Hub Group, Inc. (HUBG) Q2 2018 Earnings Report, Transcript and Summary

Hello, and welcome to the Hub Group Second Quarter 2018 Earnings Conference Call. David Yeager, Hub's CEO; Don Maltby, Hub's President and Chief Operating Officer; and Terri Pizzuto, Hub's CFO, are joining me on the call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call or contained in the release represent the company's 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 beliefs, expects, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to 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, David Yeager. You may begin. [05H3B5-E Dave Yeager] Good afternoon, and thank you for participating in Hub Group's second quarter earnings call. As we discussed in the first quarter, the market was very strong, with a robust economy coupled with ongoing capacity constraints. That momentum continued into the second quarter, as consolidated revenue grew 28%, while earnings per share grew 128% to $0.66 per share. Consolidated Intermodal volume for the quarter was up 6.5%, which is in line with the overall industry. Rail service is bottomed out and has begun to show some signs of improvement in both the east and the west. We believe that the investments our rail partners are making is being reflected in these service improvements. As anticipated, price did strengthen throughout the quarter, and we've now repriced over 60% of our business. Many of our awards have recently become effective, which will allow for continued yield improvement in the second half of the year. The yield improvement will be partially offset by rail and drayage cost increases. We are anticipating a very lengthy and strong peak shipping season. We've been in the process of planning for this peak with our clients since April, and are expecting an early peak that will have a long tail, much like 2017. We believe that a strong peak will contribute towards a positive pricing environment in 2019. As we've expressed in the past, Hub continues to look for acquisitions that would add value to our network and allow Hub to continue to diversify our product offerings. As we reviewed the organization and the acquisition pipeline, we believe that it is prudent to investigate strategic alternatives for Mode transportation. Mode has an excellent management team, with a strong solid agent base and loyal customers. While Mode has been quite successful in retaining and growing its client base and portfolio of services, there is a lack of strategic alignment with Hub's centralized business model. It is our intent to redeploy capital derived from a sale into acquisitions of new service lines, existing businesses and technology. These investments will create significant value for our shareholders, and help us to continue to build an even stronger platform for long-term success. We do not intend to provide any updates until we determine that further disclosure is appropriate. With that, I'd like to turn the call over to Don to talk about the performance of our business units.

Thank you, Dave. A strong quarter for all of our business lines, as we continue to see the results of implementing our strategy to be a premiere multi-modal service provider. In addition, we are seeing positive results from fully implementing the recent alignment we discussed at our last call. These improvements include equipment management, reductions in accessorials, and improved network balance. For the quarter, our Intermodal, Truck Brokerage, Logistics and Mode service lines all experienced year-over-year improvement. These results were attributed to our focus on service, which has allowed us to gain share with existing customers, new customers, and growth with our core and targeted customers. Our sales and account management organizations continue to cross sell all of our products, which has delivered positive growth trends, and a robust pipeline for all of our service lines. With bids now 60% complete, we've been able to gain share with existing clients, attract volume with new accounts, while also yielding up to support our network needs. With equipment being tight across our network in both Intermodal and Truck Brokerage, we continue to focus on targeted and strategic customers to drive efficiencies in our network, to improve box availability, and to provide the level of service and capacity our customers expect. Over the past few months, and as peak approaches, we've been diligent in working with our clients in establishing peak period plans so that we are in a position to best support them. We believe we are in a solid position to support and service our awarded business for both Intermodal and Truck Brokerage, while also at the same time, increasing yield and providing solutions with new opportunities. Now, let's talk about the business units. Truck Brokerage grew revenue by 10% in the quarter in a tight-capacity market, and was able to increase yield across our contracted, transactional and project business. Although capacity remained tight across the network, we were fortunate to drive growth in yield with our transactional and project business. Our diversified Truck Brokerage model allows us to flex with market conditions, while we continue to provide our customers with solutions. We believe we'll continue to see a tight truck market for the remainder of the year. However, our diversified portfolio of committed capacity, along with spot market support, have us well positioned for continued growth. Logistics grew top line revenue by 17%. The growth was driven by new accounts onboarded throughout 2017, as well as organic growth with our existing customers. During the quarter, we focused on cost control, process improvement initiatives and price increases. These price increases were to support our contracted business, along with transactional opportunities within our customer networks. We have new customer onboarding scheduled in the third quarter and fourth quarter, organic growth from existing customers and continued emphasis on yield, which will position Logistics to recover the lost ground we mentioned on the last call. We are continuing to invest in our logistic solutions as we onboard new customers and migrate from our legacy TMS to a standardized logistic solution technology across all modes. We believe this will greatly improve our operational platform, and will allow us to scale for future growth. Mode had very strong double-digit growth across all service lines. Logistics lead with 45% growth, Intermodal 26%, and truckload 24%. We were able to drive performance by using our experienced agent network to develop and provide multi-modal solutions in a very challenging constrained market. To support our overarching strategy, we continue to provide our customer solutions by tapping into our deep and loyal carrier base, while leveraging our newly-developed capacity tools. During the quarter, we recorded several new customer wins as customers seek Mode's breadth of services and capacity. Mode also continue to develop new technology applications, primarily focused on securing truckload capacity. The development of these technology applications will continue through 2018 and into 2019. Now, we'll turn it over to Terri, to review the numbers.

