Hub Group, Inc.
Q2 2008 Earnings Call Transcript

Published: 24 Jul 2008

[Operator:]

Good afternoon and welcome to the Hub Group second quarter conference call. We will begin with the discussion of the financial results led Terri Pizzuto, the Executive Vice President, Chief Financial Officer, and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Vice Chairman and CEO. The company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, President and Chief Operating Officer, will join us for the Q&A session. At this time, all participants are in a listen-only mode. Comments made by Hub Group employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the company or the SEC. Now I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group. Please proceed

[Terri Pizzuto:]

Thanks, Denise and good afternoon. We are glad to have you all with us. I want to begin by covering three things. First, we had a record quarter on a difficult comp. Second, we are excited that we grew net income and intermodal volume in spite of the challenges that we face from the sluggish economy, an owner operator strike in Northern California, and the service delays caused by floods in the Midwest. Third, we maintained our cost discipline and we started to see some results from our sales growth strategy. Here are the numbers. For the second quarter, Hub's diluted earnings per share increased 14% from 2007 to $0.40, Hub’s second quarter operating margin with 4.9% that is compared to 5.5% in 2007. At the end of June, we had $54 million in cash and no debt. Now, I’ll discuss details for the quarter starting with revenue. Intermodal revenue increased 17%. This change includes the 5% volume increase and a 12% price increase related mostly to fuel. Last year, we also grew intermodal volume by 5% in the second quarter, so we are feeling very confident about our ability to grow our volume this year. The two biggest increases in volume during the quarter came from our consumer products and transportation customers. Volume with our consumer products customers was up 7%, mostly in the food and beverage segment. Volume with our transportation companies was up 32%. This includes our wholesale customers that travel on the BNSF railroad and third-party logistics company. We have been successful in holding on to existing business and winning new business during bids. Some of the customers we grew with converted freight from truck to intermodal. Truck brokerage revenue increased 34% due to higher volume, pricing which includes fuel, and mix. Some of our fastest growing truck brokerage customers are retailers. We were again able to grow with both new and existing customers because of our collaborative approach and differentiated service. Many of our truck brokerage customers think of us as the core carrier since we use a consistent carrier base and have a high level of on-time performance. The pipeline of business in truck brokerage looks promising. Logistics revenue is 50% higher than last year due to the most part to new customers. We are continuing to bring on new logistics customers and save them money. For example, we recently landed business with another bottle manufacturer that'll start up in December. Gross margin grew by over $2 million during the quarter. The two biggest contributors to this $2 million increase were logistics and truck brokerage. These increases were partially offset by cost related to the owner operator strike in Northern California. Let me give you the story on the strike. Owner operators from the major drayage companies in Northern California staged a work stoppage most to the month of May. The owner operators wanted more pay because of skyrocketing fuel cost. We have 68 owner operators working in Stockton before the strike. We think that our fuel program was fair and closer to the top end of market. In fact, we didn't have any problems hiring or keeping drivers before the strike. Our drivers were intimidated by threats of violence and so they chose not to work. We then had to pinch head by flying in employee drivers from our other location and running tractors for