Hub Group Inc (HUBG) 2011 Q4 法說會逐字稿

Welcome to the Hub Group fourth quarter conference call. We will begin with a discussion of the financial results led by -- Terri Pizzuto, Executive Vice President, Chief Financial Officer and Treasurer; followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The Company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, Vice Chairman, President and Chief Operating Officer, will join us for a question-and-answer session. At this time, all participants are in listen-only mode. Comments made by Dave, Mark, or Terri 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.

Thanks Jeremy and thanks everyone for being with us today. I want to begin by covering three main themes. First, intermodal volumes were strong, with Hub segment volume up 16% and total intermodal volume including Mode up 34%. Second, Mode's profitability continues to improve. Third, we completed our restructuring in truck brokerage and the new organization is energized. Here are the key numbers for the fourth quarter. Hub Group's revenue increased 59% to $763 million. Excluding one-time costs of $1 million, Hub Group's diluted earnings per share increased 41% to $0.48. Now I will discuss details for the quarter. As a reminder, we now report two distinct business segments, Hub and Mode. The Mode segment includes only the business that we acquired on April 1 of 2011. The Hub segment includes all business other than Mode. When we say Hub Group as opposed to just Hub, we are referring to the consolidated results for the entire Company, including both the Mode and Hub segments.

First I will talk about the financial performance of the Hub segment. The Hub segment generated revenue of $577 million, which is a 20% increase over last year. Taking a closer look at Hub's business lines, intermodal revenue increased 23%. This change includes a 16% volume increase and a 7% increase for fuel, price and mix. Directionally, fuel was a larger increase than price and mix was negative. 250 basis points of this volume increase came from fleet boxes that we sold to Mode agents.

We are excited that this was the 8th straight quarter of double-digit intermodal volume growth. We continue to see growing customers converting freight from truck to intermodal. A large part of the truck conversion freight is in our local East market which was up 19% for the quarter. Because of the growth in this market, our average intermodal length of haul was down 1%.

Truck brokerage revenue was up 3% on 3% lower volume. The truck brokerage business unit went through a restructuring this year. The team is very confident that we will be successful winning new business that will result in growth in the second half of the year.

Logistics revenue was 27% higher than last year. Most of that growth came from existing customers.

The Hub segment's gross margin increased by $4.5 million, due to significant growth in intermodal gross margin and slight growth in logistic's margin, partially offset by a small decline in truck brokerage margin. Intermodal margin is up because of volume growth and our focus on doing more of our own drayage. Hub's gross margin as a percentage of sales was 10.6%. That is down 120 basis points compared to last year's 11.8% margin. There are three main reasons why the margin percentage is down from last year. Number one, logistics margin is down 200 basis points, since we are doing more transactional as opposed to management fee business. Number two, truck brokerage yield's down 85 basis points. Number three, intermodal yield is down since we had higher than anticipated cost increases from key carriers and our equipment did not turn as quickly as last year.

Hub's costs and expenses were flat at $37.4 million in the fourth quarter of 2011 and 2010. Salaries and benefits includes $330,000 of severance related expenses that we classified as a one-time cost. We also recorded $170,000 of one-time expense related to office closures. Finally, we are happy that operating margin for Hub increased from 4% last year to 4.2% this year, excluding one-time costs.

Now I will discuss results for our Mode segment. Mode's revenue was $195 million. The revenue breakdown is $94 million in intermodal, $76 million in truck brokerage and $25 million in logistics. Compared to last year, revenue at Mode was up 6%. Mode's gross margin was $22.7 million. Gross margin as a percentage of sales was 11.6%. Mode agents decided to use Hub fleet containers for 12% of their intermodal loads. Mode's total costs and expenses were $19.2 million. Included in these costs are one-time expenses, totaling $500,000 that relate mostly to technology transition.

To summarize our one-time costs, on the Hub side, we had the $330,000 of severance related costs and the $170,000 of office closing costs. On the Mode side, we had the $0.5 million of mostly technology transition related costs for a grand total of $1 million. Operating margin for Mode was 1.8%. If you exclude one-time costs, it was 2%.

Turning to our headcount, we had 1,349 employees, excluding drivers at the end of December. That includes 1,188 Hub employees and 161 Mode employees. Hub headcount went up 17 people and Mode headcount went down 22 people since September. The majority of the increase in employees at Hub were in the logistics group.

