether those adds could turn into potential deletions as we go deeper into the year? David P. Yeager - Chairman & Chief Executive Officer: Okay. That's a good question. As far as the neutral rail fleet, we really liked the neutral rail fleet being as we're on UP and Norfolk Southern, we use the EMP fleet and we have a very good relationship. If we're not the largest user of EMP on both railroads, we're one of the largest users. So we don't intend to decrease our participation there. I think that the way we're looking at it is that we do believe we're going to grow 2% to 4% this year in overall volume. We think that as part of that the enhanced rail service will offer us some amount of fleet expansion, if you will, just because our fleet will turn quicker, but we will need minimally that amount of boxes for just to handle the business that we expect to come on board this year. So in the aggregate, I think that that's safe. We do not intend; we don't have a plan to decrease the number from 4,000 boxes and if anything, we believe that if the economy does, in fact, come back, we want that capability to add another 1,000 or 2,000 boxes to be able to supply our customers' needs. Ben J. Hartford - Robert W. Baird & Co., Inc. (Broker): Okay. Thank you. David P. Yeager - Chairman & Chief Executive Officer: Don, do you have anything to...? Donald G. Maltby - President & Chief Operating Officer: No. I think we're positioned now to grow our business and we're confident in our ability to do so, and I think the 2% to 4% is in the range that we want to be and I think the new equipment will help us do that.

And our next question comes from Justin Long with Stephens, Incorporated. Please go ahead.

Thanks, and good afternoon. So, Terri, correct me if I'm wrong. But I think you talked about gross margins this year being somewhere between 11.7% and 12.7%, which implied a sequential decline in margins versus what we saw in the first quarter. So I was just wondering if you could provide some more color on the areas of the business that you expect to be the key drivers to that sequential decline. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Sure. You're right on exactly what I said and we – let me talk a little bit about the Hub segment first. We hope to improve gross margins from where we were in 2015. In 2015, we ended up with 11% margins at the Hub segment. So we hope to improve on that and have margins of between, say, between 11.5% and 12% in 2016 for the year. We're not going to provide quarterly guidance but as we lapped the 2015 price increases and assuming we don't get as much price in 2016, as we did in 2015, we expect the yields to go down as the year progresses. And then, for the Mode segment, we also expect yields to go down as the year progresses because of the same pressures in the macro environment.

Okay. Great. And is there any more color you can provide looking at that consolidated gross margin guidance in terms of the quarterly cadence? And what do you expect in 2Q versus the back half of the year? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Well it will go down progressively as each – the yield will go down progressively each quarter and in Q2 we have some. We've seen already pricing declines somewhat from March and April, and we have also got rail cost increases from our Western partner and our Eastern partner going in on June 1. So that will bring the margin down a bit in the second quarter from the first quarter. And then it just goes on down the line from there as we lap the price increase that we got in 2015 midyear of 2016.

Okay. Great. And maybe for a last question. So there are a lot of internal initiatives you have going on to improve margins. And I was wondering if you are able to summarize the expected impact from all of these items in 2016? If you just combine the benefit of all these what I would classify as kind of self-help items, all else being equal, what's the dollar amount of savings you expect this year? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Well, we can tell you that we hope to improve utilization by one day. That's one initiative. That's $6 million annually. We have several levers to pull there, including improved operations on the street, improved rail service and our satellite tracking unit. We do expect to realize dray cost savings by using the best carrier from a cost and service perspective, and by improving loaded miles. Our external dray spend last year was about $200 million. So, just saving a small portion of that goes a long way. And for every 100 basis point improvement in loaded miles it's about $3 million annually. Donald G. Maltby - President & Chief Operating Officer: Right. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And then we expect accessorial improvement, we'll do that by reducing costs through improved operational processes and collaborating with our customers. Donald G. Maltby - President & Chief Operating Officer: And we have seen that already and again, we are back – we are in the third inning of that game. So we are early in that process, and we have already started to see the cost takeouts. So you take the combination of the rail increases with the efficiencies that we are gaining, we figure it's around 50%. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. I would also add to what Dave had mentioned earlier. The realignment of our operations really helped us achieve our cost savings in the first quarter, and we expect that to continue for the rest of the year.