them. A couple of our carriers helped us by providing dedicated drivers. Hub's intermodal operations management would stage an on site discussion to help ensure things run smoothly. Our drayage cost for the month of May were more than twice what they would normally be in Stockton. We spent an extra $1 million related to the strike. We're proud that our team worked diligently and creatively to make sure there was minimal disruption in service and that loads were covered. To prevent this from happening again, we're moving towards a mixed operation in Stockton, this made up of both employees and owner operators. We currently have 63 drivers in Stockton a little less than a third of that are our employees. You can see that our yield in the quarter was 12.2% compared to 14.4% last year. The 14.4% growth margin last year was unusually high. The four major reasons for the yield compression are, number one, intermodal pricing excluding fuel was down between 1% and 2% it's competitive out there. We're protecting our base of business and bringing on new business at slightly lower margins. Once we have that freight in house, we work on improving the margins. Number two, truck brokerage margin deteriorated 200 bases points since capacity started to tighten and we covered loads with less than desirable margins. I'm going to tell you how we'll fix that in a minute. Number three, because of dramatic jump in fuel cost and some costumers lagging with fuel charge adjustment, fuel negatively impacted our yield compared to last year. Number four, the strike in Northern California cost us an extra $1 million in drayage. Total cost and expenses for the quarter were $35.8 million. That's compared to $35.6 million last year. We expect that our quarterly cost and expenses will be in the range of between $36 million and $38 million for 2008. We had 1086 employees excluding drivers at the end of June. That’s an increase of 15 people compared to the end of March. Most of the people that we added were in logistics and truck brokerage. The gross operating margin was 4.9% compared to 5.5% last year. While it's a difficult market, we're still shooting to improve the operating margin. There are three areas that we're focused on; First, David Marsh our Chief Marketing officer and his team have the strategies and plans in place to increase our volume and take advantage of our scalability. Second, we're working hard to improve the yield in truck brokerage. As I said, we had an issue in the second quarter where we accepted loads with low or negative margins. Now, we have the processes in place to require management's pre-approval before we take any low margin break. We'll also do more bids with truck brokerage carriers and implement detailed costumer action plans. Third, we can increase intermodal yield by more effectively using our new optimizer, purchasing drayage at lower cost and continuing to work on improvement plans for lower margin costumers. Turning now to our balance sheet and how we'll use our cash. During the quarter, we spent $1 million on capital expenditures. We bought 49,000 shares of stock in July. What will we do with the $54 million dollar of cash that we have? One option is buying stock. We have $74.8 million remaining under our current share buyback plan that does not expire until June of 2009. Our Board prefers that we use our cash for acquisition, so we are continuing to look for drayage and other acquisitions that are consistent with our strategic plan. Now, I’ll discuss 2008 full-year earnings guidance. Each quarter-end, we compare our full-year EPS forecast to the publicly available analyst range. For 2008, we are comfortable that our diluted earnings per share will be within the current analyst range of between $1.59 and $1.69. The weighted average diluted shares for 2008 are estimated to be 37.6 million. To wrap it up, we’re happy with our progress this quarter. Our earnings per share climbed 14% in a troubled economic environment. Hub had the winning team and we are in a strong position for the future. And with that, I’ll turn it over to our CEO, Dave Yeager.