Now I will discuss 2012 full-year earnings guidance. For 2012, we're comfortable that our diluted earnings per share will be within the current analysts range of between $1.85 and $2.20. Our weighted average diluted shares for 2012 are estimated to be 37 million. We think that our quarterly costs and expenses including Mode will range between $61 million and $63 million in 2012.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $49 million in cash and no debt. During the quarter, we spent $19.6 million on capital expenditures. $16 million was for containers, $1 million was for our building addition at Comtrak and the remainder was for technology investments. We think that we will spend between $50 million and $60 million on capital expenditures in 2012. Between $20 million and $30 million is for our new corporate headquarters, which is a 2-year project; $13 million is for containers and the remainder is for technology investment. To wrap it up for the financial section, the 41% increase in operating income for the quarter was a great finish to the year. And now you will hear from our CEO, Dave Yeager.

Great, thank you, Terri. As expected, the fourth quarter reflected a traditional peak shipping season for the truckload market. In fact, our demand remained quite strong through mid-December when business levels finally tapered off. This strong demand was felt in all of our business lines, but it was particularly strong in intermodal. In the fourth quarter, we achieved a 16% intermodal volume growth which translates into an overall increase of 13% for the year. We had record intermodal volumes in the fourth quarter of 2011 with October being the largest month in Hub's history. Most of that growth came from intermodal conversions in the eastern region and Texas with 20% and 16% year-over-year growth respectively. While pleased with growing market share, we did remain very focused on our price discipline.

Our fleet was 27% larger year-over-year in the fourth quarter. With a fleet of 23,000 containers, we were in a great position to handle the significant demand from our customers. In 2012, we intend to retire approximately 1,000 to 1,500 older containers and replace these retirements with new containers. The new construction will maintain our fleet size the same as it is today while reducing the average age of the containers. We are planning to utilize railed-owned assets to feed our projected growth for 2012. 2011 was quite an extraordinary year in terms of the amount of natural disasters that hit various parts of the country. From flooding along the Mississippi River to Hurricane Irene, Mother Nature dealt our rail partners numerous challenges in 2011. These natural disasters devastated certain regions of the country and resulted in some service issues. But the good news is that the rails quickly recovered, enabling Hub to satisfy our customer's service or expectations. In large part, these quick recoveries reflect the positive impact of the significant investments that have been made in the railroad infrastructure.

Our drayage Company, Comtrak had a record quarter and a record year. Through an aggressive recruiting campaign, we were able to add over 400 drivers this year which is a 26% increase. This enabled us to reach our 2011 goal of handling 60% of Hub's intermodal volume in the fourth quarter. In 2012, we intend to continue to expand Comtrak using a combination of organic growth and acquisitions.

2011 was a year of retooling for our brokerage business. Volume declined 3% for the quarter and 8% for the year, while revenue grew 3% for the quarter and 1% for the full year. We now have a more scalable model, which will enhance the service we offer to our customers while retaining specialized expertise. In addition to altering the geographic composition of our brokerage model, in 2012, we introduced a new compensation plan to tie performance to individual goals. While we expect 2012 to be a year of transition, much of the structural realignment is behind us with new programs ramping up, we believe our current initiatives will reinvigorate growth in the second part of the year.

Unyson Logistics had a record-breaking year exceeding $290 million in sales which is up 36% over the prior year. Most of the growth came from expanding the scope of our engagements with several large accounts, including retailers, manufacturers and pharmaceutical companies. Our logistics pipeline is strong and we anticipate another good year in 2012.

Mode performed much better than expected with fourth quarter revenue growth of 6%. For this year, Mode will continue to focus on recruiting new agents while supporting existing agents in their efforts to grow their business.

In conclusion, 2011 was a solid year for Hub with numerous accomplishments. We grew earnings per share by 35%. We increased market share organically as well as through the Mode acquisition. We added 4,000 containers to our fleet while maintaining good fleet utilization rates. We successfully completed three acquisitions. We restructured truck brokerage. Finally, we maintained our pricing and cost disciplines. At this time, we'll open up the line to any questions that you may have.

(Operator Instructions) Scott Group, Wolfe Trahan.

I want to understand your comment that rail rates increased more than you expected in the quarter. We didn't hear about any peak season surcharge. Can you explain what happened in the fourth quarter and how you're thinking about rail rate increases in 2012?

Sure Scott, this is Mark. I think as most of you are aware, the rails were pretty aggressive in seeking increases this year and that was certainly true in the second half. So as a result, the increases that they were looking for out in the marketplace were more aggressive than what we had anticipated. The way our fleet of pricing works, it tracks the market and as the market moved up more quickly than we thought so did our fleet pricing. We would anticipate that this year is going to be a positive pricing year, but due to the fairly significant influx of capacity, probably not as aggressively positive as we have seen in the last two years.