Thanks, Don, and hello, everyone. I'd like to highlight three points for the quarter; first, we're excited that operating income grew 93% compared to last year; second, Intermodal gross margin was at an all-time high; and third, we're raising our guidance for the year, because Intermodal pricing is higher than we anticipated when we released first quarter earnings. Now, let's take a more in-depth look at our performance in the second quarter. Hub Group's second quarter revenue increased 28% to $1.2 billion. Hub Group's diluted earnings per share was $0.66. This is compared to an adjusted 2017 diluted earnings per share of $0.44 that excludes one-time costs of about $4 million, and uses a 25% effective tax rate. That's an impressive 50% increase. Now, let's talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $888 million, which is a 26% increase compared to last year. This increase came from organic growth of 16%, and $73.9 million of revenue from Hub Dedicated, which we purchased on July 1st of 2017. Taking a closer look at our business lines, Intermodal revenue was up 17%, due to a combined 13% increase in fuel revenue, freight rates and mix, and a 4% increase in loads. Transcon volume was up 10%, local west volume was up 3%, and local east volume was up 3%. Truck Brokerage revenue was up 10%. Fuel price and mix combined were up 15%, and loads were down 5%. Logistics revenue increased 17%, due primarily to growth with existing customers. Hub's gross margin increased by $27.6 million, or 38%, due to the addition of Hub Group Dedicated, as well as growth in Intermodal and Truck Brokerage gross margin, partially offset by a slight decline in Logistics margin. Gross margin as a percentage of sales was 11.3%, or 100 basis points higher than last year. Intermodal gross margin increased due to price increases, improved accessorial recovery, higher volume and better network balance, which resulted in lower repo costs. Price increased sequentially as the quarter progressed. Partially offsetting this growth were rail cost increases and drayage cost increases for driver pay and third-party carriers. Second quarter average rail transits were up 7/10th of a day, which negatively impacted our results. All of these factors combined drove a 170-basis point improvement in Intermodal gross margin as a percentage of sales. Truck Brokerage gross margin increased primarily because of more spot business. Spot business was about 19% of total loads this year, compared to 13% in the second quarter of last year. Truck Brokerage gross margin as a percentage of sales was flat. Logistics gross margin declined about 3%, due to changes in customer mix, higher purchase transportation costs, and headwinds from the Toys 'R Us liquidation. These factors drove a 160-basis point decline in Logistics' gross margins as a percentage of sale. Costs and expenses increased $13.2 million to $75.3 million in the second quarter. The primary reason for the increase is the addition of Hub Dedicated's cost and expenses of $12.2 million, higher bonus, commission and due diligence expenses, partially offset by lower severance costs. Hub Dedicated's start-up cost associated with new business were approximately $3.2 million, and relate primarily to driver productivity and using third-party carriers. We are aggressively working on enhancing productivity. Finally, operating margin for the Hub segment was 2.8%, compared to 1.5% in 2017, or an improvement of 130 basis points. Now, I'll discuss results for our Mode segment. In the second quarter, Mode's revenue was $314 million, which was up 29% from last year due to an increase in revenue in all three service lines. Revenue breaks down as $141 million in Intermodal which was up 26%, $103 million in Truck Brokerage which was up 24%, and $70 million in Logistics, which was up 45%. Mode's gross margin increased $7.3 million year-over-year because of an increase in margin in all three service lines. Gross margin as a percentage of sales was 11.5%, compared to 11.8% last year due mostly to a 50-basis point decline in Intermodal margins. Mode's cost and expenses were up $6.3 million compared to last year, because of higher agency commission. Operating margin for Mode was 2.3% compared to 2.5% last year. Turning to head count for Hub Group, we had 2,077 employees, excluding drivers, at the end of June. That's up 68 people compared to the end of March. Turning now to the balance sheet and our cash. We ended the quarter with $26.8 million in cash, and $275.2 million in debt. Our leverage ratio was 1.3 times to 1 times. We spent $47.1 million on capital expenditures this quarter, mostly related to tractors, trailers and technology investments. Now, I'll discuss what we expect for 2018. We believe that our diluted earnings per share will range from $2.73 to $2.83. We estimate the Hub segment earnings per share for the full year will be between $2.11 and $2.21. And that the Mode segment's full year earnings per share will range from $0.57 to $0.67. We estimate 13% to 18% consolidated revenue growth for the year. By service line at the Hub segment, we expect 12% to 17% revenue growth in Intermodal, 5 to 10% growth in Truck Brokerage, and slight growth in Logistics revenue. We expect Dedicated sales in the last half of the year will range from $155 million to $165 million. We expect consolidated gross margin as a percentage of sales in the last half of the year will range from 12% to 13%. We believe that our quarterly cost and expenses will be between $112 million and $116 million in the last half of the year. We project that our effective income tax rate will range from 24.5% to 25.5%. Capital expenditures are expected to range from $200 million to $220 million in 2018. We're going to execute in our strategy, investing approximately $170 million to $180 million for equipment, and between $30 million and $40 million for technology. Included in this equipment spend is between $95 million and $100 million for Hub Group Dedicated related to both customer contract renewals and new customer wins. That wraps up the financials. Dave, over to you for closing remarks.

