Dave Yeager - CEO Mark Yeager - President and COO Terri Pizzuto - EVP and CFO.

John Barnes - RBC Capital Markets Ben Hartford - Baird Scott Group - Wolfe Research Justin Long – Stephens Kelly Dougherty - Macquarie Bill Greene - Morgan Stanley Matt Brooklier - Longbow Research Todd Fowler - KeyBanc Capital Matthew Young - Morningstar.

Hello, and welcome to the Hub Group Inc. Second Quarter 2014 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO, Mark Yeager, our President and Chief Operating Officer; and Terri Pizzuto, our CFO. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call represented are best, good faith judgment as to what may happen in the future.

Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate and project. Actual results can differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to our host for today, Mr. Dave Yeager.

You may now begin..

Good afternoon and welcome to Hub Group’s second quarter earnings call. Like the rest of the industry, we continue to recover from the severe winter weather. We are pleased to report that for the second quarter all of our business lines experienced year-over-year revenue growth.

The one ongoing issue that persists from the winter is that we continue to experience substandard rail service. Hub is fortunate that our chosen rail partners are suffering less that their competitors, but currently all rail on-time performance trials historic norms.

On a separate note, we are steadily making progress with our margin enhancement efforts and Mark will provide more color on these yield initiatives in his commentary. And with that, I’ll turn it over to Mark to discuss our operating results..

Thanks, Dave and hello everyone. I am going to take you through our operational highlights by business lines. Starting with intermodal, consolidated big box intermodal volume was up 2%, Hub segment volume was flat year-over-year while Mode’s volume was up an impressive 19%.

Hub Local West volume was up 8%, transcon volume was down 2% and Local East volume was down 8%. Mode saw a 20% volume growth in Local West, 15% growth in Local East and 10% growth in transcon.

Although we saw a slight sequential improvement in fleet utilization, utilization at 13.6 days was about a half a day worse than last year, due to ongoing rail service issues. The pricing environment continues to be competitive but we remain focused on maintaining pricing discipline.

We’ve refined our pricing processes to focus more precisely on network strengths and implemented a more rigorous and expansive increased plan.

This discipline has cost us some volume, but we believe that it is the right course of action for Hub, deploying a more disciplined approach to pricing this year will ultimately allow us to recover cost increases and develop a more stable business base.

We’ve completed about 70% of this and remain confident that we will see intermodal margin expansion in the second half of 2014. Throughout the second quarter, we continued to make progress with our yield initiatives. As you may remember from our last call, we changed our sales commission structure to focus on margin over volume.

We’re bringing out new analytic tools to help us price with a better understanding of market dynamics and network needs. Load acceptance processes and equipment prioritization criteria have been refined to help ensure operational efficiencies and to maximize network contribution. Work continues on the one system.

Our new load planning and dispatch tool which is designed to help us reduce empty miles and improve equipment utilization. We anticipate that it will be completely deployed by Q1 of 2015. We are currently in the process of on-boarding new steel containers for a net increase of 1,500 units in 2014.

We’ve received 418 of the new containers and deliveries will continue throughout peak season with an expected year-end fleet size of approximately 27,500 units. We reduced our container order by 500 containers as we await the resolution of the anti-dumping container dispute followed -- filed by Stoughton against our supplier.

As you know, we’ve placed an order for 300 trucks. We expect to receive 118 tractors this month with the remainder before the end of the year. Last quarter, we installed 500 satellite tracking devices as part of our pilot program. This satellite tracking system will be installed in an additional 4,500 containers later this year.

We expect to have our entire fleet outfitted with tracking devices by the end of next year. Hub Group trucking continued to grow with volume up 6% for the quarter. Hub Group trucking moved 72% of Hub drays during the quarter, compared to 66% last year and 70% in Q1. We also did 44% more moves for Mode transportation.

While driver recruitment continues to be a challenge, we were able to add 76 drivers in Q2 bringing the total driver count to 2,914 at the end of June. Hub’s truck brokerage division was able to counteract some of the headwinds faced from a tight capacity environment by increasing high value-added services and improving mix.

Although volume declined 10%, revenue and margin increased. Mode’s truck brokerage volume declined 7%, so they also produced similar revenue and margin increases through mix improvement. Moving onto Unyson Logistics, we saw top-line growth of 24%. We remain focused on our pipeline seeking full outsource and target savings initiatives.

This quarter, Unyson was named a top-50 global and domestic 3PL by Supply Chain 24/7 and a 2014 best places to work in St. Louis where Unyson is headquartered. We are very proud to see Unyson flourish as a leader in the logistics industry. Mode’s logistic business also continues to expand with 5% growth this quarter.

Mode transportation produced solid top-line growth of 14% in the quarter. Mode continued to grow its network adding six new IBOs and two new sales agents during the second quarter.

We received several customer awards for outstanding service this quarter, including Guitar Center’s 2013 Outstanding Performance award and the 2014 Partners in Transformation award from Sears. At this time, I will pass the call on to Terri for the details of our quarterly results..