Right, and how do you think about your ability to get pricing in the market relative to give or take, 3% to 4% pricing in 2011? Do you think you can get similar to that in 2012?

We were pretty successful, I think, in getting pricing in both 2010 and 2011. We are going to stay disciplined. We are certainly hopeful that we are going to be able to certainly offset any increases that we see and hopefully get closer to pre-recessionary yield levels during this year.

Mark, what do you think is the right long-term gross yield or gross margin percentage in the intermodal business? I know you do not break out the exact number, but is it something that can go up at some point again, or is it, the goal is to hold it flat longer term?

No, we certainly want to see it go up. I think that with the service that the rails have been providing and as the cost of the truck market continue to go up, rail pricing should follow a similar path and should continue to make progress. As long as rail service holds up. So we are pretty optimistic about the pricing environment. The dynamics in the industry, we also think favor positive pricing trends over the foreseeable future.

I would add though, the only negative could be the fact, if it is just a broader economic issue --

Right.

Sure.

-- which obviously would affect pricing for the entire truckload segment.

Right.

Okay, then in terms of the decision to keep your fleet flat and use more in the rail assets, it seems to be a bit of a change in strategy from the past couple years. Can you talk about -- is this kind of a one-year event or long-term change, again? And how did the economics compare for you using your assets versus a rail box?

As far as with the fleet, our strategy has always been that we in fact use a combination of our fleet and the rail fleet. Last year, the Union Pacific, the Norfolk Southern and CSX added about 13,000 boxes. So, since -- over the last five years, the percentage of our overall fleet versus rail assets percentage got a little bit out of kilter if you will. So we think that this is probably a one-year reset, so that in fact we can get it back to normalcy. Because again, we really view this strategy as a competitive advantage, because we do have the excess capacity during peak, with that mix. As far as the economics, they are relatively comparable. I mean, I don't look to see a large decrease in our margins as a result of using more rail equipment at this point.

Okay, that is helpful. Just last thing, real quick, the 22 people that left at Mode, where those agents or is that something else?

No, those are people that we terminated on the beginning of September. So it went according to plan with the headcount going down in Memphis.

Right, it was corporate administrative people. So, no, it was not any -- we are pleased to say that we have not lost any agents.

No. And in fact, we brought on 11 new sales agents in the fourth quarter and --

8 operating.

And 8 IBOs. So -- which was actually a record, I believe for Mode.

Yes.

Alex Brand.

So, I guess I just want to get back to Scott's question and just try to be direct about this. The greatest fear that people have -- investors have about your model is that you are in a position that is maybe not as strong as your largest facing competitor on the pricing front and you can get squeezed. So can you just as directly as you can, did you in fact get squeezed in Q4 and is that something that you are worried about in 2012?

I think to Mark's point, we in fact did, for the most part, cover the overall rail increases. But we didn't recover more than that. So as a result of that, the margin just goes down a bit. But no, we feel very comfortable with our ability to keep up with the rail pricing. Again, it just -- it was higher than we anticipated it would be.

And they were significant.

Yes.

Okay, and is that the result of the fact that your bid pricing was earlier in the year and so you couldn't -- you can't go back until now, this bid season to try to catch up, if you will?

Sure, most of the bidding takes place in the first and more so in the second quarter and that is, in many cases, held for an entire year. So we have to make a prediction about what we think the market is going to do and what our underlying costs are going to do in the second half. As it turned out, the increases were slightly more than we had anticipated, not so much so that it put us in what we would call being squeezed, but it didn't allow us to improve our margins.

Okay. So, having said that on the pricing side, your volume was good, very good. Can you talk about maybe what verticals were seeing the growth and also talk about local East versus transcon growth?

Yes, our biggest growth was 47% in transportation and then durable goods was up 15%, paper was up 24%, retail was up 12% and consumer products was up 13%. So really, in all the verticals we experienced great growth.

Yes, I think one of the good things about this quarter is that our big three, consumer products, durables and transports -- or, consumer products, durables and retail, all grew in the double-digits, which I think reflects a good balance growth portfolio as opposed to being dependent on a particular customer or on a particular industry.

Yes, our biggest growing customer in the quarter was in retail and happened to be a new customer. So that was also good.

Terri, what was East versus transcon?

Our local East was up 19% and our transcon was up 21%.

Todd Fowler, KeyBanc Capital Markets.

A couple more on the gross margin side. If pricing next year in the intermodal businesses is up 3% to 4%, let's say, is that in an environment where you can see gross margin expansion?

Depends on what the cost increases are.

Right, but I think the answer would probably be yes.