Thank you, Terri. Obviously, we're very pleased with the results from the second quarter. Intermodal is performing at record levels, and the other lines of business are also performing quite well. We believe that the investments we have made are bringing value in this rapidly-evolving market. We expect pricing in the second half of the year to sequentially improve in a capacity-constrained environment. We believe this will enhance our ability to increase price in the mid single-digits in 2019. And with that, we'll open up the line to any questions.

Thank you. We have a question from Scott Group from Wolfe Research. Please go ahead.

Hey thanks, afternoon guys.

Hi Scott.

So can you maybe talk about the volume trends in Intermodal throughout the quarter and so far in July? And then from a pricing standpoint, it looks like high single-digit pricing ex-fuel in the second quarter. Should we be getting to double-digit pricing in the back half of the year?

Well, as far as sequentially, we did have some increases that did sequentially get a bit better over the quarter. So it did go along quite well, and we continue to see a robust pipeline, and a strong, strong Intermodal business.

But you're right Scott, that we did get some double-digit increases from customers, but on an overall basis it's more like high single-digits. And as Dave said, pricing did increase sequentially as the quarter went on. And then we expect pricing to increase in Q3 and Q4. So we're happy with that. In terms of the volume, if you look at it by business day, April was flat, May was up 6%, and June was up 4%. And then July, our Intermodal volume was up 3.5%.

The issue's with the bids, the bids are 60% complete, and we're seeing the increases we thought we were going to see, which is certainly in the high single-digits.

Okay. So there's a lot of talk in the industry about what UP is doing, limiting volume, putting in big surcharges, caps. How's all of this impacting you?

Yeah. Scott, that doesn't really impact us because we have our own fleet on the Union Pacific. That's predominantly with their EMP and UMAX business, where I believe they feel as though at this point they've made all the commitments that in fact they can live up to this peak. So it does impacts us to a small extent, because we do use EMP, but it's very minor, and we feel very comfortable with the commitments that we've made to our customers, that we're going to be able to deliver the capacity that, in fact, we've committed to.

Right.

So along those lines I guess, Dave, do you have to pay peak surcharges to the rails this year, and are you confident about your ability to get peak surcharges?

We do feel very confident that we will have peak surcharges. In fact, any cost that we might have, we would be able to recoup. But as far as surcharges, we can't really get into the overall contract we have with the Union Pacific, but certainly, we feel very comfortable with it.

And our pricing with our customers is based on their commitment to us on volume, and how that spikes above that, as well we're able to get the surcharges.

Okay. And then one last one before I pass it along. So it looks like in 2011 you paid 11 times trailing EBITDA for Mode from Deutsche Post. Is that a fair way to think about valuation today on Mode?

Yeah, Scott. We really can't talk about that at this point in time.

Do you think there's something flawed in that thinking now?

No, I really don't have a comment on it.

Okay. All right. Thank you, guys.

Thanks, Scott.

And we have a question from Kevin Sterling from Seaport Global. Please go ahead.

Thank you. Good afternoon, Dave, Terri and Don.

Hi, Kevin.

Hey, Kevin.

Hi.

Congrats on a great quarter.

Thank you.

Thank you.

Yeah. Obviously, you guys aren't seeing any impact from trade wars tariffs. But maybe could you comment, just general, just some customer conversations, and things like that, and how they might be thinking about the back half of the year.

Yeah. We initiated peak planning with our client base actually as early as April. And we now have plans in place with all of our major retailers except for one that's finalized. So they feel as though it's going to be a very strong peak season. I think that everyone sees that inventory levels, while they might be a little bit looser than before, they're still pretty tight. And so we look forward to, and our clients have confirmed, a very strong peak shipping season.

Yeah. To Dave's point, I mean, when we started working with our clients back in April, they're all concerned about capacity during peak. So that's why we wanted to have a good dialogue with them and set expectations.

Right. And we do believe that the peak will be early, and it's going be a very long tail on this.

Yeah.

Okay. So maybe, I guess, if you could put kind of, Dave, what we're seeing today kind of looks like to me normal peak, something we haven't seen in about 15 years. Maybe you can compare what we're seeing today, this cycle, to the last multi-year freight cycle, 2003, 2006, some of the similarities. And obviously, I think you gave some guidance or at least kind of talked about 2019, you expect the pricing momentum to continue, I think, up at least mid single-digits in 2019. So help us put in the context kind of what we're seeing now to maybe what we saw 15 years ago, if you don't mind.

Well, 15 years ago, I have a hard time recalling that far back. But no, I think, it is quite similar in as much as there's capacity constraints. I think it's even more exacerbated at this point, strictly because of the driver dynamics, and the tightness of the driver market. And it's not something that's going to be easily rectified. Again, just from a demographic perspective with drivers, trying to attract new drivers into the industry, I really believe that at this point in time it's very different. It's going to allow for a longer peak. It's always dependent upon the economy, of course. But certainly, it seems as though the economy, from everything we've seen, has been very strong. And if, in fact, we have the tight capacity market that we believe we will see for the remainder of this year, that just leads into a very strong pricing environment in 2019. And after that, looking into 2020, my crystal ball gets very hazy. I would love to see it continue, but it's certainly – again, I think that Intermodal itself is just extraordinarily well-positioned for the future because of all the challenges within the truckload sector.