Thanks, Mark and hello everyone. As usual, I'd like to highlight three points. First, growth margin as a percentage of sales improved sequentially in all three Hub business lines. Second, Mode delivered a best ever 2.9% operating margin and third, Unyson Logistics had another strong quarter with 24% revenue growth.

Here are the key numbers for the second quarter Hub Group's revenue increased 7% to $894 million. Hub Group's diluted earnings per share was $0.51, compared to $0.50 last year. Now I will discuss details for the quarter starting with the financial performance of the Hub segment.

The Hub segment generated revenue of $682 million, which is a 6% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 1%. Intermodal volume was flat and price was up slightly.

Loads from retail customers were up 7% while loads from consumer products customers were down 3% and loads from durable customers were down 10%. These declines resulted primarily from pricing actions we took to improve freight mix. Truck brokerage revenue increased 6%.

Price, fuel and mix combined were up 16%, but were partially offset by a 10% decline in volume. Length of haul increased 8% to 681 miles. Logistics revenue increased 24%. The increase is due primarily to growth with customers that we on-boarded last year.

Hub's gross margin decreased by $728,000, intermodal gross margin was down because of unfavorable timing of cost increases and worse equipment utilization due to rail service issues partially offset by a modest increase in price. Truck brokerage gross margin increased because of customer price increases and more value-added services.

Logistics gross margin increased due to growth with customer, we on-boarded last year. Hub's gross margin as a percentage of sales was 10.4% or about 70 basis points lower than the second quarter of 2013.

Intermodal gross margin as a percentage sales was down 120 basis points because of the change in mix of business from the second quarter of 2013 and unfavorable timing of cost increases. Logistics gross margin as a percentage of sales was up 25 basis points due to more cost effective purchasing.

Truck brokerage gross margin as a percentage of sales was up 100 basis points as a result of more favorable mix, shedding some unprofitable business and customer price increases.

Gross margin as a percentage of sales increased sequentially by 50 basis points, all of our service lines improved, intermodal gross margin as a percentage of sales was up 30 basis points and both logistics and truck brokerage were up 90 basis points.

Hub's cost and expenses increased $400,000 to $46.4 million in the second quarter of 2014 compared to $46 million in 2013. Salaries and benefits were up about $800,000 due to wage increases and higher headcount. This was partly offset by a decline in commissions.

Finally operating margin for the Hub segment was 3.6% which was 30 basis points lower than last year’s 3.9%. Now I’ll talk about results for our Mode segment. Mode had a strong quarter with revenue up $232 million which is up 14% over last year.

The revenue breakdown at $114 in intermodal, which was up 19%, $87 million in truck brokerage, which was up 10% and $31 million in logistics, which was up 5%, Mode’s gross margin increased $3.8 million year-over-year due to growth in all three service lines with the largest growth coming from intermodal.

Gross margin as a percentage of sales was 12% compared to 11.8% last year. Mode’s total cost and expenses increased $2.2 million compared to last year, due primarily to an increase in agent commission. Operating margin for Mode was 2.9% or 50 basis points higher than last year’s 2.4% operating margin.

Turning to headcount for Hub Group, we had 1,481 employees excluding drivers at the end of June. That’s up 14 people compared to the end of March. Now I’ll discuss what we expect for 2014. We project that our 2014 diluted earnings per share will be between $2 and $2.10. We think we’ll have about 36,850,000 weighted average diluted shares outstanding.

Our goal for 2014 is to improve gross margin as a percentage of sales from the 11% that we had in 2013. We remain very focused on margin enhancement initiatives and improving our network.

Headwinds include the difficult first quarter and the mix impact from growth and logistics since it’s our business with the lowest gross margins as a percentage of sales.

Gross margin as a percentage of sales in the last half of the year should improve sequentially and year-over-year because the majority of customer price increases take effect in the second half of the year. Our cost and expenses will probably range between $68 million and $70 million a quarter for the rest of the year.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $73 million in cash and $51 million in debt, including $20 million of capital leases.

We spent $13 million on capital expenditures this quarter including $8 million for containers that came off lease, $3 million for technology investments and $2 million for the building. That brings total year-to-date capital expenditures to $46 million.

Estimated capital expenditures for the last half of 2014 are between $85 million and $95 million, approximately $39 million is for tractors and $38 million is for new containers. We intend to finance these purchases with debt. And that wraps up the financial section and I’ll turn it back to Dave for closing remarks..

Great. Thank you, Terri. Again thank you for your participation on this call. We’re continuing to make progress with our initiatives and we’re looking forward to improve profitability in the second half of the year. At this time Mark, Terri and I are happy to take the questions..

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(Operator Instructions) And your first question comes from the line of John Barnes with RBC Capital Markets. Please proceed..

Hi John. I am afraid the first cal will not come from John Barnes..

Okay..

In line of Mr. John Depan Mr. Barnes you may begin..

Hey can you guys hear me okay?.

Hey can you guys hear me okay?.

We can now yes, yes..

Yes..

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Hi John, it’s Dave. This is unfortunately no quick fixes on this. This is something that will take a bit of time. There is really two broad areas that the rails are attacking right now, one is increasing the available resources, the other is efficiency to route, more efficiently route the traffic.