Yes, I mean I understand that it depends on what the cost increases are, but based on what you know right now and thinking about what the rail's approach to pricing is going to be and what realistically the market can bear. If that is what you can get on the pricing side, can you see gross margins improved from where they were in 2011?

Yes, I mean we think so. We think that the rails obviously are going to look to get increases, no question about that. But we are working very hard to reduce our costs and reduce the cost of our street operations. We are having a lot of success there. I think a 4% price environment would be very good and one that would enable us to gain some ground back to more historic norms from a gross margin perspective.

Okay, good. That is helpful. Then Terri, I think you also mentioned that container turns were part of the issue with the gross margins here in the quarter. Did you say specifically what the turns were?

I didn't, but I can tell you what they were. They were 14.9 days versus 14.5 days last year in the fourth quarter.

So, I mean that is not too bad from a turn perspective. Is that something related to the timing of when some of the equipment came in? Or is there something else going on with the fleet in the quarter?

No, I think that -- Todd, this is Dave. It really was more so than anything else, there was a large influx of equipment that came in with the all the big three us, the UP and the guys in Arkansas. So I think as a result, while demand was strong, we didn't have the shortages that we actually had in 2010. We do think that demand will continue to be strong this year as there is more conversion business. So, that is partially why we are approaching this. We are going to grow, we believe in the mid to high single digits, but we do believe that overall using more rail assets this year will make a lot of sense for Hub.

Okay, got it. And then a couple of questions on the guidance. It's a pretty wide range and maybe that is more of a reflection of the analysts that are out there versus your expectations. But can you talk about the differences between the high end and low end? Can you also comment on, Terri, I think you gave some numbers on operating expenses in the low $60 million range which is a step up from where you ended the fourth quarter. What is driving the increase on the cost side?

Sure, in terms of your first question, what would drive the high end of the range versus the low end of the range, it would be pricing and what happens with pricing and cost. Then secondarily, volume. Then also we think we have a lot of opportunity, as Mark said on the drayage side of the house to improve street operations. We can do more of our own drayage. So that also helps to the extent we can make a lot of progress there, which we were able to do this past year. So we think we'll be able to do in 2012. And then in terms of the costs and expenses going from the run rate in the fourth quarter to the guidance of the $61 million, we have our pay increases, which go into effect on January 1. Those are a little over $1 million. Restricted stock expense is up about $0.5 million. We have headcount adds of about $0.5 million and then bonus would probably be $1.5 million more than it was in the fourth quarter.

Those are all the annual -- those are all annualized numbers that you just --

Yes.

Okay. Then how are you thinking about Mode for 2012?

We think they are going to be successful and we think that they'll hopefully maintain that 11.6% gross margin that they have got, which is great. We got to 2% when you exclude one-times from Mode in the fourth quarter. So our goal for them would be to be north of that 2%.

John Barnes, RBC Capital Markets.

Can you talk a little bit about where you finished the quarter in terms of Comtrak doing your internal drayage? How much of your intermodal business, your internal drayage is Comtrak handling both for the core Hub business as well as the Mode business?

Yes, it was 59%, John, for the quarter in terms of the percentage of our drayage that we did, but actually the last few weeks of the quarter we were at the 60%.

Is that for both Mode and for Hub?

No, that's for Hub. Then on the Mode side, we didn't do a lot. Only because we were using so much for Hub and continually adding drivers. So there is just not an opportunity to provide drayage as much to Mode.

So that would still be in the single digits as a percent with the Mode folks. But we did reach the goal which was 60% at year-end. Spilled over a little bit into the 61%, 62% range for next year, or this year rather, we are targeting 70%.

Okay, so the goal is still in that 70% and kind of continuing to work it up?

Yes.

Absolutely, we are thrilled with the progress we have made so far and feel like that's really a very realistic goal.

Where do you think for Mode? Is there an opportunity to start doing more for them, or are you so full with the core Hub business that Mode's just going to have to continue to do business as they have been doing?

Well, we are, obviously as Terri said we are, deploying most of our capacity towards Hub businesses as it probably should be. But the volume of Mode dray activity is increasing every week and we are glad to see that they are taking advantage of the network. We feel like we can make the entire Comtrak network more efficient by handling as much Mode business as we can. So we are out marketing to the Mode agents and making sure we are making that available to them as an option.

Okay, very good. Terri, you made the comment earlier about how much of Mode's business were handled in Hub containers. Mark, do you have a goal for that as well?

Yes, it was 12%, you're right John, in the fourth quarter of their intermodal load.