Okay, that's all really helpful. Thanks so much for the time.

And our next question comes from Todd Fowler from KeyBanc Capital Markets. Please go ahead.

Great, thanks. Good afternoon. I guess just a follow-up on the guidance and maybe this is overly simplistic but when I think about the $0.58 here in the first quarter, and I annualize that, it puts me at the high end, a little bit above the high end of the guidance range. And I understand in response to Justin's question, some the gross margin pressure that's going to be coming throughout the year. But is it really all just – I mean, the price competition that you're seeing within the market and the rail cost increases or is there something else that has a very different seasonal pattern, I guess, to earnings than what you've experienced in the past? David P. Yeager - Chairman & Chief Executive Officer: Todd, this is Dave. It's really not. It is those two items. It is the rail increases and it's just the competitive environment that we are currently in. Just those two factors alone are enough to drive that.

And between the two, Dave, I mean, have the rail cost increases been a higher magnitude than what you were anticipating back at the beginning of the year? Or have those been in line and it's really just the pricing pressure within the market? David P. Yeager - Chairman & Chief Executive Officer: No, the rails are pretty much in line with what we anticipated. It's really looking at the price competitive nature of today's market. We candidly, if you recall in the fourth quarter, we actually did not – although many people did not see a peak, we did. We also – we had very strong volumes and I think we were a little bit insulated from what was occurring for last year. And certainly in the light of the day, as we're seeing 2016, it's just, it's a very soft freight economy right now. And so we have to react accordingly to what our competitive position is.

Okay. And is some of that the need to maintain the network balance as well and to make sure that you have – it's not just going after share of growth, it's just to make sure that you got the balance within the network. Is that part of the equation? David P. Yeager - Chairman & Chief Executive Officer: Absolutely. That is critical to – whenever you have as many assets as we do, you need to have your balance. You need to continue to grow, enhance your network and certainly to maintain the balance. That's critical importance.

Okay. And then just for my follow-up, can you give us just an idea on the acquisition front? I am sure that you probably don't want to talk about specific companies, but just a broad brush of areas that you're looking at and kind of sizing that sort of thing where you're at in the process? I think that would be helpful. David P. Yeager - Chairman & Chief Executive Officer: Sure. We've been looking at a dedicated operation in some length. We also are currently looking at a logistics company that is both – some of it actually is air freight but a great deal of it also is transportation management related. And so they are all pretty much within the line of what we had outlined previously that, again, we are very interested in dedicated, we are very interested in outsourced logistics of various type, whether it's transportation management, cross docking, all those types of operations or whatever of particular interest, and we've maintained that focus. We're not suddenly looking to purchase a large international freight forwarder or a small international freight forwarder, even worse. We're keeping very focused on the areas we think that are going to be very sellable business lines to our clients.

Okay. That helps. Thanks again for the time and congratulations. Donald G. Maltby - President & Chief Operating Officer: Thanks, Todd. David P. Yeager - Chairman & Chief Executive Officer: Thank you, Todd.

