Hub Group Inc (HUBG) 2012 Q1 法說會逐字稿

Good afternoon and welcome to the Hub Group first quarter conference call. We will begin with a discussion of the financial results led by Terri Pizzuto, our Chief Financial Officer, followed by an overall business discussion to be conducted by Dave Yeager, our CEO. The Company will make its prepared presentation followed by a question-and-answer session. Mark Yeager, our President and Chief Operating Officer will join us for the question-and-answer session. (Operator Instructions).

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.

Thanks, Jeremy, and thank you all for being with us today. We had a solid first quarter with three main themes. First, intermodal volumes were at an all-time high with Hub segment volume up 15% and total intermodal volume including Mode up 31%.

Second, operating income was up 22% after adjusting 2011 for one time costs. And, third, Mode's results were better than we expected.

Here are the key numbers for the first quarter. Hub Group's revenue increased 52% to $740 million. Hub Group's diluted earnings-per-share increased 32% to $0.37. We're proud that this was a record first quarter.

2011 diluted earnings-per-share excluding one time costs related to the Mode acquisition were $0.31. Diluted earnings-per-share are up 19% when comparing to this adjusted earnings-per-share.

Now I will discuss details for the quarter. As a final reminder we 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're referring to the consolidated results for the whole 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 $563 million, which is a 16% increase over last year. Taking a closer look at Hub's business lines, intermodal revenue increased 20%. This change includes a 15% volume increase and a 5% increase for fuel, price and mix. Directionally, fuel and price were up and mix was negative. 280 basis points of this volume increase came from fleet boxes sold to Mode agents.

We're excited that this was the ninth straight quarter of double-digit intermodal volume growth. We continue to see our growing customers converting freight from truck to intermodal in both transcon and local East markets.

Truck brokerage revenue was down 6% on 3% lower volume. A lot of our volume decline results from how we fared in the bids last year. It's still early in bid season this year, but we're encouraged by the results.

Logistics revenue was 23% higher than last year. Most of our growth is from existing accounts, although we did start ramping up with a few new customers.

Hub's gross margin increased by $4.2 million due primarily to significant growth in intermodal margin. Intermodal margin is up because of volume growth, price increases and our focus on doing more of our own drayage. Logistics also contributed to the margin increase. These increases were partially offset by a decline in truck brokerage gross margin.

Hub's gross margin as a percentage of sales was 10.9%. The good news is that margin is up 30 basis points compared to the 10.6% margin in the fourth quarter of 2011. However, margin is down 90 basis points compared to last year's 11.8% margin. There are a few reasons why the margin percentage is down from last year. Number one, intermodal yield is down about 95 basis points since we had higher-than-anticipated cost increases from certain key carriers. And number two, logistics margin is down 75 basis points since we're doing more transactional as opposed to management fee business.

Hub's costs and expenses increased $1.1 million from $40.5 million in the first quarter of 2011 to $41.6 million in the first quarter of 2012. We had a $2.3 million increase in salaries and benefits that was partially offset by a $1.3 million decline in G&A expense.

Salaries were up $1.4 million and restricted stock and bonus combined increased $900,000. In 2011 we had $1.7 million of one time costs that were included in General and Administrative expense related to the Mode acquisition. Finally, operating income for the Hub segment increased $3.2 million or 19%.

Now I will talk about our Mode segment. Mode's revenue was $187 million. That revenue breakdown is $82 million in intermodal, $80 million in truck brokerage and $25 million in logistics. Compared to last year, revenue at Mode was up 10%.

Mode's gross margin was $22.2 million. Gross margin as a percentage of sales was 11.9%.

Mode's total costs and expenses were $19.7 million. Operating margin for Mode was 1.4%.

Turning to headcount we had 1,356 employees excluding drivers at the end of March. That's only up seven people compared to year end.

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 analyst range of between $1.89 and $2.10. Our weighted average diluted shares this year are estimated to be 37.2 million. We think that our quarterly costs and expenses, including Mode transportation, will range between $62 million and $65 million for the rest of 2012.

Turning now to our balance sheet and how we used our cash. We ended the quarter with $53 million in cash and no debt.

During the quarter we spent $17 million on capital expenditures. $10 million was for land for our new corporate headquarters, $2 million was for containers, $1 million was for our building addition in Memphis and most of the remainder was for technology investments.

We think that we'll spend between $60 million and $70 million on capital expenditures in 2012. Between $20 million and $30 million is for our new corporate headquarters which is a two year project. $25 million is for containers and the rest is for technology investments.

To wrap it up for the financial section the 22% increase in operating income and record earnings-per-share are a great start to the year. And now you will hear from our CEO, Dave Yeager.