[Dave Yeager:]

Great. Thank you, Terri. Due to impressive intermodal growth and solid quarters from both truck brokerage and logistics, we produced another record quarter despite a slow freight economy. Our intermodal business grew nicely during the quarter with volumes up 5% over a tough comparable in ‘07. We brought on some business and had better success in bids compared to prior years. We remained focused on growing business in corridors that had the most positive impact on our network. And although the realignment of our sales and pricing and marketing groups last fall is still quite recent, we do believe the changes we made in this area helped contribute to our growth and allowed us to take share. Last quarter, we predicted that our intermodal volume would be up for the year despite the volume decline in the first quarter. After just six months, our volume is already up for the year, thanks to the strong growth in the second quarter. Although in the past you have seen us grow volume one quarter, shrink the next, we expect to continue to seek volume growth in both the third and fourth quarters of this year as our intermodal pipeline remains quite robust. Rail service improved in April and May. Due to the well publicized flooding in the Midwest, we did see rail service deteriorate in June. However, the railroads managed to keep freight moving despite very difficult conditions. We were very impressed with how quickly they rebounded from the floods. Their networks recovered more quickly than in years past and services approaching pre-flood levels. Our intermodal volume was no doubt hurt by the floods, but it’s very difficult to quantify the exact amount of lost business. 53 load capacity was generally adequate for most of the quarter but definitely tighter than last year. Fortunately, Hub has already received approximately 400 of the 1,000 additional new containers we are getting this summer. The rest will be in place before peak season. The utilization of our fleet continued to improve during the second quarter even with the drayage strike in Northern California and the flooding in the Midwest. Our operations team is doing a great job deploying the fleet in the lanes where it makes the most sense for our network and keeping the fleet turning. As far as ISO containers consistent with what we saw in the first quarter, they remain in short supply. We expected that tightness to continue through the year. We’re very pleased with the performance of our intermodal business, and believe we have the right long-term rail strategy. We have a strong partnership with each of the met four [ph] major U.S. railroads and are the largest IMC on each network. By having a significant relationship with each railroad, we can take advantage of areas where given a railroad, has a particular cost or service advantage. An example of that is for loads going from the West Coast to the Midwest. BNSF has the best service offering. For loads going from the West Coast to the Southeast, Union Pacific has the best service. Since we have a significant presence on each railroad, we can offer our costumers the best price-service combination available. Additionally, certain markets are only served by one railroad and by being in each network, we can offer our costumers access to all available intermodal destinations. We feel very good also about the future of intermodal. The railroads continue to invest in their networks and are working to improve service. At the same time, many of our costumers are beginning to focus on green initiatives and are looking to reduce their carbon footprint. Our intermodal service not only saves costumer’s money but it is more fuel efficient than truck and it’s better for the environment. As an example, we recently examined the network of one of our largest consumer products costumers. By converting a portion of their network from truck to intermodal, they can reduce their carbon emissions by 29,000 tons per year or 52% while saving 28% on their transportation spend. We think these trends bode well for intermodal over the long term. Our brokerage group had another excellent quarter. Revenue was up 34% over last year driven by new business wins. We continue to benefit from our efforts to cross-sell our truck brokerage to existing customers as we have better trained and equipped sales force to sell this product. Truck capacity did tighten unexpectedly in the second quarter and covering the freight became more difficult. Quite frankly, we were a little slow to react to this tightening of capacity, and took some loads at undesirable margins. We put processes in place to fix this, as we believed both truck and intermodal capacity will be tight in the third and fourth quarters of this year. Our Unyson Logistics business remains very strong with revenue up 50% for the quarter. We completed the onboarding of two customers in the second quarter and expect to have two additional customers fully onboarded by the end of the third quarter. Our Logistics team has proven to our customer base that we can save money and improve their operations by outsourcing to us. Logistics has a solid pipeline of new business pending and we expect to see continued impressive growth in the coming quarters. In conclusion, we are proud to deliver another record quarter. We managed to grow our intermodal volume by 5% and both our truck brokerage and logistic revenue by double digit levels in a tough freight market. We have another quarter of healthy free cash loan and remain a debt free company with significant cash on the balance sheet. Thanks for our asset like business model in preferred position with all of our real partners. We like the future for our intermodal business and are confident we can continue to grow both truck brokerage and logistics over the long term. We appreciate the confidence that our investors and customers have placed in us and we look forward to a great second half. With that, we can now open up the line to any questions that you may have.

[Operator:]

(Operator instructions) Your first question customer line from Edward Wolfe from Wolfe Research. Please proceed sir.

[Edward Wolfe:]

Hi, good afternoon everybody. Thanks for that explanation. It's such a change in the operating environment where you go from a low growth and yield expansion to this big upticking growth. When you look though the gross revenue growth that your truck and intermodal businesses, let's take logistics out of it for now, how much of that is demand is improving a little bit, may be some mode shift or market sharing, how much of that is the sales force is starting to really kick in and you get a sense that this is individual to Hub, how do you look at these things?

[Dave Yeager:]

I would say Ed, that this is individual to Hub. I believe that we're taking share that the sales force is beginning to kick in and some of our focus that we've had is beginning to payoff. So I do believe it is specific to Hub. I don’t really see the overall freight market improving much over the last several quarters. Mark I don’t know if you have anything to add on that?

[Mark Yeager:]

I think I would agree with that when you look at – one of the major things we did in November was particular an enterprise account's group and we saw a 14% increase in the quarter in business generated by enterprise accounts. So I think there are some certainly some market fundamentals that are helping intermodal, but I think individually we're doing a better job in the sales as for service, pricing and marketing area.

[Dave Yeager:]

And just say you know, we define enterprise accounts as we identify the large customers that have the capability to give us tens of millions of dollars in business. So his definition – I don't think we've mentioned that on the call before.

[Mark Yeager:]

Right.