And our next question comes from Kelly Dougherty from Macquarie. Please go ahead. Kelly Dougherty - Macquarie Capital (USA), Inc.: Hey, everybody. Thanks for taking the question. Just a quick one. Am I right that you were previously expecting to grow Intermodal volumes kind of 1% to 3% in 2016? Because it now looks like you are saying (35:15) 2% to 4%, but at the same time the pricing and the volume is more challenging. So, just wondering if the first quarter was a lot better than you had expected or maybe what might explain that increase? Donald G. Maltby - President & Chief Operating Officer: Yeah. Kelly, this is Don. What we feel is that we've been working on our operational efficiencies in the company and getting our service levels up to where we'd be more attractive to gain new customers, and we feel that we're there and our focus now is growing through target accounts, cross-selling opportunities, and we're positioned better now, and we think that the 2% to 4% is in line with what we think in a tough market. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And you're right, Kelly. You have that right. We did say 1% to 3% last quarter. Kelly Dougherty - Macquarie Capital (USA), Inc.: Okay. So you think – I guess, I am just trying to get my head around – you think the volume can be stronger, which I understand from a service and that perspective, but the margins look like they're also going to be a little bit higher than you were saying before, even though it looks like pricing is more difficult. So, I guess, the upside comes on – Don, maybe when you were talking about some of the operational efficiencies are just coming through faster and maybe to a greater magnitude than you had expected? Donald G. Maltby - President & Chief Operating Officer: I think we've got off to a good start, but as I said, I think we're in the early stages of it. I think it'll get better as the year goes on as we meld our operations groups together and implement our account management teams. So we're confident in that ability, but we're also confident in being able to grow share with not only the existing customers and also new customers that we don't have business with today. We're in early stages of our bid cycle and what we're seeing is, especially in the local east, the truck prices are going down faster, obviously, than what the other intermodal providers are doing. So we're watching that closely, but we feel we're very competitive in the marketplace and we'll be able to grab that share that we need. Kelly Dougherty - Macquarie Capital (USA), Inc.: Okay, great. Thanks. And just a quick one on the logistics side. You'd talked on the last call about expectation to win more business, which you'll second half in. Can you maybe help us think about the magnitude or the cadence throughout the year on the revenue side and how it should help improve the margins? Because I think that that business is all coming on at a much better profitability profile than you had in the past. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. You're right, Kelly. We expect revenue for the year for logistics to be up mid single to high single-digits, and that growth is in the back half of the year, and we – Don talked about the business that we onboarded in the first quarter for logistics. That would be about $35 million annually. Some of that business is from new customers and some from existing customers. The beauty of that business is we're saving our customer's money and it's in a variety of our service lines. And then he also talked about onboarding business in Q2, and that's minimally $30 million annually and the pipeline is pretty strong. Donald G. Maltby - President & Chief Operating Officer: Correct. Kelly Dougherty - Macquarie Capital (USA), Inc.: Thank you for that. Are there any kind of start-up costs or anything associated with onboarding this business that might impact the margins initially and then they improve thereafter? I am not exactly sure how it works on that side. Donald G. Maltby - President & Chief Operating Officer: Two-fold. One is – this is Don again. Sorry. There's an onboarding cost that's generally a transfer with our customer. But then secondly, as you onboard the customer, it takes time to ramp it up to get to the margin levels you need. Generally, it's 90 days. 90 days after startup, you should start to see the margin levels that you expected. Kelly Dougherty - Macquarie Capital (USA), Inc.: And have you said what those margin levels would be? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: No. We haven't said specifically what they'd be. Last year – as compared to last year, we would say that yields would go up in logistics by 50 to 100 basis points. Kelly Dougherty - Macquarie Capital (USA), Inc.: Okay. Great. Thanks very much, guys. Donald G. Maltby - President & Chief Operating Officer: Thank you.