Great. Thank you, Terri. We are very pleased to report the results of an exceptional quarter which generated the greatest intermodal volume in Hub's history. We saw double-digit volume growth in all of our major geographies and we grew with all of our major industry segments. And although we're happy with the strong growth, we have remained focused on price discipline.

Our intermodal fleet is currently 22,000 containers. We'll be buying 2,000 new containers in 2012 that will be delivered prior to peak season. At the end of 2012 we intend to retire a thousand older containers and will then evaluate our 2013 build based upon demand trends at that time.

Obviously, the current rate of our volume growth is outpacing fleet growth. We intend to supplement that shortfall with rail owned assets. We strongly believe that our ability to deploy both fleet and rail owned capacity is a competitive advantage for Hub in servicing our customers' needs.

In the first quarter rail-on-time performance was excellent on both the Union Pacific and Norfolk Southern. In fact, this is some of the best rail service that we have ever seen.

Undoubtedly this excellent service is partially due to a mild winter, but the main driver is the massive investments in infrastructure both Union Pacific and Norfolk Southern have made over the past five-plus years. We believe that the enhanced service levels coupled with rising fuel costs and the driver shortage will continue to be strong catalysts for truck conversion. And as a result of the superior rail performance and the demand we have seen from our customers, our fleet utilization of 13.8 days was back in line with historic norms and well ahead of industry standards.

Although we still have a long way to go, the bid season is in full swing. We're seeing about the same amount of bid activity this year as last with roughly 35% of our intermodal business being repriced in the first quarter. Another 40% is in various stages of the bid process and is expected to be repriced before the end of the second quarter. By that time we expect to be through the vast majority of this year's bid activity.

Comtrak had a record quarter. Volume was up 38% year-over-year with Comtrak handling 64% of Hub's intermodal business versus 52% the prior year. We had great success in driver recruitment and retention this quarter adding 179 drivers and wrapping up the quarter with over 2200 drivers. Our goal for 2012 is to grow our driver base by over 400.

In 2011 we retooled our truck brokerage business. We are now poised for growth in the second half of 2012. We consolidated our network, we brought in new management, overhauled our operating model and put a performance driven compensation structure in place. While volume declined 3% in the first quarter, margin as a percent of revenue improved on both a sequential and year-over-year basis. In addition, we transitioned our business to the new model without incident and we are a now actively pursuing new opportunities with our sales team. On an industry note capacity has become tighter, which does reflect the strength of the economy and the lack of expansion by the truckload industry. We believe this environment is quite favorable for the brokerage model.

Unyson Logistics also had a strong first quarter delivering revenue growth of 23% year-over-year. We onboarded new business with a few major retailers in the US and Canada and grew organically with our existing clients. We continue to focus on strong sales and maintaining an active pipeline of prospective customers.

Mode also had a strong first quarter with 10% revenue growth and solid margins as its independent business owner network continued to perform well. Growth was particularly strong in the intermodal space where the agent network continues to capitalize on using Hub's fleet and Comtrak drayage. Additionally Mode's management has been successful in attracting and recruiting new agents. We believe that the IBO network is well positioned to grow while showing good margin discipline.

In closing we're extremely pleased with the record breaking results of the first quarter. We delivered strong double-digit revenue growth in both intermodal and logistics while showing progress in the transition of our brokerage model.

Our Comtrak drayage unit continues to grow while adding significant value to our intermodal franchise. And the Mode acquisition integration continues to move forward constructively as the agents and their customers see the positive benefits of their affiliation with Hub. At this time we will open up the line to any questions.

(Operator Instructions). Our first question comes from the line of Scott Group with Wolfe Trahan. Please proceed.

Hey. Good afternoon, everyone.

Hi, Scott.

Hi, Scott.

So, Dave, I think we entered the year thinking about mid to high single volume growth on the intermodal side and clearly a lot better than that in the first quarter. Can you talk about maybe your expectations going forward for the rest of the year and if you think this double-digit or mid-teens growth rate is sustainable?

We really think that the high single-digit is probably where we will end up for the year. Right now thus far in April we're up 9% year-over-year, and so we believe that that's probably a more reasonable number as the comparables do get more difficult.

Got you. That makes sense. And how are you thinking about rail rate increases for the year? I know you talked about bigger than expected increases the past couple quarters. When do you think we catch up to that? And just overall I think it's been four years in a row of that gross yield percentage coming down. Do you think we can finally stabilize that this year, or does it look like we will have another year of gross yield contraction?

Yes. This is Mark. The main thing for us is to be able to cover the increase costs that we experience. We are anticipating that we're going to see rail cost increases this year, but we're also anticipating that we're going to be able to pass on those increases in the marketplace. So we do not feel at this time that you're going to see continued margin contraction.

So, Mark, what's different this year than the past four years that gives you that confidence?