[Terri Pizzuto:]

Yes, and I guess the other thing I would point to is we grew in local lease about 10% this quarter, where in Q1 we were only up 2.5%. Some of that local lease increased with related to business that converted from truck to intermodal and say the words as well as some paper customers.

[Edward Wolfe:]

Okay. So it sounds like things are not front filled consistent to you. You talked about Dave having better visibility than you've had for sometime going forward. Yet you only raised the head count by 15 people. I would expect to see more operating leverage, other than the million dollars that that probably is an ongoing related to the strikes out west. Am I thinking about that right? That when you have this much volume without having to raise the employees, we should start to see some better cost improvement than this going forward?

[Terri Pizzuto:]

Are you talking about the scale ability Ed?

[Edward Wolfe:]

I'm talking about the operating leverage if you will.

[Terri Pizzuto:]

Yes, I mean our operating margins at the quarter was 4.9%. We're definitely shooting to improve that, some of the major reasons for the yield compression when you look quarter over quarter Q1 versus Q2 were because, you know, the biggest difference there was because of fuel and some of our customers lagging with fuel surcharge adjustment sometimes on a weekly basis, sometimes on a monthly, sometime quarterly or is derailed, their schedules throughout the jobs weekly.

[Edward Wolfe:]

Can we talk about that for a second? I would have assumed that you have had a small benefit net of surcharging cost on fuel in the quarter year over year because you would have gotten from your customers quicker than you had to pay the railroads–I was under the impression you paid them a little slower than that, can you?

[Dave Yeager:]

Well actually, yes, well I can elaborate on that a bit. If you look at our top three reasons for the yield compression, the largest was the intermodal fuel surcharge. If you think about the intermodal fuel surcharge, Q2 was really very erratic diesel was up over $0.83 versus the first quarter and as we've said on the call before about 70% of the fuel surcharge schedules we have are using our customers and so it does become apparent that as fuel becomes a bigger piece of the revenue pie, that yield does have somewhat of a bit of a compression. But with a lot of our customers with that lag that we have, again with 70% of our clients were using their fuel surcharge, some of our largest customers lagged by an entire quarter, one large retail does, another large retailer lags by a month and in all candor sometimes a customer just has a fuel surcharge that as it flattens out as fuel gets more expensive and becomes non-compensatory. So the steps that we’re taking on this is that number one the lagging customers they’ll catch up this quarter so that’s good, that’s good business for us in the third quarter. For those customers that just will not give us a compensatory fuel surcharge and our margin is negative, we will in fact either raise prices or we will walk from the business, we have one midsize customer right now who refuses to give us a compensatory fuel surcharge and we’re going to walk on the business. We gave him our 30 days notice and we'll be disposing of that business as of August 1.

[Edward Wolfe:]

That’s helpful. One last one and I’ll give it to someone. Can you talk about that 5% volume improvement in intermodal, month by month and how it looks in July so far?

[Dave Yeager:]

We really don’t break it down by month. It was –

[Terri Pizzuto:]

Fairly consistent.

[Dave Yeager:]

Fairly consistent. And I will clarify July even though I don’t normally do because I have seen some of the other transcripts and we actually have not seen any decline in volumes. Things seemed for us appear to be going strong. So I know some of the others have said that it’s been a littler bit weaker at the beginning of July, we haven’t seen that.

[Edward Wolfe:]

We’ve heard seasonal, so you are saying you’re it feels similar to what’s been going on year-over-year.

[Dave Yeager:]

Yes.

[Edward Wolfe:]

Okay, thanks for the time I appreciate it. I will get back in line.

[Dave Yeager:]

Thanks.

[Operator:]

Your next question comes from the line of Alex Brand from Stephens, please proceed

[George Fickle:]

Hi, this is actually George Fickle [ph] for Alex Brand.

[Terri Pizzuto:]

Hi George.

[George Fickle:]

Dave, are you able at all to break down your truck division, its revenue in terms of fuel and volume?

[Terri Pizzuto:]

I can help with that. On the fuel side, the revenue increased about 17% of the increase related to fuel, George.

[George Fickle:]

Okay.