Yes, that's pretty much on track with where we want it to be at this time. It is something that we'll grow over time, we are thinking 15% to 20% right now is probably going to be a comfortable number. That could grow beyond that. It could stay under that. But for right now, we would like to see it continue to incrementally grow and so far that has been successful. Based on what we know, we think that 15% to 20% is achievable.

John, just to reiterate back from when we initially acquired Mode, we never tried to force them to use Comtrak or the fleet. It is as if those products in fact bring value to the agents. So we will continue down that path and we do believe that we will be able to continue to grow it and as we do, bring more value to them.

Okay, very good. Then my last question is, just your comment around pricing, you lead with the comment of, given that the amount of capacity that's come into the market, you were worried or concerned that you may not be able to realize the same type of pricing power you've had in 2010 and 2011. I am just curious, can you clarify what you see from an industry capacity perspective and maybe even provide us a little insight into where you think that capacity situation may evolve as 2012 progresses?

Yes, I'm sorry John, I wasn't very clear there. We really don't think that the capacity that came on in 2011 held down price. We thought that we were able to get price up in a reasonable fashion with our clients. It is just the rails increased their pricing a little bit quicker than we did. But we think that was actually a rationale for partially why our turn time was not quite as good as it was the prior year. So we really don't look at it as hurting pricing for this year and we do believe that demand is going to continue to be strong. You are not going to see the ramp up of -- the substantial ramp up in container capacity that you saw last year.

Yes, our guess is that it will go up by maybe 5% at most.

Yes.

5% industry growth?

Yes.

And just remind me again, I am sorry if I missed it, but your plans on container additions in 2012?

What we intend to do, John, is we are going to build 1,000 to 1,500, but we are going to be retiring the same number and we're going to be handling our growth and volume in rail assets and we do believe that we can spin our existing fleet faster as well. So that will also contribute to being able to handle the increase in volume.

What kind of improvement on turns do you think you can realize?

Based on our experience in 2010, when you did see demand exceeding supply, we were able to run at certain points a full day to 1.2 days faster than we are currently running. So we think that if in fact, we do see robust demand, we will be able to get back to those 2010 type of utilization levels. Which were in the low-13s.

Okay, very good. Nice quarter guys, thanks for your time.

Ben Hartford, Robert W Baird.

I just wanted to get your perspective on some of the terminal expansion projects that are coming up and will be running in 2012 and when you expect those benefits to hit. Is that something that we expect to ramp through the course of the year and then 2013, you're able to take full advantage of the expanded terminals for Norfolk? Or is that something that can happen sooner in 2012? Can you provide some perspective there?

Yes, sure Ben. Actually we have been seeing the benefits of that really for the last probably 18 months or so and it has certainly been something that has led to the expansion of local East for us as well as for Hunt, it is now about one-third of what we do. But the good thing is, the market share in a lot of those lanes that are going to be really opened up by this terminal expansion remains below 5%. So there is a tremendous opportunity for us to continue to grow volume through modal conversion, local East. I think that you will see it. It is something that is taking place over the course of the year, so it isn't a big bang. It isn't as if we are suddenly going to have a whole new array of services, but you're going to see services opening up throughout the course of the year. We are certainly out with our customers talking about the potential there and trying to work with them to look at their supply chain and look at conversion opportunities. So it's going to help us this year throughout the year. I think is going to help the whole industry for years to come. It's probably a bigger opportunity than the system would ever be capable of handling. But it is -- I think that the NS is calling this a transformational year in terms of their ability to offer service, local East. So it's very exciting.

Good. On this Comtrak side, you had mentioned -- I believe you had mentioned acquisitions specific to Comtrak or drayage generally. How is that acquisition environment shaping up? Where can we expect that from a regional perspective and then similarly, how is the driver recruiting market with your in-house dray?

Well, to answer the last question, the current recruiting market it's very tight. We obviously have very high safety standards. So we are spending on average between $3,500 and $4,000 to recruit a driver. While our turnover is down and well below industry standards, it is a very competitive market to get good drivers. Obviously with some of the regulatory environment, just the basic demographics of drivers from an age perspective, is not going to get any easier near-term. So, we are putting forth a lot of effort on that.

Yes, I think in terms of -- we are open in a number of geographies, I wouldn't want to talk about specific places where we might be looking at potential candidates, but there is a number of different geographies. It's not just places where we don't have operations, but markets where we don't have quite enough scale as of yet. That's honestly, most markets in the US. So that is a path that we think there is opportunity for us to bring some tuck-in acquisitions that help us get to our goal of 70% and beyond.