Got you.

So to Dave's point, I mean, peak started early in 2017, and now you've got the impact of e-commerce over the last few years. So what you're seeing is an earlier peak start up, and then it just goes longer to the season.

Got you. No, that makes sense. Thank you. And just last question. I know you can't comment much on Mode, and I'm going ask this question if you don't mind. It's just more of a modeling question, because Terri, I think you gave some numbers around the contribution you see for Mode. As we think about maybe a potential timing for the sale of Mode, should we adjust our estimates for 2019 and back-out Mode for 2019? Do you have a common idea with timing? Does that make sense what I'm asking, just as we think about the timing of Mode, and should we adjust our estimates for sale of Mode for 2019?

Yeah, Kevin, your question does make sense. We can't really comment on that, if, in fact, Mode may or may not be sold prior to that time period.

Okay. But even if it obviously is sold, I guess, you have plans to quickly redeploy the capital from that business.

We do have plans that we will redeploy the capital. We feel as though there's a lot of upside potential in acquiring businesses that may be better aligned, and maybe more of a centralized control, such as what Hub Group is. So yes, we would redeploy that. But we would be – as always, we're very cautious in our approach to acquisitions. We make sure that culturally they're a good fit, and then it's something that we're going to be able – a service that we'll be able to offer to our clients that's going to enhance our relationship.

Okay. Got you. Well, I'll get back in queue. That's all I had right now. Thank you so much for your time, and congrats once again on a great quarter.

Thank you.

Thanks, Kevin.

And we have a question from Ben Hartford, from Baird. Please go ahead. Benjamin J. Hartford - Robert W. Baird & Co., Inc.: Hey, good evening, everyone. Maybe just one final one on Mode, Dave, just your broader framework on the decision to go forward with exploring it. Maybe here and now, in the context of what you have previously discussed, just kind of 5-year, $1 billion acquisition strategy, is there any change to that $1 billion target? Was exploring this approach here somewhat embedded in that, when you had first articulated that strategy a year or so ago?

Yeah, I would say that, number one, no, it has not changed the focus on an acquisition that over five years would total about $1 billion. The thought process with Mode has been discussed over a period of time. But I wouldn't say, certainly, it's sudden. So no, but we will be continuing with our acquisition strategy going forward. Benjamin J. Hartford - Robert W. Baird & Co., Inc.: Sure, okay, that's helpful. And then, I think it was Terri, last call you alluded to kind of peak-ish, a peak-ish profile as the business is presently constituted of roughly 13% overall gross margins, roughly 4% EBIT margins. And I think the comment was it's predicated on two healthy pricing cycles. And I guess, the question either to Terri or Dave, for that matter Dave you've made the comment of a mid single-digit pricing growth in 2019 expected based on your peak forecast. Does that qualify as a healthy enough pricing cycle next year to put those loose targets in place that you guys had talked about last quarter?

Certainly, this year is better than we expected with the pricing. And so it sets us up well for 2019. To be honest, we haven't gone through our detailed process of budgeting where we'll come up with what the targets are. But yes, another strong mid single-digit pricing here next year. And we have visibility to what our rail costs would be and what our drayage cost increases are. Yes, we would feel like that would be a good start to getting to those margins. Benjamin J. Hartford - Robert W. Baird & Co., Inc.: Okay. That's helpful. Thanks for the time.

Thanks, Ben.

And we have a question from Justin Long, from Stephens. Please go ahead.

Thanks. And congrats on the quarter. So to start on Intermodal, I wanted to ask about the level of truck-to-rail conversion activity that you're seeing. When we think about the 6.5% consolidated Intermodal volume growth, how much of that's coming from conversions versus the underlying demand environment improving, and how are you thinking about the pace of conversions in the back half of this year?

Justin, that's a really good question. It's really difficult for us to quantify it. We know that we are getting some conversion just because when we're talking to our clients, they are specifically focusing on them. But we don't really have the metrics in place that would allow us to identify the specific amounts of conversion. I do think an awful lot of our more progressive clients are looking at Intermodal as capacity so that they can get their product on the store shelves, or get them to their customers. And in this environment, as the trucking market remains constrained, we think that'll continue. But we just don't have an exact number we can give you as far as conversion.

Our transcon business was up about 10%. And one customer in that group converted 90% of their freight from over-the-road to intermodal. And some of our retail and pay per customers also converted. But like Dave said, it's pretty difficult to get that aggregate number.

Right. It's hard.

Okay. Understood. And I'm sorry if I missed it, but did you give volume guidance for the back half of the year? Just curious what you're expecting for Intermodal volumes, and if that full year expectation of 3% to 6% growth you gave last quarter is still a good ballpark to be thinking about.

It is still a good ballpark, Justin, the 3% to 6%. We would expect our volume in the second half of the year to be slightly higher than it was in the first half of the year.

Okay. Great. And then lastly, I guess, to try one more time on Mode, maybe from a different angle, just from a high level, could you talk about your confidence level that you'll be able to divest Mode and redeploy that capital in a way that results in EPS accretion?

Yeah. Again, that's something that we really cannot talk about at this point in time.