And the next question comes from Kevin Sterling from BB&T. Please go ahead. Kevin Wallance Sterling - BB&T Capital Markets: Thank you. Good evening and congratulations on a nice quarter in a challenging environment. David P. Yeager - Chairman & Chief Executive Officer: Thanks, Kevin. Donald G. Maltby - President & Chief Operating Officer: Thank you. Kevin Wallance Sterling - BB&T Capital Markets: Dave or Terri or Don, did you guys tell us what your box turns were in the quarter? David P. Yeager - Chairman & Chief Executive Officer: They were 15 days. Kevin Wallance Sterling - BB&T Capital Markets: 15 days. How does that compare to – if you don't mind, how does that compare to last quarter and a year ago? I know it's up, but just maybe for comparison purposes. David P. Yeager - Chairman & Chief Executive Officer: If I'm not mistaken, year-over-year, it's up six-tenths of a day? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Better by six-tenths of a day. David P. Yeager - Chairman & Chief Executive Officer: Yeah. Better by six-tenths of a day. It was 15.6 days before. And sequentially, Terri? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: In Q4, it was 15.4 days, so better than that, too. Kevin Wallance Sterling - BB&T Capital Markets: Okay. David P. Yeager - Chairman & Chief Executive Officer: Yeah. So that's something we certainly believe that we can continue to get better and better at as the rail service is now back to a good competitive level that was at 2013 and so, I think at the low point, we were at about 13.6 days or so? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. Yeah. 13.375 days. David P. Yeager - Chairman & Chief Executive Officer: 13.375 days. So I don't know that we'll get back there next quarter, but certainly that's one of our focuses. Kevin Wallance Sterling - BB&T Capital Markets: Okay. And so, obviously, you mentioned rail service driving that. I imagine, is satellite tracking helping as well? Donald G. Maltby - President & Chief Operating Officer: Yes. In a big way. We're roughly – 60% of our fleet is now completed, and we'll have the remainder of the fleet done by the end of the year. So it's just a tremendous asset. David P. Yeager - Chairman & Chief Executive Officer: Yes. And basically, Kevin, some of the statistics are actually kind of shocking to us because the average customer, this is the average of what we've seen, they don't call us for 24 hours once the container is made available to once it's empty. We now know that and so we can actually be a lot more proactive. And while it may not reduce it by an entire day itself, it should help reduce it by at least a half a day, particularly as we get the entire fleet with GPS units. Kevin Wallance Sterling - BB&T Capital Markets: Got you, got you. Okay. That makes sense. And Dave, I think also, too, you mentioned in your prepared remarks or in the Q&A, you said, I think, maybe particularly on the east you are seeing more conversion from the rail back to the highway. Do you anticipate that to continue? Do you maybe bleed into other markets or how should we think about that or – and what if maybe fuel – what impact would fuel play into that conversion as well? David P. Yeager - Chairman & Chief Executive Officer: Well, certainly, fuel is a major impact on it. It certainly reduces the motor carriers' costs and you combine that with the weak market we're in, I think local lease is particularly attractive to the carriers that might generally like to go at a 350, 400, 500-mile haul to lengthen to the large metropolitan consuming areas like Chicago to Harrisburg, Atlanta-Chicago. Those are areas that have a lot of round-trip business that we historically when freight has gotten soft, we've traditionally seen motor carriers come back in with aggressive pricing and that's what we're seeing today. Kevin Wallance Sterling - BB&T Capital Markets: Okay, got you. And last question, how much of your drayage now is internal versus external? What percent? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: 59% is internal now. David P. Yeager - Chairman & Chief Executive Officer: Versus 64% year-over-year. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Correct. David P. Yeager - Chairman & Chief Executive Officer: Okay. Kevin Wallance Sterling - BB&T Capital Markets: Okay. Great. That's all I had. Thanks, again, for your time. Donald G. Maltby - President & Chief Operating Officer: Thank you. David P. Yeager - Chairman & Chief Executive Officer: Thanks, Kevin.

And your next question comes from Scott Group from Wolfe Research. Please go ahead.

Hey. Thanks. Good afternoon, guys. David P. Yeager - Chairman & Chief Executive Officer: Hey, Scott.

So, I am not sure. Did you tell us or can you tell us what you think intermodal and truckload pricing are going to be this year? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: We think that for the whole year they'll be up low single-digits.

Okay. And then within the sequential gross margin compression you are expecting from the first quarter, is that weighted more towards intermodal or brokerage, Terri? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: It's weighted more towards Intermodal.

Yeah. I guess, that's much bigger. So, I guess, what I'm struggling with is we've been in pricing environments that are worse than – certainly worse than low single-digits. We've never seen such a sharp – we've never even seen close to such a sharp drop in gross margins from the first quarter to the rest of the year like you are talking about. So, I guess, I'm just struggling with what's really changing here. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: It's a challenging pricing environment and the price pressure we're seeing as well as the demand being not what – it's pretty soft. David P. Yeager - Chairman & Chief Executive Officer: Yeah, Scott, and I would – I'm not so sure that this is – this is a very competitive pricing environment right now, so I would not undersell that at all. And so I don't know that that's necessarily the direction. We're just reacting to the market, making sure that we maintain or grow share and service our clients effectively. And we just feel as though the margins are going to be compressed somewhat as we go through this cycle.