[Terri Pizzuto:]

We don’t disclose volumes, but –

[George Fickle:]

But we can kind of back into the other 18%. And along those same lines, the 5% intermodal growth, can you break down exactly how much you think was from, call it, market share gains and how much was from modal conversion?

[Dave Yeager:]

Well as Terri had said about 10%, we were up 10% in local East and much of that could be that we converted from truck to intermodal, as well as a few customers being up in that corridor and some bids. From a customer segments perspective, our consumer products and durable good segments were a little bit better by comparison to Q1. Our consumer products had been down 8% in Q1. It was up 7% in Q2 and durables that should have been down 9% in Q1 was up 4%. So, we do think that a lot of it is taking share, there is some conversion in there but the majority of the new business is gaining share at this point.

[George Fickle:]

Okay. While you’re at it, can you give your retail paper and wholesale improvements too, if they improved?

[Dave Yeager:]

I know that retail actually did not improve.

[Terri Pizzuto:]

Yes, that was down about 13%, which is the most it's been down for us in ever actually.

[Dave Yeager:]

It's actually down now to 20% of overall revenue versus 27% year and at one time the high was probably about 34% of our business, wasn't it?

[Mark Yeager:]

That's right.

[Dave Yeager:]

Yes, so it continues to go down. It's not that we've lost costumers or lanes, it's just that overall retailers are tightening their inventories.

[George Fickle:]

What about paper in wholesale?

[Terri Pizzuto:]

Those grew in the mid 30% range.

[George Fickle:]

I guess lastly, then I'll let someone else have it, it sounds like everything is going well and you seem upbeat about the back half of the year. Is there any chance that we could see pricing going up? Or if you're wrong and the market's actually better than you expect, could you or would you want to take on additional container capacity if you had the demand? Would you think you would even have that chance?

[Dave Yeager:]

That's an interesting question. It's something that we're looking at. I don't know that we'll see price increases. I do think that some of the railroads we're now talking about having peak surcharges which I think is very possible out of the gateway cities as well as off of the West Coast. So, we may see some temporary price increases during that period of time. We do think that during the third quarter and early fourth quarter that we are going to see a fair amount of capacity constraint. We saw some tightness at the end of the second quarter, tighter than normal and we've even started out July with a little bit of tightness in certain markets. So, it will be a tougher capacity environment than most customers maybe anticipating at this point.

[George Fickle:]

Alright, thank you for your time.

[Dave Yeager:]

Thanks George.

[Operator:]

Your next question comes from the line of John Barnes from BB&T Capital Markets. Please proceed.

[John Barnes:]

Hi, good afternoon guys.

[Dave Yeager:]

Hi John.

[John Barnes:]

Hey, we've heard from a couple of the rails who have reported earnings here recently and specifically Union Pacific this morning, in talking about the improvement that they've made in service and that type of thing within their network, and their comment was that they believe it means price increases, not only more major price increases now but price increases for a longer period of time. As rates with the rails have continued to go up at a pretty decent clip, what kind of lag are you experiencing in terms of being able to pass on that cost to your customer and to protect margins? Because I get the feeling that the rails are going to be more aggressive about raising rates as service has improved.

[Mark Yeager:]

This is Mark. In 2004 and 2005, we saw the rails go down a path of significant price increases on a regular basis and we were able at that time to develop a discipline to pass those increases on. We are confident that in the event we get back into an environment where price increases are attainable, we'll be able to go out into the marketplace and realize those and won't see a margin deterioration relative to price increases on behalf of the rails. Rails normally give us enough time to get together with our customers and work our way through the increased issues. So there normally is not a log between a rail increase and our pricing with the customer. Every once in a while, you will see a few customers where there is a ladies and gentlemen, but it generally is not a material aspect for us. I think it is important to look at intermodal pricing versus pricing with the rest of the rail segments generally speaking. There has not been a lot of increased activity in 2007 or 2008 despite the fact that rails have been able to secure some price increases in other segments. So, in the event that the tables do turn and we do see a tight capacity environment and the rails go out and increase prices on the intermodal side, we are confident that we'd be able to react appropriately without a rolling margin.