Well, I think that last year we saw a situation in which the rails were very aggressive about the levels of increases that they were seeking. And while they're looking to increase their rates and we think that's appropriate, it's not as high of a bar for us to jump over. We believe that their expectations are somewhat more muted than they were at this time last year, and we should be able to pass on those increases as we have done historically at Hub. Normally when rates are going up we have not seen margin compression in the way that we saw it last year, so we feel like we're be able to get back to more of our historic practices.

And you're not seeing any changes in the rails' behavior with all the pressure they're seeing in their coal business, either form a desire to want more volume, or maybe a desire to focus more on pricing and margins in the intermodal business, or are you just not seeing a change since coal has really fallen off for them?

I think that the rails have been committed to raising price. I think that they have stayed committed to raising price. At the same time they recognize that there's a market out there and if they want to maintain and grow share, they need to be competitive in that market. So I think that their expectations were pretty aggressive last year and they're somewhat more muted than they were regardless of the challenges that they face on the coal side of things.

Got you. Okay. Just last thing for Terri. The guidance for quarterly expenses and for CapEx came up relative to last quarter. Can you just talk about what the incremental changes are there for both?

Sure. CapEx guidance went up by about $10 million, you're right, Scott. That was for additional containers. So we decided to order an additional 1,000 containers this quarter that will come in before peak and we had already ordered a thousand. So in total we'll be getting 2,000.

And then on the cost and expense guidance, you're right, that also went up $2 million. That's primarily related to increased agency commissions because we think we're going to see growth at Mode, and a lot of that growth will come from the agent network. Corresponding with that growth we have to pay out more agency commission, and so that's the bulk of the increase there.

Since this is now we've [lapped] Mode, what organic growth rate should we be thinking about for Mode going forward?

Probably what it was last year, if not more. It was about 10% last year, and so we're hoping for that again this year.

And as it is the first quarter, right.

Yes.

Okay. Great. Thanks for the time. I will get back in queue.

Our next question comes from Alex Brand with SunTrust. Please proceed.

Hello, gentlemen and Terri. This is Sterling in for Alex.

Hey Sterling.

Did you -- unless I missed it can you give us local East and transcon volume?

Yes. Local East was up 12% and transcon was up 21%.

Wow. Okay. Thanks, Terri. So I want to ask more for clarification for all of us, when Union Pacific reports their intermodal pricing is up 13%, is there anything we can take-away from that as -- in our analysis this is not really impact how pricing works with their IMCs?

I would suggest, Sterling that probably may be some contracts that came up that might have moved the needle that much. We're certainly not seeing anybody looking at double-digit rate increases or anything close to that this year. So I'm not really quite sure why that would be.

Okay. Thanks. Thanks for that. And Dave, when Terri talked about gross margin being under pressure, she mentioned rail partner cost increases. Is that reference to cost increases from last year that are causing this quarter's pressure, or was there additional yield pressure in this quarter?

No. It was mostly the cost increases that we saw last year. that took effect later on in the year. They didn't start in Q1.

Perfect. Thanks for that Dave. I appreciate the time, guys.

Thanks, Sterling.

Next question comes from Todd Fowler with KeyBanc Capital Markets. Please proceed.

Hey, guys. This is actually Ryan in for Todd. How are you?

Good, Ryan. How are you?

Pretty good. Appreciate the call. The first question I had is on the fleet. Your guys' decision to use rail owned boxes for growth versus your own fleet, particularly if the environment is looking good. I just wanted to get maybe some color around that in terms of the decision to approach the market that way.

Well, we have in fact -- we did make the decision to grow the fleet by an additional thousand boxes for peak this year. So we originally had anticipated just a thousand new builds, and we're going to move that up to 2,000.

We think it's a real strategic advantage for Hub that in fact we can offer both the rail assets as well as our own fleet, and we very frequently once we get a rail asset within our network we treat it like a fleet box. We are moving it without ever bringing it back to the actual rail ramp. So it gives us that nice flexibility and it gives us the ability as we take on more business also to continue to grow the percentage.

And the railroads like it. I mean we focus on our railroad partners' needs. They feel very strongly that they need to supply equipment to the IMC industry, and we're very supportive of that fact.

Okay. So if I heard you right, I think it last quarter you guys were looking to maintain the size of the fleet and now you're looking to add an additional thousand here by the end of the year?

Right. We do think that just the initial signals we're getting for the economy for this year we think that will be prudent as we approach peak.

Okay. Great. The other question I had, too, is I know your brokerage model is a little bit different, but Dave, you had mentioned that in a tight truckload capacity environment you think that's good for your model. Just maybe some color around that and what you're thinking there.