Okay. Fair enough. And congrats again on the quarter. I'll leave it at that.

Thanks, Justin.

And we have a question from Tom Wadewitz from UBS. Please go ahead.

Hey, this is Mike Triano on for Tom.

Hi, Mike.

Hey. So I wanted to ask about the cadence of operating income in third quarter and fourth quarter. You mentioned that you expect a similar peak season to last year's. So should we kind of expect a gradual improvement in 3Q and then a bigger step up in 4Q?

Yes. We expect our margins in fourth quarter to be higher than in the third quarter, and a lot of that goes to operating income. So correct, we expect fourth quarter to be our strongest. And however, I will say that we expect more EPS growth in the third quarter than we will see in the fourth quarter, because we have such a strong fourth quarter of 2017.

Right. Difficult comp. Right.

Is it possible you could be up year-over-year on operating income in fourth quarter, given the difficult comp?

Yes. We estimate we will be up year-over-year.

Okay. And then just one on rail service. How much better do you think the rail service can get in second half, given what you know, and how the rails are kind of bringing on some crews and more locomotives?

I would love to be able to say it's going to be a light switch, and there will be daylight everywhere. I think that realistically, this is going to be incremental gains. We are starting to see the incremental gains right now from these investments, with both the Norfolk Southern and the Union Pacific. I would hope that we could gain maybe a half a day over the second half versus what we were year-over-year. But I think that it's kind of wait and see to – they've had – unfortunately, Union Pacific's had several issues in the I-5 Corridor with the fires most recently, with the tunnel collapse, which kind of those types of disasters will not be ongoing. So just with the current investment levels, et cetera, we know it'll be incremental gains, we just don't know how large it will be. And it's going to take a fair amount of time, several quarters into 2019 to really see it continue to improve where you can have a dramatic improvement.

Right. Was the tunnel collapse issue, was that meaningful in the quarter, just from a cost perspective?

It was probably about $300,000. It wasn't enormous, but I'm sure it was a lot more expensive for the UP as they were diverting everything over Salt Lake. But it certainly did have an impact on us.

Okay. All right. Great. Thanks for the time.

Thank you.

And we have a question from Todd Fowler from KeyBanc Capital Markets. Please go ahead.

Thanks. Good evening, everyone. Dave, when you think about the guidance, it sounds like that you've got good visibility on both the price and the rail cost side in the back half of the year. It feels like with where the environment is, that the volumes are going to come through. What are some of the opportunities where guidance could come in a little better than what you're anticipating in the second half, and then what are some of the things that might present some risks to the second half numbers?

The risk would obviously be a slowdown in the economy. That would be the largest risk. I really don't foresee rail service getting worse. So I think that the biggest risk would be a sudden, dramatic, black swan event. But so highly unlikely. The upside is, how much kickback (36:26) can we get in surcharges. We're done now with 62% of our overall price repricing, we have 13% that are in process. But it still leaves us about 25% of our business, and how substantially can we increase those costs. And so I think that would be the primary upside is within the Intermodal side and gaining larger margins, and being able to possibly get a little bit better as far as our empty miles that our trucking is currently operating under. Terri, do you have anything to add to that?

No, in terms of Intermodal, you're spot on. I guess, I would say, for the other lines of business, we might get to the higher end if we had more spot business in Truck Brokerage than we had projected, got a pretty tough comp as we previously said in the fourth quarter. And then the third way that we might get to the high end is that driver productivity improves faster at Dedicated than we anticipate.

Okay. Those make sense. And I'll ask one more just on the other side, maybe towards the lower end. So it sounds like that you're not expecting a big deterioration in rail service. What about drayage capacity and costs on the dray side as you think about the second half of the year?

Yeah. Our dray costs have gone up in the high single-digits. We're looking right now, do we need another boost for our drivers in the third quarter. That's going to be an ongoing concern, an ongoing issue that we're going to have to manage well. As far as the third-party capacity, I think we really handle that very well. We've outsourced drayage since our inception, and so we have very long-standing relationships. We tender business to them, not just on a spot basis, but on a permanent basis. So the relationships are intact. And while it can be challenging during peak, particularly in Southern California with drayage capacity, Todd, I feel very, very strongly that we're in a very good position for that.

Okay.

To Dave's point, in the past, we don't go transactionally on our drayage. So to Dave's point, we try to act like a customer, and tender that business on a 12-month period. So we're not subject to the spikes in the market.

Right. So we try to treat our drayage partners as we like to be treated by our clients in essence.

Yeah. And we have good visibility, as Dave said, to that high single-digit, low double-digit increase, for both our third-party carriers and for our drivers. So...

Okay. Sorry, Terri, I didn't mean to cut you off.

No, that's okay. I'm good.

Just the last one that I wanted to ask is, can you do acquisitions, or I mean, would you be able to close on an acquisition of some size or some scale prior to doing anything with Mode? Can you kind of dual track that process or is it something that you'd have to wait to see kind of what happens with Mode before you're able to put something else in place?

Yeah, it's really not something we can comment on, because we don't know any timing, if or when it will occur. But we certainly, if you look at our current debt to EBITDA ratio, it's very low. We could certainly, without any sale of Mode, be able to make an acquisition of a fair size.