Good. Then one last clarification, I think Dave, you had mentioned mid to high single digit growth. It was specific to intermodal. Is that volume for next year?

That is volume.

Michael Weinz, JPMorgan.

I guess to begin, just a follow-up on the margins. I know you have addressed this a couple times, but if you have these rising rail rates, is this something you could potentially recover in the bid season in first or second quarter when the new contracts come up for repricing? Or is this something that is going to be constraining you for a while and this is the new norm?

No, we certainly wouldn't say that it is the new norm. Most of our pricing, the way it works, we are in bids right now and we'll continue to be in the majority of our bids throughout the second quarter. We will price in the rail increases at that time for the second half of this year and the first half of next year. But with what we have already experienced and what we are anticipating. So it is certainly not a permanent condition and we are planning on going to the marketplace for increases with this next round of bids.

Okay. So maybe it'll last a quarter, almost two quarters then you -- it moderates.

Yes, about 10% of our business reprices in the first quarter and 60% in the second quarter. So, yes, the first half of the year is where most of it reprices.

Right.

Okay. Then earlier, let's see. It looks like your volume growth accelerated again in fourth quarter, it was up year-over-year third quarter 10%. Is this because of new customers or is this a comparison issue?

There's some new customers. Of our growth, about 80% of it came from existing customers and 20% came from new customers. The growing regions, like Dave said, were local East and Texas. And we also had truck conversions freight in there which is why local East was up 19%. So really it was from a myriad of sources.

Peak also extended longer than normal, usually by the first week of December you begin to see it tail off and -- just the demand continued to be very strong, right up to the week prior to Christmas. So I think that did contribute as well to the strong growth.

Yes, just to be clear, this was our largest volume quarter in intermodal in the Company's history. So it wasn't just a matter of having soft comparables.

Right.

Okay. We've been -- in our discussions, we've heard that there has been some shifting of business between some of the players. We haven't heard anything to say that you have lost business, but have you gained business that could be coming online mid first quarter?

We saw a little bit of bid activity in the fourth quarter, but it is so little that it is hard to predict.

Right, most business doesn't transition at this time of year. We have been through some bids and been pleased with the outcome, so we feel like we are competing in the market well and continuing to take share. We certainly took share last year and the year before. So, there isn't anything materially coming on board this quarter, but that would not be -- that is only because there aren't many things coming out that would be awarded this early in the year.

Okay. Then it is probably a little early, but have you had any conversations with customers and can you provide any insight into whether or not there is a change in the view on truckload capacity constraints given the hours of service rules that have been announced?

Since those are actually deferred until 2013, I do not think that we're seeing a lot of -- people are in a wait-n-see atmosphere. But we do believe that a lot of our clients are in fact looking to lock in capacity. Just as over the longer term, I think again, windows with driver age demographics, with CSA and some of the other regulatory environments, the hours of service that in fact the market is going to get tighter. So you are seeing the strategically focused shippers, very much trying to lock-in capacity.

That makes sense, but does it seems like maybe concerns have moderated because it has been pushed out to 2013 and there was not that change from 11 hours to 10 hours of drive time?

No, I don't think that it is changed behavior, I think most shippers, especially the large shippers that we do business with are convinced that truck costs are going up in the foreseeable future. For the next 3 years to 5 years, maybe 10 years. They are aggressively looking for ways to mitigate that exposure. If you look at our local East growth, most of the guys that really contributed to that in a big way had concerted efforts to convert, because it is more of a long-term perspective than it is thinking about one quarter to the next or specifically how hours of service are going to impact them. The reality is, there are a number of factors that are driving truck cost up and it is really very unlikely that those things would in any way be reversed.

Right. Okay, for Terri, I just have one follow-up here on the tax rate, it seems a little bit light in the quarter. Is that just normal fourth quarter fluctuations or is there something in there that you had a benefit on in the quarter?

It's normal. Normally, we true up our tax provision to the tax return in the fourth quarter and we do that every year. So that's what it is related to.

So it was a bigger full year -- (multiple speakers)

-- Going forward, it'll be about 38.5%.

Brad Delco, Stephens.

We talked a little bit about -- you gave some color on 2012 and the outlook on some growth. But if we think about, I guess, the two segments, Hub being one and Mode being the other, how do you think about growth between those two segments? Then I guess the ultimate question is, what does that do to your margin expectations on a consolidated basis?

Well, we certainly think segments will grow, right? And have the ability to grow.

Right. The margin for the Hub segment for the whole year 2011, was 11.2%. So we hope to beat that in 2012. On the Mode side, it was 11.6%; we hope to maintain that.