Okay. That makes sense. I was just – I guess, I am surprised, then, you still think you can get slightly positive pricing there? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: It's our best guess, right? Donald G. Maltby - President & Chief Operating Officer: Exactly. We're still very early in the overall bid cycle and 70% of our overall business is bid. David P. Yeager - Chairman & Chief Executive Officer: That's right. Donald G. Maltby - President & Chief Operating Officer: So as Terri had said earlier in her remarks, we will have a much better insight when we report in July, but that right now is our best guesstimate. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. And we're only 30% done with bids that are effective right now, so it's hard for us to know what the remaining 70%. David P. Yeager - Chairman & Chief Executive Officer: Hopefully we see inventory levels get drastically reduced and demand pick up, and then we're completely wrong. We would love to be wrong in that direction.

Sounds good. And just last question, Terri, on the guidance for operating expenses, assuming a pretty meaningful pickup, can you just talk about the puts and takes there? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. Our operating and expense guidance was lower than we projected for a couple of reasons in this first quarter. IT costs were lower than we projected, and we think that IT costs are going to catch up to projected levels for the rest of the year. In addition, our bonus was lower than we originally projected. Bonus is lower because our outlook for our Intermodal business for the rest of the year isn't as optimistic as it was at the time of our Q4 call because we've seen the challenging environment for Intermodal pricing and volume. And so, as a result of that, we lowered our bonus projection for the year, and that's why we brought our cost expense guidance down by $1 million a quarter.

Okay. Perfect. Thank you, guys. Appreciate it. David P. Yeager - Chairman & Chief Executive Officer: Thanks, Scott.

And your next question comes from Tom Wadewitz from UBS. Please go ahead.

Yeah. Good afternoon and congratulations on the strong quarter. It looks like very good results. Can you review the timing of the rail rate increases? Did you start paying higher rates on January 1 or is all of the rate increase on the June 1 that you talked about? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: This year, we had some rail cost increases go in in January and another portion will go in June 1.

So part of the rail pressure might have already been in the first quarter or is that the wrong way to look at it? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: A piece of it is, but not – the majority of it goes in June 1.

Okay. And I think this has come through in some of the questions before, but it just seems that with such a strong first quarter and even if the market's weak, it's kind of hard to see the numbers come in and deteriorate as much as you're talking about. So, I mean, is it fair to say that maybe you're being a little conservative with the full-year guidance or is it just that pricing maybe ends up being down and that's just so tough in terms of rail costs up and rail prices up and your pricing maybe down? Or how do you – it still seems like it's a little hard to match it together unless you're just saying, well, maybe it is a little conservative on the guidance. Donald G. Maltby - President & Chief Operating Officer: Well, Tom, you've covered us for a long time. We are always a little bit conservative on the guidance. But again, we're early in the bid cycle and so we are being on the conservative side here as far as what we believe the remainder of the year will play out. But again, it's a soft rate economy, it's an aggressive priced economy, and so we're going to react accordingly and make sure that we protect share and protect our clients.

Okay. I've got just one more, if I can sneak it in. What's the timing on the drayage? I mean, I guess, from a truck brokerage perspective in a weak market, you benefit on your buy of capacity. Do you have some of that dynamic in your drayage where it's not all contractually fixed and as the trucking market gets weaker and maybe dray costs go down, you can benefit near term on that? Or does that tend to be one-year contractual that you wouldn't see the benefit on the Intermodal dray? David P. Yeager - Chairman & Chief Executive Officer: Well, from a drayage perspective, first of all, we will see a benefit from closing our Los Angeles terminal throughout the year. That was a drag on all of 2015, and I would say not an inconsequential drag at that. As far as our pricing actions, as Terri had indicated, we're at 59% hub dray. We intend to continue to grow Hub Group Trucking where appropriate, as it is a very important part of our business from a strategic perspective, but we have had outsourcing events that will occur all the way through July. You don't want to go too much beyond that just because you get into peak season, you can get into capacity shortages, it's hard to execute, but we do believe we may see some, but very nominal cost. I think the biggest benefit you'll see in dray in 2016 versus 2015 is the closure of the LA terminal.

Right. Okay. Thank you for the time. Appreciate it. David P. Yeager - Chairman & Chief Executive Officer: Thank you.