Okay. That helps. Thanks a lot for the time tonight.

Thanks, Todd.

Thank you.

And we have a question from David Ross, from Stifel. Please go ahead. David G. Ross - Stifel, Nicolaus & Co., Inc.: Yes, Dave, Don, Terri, good afternoon.

Hi, David.

Hi. David G. Ross - Stifel, Nicolaus & Co., Inc.: I wanted to talk a little bit about the Truck Brokerage. It's a very strong market, obviously, the tight truckload capacity, but loads were down 5% at Hub, even though they I think grew at Mode. Why was that?

Yeah, the mix of our business, our Tracksward (40:35) business was down a bit. But we made it up with projects, specialized services, as we call it, and our transactional business. So we're in very strong position with our services in the marketplace. And we expect the second half to be strong. David G. Ross - Stifel, Nicolaus & Co., Inc.: If loads were down, it doesn't sound like you made it up. I would just think that there's plenty of loads out there that need to be hauled. I just don't know why it wasn't growing.

Yeah, I think it's customer mix. And at the end of the day, we're tied to the contracts and negotiations and bids. So we went through that cycle. We eliminated some low-margin business that simply wasn't worth it. And we focused on the transactional and project work. David G. Ross - Stifel, Nicolaus & Co., Inc.: All right. Then on the Dedicated side, you've had the division a little over a year now. What's changed over that period? What have you learned, or what's been improved?

We think it was the right acquisition for us to do. Certainly it's what our customers want. And we were able to land a lot of new business in the first quarter. We're bringing that on very carefully, because it's significant new customer wins. So we've learned that we bought the right company, it's got culture very similar to ours, and very focused on the customer. We also learned that when we do big and new customer wins, when we try and deploy all that, Estenson really hadn't done a lot of big customer wins in the past. They were much smaller than what we brought on. So as we said in our prepared remarks, we had over $3 million in start-up costs during the quarter, and we're very focused on productivity. And some of the things that we're doing there is we're working with our customers to enhance driver productivity by changing operating parameters that impact our ability to optimize, which could, for example, include changing delivery windows. And our customers are working with us to remove constraints that will allow us to optimize better. Our new head of recruiting has been very successful in hiring drivers, reducing the need for expensive third-party carriers. Intermodal and Dedicated are sharing drivers to be more cost effective. And finally, we're increasing prices to keep pace with the increases in driver pay because the driver market has been so challenging. But we would buy it all over again.

Absolutely.

I think that was the right decision.

Yeah, I would just add there, I think that one of the very positive things I've seen is culturally they were who we thought they were, and the cultures are very much aligned. And we're going to be able to continue to work together and expand this business with the management team. They're very solid. And again, I think every acquisition, culture is a major issue for it. And so we're very pleased with the acquisition and moving forward with it.

It's very exciting. We had a strong pipeline. And to Terri's point, the accounts that we've landed and brought on are bigger than the traditional onboards at Estenson, which is a good experience. So we're getting through it now, and we'll work through it. David G. Ross - Stifel, Nicolaus & Co., Inc.: Glad to hear it's good cultural fit. Just to follow up lastly on that $3.2 million of dedicated start-up costs, because a lot of dedicated fleets do have start-up costs associated with it. Is that something though that may be unusually high given the lack of experience that Estenson had with large-scale implementations, and something that should come down over time, or is that something that was already factored into the pricing, it's kind of a cost, but that doesn't impact the margin at all?

It will be something that will come down over time. I think that it was more so than Estenson's ability or history of putting on large dedicated contracts such as this. I think it was more the timing. It moved too quickly, and which causes you to outsource to third-party carriers and do things such as that, which really throws the cost off. So I think it was more so a timing issue than anything else. David G. Ross - Stifel, Nicolaus & Co., Inc.: Excellent. Thank you.

And we have a question from Brian Ossenbeck from JPMorgan. Please go ahead.

Hey, good evening. Thanks for taking my question.

Good evening.

So just wanted to go back to rail service for a minute. Just to clarify, it sounded like you were hoping for improvements, but basically expecting to see sort of consistent levels of service and capacity from the rail as of right now. Is that a fair way to characterize it?

Yeah, we are seeing improvement. I mean, it's incremental at this point in time. It's not like we're jumping up by five hours, or a half a day, or something. But we are seeing incremental improvement. We're seeing better consistency, which is really the key. The speed is not nearly as important as the consistency of the service level. So we're seeing it improve. We're seeing the longer – sometimes a container may take an extra day or something, that's always problematic. So that's being compressed somewhat as well. So again, we're seeing it incrementally, and we do believe that it's going continue to improve as both NS and UP continue to invest.

Okay. And I know CSX wouldn't necessarily be a direct impact to your service, but they're starting to move forward into addressing the intermodal network. They've put some merge fees at different terminals to kind of reroute and change their density, got rid of a lot of wings, which I know we've talked about in the past. So just curious to see if you're seeing anything change from that perspective. Are you seeing interest from shippers, perhaps seeing that coming, and when they come over, put more volumes with you? Just curious to see if you have seen, if anything, at this point.