So with the first with the resource, they’re hiring new crews, acquiring new locomotives where available and returning restored locomotives to service as well as accelerating increases in intermodal terminal capacity. All those take, that’s not something you do in a week or a day, it’s more like months and possibly quarters.

Some of the things that are a little bit quicker fixes is that they are trying to more efficiently route their traffic and avoid the bottleneck with Chicago for non-intermodal trains so they might go through Peoria or St. Louis or some other area.

So we do think that that’ll help and plus I think that they’re taking a real hard look at, as you know summer time is maintenance time not just in the city of Chicago but also on the railroads. I think they’re looking at how they’re planning that maintenance to do the right maintenance but maybe try to make it so as not as disruptive to service..

Okay, alright..

Okay, alright..

But as you pointed out we’re looking at quarters I would say, hopefully by year-end we’ll begin to see some gradual improvement within the service parameters..

By year-end?.

By year-end?.

By year-end, yes, and those are the railroads that we are those are based on which is the Union Pacific and Norfolk Southern..

Sure okay alright, and then my other question is, the two internal initiatives that you talked about, number one increased internal drayage and then obviously the improved utilization in your boxes.

Where do you believe those metrics will be year-end and what do you need to do further to improve those metrics as you go into 2015?.

Sure okay alright, and then my other question is, the two internal initiatives that you talked about, number one increased internal drayage and then obviously the improved utilization in your boxes.

Where do you believe those metrics will be year-end and what do you need to do further to improve those metrics as you go into 2015?.

Well the first one is greater use of Hub Group Trucking for handling our internal drayage and as I said in the script, we’re around 72% right now versus 66% last year. We think that will be our goal has been to get to 75% by year-end. We think that that’s attainable.

It will be challenging and obviously the big difficulty there is with driver recruitment and retention. It’s an issue that I think everyone is aware of, it’s become more challenging if anything this year and we would anticipate that that’s going to be a significant challenge for us, but we think the 75% attainable.

Our long-term goal is to get up to around 85% which we think we can do but it’ll take us a couple of years to get that level of penetration.

In terms of utilization as we said we think the rail service issues probably cost us about half a day in the second quarter we would anticipate that we’re probably going to see a similar headwind throughout the year, but certainly having utilization back to more historic levels in the mid 13s, should be achievable, particularly in the third quarter which we would anticipate because the demand is normally going to be pretty good opportunity from a utilization perspective.

So much of that is dependent on any progress that we’re able to see from a rail service perspective so I would say that that’s the big variable there at this point in time..

Very good, alright, I really appreciate your time today and nice quarter, thanks..

Very good, alright, I really appreciate your time today and nice quarter, thanks..

Thank you, John..

And your next question comes from the line of Ben Hartford with Baird. Please proceed sir..

Hey good morning, guys I have just, or good evening sorry, good evening. Long day, just wondering how do you guys feel in totality I know that the network has been as issue for everybody in the first half of the year.

It sounds like the system implementation, and correct me if I’m wrong, maybe it’s pushed a little bit as you guys have been hoping to get that in by peak now it sound like year-end and you won’t have the entire fleet with the devices in place until year-end ’15 but in totality if you adjust for the service issues here in the first half of the year, do you feel any less confident in terms of what you’ve been able to do during the season, improve the mix of business in terms of driving gross margins and this kind of accelerated expected accelerating pace here in the back half of 2014 and into and through 2015, and I’m looking for something in totality I guess trying to normalize for the issues here in the first half of the year outside of your control?.

Hey good morning, guys I have just, or good evening sorry, good evening. Long day, just wondering how do you guys feel in totality I know that the network has been as issue for everybody in the first half of the year.

It sounds like the system implementation, and correct me if I’m wrong, maybe it’s pushed a little bit as you guys have been hoping to get that in by peak now it sound like year-end and you won’t have the entire fleet with the devices in place until year-end ’15 but in totality if you adjust for the service issues here in the first half of the year, do you feel any less confident in terms of what you’ve been able to do during the season, improve the mix of business in terms of driving gross margins and this kind of accelerated expected accelerating pace here in the back half of 2014 and into and through 2015, and I’m looking for something in totality I guess trying to normalize for the issues here in the first half of the year outside of your control?.

Sure, I think that the one system initiative is behind schedule a bit, no question, we are up and running in two terminals right now, but we’re going to take a deliberate approach to rolling it out.

And so while we had initially hoped to get it in, in time for peak throughout the network we don’t want to be going through an installation process during peak, so we will really do it in two segments and that means that it won’t be until the first quarter of next year, that we are really up and running.

And I think realizing the full benefits of one system at that point in time. The satellite tracking really is on schedule as we had thought. Once again reviewing it in a grouping, so that we can really observe the technology to make sure it’s working, make sure it’s bringing the kind of benefits that we want.

We also don’t want to disrupt container supply at this point in time by bringing them in to have the devices installed. The issues with the rail service, I think are more prolonged than we would have anticipated at the beginning of the year and even when we had our last conference call.