I guess I was thinking more on the operating line. To me, if I remember correctly, the Mode initial target was 2%. It looks like you got there.

We did.

Then you want to expand that going forward, which is -- it's a margin a little bit lower than Hub. But if that segment's growing faster then you can be a legacy Hub business. How do we think about the impact on margins going forward?

Well, certainly to the extent that Mode is a bigger part of our mix then it would have the effect of compressing margins, right? No doubt about that. We don't really see a point where Mode's operating margins are at Hub levels. However, I would also say that I think that the Hub segment is more likely to grow faster than the Mode segment. We think Mode will grow. We think we'll continue to be able to add new agents. But the likelihood is, that the Hub core outpaces growth and thereby mitigates a little bit that compression factor.

Okay, great. That's great color. That's what I was looking for. Then the -- I guess my follow-up. This goes into -- it seems like people are more conservative on the amount of capacity that will be added. But when I think about the amount of, I guess, terminal capacity that will be added this year -- I mean how much industry demand do we need to see to see demand get as tight as we saw in 2010 or how much excess capacity do you think there is?

We don't think there's a tremendous amount of excess capacity right now. We only have about 3% of our fleet parked, which is under what we had projected. So we are not seeing a lot of slack capacity in the marketplace at this point in time. About 36,000 plus units were added last year, but we certainly think that demand is going to probably suck up that amount of additional incremental capacity that was added. So we think it's going to be probably a little tighter equipment situation this year than we saw in the second half of last year. But it should be a reasonably fluid situation.

I've got you. Then one kind of maybe nitpick question. In terms of the fleet box turns and the growth being certainly a lot greater in the East. I mean, shouldn't we see -- or what would cause your ability to turn boxes faster or not be able to turn them faster given that you're probably shorter length of haul in the East than the transcon business?

Probably, obviously a significant softening in demand conditions would hurt utilization or significant rail disruptions could. But they would have to be of relatively long duration.

But it's fair to say, if East is growing faster then you should be able to inherently turn boxes faster? Is that right? Is that some of the market dynamics?

Absolutely.

If you think about it, it's really -- if you're going Chicago to New York or Chicago to Los Angeles, you're talking a day or two. So it's really the street turns and how quickly you can get -- it's on the rail for just a very small amount of time in the overall picture.

Jeff Kauffman, Sterne Agee.

Quite honestly, everything I was going to ask you has been asked at this point. But let me just ask one to Terri. When do we start to see the end of these one-time integration costs? How far through the integration are we? Obviously the margins at Mode are up to where you'd like them to be. The restructuring at brokerage is largely done. You do have a headquarters move. When do we start to see results without these costs?

That's a good question Jeff. We think that, first of all on the Hub side, there shouldn't be any. Because it was mostly related to truck brokerage and then opportunities to close some other offices. So shouldn't be any other than our move coming up in 2014, which hopefully won't cost us too much. Then on the Mode side, we will have some integration costs in 2012. Maybe as much as $0.5 million for the whole year, but it shouldn't be a lot. We don't think.

Okay, when do you -- not to move on to the next acquisition, but when do you start looking back at the market. Or do you digest this for a couple quarters first?

This is Dave, Jeff. We're looking right now. So we've been very fortunate -- we did in fact, in addition to Mode, we did make two small drayage acquisitions. But we are actively in the market right now. We believe that the integration of Mode is going quite well. We've got our IT team very, very focused. As well as, of course, we kept the -- most of, in fact, all of Mode's management. So it's allowed for a very easy integration and we will be active in the market as soon as something else comes up that's attractive to us.

Art Hatfield, Morgan Keegan.

I got on the call late and I just want to circle back to a couple things so I understand correctly. If we can go to the Hub gross margin -- Terri, you had mentioned that the logistics segment had a negative 200 basis point impact on that number within logistics. It was due to more transactional business. I know you've been doing more of that, but is that a trend that we should continue to see? Or does that kind of, as you do more transactional, will we see a stabilization in that gross margin within that business?

Yes Art. You could look to the second half of 2011 and what logistic's yield was and it will stick at that. We don't think it's going to get any worse, to answer your question.

Okay. No, that's fair. Then just, I want to make sure. You had mentioned the impact on the gross margin from truckload, but you didn't get specific about the basis point degradation on intermodal. Did you share that at any time? Did I miss it? And if not, could you share that with us?

You didn't miss it. It was about 100 basis points.