[John Barnes:]

Okay, and then a follow-up on pricing. Have you been stymied at all in terms of pure kind of core price increases giving where fuel is, have you been able to secure core price and the fuel surcharge, larger surcharge collection, or has fuel in the rise really negated your ability? I think you did a nice good job this quarter but just in prior quarters and what do you see going forward?

[Terri Pizzuto:]

George. John, sorry. When we look at the profit on the move, we look at the whole profit because the costumer wants one price really. So, like Dave mentioned earlier, 70% of our load is around on the costumers' fuel surcharge schedule. Our margin team works really hard and is very creative in making sure where we got a low margin costumer that we go out and get that additional money somehow either by changing the fuel surcharge schedule or by increasing in a particular lane, whatever, or getting better rates from the drayage carriers. Like there are all kinds of combinations on that, so we really don’t break it out separately. The low margin team is focusing on the profit at that portal [ph].

[Dave Yeager:]

But if we look at just pricing, I think it’s probably in the first quarter, we had said that it was down about 1%.

[Terri Pizzuto:]

Between 1% and 2%.

[Dave Yeager:]

Between 1% and 2%, and I think we saw a similar year-over-year second quarter.

[Terri Pizzuto:]

Yes.

[Dave Yeager:]

As far as the environment.

[John Barnes:]

Okay. And then last question, I had talked a couple of you about this before and I’m just kind of curious of your thoughts now. As you look at, it does sound like you are a little bit more optimistic on the back half. I have had the feeling that part of the lack of revenue growth over the last several quarters, more material revenue growth especially in the intermodal product has been, I get the sense that maybe you guys have cut too deeply into your sales force that maybe you got into the muscle of the sales organization a little bit. Do you anticipate beginning to beef that up a little bit more? Would you consider additional sales, headcount, from here on out if you are starting to get a little bit more optimistic about back half of '08 and into '09?

[Mark Yeager:]

We certainly did cut back on the sales effort at one point in time. We have been in the process of rebuilding that sales effort. We now have rounded out our Regional Vice President team with the addition of a new person on the West Coast. We think that we have beefed our sales effort up appropriately and we have now got them focused in the right areas. So, we are getting more productivity out of our sales as well and really putting our best sales guys in front of the costumer, which is exactly where they belong. We are certainly open to adding some additional sales talent into the organization. We have an initiative underway to develop our own sales talent as well. But I don’t think you are going to see a material change in the costs associated with our sales effort. We do not think that is necessary but we do think that we are becoming more effective in utilizing the resources that we have in place.

[Dave Yeager:]

John, just to piggyback a little bit on Mark’s comments, we did in 2004 when we realigned the company, one of the things we did with the sales group which in hindsight was probably incorrect was that we made our best sales people into Sales Managers, and so you take them out from being in front of your large costumers and garnering new large accounts. We have changed that with this enterprise group. We now have our best sales people not managing other sales people but managing clients. And then we do have Regional Vice Presidents that have been trained and their sole duty – they have no account responsibility, they solely manage sales people. So it’s a different sale structure and we think it’s a far better sales structure and really takes advantage of the talents of our people.

[John Barnes:]

Good deal. All right. Thanks for your time. I appreciate it.

[Dave Yeager:]

Thanks John.

[Operator:]

Your next question comes from the line of Todd Fowler from KeyBanc Capital Markets. Please proceed.

[Todd Fowler:]

Hi, good afternoon everybody. Can you help us think a little bit about how volumes will trend for the rest of the year? The 5% growth here in the second quarter was against a pretty good and the comp does ease as we can get into the third quarter but it sounds like there are still some moving parts with some business that you are going to be walking away from. Is there more business that continues to ramp in the back half in the year and is kind of mid single digits where we need to be thinking or is that maybe too aggressive or too conservative.

[Dave Yeager:]

Todd, I would candidly be disappointed if we didn’t at least continue with our current business increases. We do have more business ramping in the third quarter. Some significant accounts are coming onboard. And so, despite my poor track record, I’m very bullish on volume and we do – from the pipeline that we see that if it’s not over the 5.3% at or above, I would be quite disappointed.