I think we felt that the rail service issues would be resolved more quickly. It appears they are more complicated in nature and of a longer term. We are dealing with them well. Our on-time performance for our customers remained in the 90s, but it’s defintinely a challenge and it’s forcing us to jump through a lot of hoops.

Nonetheless, I don’t think anything has changed in our beliefs about their ability to run the network efficiently and expand intermodal margins in the second half of this year and going forward as we get into another pricing cycle. I think there’s an opportunity to get closer to more historic norms from a margin perspective.

So nothing has changed to make us deviate from the plan at this point..

Okay.

So you got the service issue that are taking longer than expected, but in terms of the results that you can control, and in terms of the results I guess from the pricing that the bid results to-date, you don’t feel like that the cadence of gross margin expansion is any different is that the question, do you feel like that the cadence of gross margin expansion is any different?.

Okay.

So you got the service issue that are taking longer than expected, but in terms of the results that you can control, and in terms of the results I guess from the pricing that the bid results to-date, you don’t feel like that the cadence of gross margin expansion is any different is that the question, do you feel like that the cadence of gross margin expansion is any different?.

No. We really don’t. A lot of it depends on what materializes from an award into actual business, and what kind of mix we end up with at the end of the day. So certainly not the time to declare victory, but we do feel that we are, at this point in time, on pace to accomplish the goals that we talked about at the outset of the year..

Okay, and then as you look into the next year, you go through this year with regard to some of the recalling initiatives.

Do you feel like that there is a share opportunity, given some of the issues with the competing Western line and some of the truck tightness that we are seeing year-to-date, is there more of an opportunity from your own competitive positioning from intermodal broadly that allow you some line of sight to kind of normal, mid, to upper single-digit volume growth as you head into next year?.

Okay, and then as you look into the next year, you go through this year with regard to some of the recalling initiatives.

Do you feel like that there is a share opportunity, given some of the issues with the competing Western line and some of the truck tightness that we are seeing year-to-date, is there more of an opportunity from your own competitive positioning from intermodal broadly that allow you some line of sight to kind of normal, mid, to upper single-digit volume growth as you head into next year?.

Yes, I mean I think that there definitely is that opportunity. We hope that the rail service issues don’t go on too long because that’s the biggest vulnerability to the service not continuing down the market share path or the gains that they have realized.

So as long as we start to see improvement in rail service, I think that’s a positive momentum of conversion from the truck market, because of the challenges that the truck market is undoubtedly facing will continue. We think that there is certainly is some conversion opportunity in the West. We did grow local West 8% on the quarter.

Some of that was undoubtedly conversion from the volumes in North. So I think we are realizing some of that benefit and we would anticipate that as the year goes on. We will continue to see that develop in the West..

Okay, and then last one if I could, Mode’s EBIT margin was obviously good, very good this quarter.

Can that business -- you’ve been fairly conservative in terms of churning that very good margin or at least guiding to that EBIT margin, since you have acquired it can that business become as profitable as core Hub from an EBIT margin perspective?.

Okay, and then last one if I could, Mode’s EBIT margin was obviously good, very good this quarter.

Can that business -- you’ve been fairly conservative in terms of churning that very good margin or at least guiding to that EBIT margin, since you have acquired it can that business become as profitable as core Hub from an EBIT margin perspective?.

Probably not, we think that, you’re right, Ben we said that, originally we were shooting for the 3% operating margin. We are at 2.9%. So we’re pretty proud of that it is about several that we have done.

There is some seasonality to that business, and so you will see that generally the first quarter and the fourth quarter are lower than that 2.9% and so to answer your question directly, I don’t think it will ever get to Hub only because of it is Hub operating margin, only because it is a different modal and agents do all the heavy lifting with selling the freight and operating the freight.

And we pay them a commission based on gross margin. That being said it can probably be north of the 3% that we originally anticipated..

And your next question comes from the line of Scott Group with Wolfe Research. Please proceed..

Hey thanks, afternoon everyone. So wanted to ask about the guidance for the year because, and obviously first quarter was tough with the weather, the system rollout a little bit delayed and you got these rail service issues, but you’re keeping the guidance unchanged.

So I am wondering if there are things that are going better than expected in other places or if maybe we should just be thinking towards the lower end of the range.

How are you thinking about that?.

Hey thanks, afternoon everyone. So wanted to ask about the guidance for the year because, and obviously first quarter was tough with the weather, the system rollout a little bit delayed and you got these rail service issues, but you’re keeping the guidance unchanged.

So I am wondering if there are things that are going better than expected in other places or if maybe we should just be thinking towards the lower end of the range.

How are you thinking about that?.

We are thinking that the biggest factor in improving our intermodal network is pricing right and getting the right business for the network. If we have a strong peak season that also helps us to get to the higher end of the range. In addition, if we are more successful adding drivers that would be a benefit.

But we are very comfortable with the range that we gave. We’re not going to give guidance within the range. And a few factors that will impact the EPS for the rest of the year, the rail service isn’t back to normal, which Mark talked about, the decisions are more prolonged to pronounce than we anticipate it which were our service and utilization.

Second it’s more difficult to get drivers and then third and very important too is we need to determine if the freight that we were awarded actually materializes. Now is when we see all that freight coming in in the third quarter and our mix will change..