Okay, thank you. You had talked about the rate increases and the turns and I got all that. What are the things to think about going forward -- is there any way to get ahead of this cycle of the rails raising rates throughout the summer and the fall and you trying to play catch up in the first half of the following year and having that seasonal impact on the gross margins. Is there any way to start to get ahead of that? Or how could that stabilize and be more rational going forward, if that's a fair way of thinking about it?

Well, Art, this is Dave. We do give a lot of thought to this when we're making bids and participating in them on a regular basis. So it just so happens that this one, we just kind of missed. We recouped most of -- we recouped a lot, we covered the rail cost increases, but we just didn't have anything additional. So it was just a -- I mean, it wasn't like we missed it by 15%, it was a small number overall. We just hadn't forecast for the rail increase to be that substantial. So I think if you look at historically, we've been able to have pretty good insight going into the bid season and to price accordingly.

Keith Shoemaker, Morningstar.

I note your progress in exceeding 60% internal Hub drayage and heard you mention the driver recruiting as a challenge. Assuming volume continues to expand somewhat, what barriers do you have at this point to overcome to achieve targeted higher internal drayage this year?

Well I think like any trucking company, it's finding good, quality drivers and making sure that once you get them that you maintain them, is just the basic issue with it. It certainly -- our pay has gone up this year. I would forecast that you'll continue to see driver pay go up. As I think you can -- the beauty, the advantage that we have, is that a normal trucking company is dependent upon a lot of outside customers. We have a lot of business yet that we farm out to other drayage companies. So we always have work for our drivers to keep them busy and consistent. So again, that's why we don't believe that it's unrealistic to continue to grow at the pace that we grew this past year. Again, we believe it's a strategic imperative for us.

I guess this second. I know that your action this year has been a lot of consolidating into larger, rather than disparate, small, widely dispersed offices. But would you at any point consider putting operations -- expanding operations in Canada or Mexico?

Well, we have a pretty good sized operation in Canada and Mexico. The Mexico operation, we just opened just about two years ago, I guess, a physical presence there and that has grown steadily. So we will continue to put resources there. That is certainly a very large, potential market for us and one that we're committed to continuing to grow. It continues to grow quite well for us. Canada has also been very successful. In addition, we have two very successful Mode agents operating in the Canada market, in addition to our Hub operation in Toronto. So that has also -- we are firmly committed to participating in the cross border business.

Great, thank you. Finally, you mentioned you expect some fluidity even a little tightness, maybe a little more than last year. But can you comment on rail service you're experiencing at this point please? Thanks.

Sure. We saw a little bit of deterioration on a year-over-year basis in terms of rail service, but it's really been stable in the second half of the year. The rail deterioration that we did see did not -- was not severe enough to alter our ability to hit our customer commitments. So by and large, rail service has been reasonably stable and is giving us the level of performance that's enabling us to make intermodal a viable competitor to truck. That's despite some strong growth. I think that the domestic industry grew 8% in 2011, which was a solid year. They'll probably have another solid year this year, somewhere in the mid to high single digits. Based on the investments that the rails have made, we feel like the service levels should be sustainable and may even improve just a touch throughout 2012.

Scott Group, Wolfe Trahan.

I think I heard that local East's volumes were up 19% and transcon volumes were up 21%, is that right?

That's right.

What's the third part to get to 16% overall growth?

Local West was up 10%.

Okay. With that, I guess I would have thought if transcon's up 21%, if that's the fastest growing, I wouldn't have expected to see the negative mix.

Yes, I mean, our length of haul was down by 1%, so that's negative mix.

Right. When you think about it, transcon is only about 20%, it's not nearly as large as the other two pieces.

Correct.

Got you. Okay, great. Then just last thing, Dave or Mark, can you talk about the volumes you're seeing so far in first quarter and how you think about early Chinese New Year and early Easter, extra day in February, things like that in terms of volume growth in the first quarter.

Well, as we looked at the way that January started out. It started out a little bit slower, just in as much as we had, I think because the holiday fell on a Sunday, which also though helped December somewhat. But we've seen it come back very strong and solidly ahead of last year. So we look forward to continue to grow. As far as the Chinese New Year and its impact, we're not really seeing much yet, impact. I would add that our intermodal business grew substantially despite the fact that the ports on the West coast had mediocre results at best. So the extra day in February is always a help because, just, it's another day. But I don't see any real big changes in with an early Easter either. I don't think it's going to negatively impact us.

Fair to think about double-digit growth for the first quarter?

Again, I think we're sticking with the mid, high single digits.

At this time there are no questions queued. I'd like to hand it back to Mr Dave Yeager.

Okay again, thank you for taking the time to participate on our call. If you have any questions please do not hesitate to call Mark, Terri, or myself. Thank you very much.

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