Yeah. I would suggest to you that if you just look at the intermodal volumes of Norfolk Southern versus CSX, you can see that NS is growing dramatically. And I'm sure that some of that is truck conversion, but I'm sure some of that is conversion from CSX. And as far as, despite the fact we're not on CSX, we are impacted by some of the changes because that they make, because they obviously connect with our Western partner, as well as the Burlington Northern, and some of the changes that they've made on interline traffic bogs things down, if you will, at some of the gateways. And as a result of that, we have had some extended service issues that, despite the fact we're not using them, it does impact our connecting carriers.

Right. Understood. And just one last one on Dedicated. Is the sales number, I think it's about $280 million mid-point, is that expected to change at all with the increase in start-up costs? Or I guess, in response to last question, it sounded like maybe some of the start-up costs you incurred this quarter, which were almost double the full-year estimate were kind of catch-up, and laying the groundwork for future growth. So maybe you can kind of bring those two back together.

Sure, yeah, we gave our projections for Dedicated in the second half of the year. And we expect Dedicated sales in the last half of the year will range from $155 million to $165 million. And to your point, Brian, we think we have incurred the majority of the start-up costs now. And those were more of a timing thing with a challenging driver market and expensive carriers, third-party carrier services that you have to get when you don't have the drivers. But we feel comfortable with that guidance given where we're at.

Okay. Thanks for your time.

Thank you.

Thanks, Brian.

And we have a question from Bascome Majors from Susquehanna. Please go ahead.

Yeah. Thanks for taking my question here. Good afternoon. And you made some comments on some preliminary pricing expectations for the Intermodal business into 2019. In some kind of generalized comments on margins, and how that could be helpful for them, can you help us on the cost side with any sort of directional preliminary outlook on to how things trend into 2019, or even just some things that were uniquely inflationary, or any other items in the base here that we should think about here, Terri? So pricing from the rails, anything on the labor front, including incentive comp, and you've talked some of that coming back this year, or any other notable overhead costs we should think about pacing into next year. Thank you.

Yeah. Sure. Well, this year you're right. We had the headwinds from our bonus. And we didn't have much bonus last year. And this year, if you were to say, well, how much higher is bonus than last year in the second quarter, I would tell you it's about $7 million higher. As we have done better throughout the year and we're raising our guidance for the whole year, our bonus expense goes up, as it should, because it flows with our EPS. And so we wouldn't have that big a headwind next year as we do this year, with bonus being about $7 million higher per quarter for Q2, Q3 and Q4, because that EPS scale that the board gives us is reset at the beginning of every year. And so a lot of that would go away. We've also made a lot of effort to look at our other costs and expenses, including travel and entertainment, marketing, things that are more discretionary. And we've got good controls in place to make sure that we use our money effectively, that those expenses have come down a lot this year, expect that trend to stay the same and perhaps get better next year. And then, in terms of our IT spend, that's the only cost that will continue, as we've discussed, because we think that will give us a competitive advantage. And we're absolutely going to invest about $100 million in technology over the next five years.

And any other (51:35) on pricing from the rails?

We have a pretty clear idea of what we'll be paying as our price increases, with the rails. It's a little bit more hazy, if you will, on the driver pay. That will continue to escalate. I'm not quite sure as far as what the amount is. We have to be market competitive. But I certainly would believe that we're going to continue to see upward pressure on driver wages.

And the last thing, just to clarify something you said a second ago, Terri. You said the headwind and incentive comp wouldn't be as big next year. I would assume at this point, with the guidance raise you're accruing above plan this year, where that could actually be a tailwind, but could you help me with kind of how that works, and at least on an absolute basis year-over-year, if you went to plan in 2019, how would that look?

Yeah, if we went to plan it would be lower. I mean, we're above plan now, you're exactly right, and so we're accruing our bonus at above plan. It kind of goes with the territory. Last year we did bad, we didn't get any bonuses. This year we're doing pretty well, so we hope to get a bonus, a pretty good sized bonus. Next year it will probably even out.

Right.

Thank you for the time.

Sure. Thank you.

Thanks, Bascome.

And we have a question from Diane Huang from Morgan Stanley. Please go ahead. Diane Huang - Morgan Stanley & Co. LLC: Hi. Thank you for taking my questions. First, can you elaborate on your thoughts on the upcoming peak season to be lengthy and strong? It seems like some of the TL carriers, they don't have that visibility yet. So I was just wondering, are your comments on peak for both Intermodal and TL?

I would say that they are based on our conversations with our retail clients, as well as our CPG clients, to expect an early peak. We have a fair number of retailers that are going begin bringing in product in mid-August, and even before. And then to Don's earlier point, the longer tail, a lot of that is – we've seen it over the last several years where e-commerce does have an impact. Traditionally, in years gone by, we basically, by Thanksgiving, were done, and business would slow down dramatically. And that simply is not the case any longer with e-commerce. And we do participate with multiple e-commerce companies and brick-and-mortar retailers that have large e-commerce presence.

Yeah, if you look at the history, in 2016 peak started later than anticipated. 2017 start came in earlier, and we're expecting 2018 to be the same. So in talking to our customers, to Dave's point, and seeing the results in the bids, they're bullish on what the peak's going be this year. Diane Huang - Morgan Stanley & Co. LLC: Okay. That's very helpful color. And another industry question. What is the competitive dynamic like now in the Intermodal space, in terms of pricing discipline, and whether there's a greater focus on price now more than volumes?