So along those lines, so even with all these rail service issues, the industry actually had, when I look at the rail, they had pretty good intermodal volume growth in the quarter, particularly if you’ll take out the end.

So it seems like your flat volumes are maybe less -- are maybe more about you calling some business or maybe losing some share, however you want to talk about it but I would have expected to have seen a little bit more improvement on the pricing side.

Is there just a lag there and we start to see that in the third quarter and fourth quarter? Is that what you guys are kind of saying?.

So along those lines, so even with all these rail service issues, the industry actually had, when I look at the rail, they had pretty good intermodal volume growth in the quarter, particularly if you’ll take out the end.

So it seems like your flat volumes are maybe less -- are maybe more about you calling some business or maybe losing some share, however you want to talk about it but I would have expected to have seen a little bit more improvement on the pricing side.

Is there just a lag there and we start to see that in the third quarter and fourth quarter? Is that what you guys are kind of saying?.

Yes Scott, I think that’s what we’ve tried to make clear in the last call and hopefully when we’re talking with the investment community is that it’s always been our belief that we won’t really see the impact of pricing improvement until the second half of the year.

While most of our business now at this point has been re-priced; about 70% of our business, most of that doesn’t take effect until the second half of the year. So it’s not at all surprising that there isn’t more of an impact in Q2 from price. So that is by no means a surprise to us..

And far as the flatness Scott in the overall volumes, that’s anticipated and again to Mark’s earlier point that is something we try to make very clear is that we remain very, very focused on margin enhancement. A part of that is price. So when you do that, you are going to have some volume erosion.

We still believe that over the longer-term we’ll be able to grow at a greater rate than intermodal. It’s just that I think over the near-term as we continue to focus on our margin initiatives, that we’ll continue to lag a little bit..

And given your model that makes a lot of sense. Just last thing, if volumes aren’t growing, why are you adding containers and if you’re using debt for the CapEx in the back half.

Any thoughts on a buyback?.

And given your model that makes a lot of sense. Just last thing, if volumes aren’t growing, why are you adding containers and if you’re using debt for the CapEx in the back half.

Any thoughts on a buyback?.

That is something that we will approach with our Board of Directors in our August meeting..

And the first part on why you need to add containers, if you’re not growing volume?.

And the first part on why you need to add containers, if you’re not growing volume?.

We still believe that we will have some containers that are getting a little bit older that we will be retiring at some point in the not too distant future. So it’s basically adding them and we do believe that we will again get back on the growth path..

And your next question comes from the line of Justin Long with Stephens. Please proceed..

Just wanted to go back to bid season and was wondering if you could provide some more color. You said you are about 70% of the way through at this point.

Based on how things have progressed, do you now have the confidence that you can price at a rate above your rail cost?.

Yes, we had said that that was our goal and having gotten through about 70% of it, we do believe that we’ll be able to offset the rail cost increases. And when you combine that with an improved mix we think that we’ll see margin expansion in the intermodal product in the second half.

So yes we do believe that we’re getting sufficient price increases in the market to offset the rail cost increases..

And as a follow up to that, I know you don’t comment on core pricing in intermodal specifically, but could you just speak to the overall pricing environment you are seeing in the market and how it progressed over the last quarter or so? Have you seen an inflection higher? Are things kind of stable? Any color on that would be helpful?.

I think it’s been competitive. It remains competitive. I wouldn’t say that we’ve seen the phenomenon maybe that some of the truckload folks are indicating where they’re really getting significant increases. We didn’t anticipate that we would.

We are certainly testing the market but what I would say is that what we’ve seen is that it continues to be a challenging pricing environment..

Yes we saw a number of consumer products and durable companies where the business is really hotly contested and that was particularly true in the Local East TransCom market..

And last one if you don’t mind, I just was wondering, any change to the visibility you have on your rail costs for the remainder of 2014 or do you still have pretty clear visibility on that?.

No we still have clear visibility on the remainder of the year from a rail cost perspective..

And your next question comes from the line of Kelly Dougherty with Macquarie. Please proceed..

Just needed a follow up on that last one.

You have visibility into this year but is there any way that you can think about maybe if some money was left on the table on the rail side, this year is there any concern about them trying to catch up next year or if you got any kind of visibility into the rail cost beyond 2014 and then maybe if not, if there are things that you think that you’re doing from an operating initiative improvement that even if there is pressure on the gross margin, maybe you can offset on operating margin side of things..

At this point we don’t really have clear visibility in 2015. I think we’re getting there, but we don’t have it as of yet. There is awful lot of initiatives and the Mark had gone through quite a few of those that we do think will allow us to enhance our margins, whether it’s by moving our boxes faster or handling more of our local trades ourselves.

So it does give us an awful lot of what we’ve seen in the past, has been in fact in term of efficiencies and we have no reason to doubt with what we have got going on right now, but that will continue..

Yes. And we don’t think that next year the rails are going to have any catching up to do. That’s our view..

Hopefully it’s not there, either though. I appreciate the color thanks. And just wanted to kind of follow-up on the intermodal volume. We saw hunt volumes, we saw kind of some of your partner’s volumes grow faster than that.