And our next question comes from Alex Vecchio from Morgan Stanley. Please go ahead. Alexander Vecchio - Morgan Stanley & Co. LLC: Good afternoon, and thanks for taking the questions. In terms of the competitive pricing environment, to the extent you could kind of force rank where you're seeing the greatest pressure from and maybe kind of characterizing it in three buckets. One, the major intermodal player out there, two, other smaller IMCs, or three, the truckload market and the situation there with capacity and pricing, how would you kind of rank the pressures to Intermodal pricing between those three? David P. Yeager - Chairman & Chief Executive Officer: I think that if we looked at this, it's got to be kind of by region. If you look at local East, I would suggest to you that our largest competitor and the truckloads carriers are probably equally weighted at this point with the smaller weighting on the smaller IMCs. If you get to the longer lengths of haul, it's certainly your first question with our large competitor and not just them, though, but there is some other asset-based players which are being more aggressive in the market. So, I would say that our largest competitor would probably be one in the longer lengths of haul, but a not too distant second would be the smaller asset-based players and as well as we're seeing some of the smaller IMCs. But, we never really focus on them as much just simply because, from a competitive perspective, they're usually not quite in the same game as us just due to some of the efficiencies we have with the equipment and with the in-house drayage. Alexander Vecchio - Morgan Stanley & Co. LLC: Okay. That's helpful. And in terms of the large competitor, would you say some of their pricing behavior is outright irrational from your perspective or does it look more opportunistic in certain lanes where it makes sense from a balance standpoint? I just kind of want to get a sense for just that kind of dynamic there and the extent to which that's really pressuring the overall market? David P. Yeager - Chairman & Chief Executive Officer: Yeah. As we've evolved as an asset player ourselves, I think that I've found that really the pricing generally is never irrational that there's always a reason for it. There's some fit within a network that makes sense and that's the reason the prices go to levels that they do. And so, I would say not irrational. I would say aggressive in this market. I would say that what they're trying to make sure that they're turning their assets and they're turning them as quickly as possible. So, no, I wouldn't say irrational, but I would say aggressive. Donald G. Maltby - President & Chief Operating Officer: I would agree. Yeah. Alexander Vecchio - Morgan Stanley & Co. LLC: Okay. That's helpful. And then just lastly, Terri, on the first quarter, what were the total cost and expenses if we adjust for the one-timers? I came up with kind of $77 million, but I wanted to just double-check that? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. That's right, Alex. $77.5 million, yep. Perfect. Alexander Vecchio - Morgan Stanley & Co. LLC: Okay. Perfect. Thanks so much.

And our next question comes from Van Kegel from Barclays. Please go ahead.

Hi. This is Eric Morgan on from Barclays. I just wanted to come back to rail pricing real quick. Can you just talk about what willingness or flexibility you have with the contracts to adjust for cost increases, especially in what's clearly a weaker freight environment with rail volumes trending down 7% in Intermodal right now? David P. Yeager - Chairman & Chief Executive Officer: I would say that for the most part, our rail prices, while there may be some room for negotiation, it's very limited, and so for the most part, they're set. And so I think that the estimates that we have in our outlook for the year are going to be pretty accurate. So I don't see a whole lot of flexibility with that. Again, the railroads, I think that you'll find in all cases they have a certain amount of capital that they require in order to maintain their track, maintain their service, and so their fixed costs are something that we will have to contend with for many years to come whether it's a good market such as last year or a poor pricing environment such as we have this year.

Okay. And then maybe just one quick one on the cash priority discussion. Given where you are with the share repurchase program, just can you comment on potentially ramping that up even further? Or is that kind of off the table with the M&A you're looking at? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: We're going to execute on the $40 million that remains on our share repurchase authorization and we hope to do that in Q2 and Q3. And we had $200 million in cash at the end of March and so we have ample ability to do both share repurchases and an acquisition. And we'd look to next year before we'd do another share repurchase and see where we're are at in the acquisition market.

Got it. Okay. Thank you. David P. Yeager - Chairman & Chief Executive Officer: You're welcome.