[Todd Fowler:]

I was surprised to get that much color. I was not sure what the answer was going to be.

[Dave Yeager:]

I was reading through the first quarter transcript, Todd, and I think I told you that a lot of it was back-end loaded – a lot of our sales growth. .

[Todd Fowler:]

Exactly, I do remember that. And then, I guess, kind of along the same lines, where are still the biggest opportunities at this point? Is it local east, and what percent right now of intermodal revenue is coming from the local east or is it some of these other areas including beverage transportation or, something coming back in retail.

[Dave Yeager:]

Well obviously if retail would come back, that would be a huge boom for us, because again we have not been losing market share within the retail space. They just – their volumes are down significantly. So that would be -- an uptick in that segment would be tremendous for us. We do have continued a lot of opportunity within the transportation company space with the various 3PLs and some of our IMC customers and competitors. So that does continue to have a lot of opportunity.

[Terri Pizzuto:]

And about 80% of our growth is with existing customers so it's really better penetrating our existing customers and getting more business from them and then building on a new relationship that we've got.

[Dave Yeager:]

Yes and I really feel so. One of the great things is it going into this capacity market that we believe is going to be tighter is our fleets are going to give us a huge advantage over our conventional IMC competitors that don’t have the fleets. I do think also, we -- Terri had elaborated on the strike in Northern California where we spent about $1 million. We did that for our customers to make sure that their goods were being delivered in a timely fashion. Our smaller brethren were unable to accomplish that type of a feat or it was much more difficult for them. And while it certainly did have a negative impact on our quarterly results, it’s something that I think will engender a lot of customer loyalty as a result.

[Todd Fowler:]

Were you able to pick up any share because of that situation that there were smaller IMC that weren’t able to provide the same sort of service? Did people turn to you in that situation and then were you picking up volume because of that?

[Mark Yeager:]

I don’t think we had quite enough capacity in order to really garner a whole lot of market share out of it. We did obviously put a lot of effort towards servicing our customers and probably enjoyed some greater share of that business where we might be splitting it with another IMC who was struggling to provide capacity but I think more importantly today's point, you know, I think that people saw that even in an adverse circumstance we were willing to step up and serve our customers, despite the fact that there was a short term cost to the company to do so.

[Dave Yeager:]

I do know and I don’t know if you can directly attribute it to the majors that we took. But we have a lot of nice winds or several nice winds out of Northern California and into just most recently. So I don’t know if partially it's attributable to the efforts we made or not. But that certainly remains a very strong and viable market for us.

[Todd Fowler:]

Okay. And then as far as profitability in some of the different segments that you serve, how wide is the variation between a retail customer doing business production for another transportation company (inaudible)? Is it a pretty wide swing on what you can see in the margin of those shipments or is there a pretty narrow band and generally profitability is pretty close along the different business lines?

[Dave Yeager:]

I would say by business line it’s pretty comparable. You have fluctuations. You do have a broad band as far as customers and where the margins are and if it's a strategic move into a gateway into the West Coast, so it really varies. But I don’t think there's really much of a difference in margin by customer segment.

[Todd Fowler:]

Okay. And then just last thing here, with the share buyback, my impression is that you guys are going to look to execute the entire $75 million within the next 12 months. Is that still the right way to think about that? Is there a chance that that doesn’t get done if something comes up, and as you talk about the guidance space, it sounds like the share count could remain relatively flat, so maybe a little bit of color around what you're thinking with the share buyback and as it relates to acquisitions as well?

[Dave Yeager:]

Well we do, we would love to have a large acquisition to put in there that would preclude us from purchasing the shares but at this point in time we don’t have that in the pipeline. So it is our intent to complete the share buyback over that period of time. As you can tell we had a strike price where we did purchased a few shares, but the stock price didn’t go down much. It didn’t stay at that level for long.

[Terri Pizzuto:]

Yes, we had put a plan in place in the second quarter.

[Todd Fowler:]

Wish I guess it's both good and bad, so

[Dave Yeager:]

Yes, exactly.

[Terri Pizzuto:]

And you're right Todd that share count that I gave did not assume any buyback.