When do we see -- you said in the near term there still may be some pressure from a volume perspective from your pricing discipline.

Is that something that we’ll start to see grow more in line with the market in second half or is it going to be longer than that as you kind of cycle through some of these unprofitable contracts?.

Yes. Kelly, we’ll probably be below market I would think in the second half, but we do think it’s going to be a positive number. If you look at the volume issue it was really somewhat concentrated. We had good growth in the west.

What we really suffered from was a fairly significant loss in local east and we don’t think that that’s a long term model issue. What really happened there was we lost a fair amount, sort of, price driven low margin business we probably shouldn’t be handling in the first place. Yes.

We also went through the market with a pretty disciplined pricing philosophy and plan and there were some that didn’t necessarily follow as disciplined having approach.

And the third thing that we had, which was really an internal phenomenon was, we had a disconnect between a assigned free cost and market dynamics that ended up impacting the competitiveness of our pricing in some key lanes.

So it was really more of a distorted view of cost in some key lanes that ended up costing us a fair amount of business in Local East. We’ve got a fix for that in place. So we think going forward it’s a contained issue. The problem is it will continue to be a headwind for us for the remainder of the year..

That’s helpful. And then maybe just switching gears, can you help us think about maybe the puts and takes from the tight trucking background. All things considered, I imagine it’s good for pricing, but maybe a headwind for a higher transportation cost, high trade costs.

Now any color you can you give it there, maybe what you can do to mitigate the impact, that would be appreciated?.

Yes. I mean we as a broker always hope for a tight truck environment, right. We think that that’s the best scenario for a truck broker. There certainly is pressure on purchase transportation, right. There is no question about that. So you have to be as good buyer to capitalize on that opportunity.

I was pleased to see that we saw some margin expansion this year at both Hub and Mode this quarter, 100 basis points was pretty good in a fairly volatile environment. So I think we did a good job of dealing with that truck market, albeit it wasn’t as tight as some markets that we’ve seen in the past.

But we believe that the arrangements that we set up with our customers and the selectiveness that we have when we’re looking at opportunities, if you think it’s got to be a tight environment, that’s probably a time when you want to make sure that you’re selective, that you have a good core base of carriers that you know are going to work with you and not try to gouge you when things do tighten up.

So we try to offset that risk with arrangements with good solid core carriers who are going to be there when we need them. And so we are actually hoping I think for a tight truck environment in the second half..

But was that tightness, I am sorry?.

Well, that’s okay. Just maybe to elaborate this from a great cost perspective is that there is no question that there is upward pressure on truck driver salary and incomes. So that will be an ongoing issue for us particularly as we have almost 300,000 owner/operators and company drivers that are working for us.

So we had -- year-over-year we’re up about, it’s up $7 million annually as far as the increase in driver wage. And that pressure will probably, undoubtedly continue in the, over the near term..

I guess one follow-up on that and then the other one, I was thinking about, is that so selectivity, is that why you did see the volume increase and you think that in an environment like this where the value of a broker is high and you would have had a volume increase on that side of the business?.

Yes. I know that certainly was a part of it. We have changed our strategy somewhat or modified our strategy somewhat to make sure that we’re spending a lot of time upfront identifying where we can succeed and where we can really bring value and where we’ve got the customer at a carrier base to support the business.

And so there is no doubt that we probably turned away from some business we would have maybe more traditionally brought on. But what we end up with is a better book of business, improved margins and something we can really build upon going forward..

So that can continue? Even in a tight environment you might see volume declines as you’re kind of being selective in the broker side of business like you are in intermodal? Is it fair to say that?.

I think it’s entirely possible that we could see volume decline, but as far as margins moving in the right direction, we’re okay with that trade off..

And your next question comes from the line of Bill Greene with Morgan Stanley. Please proceed..

I think in the past you’ve mentioned that a day of utilization is about $1.5 million.

Is that a still a fair estimate?.

A day of utilization on an annualized basis is….

Sorry, so that was an annual number, not a quarterly.

Is that right?.

Yes, $6 million for one day of utilization and that’s an annual number..

And so when we talk about the half day utilization here, the impact you estimated from that on your -- I guess it’s really kind of EBIT at the end of the day should have been about half that number.

Is that fair? So it’s half day, half of the number right??.

Yes, that’s right..

And could we ever go -- so you say the impact was about half a day this quarter. Could we ever go back above those levels or you are just saying that’s getting to a normal for a long periods of time who runs in that band.

In other words, could rail service ever actually be a benefit in the long-run to you?.

Sure, especially when we get the GPSs on the containers, that will help too. That will help improve the utilization..

And do you feel like in the second quarter -- I’m sure this has probably happened in the first, but in the second quarter, do you feel like there was a market share loss to the highway because of the rail service problems?.

We did see some conversion back to highway but it was not an overwhelming amount. But there was some that were for service sensitive clients, yes..

Yeah, okay. And then just one last question. We know obviously Pacer is now part of XPO.

Can you notice them in the market at all at this point? Are they aggressive? Can you see? Does it create an irrational sort of player from your perspective?.