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

Hey. Thanks. Good afternoon. Wanted to get some commentary in terms of Intermodal volume growth, how it progressed through first quarter? If you have the month-by-months, that would be great. And then I think you did mention that things are getting a little bit softer. And the second quarter thus far, April, if you're able to talk to maybe magnitude of that softness relative to 1Q, just trying to get a feel for what 2Q looks like right now versus what you put up in first quarter? David P. Yeager - Chairman & Chief Executive Officer: Yeah. Q1, it was a little bit choppy, January, and oddly enough, March were actually down. And I don't know the specific numbers. Terri, I don't know if we... Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Yeah. David P. Yeager - Chairman & Chief Executive Officer: But February was very strong and, which again is not necessarily historically the way you would expect it to follow. April, it's less than 1% we're down, so it's a de minimis amount. And so it's not something that we're overly concerned with. We really believe that the 2% to 4% volume increase for the year is a very fair estimate.

Okay. So down less than 1% in April, and it sounds like you're down a little bit in March as well. So it sounds like things are falling off a cliff here? David P. Yeager - Chairman & Chief Executive Officer: No. It's not falling off by any stretch of the imagination.

Okay. And then my second question. Is there any way to quantify or at least provide some incremental color in terms of how much Intermodal to over the road truck conversions were potentially a headwind for your volume growth this quarter? Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: Dave, I think they've said Local East was down 7% for the quarter. David P. Yeager - Chairman & Chief Executive Officer: Right. Terri A. Pizzuto - Chief Financial Officer, Treasurer & Executive VP: And you could say maybe half of that business went to truck. David P. Yeager - Chairman & Chief Executive Officer: Yeah. I think that's probably a fair assessment, Terri.

Has that changed it all in April? Do you have a sense for that? David P. Yeager - Chairman & Chief Executive Officer: We still see the trucking market very, very aggressive on their pricing in the Local East and that's something we don't think is going to change until we see demand increase pretty dramatically. So at this point in time, no. We're seeing the truckers very aggressive on pricing. So we would expect for that to continue in Local East business. Donald G. Maltby - President & Chief Operating Officer: Yeah. Anywhere from 350- to 700-mile range is the trucks have been very aggressive.

Okay. That's helpful. Appreciate the time.

And the next question comes from Matt Young from Morningstar. Please go ahead.

Good afternoon, and thanks for taking my question. If I could, I just wanted to go back real quick to the acquisition topic. You guys did mention transportation management is a focus. I just wanted to clarify if by saying that you were implying Highway Brokerage, I know that that can mean several different niches, so I just wanted to clarify that. David P. Yeager - Chairman & Chief Executive Officer: Yeah. With transportation, we would list out separately truck brokerage. Truck brokerage is kind of an – it's an interesting potential acquisition target, but it depends upon what it's going to do for us. Is it going to bring us technology we may not possess or processes? The cultures of so many of these startups are very foreign to Hub's culture, and so not all of them would be something that we could assimilate. You'd almost have to kind of let it go by itself. But transportation management, we really view transportation management as bringing technology to clients that allows them to better manage their supply chain. We have a strong offering with Unyson, but there may be other transportation management companies that possibly specialize in a vertical, a chemical vertical, a steel vertical, other areas such as that that that could be of great interest for us.

Okay. That makes sense. David P. Yeager - Chairman & Chief Executive Officer: So that's kind of how we define transportation management.

Okay. Thanks for the clarity on that. And then I guess one more question along those lines. Would you be looking for -- if you did look at truck brokerage, would you look at a Mode like model or would it be more of the company store, company employee model? David P. Yeager - Chairman & Chief Executive Officer: We have the best agent network right now out there in our minds, anyway, and so I think that it would be more company store focused. The pay could be different than us, but that is much more variable compensation as many of the models are. But, no, it would be a company store. Again, we really think that we've got the best agent model and we wouldn't be interested in expanding through acquisition in that area.

Fair enough. I appreciate it. Thanks.

We have no further questions at this time. I'll now turn the call back over to Dave Yeager for closing comments. David P. Yeager - Chairman & Chief Executive Officer: Great. Well again thank you, everyone, for joining us on our first quarter earnings call. As always, Terri, Don, and I are available if, in fact, you have further questions. Thank you.

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