[Todd Fowler:]

Okay. That's helpful thanks a lot.

[Operator:]

(Operator instructions) Your next question comes from the line of Jon Langenfeld from Robert W. Baird.

[Jon Langenfeld:]

Good afternoon

[Terri Pizzuto:]

Hi, Jon.

[Jon Langenfeld:]

The transportation side of intermodal that comes from base, how big is that of the presented total?

[Dave Yeager:]

Bear with us one second.

[Jon Langenfeld:]

Okay.

[Terri Pizzuto:]

Of the total of 10%.

[Jon Langenfeld:]

And how is that trended over the last, call it 12, 18, 24 months, did that become a bigger part of what you do?

[Terri Pizzuto:]

It has been, yes especially with the whole sale customers that we have is a big piece of it and then some third party logistic company.

[Jon Langenfeld:]

That’s okay, and how about truck load companies, are they in there as well?

[Terri Pizzuto:]

Not really.

[Dave Yeager:]

No.

[Terri Pizzuto:]

Not too many. A few but not too many.

[Dave Yeager:]

There’ll be some truck load within the wholesale branch.

[Terri Pizzuto:]

Yes.

[Dave Yeager:]

With a very small percentage.

[Terri Pizzuto:]

Right.

[Jon Langenfeld:]

Okay. Okay good. And then fuel, how much do you think that lag cost in the quarter?

[Terri Pizzuto:]

You we think it was the biggest drag on yield compared to Q1.

[Dave Yeager:]

Okay so bigger than.

[Terri Pizzuto:]

Then after that would be the yield deteriorating in truck brokerage and then finally the million dollars to strike cost.

[Dave Yeager:]

Okay.

[Terri Pizzuto:]

That was really the biggest component.

[Jon Langenfeld:]

Alright, good enough. And on the truck brokerage side the gross margin compression there how much of that, I mean if you kind of think about what should we expect giving where fuel prices are at, I mean, is it worse than what you to expect or have we just been in an environment here over the last couple years where maybe it’s probably been a little bit better than what it should have been and so now were kind of coming back to more of normal environment if you will?

[Dave Yeager:]

Jon, I would, I would tell you that it’s worse than we would expect and worse than we will accept.

[Terri Pizzuto:]

But it really wasn’t related to much to fuel and in the truck brokerage side, when were talking to drag on.

[Dave Yeager:]

Yes but it was partially I think a functional of fuel, I think people are much more are pushing back much more on receiving cost increases in the trucking space and so we were subject to that and we candidly took business that we shouldn’t have taken that we're not taking now and the reason that we were giving it is probably because the primary carriers said that I can not accept it at this rate level. So, we’re going to be– we’re being very aggressive on that Jon, we've got a lot of processes in place to stop that and I think we’re already receiving some improvement as a result of that.

[Jon Langenfeld:]

And so in today’s environment after you kind of made some changes if I’m a customer service rep and I want to accept a zero gross profit or even a negative gross profit load, how does that proceed to the organization?

[Terri Pizzuto:]

You need a managers approval you need Dave, not necessarily Dave but if Dave were your manager, you need his approval. Before you can accept that load cause like Dave's got a lot of what we were doing ahead of time we just accept all the loads coming in. So, you know our (inaudible) highway kind of (inaudible) like a smorgasbord where we’re automatically accepting and keeping all this loads and then we felt the gas afterward.

[Jon Langenfeld:]

Okay. Alright. Good. Thanks for the color.

[Operator:]

In the next question is a follow-up question from Edward M Wolfe from Wolfe Research

[Edward Wolfe:]

I was asked to answer I'll get it off line, thank you.

[Operator:]

(Operator instructions) At this time we have no further questions in the queue.

[Dave Yeager:]

Okay, great. Well again thank you for joining us on the conference call. If there’s any further questions et cetera please don’t hesitate to give us a call. As I had said earlier we are very appreciative of your support and we do look forward to a very solid second half. So thank you again for joining us.

[Operator:]

Thank you for your participation in today’s conference. This concludes presentation. You may now disconnect. Have a great day.