To date we actually have -- they have not been irrational and so we have not really seen anything from them which surprises us at this point. Our traditional competitors, of course they are pretty aggressive as usual but that’s just part of the game..

We don’t have a tremendous amount of overlap with Pacer. No, we do not..

No..

And your next question comes from the line of Matt Brooklier with Longbow Research. Please proceed..

Terri, question for you.

The total operating expense per quarter number, is that -- that was still 68 to 72 or did that number come down a little bit?.

It came down a little bit, 68 to 70..

Okay.

So 68 to 70, I guess the question being, why has it been received down a little bit?.

Based on our run rate kind of where we are at and the biggest factor there would be bonus and that’s predominantly based on earnings per share, but that was in there to begin with but really it’s just based on run rate, kind of where we’re at.

We also have an additional $1 million of IT cost in the last half of the year as compared to the first half of the year..

I guess we know rail service levels, they are what they are. It doesn’t sound like they’re going to get much better, maybe until early ’15. You guys are going through this cooling -- mix improvement process on the intermodal side and you’ve seen it in the margins.

I guess those being headwinds with respect to volume growth, what are some of the things that you can do in the second half of this year knowing these two factors to kind of mitigate those headwinds.

I don’t know if there is anything you can do network wise in terms of trying to improve utilization or moving some things around? I am just trying to get a sense for if there is anything you guys can do proactively that may add to volume growth in the second half?.

Well, we are certainly targeting areas that we saw volume declines, particularly associated with this kind of mismatch between assigned class [ph] and end market. So there is certainly some things we can do from a sales perspective to add some volume into the pipeline.

What we don’t want to do is give up our pricing discipline in order to make that happen.

The other thing that we need to make sure that we are doing is that we’re exercising our new equipment allocation and load acceptance, discipline as well and so that we’re taking the right freights and we’re feeding the right markets, because we do think that, that’s a critical element.

We probably could have squeezed out a little bit growth if we were able to feed some markets that were deficit throughout the second quarter. So I think we can continue to do a better job with that. We don’t think that we’re going to be stuck at the equipment utilization that we’re stuck at right now either.

So I think that we can capitalize on a little better equipment utilization. Even if rail service doesn’t improve substantially, we should be able to position the network a little bit. We’re also well positioned for peak.

We feel very confident that we’re going to be able to support peak in the P&W and in Sothern California, probably better-positioned than we were last year.

So there are some things that I think we’ll be able to capitalize on, but there’s no doubt that rail service will continue to be a bit of a headwind for us, in terms of volume growth but for us while volume is a good thing, certainly price is the most important driver..

And your next question comes from the line of Todd Fowler with KeyBanc Capital. Please proceed..

So just to be clear the expectation is that the Hub segment intermodal volumes are going to grow in the second half of the year but it sounds like it might be something below market rates and then as a follow up to that, I’m curious, the mode intermodal segment volumes seem pretty strong in the quarter and I’d be curious to kind of get your thoughts on a, what’s driving that and b, how we should think about the sustainability of that into the second part of the year..

Yes the, the first part of your question was Hub volume in the….

Last half of the…..

A little more of the…..

Yes, expectations..

I think our presumption at this point in time, we think that we’ll see positive growth but it’ll be probably below the intermodal market, but we do think it will be a positive number. The mode volumes have been terrific. There’s no question about it.

Their intermodal volumes have grown tremendously now for a couple of years and we’re very pleased to see that. What you have at mode is a few agents that are very committed to the intermodal product. They do a very good job operating it.

They’ve been very successful with bringing on new business and they look across the whole spectrum of potential options and they’re picking the best one for their customer.

So it’s been an appealing model I think for the customers and they have a very good product to sell and we’re trying to help them with our fleet boxes and you could see from the numbers that both fleet usage, as well as Hub group trucking usage are way up.

So they can sell not just sort of the spectrum of options, they can also position themselves as an asset based carrier for those that place an importance on that. So I think they’ve done a very good job. It isn’t the majority of IVLs.

It’s really like I said a handful, but they’re very good, they’re intermodal specialists and they’re doing a very good job of growing the relationships that they have with their existing customer base and bringing on new opportunities..

And they were fortunate enough not to have to price up and walk away from some non-compensatory business, which we get at the Hub segment. Their business is pretty profitable and they’ve done a great job and that’s really encouraging..

Sure that makes sense. So the answer, or is it fair to say then that the revenue growth or the volume growth that mode had here in the second quarter, that that’s something that we could see continuing through the back half of the year..

Yes, we certainly think that they’re going to continue to grow intermodal, and there’s nothing that would appear to us that would slow that momentum down. I hate to say they can continue on that kind of a track because that surprised us as well.

But I don’t think -- it’s the underlying fundamentals that would prevent them from continuing to post really solid intermodal growth and we’re committed to helping them do that..

And nothing unusual I guess, either in the second quarter that was a one time or something like that that they picked some share or something that was service disruption related or anything?.

I don’t think there was one timers or any business that’s going away or anything..

They did have some truck freight convert to intermodal, which is good..