There is no question that this has been a very orderly peak season. From a pricing perspective, I think that everyone is realizing that for the prior 18 months up until June of last year, that we were driving our prices down to a point where it just didn't make our product reinvestable. And so it's been very disciplined. I know we have been very disciplined in approaching the bid season, looking very much to balance our network, to take costs out, to adjust some of the contracts that we may have had, that had accessorials which were unacceptable, as well as price increases. So I think that it has been very orderly. And I would expect that we'll see that in 2019 as well. Diane Huang - Morgan Stanley & Co. LLC: Got it. Just squeezing in one more. And you mentioned accessorials. Does your outlook for a high single-digit pricing increase in the second half include like additional accessorials?

It does. Diane Huang - Morgan Stanley & Co. LLC: Okay. Great. Thank you.

Thanks.

And we have a question from Jason Seidl, from Cowen & Company. Please go ahead.

Thank you, operator. Hey, guys, sorry to ask you to drag the dead horse back out, but I'm going get a swing at it. On Mode, I guess, I'm just trying to understand, so what has changed in terms of the fit within Hub as a company from where you acquired it? Because it's a fairly good company. It throws off some good free cash flow. You have minimal CapEx requirements. You're sort of on track to sort of get close to making or exceeding your 2016 high-water mark. I'm just curious there.

Yeah. Well, I would suggest to you first and foremost that it's not a fairly good company. It's a very good company. It's got a very strong management team. The agent network, I think is by far the best in the business. What we're looking at is, part of what our board has directed us to do is to diversify our product offerings and also to enhance those that we currently have. Mode is an excellent company, as I have said. But if you look at it, it's basically the same services we have, except in a decentralized agent structure versus our centralized structure. So we believe that we can, with the proceeds from the sale of Mode, if that takes place, that in fact we'd be able to redeploy that into other lines of business that would be of interest to our clients and of benefit to our clients, deepen our relationships with our clients. So that's really the rationale. And this has been part of an overall strategic look at the business that we've had with our board for several years now, and it's really now just coming to fruition.

And how should we look at some of the other potential acquisitions that might be out there for Hub that'll be a better fit? Is this really, more or less, trading somebody like Mode for about the same multiple-type company without giving any multiples or numbers or anything like that? Is this just going for a better fit?

It's a better fit. It's also one that we can build. Mode is growing. Mode is doing well. But again, it's an agent-based model. So it's based on the agents' growth. We feel as though we can impact with our clients, that we can add additional services that will bring value to them, deepen our relationship with those clients, and also allow us to grow that entity. That was the theory behind the Dedicated trucking. That was the rationale behind buying, it was that this is a service that our clients want. As Terri had alluded to earlier, the major thing we've done right now is try to hold back the throttle and not grow it too quickly, because Estenson or Hub Group Dedicated is, in fact, a high service organization, and we don't want to risk their overall service levels and focus on the client and obviously, safety first.

And so we should think of using any proceeds that you get for Mode, however much it might be, whenever it might be, as to going towards acquisition, not towards redeploying to growth of Estenson?

No, we don't need to, no. We can fund and finance the growth of Estenson with our own free cash flow and with the debt.

That's what I thought. All right guys. I appreciate the time as always. Nice quarter.

Thanks Jason.

Thank you.

And we have a question from Scott Group from Wolfe Research. Please go ahead.

Hey, guys, thanks for the follow up. I'll be quick. Terri, you raised the cost guidance to $112 million to $116 million a quarter. What's going on there?

Yeah. The biggest reason that we increased it is because of higher bonus expense than we had originally projected because we're running to the high end of that. And that we also project increased salaries because we plan on hiring more people as we continue to grow. And our health insurance costs are going up a touch. We also have some deferred IT spending that we'll see in the third quarter and fourth quarter. We would anticipate that the fourth quarter expense will be the highest, closer to the $116 million, and the third quarter expense would be at the lower end, closer to the $112 million.

Okay. And then I want to follow up, Dave, you said that you have, I think you sort of implied that you've got visibility to rail pricing increases or cost increases for next year. Do you think that they're higher next year than this year? I mean, I guess the thought or concern would be, you guys are getting high single-digit pricing this year, the rails are not. Do they come back and say, next year, well, we want high single next year? What's the risk of that happening?

Well, first of all, we can't really comment on what we're giving the rails this year. But no, we feel very comfortable knowing, or at least – and this is as we see it today, that we have clear visibility, that we feel very confident we'll be able to pass on to our customers, the cost increases we see from the rail. Plus, obviously, our goal is, we need to continue to grow our operating income because even with the improvement we saw this quarter, it's still not where we're focused on to get it to.

And without putting numbers, do you think your cost increases are similar, higher or smaller next year than this year?

I would say it's similar, that would be my best guess right now.

Okay. Perfect. All right. Thank you, guys.

Thanks, Scott.

Thank you.

At this time we have no further questions. I will now turn the call over to David Yeager for closing remarks.

Well, again, I'd like to thank everyone for joining us on the conference call today. And as always, Terri, Don and I are available for any additional questions that you may have. Have a great day.

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