Okay good. Just the follow up that I had is kind of a high level question. It’s back to the full year guidance and there is a ramp in just what the earnings growth is going to be, taking where you’re at mid-year and looking at the full year, we’ve got earnings that are going to up somewhere between the 16% to 25% range.

And I guess, at a high level what are some of the things that are going to contribute? It sounds like that the volume expectations, the better price and the gross margin improvement; is there anything else that we need to think about that’s driving the earnings growth now into the second part of the year, relative to the first part.

I understand it was obviously the weather comps in the first quarter..

Kind of as Mark mentioned earlier, all the bid results kick in in the second half of the year. You’ve got the price increases and they’re basically off Q3 and off Q4.

You didn’t have much of that price increase during Q2 or Q1 at all and as well that the mix of freight changes because the customer has awarded us a certain block of business and so we’re on boarding that all right now and so that’s where we have the opportunity to mix up and replace lower margin freight with higher margin freight.

The awards are just that, they’re an award based on what the customer estimates our volume’s going to be and so we have to make sure we get all that volume and that’s what we’re waiting for to materialize..

And we built some improved processes to track that and make sure that upfront we’re getting the business that helps our network, the business that we price too secure..

So with the weaker volumes here in the second quarter and some of the sound -- sounds like internal pricing issues and being able to maintain the outlook for the back half of the year and sounds like a lot that’s being predicated on the price.

Is the pricing better than what you were expecting maybe at the end of the first quarter call or on the first quarter call?.

…expectations, so..

And your next question comes from the line of Matthew Young with Morningstar. Please proceed..

Just a quick question on Unison. I’m wondering where you see the key growth opportunity at this point for kind of the outsourced managed transportation space.

Are you generally targeting the smaller, the mid-size shippers, those, I don’t know, call it few million in annual transportation spend? Or do you think there’s still opportunity with a larger, perhaps Fortune 500 companies with tens of millions of transport spend? Just trying to get a feel for who is outsourcing at this point and where those opportunities are?.

For us, we don’t really try to go after the very large engagements. We don’t think that we bring nearly as much value to those engagements. It’s also very hard to make a return on those engagements. A lot of those have proved to be unmanageable and non-compensatory for the folks that take those on. So that’s never been our sweet spot.

We’ll always gone through the sort of smaller and mid-tier. We have taken on some engagements there are bigger than that, that are tens of millions of dollars. We’d like to see engagement that’s over $5 million, but typically to go north of $50 million would be very unusual, for Unison. But we do have a feel that are in that sweet spot.

We love growth companies; companies that our really growing rapidly, because typically they haven’t maybe had the time or the resources to really get their supply chain as under control as they want to get it.

And so far us there is a great opportunity for us to bring a lot of value by helping them digest the growth and build a really solid supply chain. So we think we bring a lot of value there and it’s a customer that as they grow, of course our engagement grows. So that’s been the biggest area of success for Unison thus far.

But we believe that outsourced transportation is going to continue to be a really strong and growing trend in North America. It’s still in its early stages..

And I guess the last question.

Do you think there are a lot of brokers or freight brokers talk about managed transportation as well, but do you sense there is a lot of competition in that niche for the smaller and mid-sized type customers type in outsourced transport? Or do you think there’s only a handful of capable at retail so to speak including you guys?.

In the market, we play, and I think there is only a handful. It is easy to talk about them. We get that the systems are backing up. We have to have people that can operate the analytics and it’s a lot more complex to find and train logisticians who can help companies manage their supply chains than candidly do truck brokerage..

Yes, and one of the unique things that we bring I think to the table is most of our customers are people who have done business with us in intermodal or in highway that are familiar with our organization. Outsourcing is a risky proposition, and you don’t want adjust bring in a complete stranger and turnover your supply chain to them.

So I think we really have an advantage in that we have thousands of relationships built up over many years. I think that gives us an ability and entry into the process. .

(Operator Instructions). And your next question is a follow-up from Ben Hartford, please proceed..

Last question, you talked about addressing the buyback in the Board meeting in August.

Where do you stand in terms of acquisitions? What does the pipeline look like and I guess more specifically how are you thinking about now the balance between potential acquisition and share buybacks? You guys obviously have the capacity on the balance sheet and free cash is going to accelerate presumably here in 2015.

So what are your thoughts there?.

We continue to prefer acquisitions versus buybacks. And so we do think that it brings more shareholder value over the longer term. We have looked at several potential candidates, and in fact there is an accrual in the second quarter, a fair amount of due diligence; Terri, the number is about--.

850, yes Ben, we had about $850,000 of professional fees in the quarter related to due diligence for an unsuccessful acquisition..

So we continue to look. We do have some discussions underway with some potential candidates. Then again we also understand share buybacks and the value that it can bring to our shareholders as well, and certainly that’s going to be a long discussion at our board meeting in August..

Ladies and gentlemen that concludes our question-and-answer session for today. I would now like to turn the call back to Mr. Dave Yeager. Please proceed..

Well, again thank you for participating in our second quarter earnings call. As always, if there are any additional questions, please feel free to contact Mark, Terri or I. Thank you again..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day..