Well, what happens there is a lot of larger customers and smaller customers who may have compressed pricing with their primary carriers suddenly find that in fact capacity is tighter than they might have anticipated, and it opens up a lot of opportunities for us that has relationships with thousands of carriers to in fact supplement some of that increased demand.

Okay. That's helpful. And the last question I had, Terri, on the pricing any color that you can give in the quarter -- out of the 5%-plus. I know that includes fuel and mix, but where base pricing is trending right now and really what your initial expectations are for this year in 2012?

Yes. I can tell you mix was negative, but we really can't break out price and fuel just because that gets very complicated to do. I can tell you they were both up and I would say that a fuel was a bit higher than price, but it's just very difficult for us to measure and everybody measures it differently.

Okay. That's fair. Maybe just a follow up on that. Maybe any color you guys can give on what you're seeing in the pricing environment. Maybe particularly with the maybe Smaller IMCs. Does it seam like everyone is being disciplined right now? Maybe just the initial view of the current pricing environment within intermodal here year to date.

Sure. I mean I think it's been an aggressive bid season, but all bid seasons are relatively aggressive. Nothing unusual there. Nothing that we didn't anticipate.

We are not seeing a lot of aggressive activity out of smaller IMCs. That's something that has not been a factor in the market for some time. It's predominantly the larger players and we have been able to secure increases with the vast majority of our customers at this point in time. So we have no reason to think that we're seeing a situation that is unusually aggressive or for that matter unusually opportunistic.

Okay. Thanks, guys. I'll hop back in the queue.

Our next question comes John Barnes with RBC Capital Markets. Please proceed.

Hey good afternoon guys. Nice quarter. Thanks for your time. A couple of quick ones.

First, as we look through the first quarter and some of the truckload announcements it looks to us like the improvement in truckload pricing might be a little softer than we had originally anticipated, especially given what seems to be a pretty favorable capacity environment. I'm just curious as to -- are you concerned at all that if you see truckload pricing improvement decelerate to these levels consistently that it may end up putting some pressure on intermodal pricing? Your ability to get pricing?

Yes. I think that in order for it to really negatively impact intermodal pricing we would have to see a pretty significant drop off in over-the-road pricing as opposed to just maybe a disappointing increase, right? I think there's' large enough gap at this point and rail service is good enough that it's unlikely that truck pricing is going to put a lot of pressure on the intermodal price.

The thing that really impacts intermodal is the competitors within that particular space. So the major participants in intermodal are more likely to have a positive or negative impact on pricing than the truckload sector.

Okay. Alright. Very good. Terri, when you gave the volume on the local East traffic versus the transcon, I'm a little surprised at that mix just because we've typically viewed transcon as maybe a little bit more mature. Can you talk a little bit about how you see those growth rates progressing through the years. Should we expect at some point that local East becomes a (inaudible -- technical difficulty) as we move through the year?

Local East was impacted by a couple things this quarter. Number one, we had a couple customers whose business was just down and we had another fairly large customer who had some facility shutdowns during the quarter. We expect that would pick back up for the rest of the year. Local East is still about 34% of our total base of business and we expect that to continue to grow, especially with all the infrastructure improvements that have been made by the rails. That's a strategic initiative that we have going.

So you think we should see local East begin to grow at a faster pace as the year progresses?

Yes.

Okay. Alright. And then lastly could you just give us an update as to where you stand in terms of the amount of drayage your doing internally with your own drayage company?

64%.

We're at 64%. It was 52% first quarter of last year.

Okay. And do you have a stated goal by the end of this year?

Well, we do intend to add 400 drivers and so we are focused on 70% as far as the amount of Hub business that Comtrak will handle.

Okay. Alright. Very good. Again, thanks for your time. Appreciate it.

Thanks, John.

Our next question comes from Ben Hartford with Robert W. Baird.

Afternoon, all. Just wanted to address I guess building on the drayage penetration for this year. Maybe, Mark, if you can talk a little bit about expected productivity gains this year relative to years in the past as we start to work through some of the gross margin headwinds from a pricing standpoint.

Sure. As it relates to Comtrak, you mean the productivity gains?

Yes. Sorry, specifically on the intermodal side when we think about Comtrak, when you think about broader productivity gains on the intermodal side.

Sure.

Any reason to think that this year should be better or worse than years past?

No. I think we're going to see continued similar trends. We're looking at capturing a pretty similar percentage of our drayage and bringing it in, and should see similar productivity improvement. Obviously, it helps us reduce our cost-of-purchase transportation.

It also helps us improve utilization of our fleet, and as we have said before, every day of utilization on our fleet is about $1.5 million per quarter. As we get better at managing street operations, we can reduce our percentage of empty miles. And for every percent there that also translates into $1 million. So there is a lot of really important aspects in terms of economic impact of doing more and more of our own drayage. So we're going to keep pushing that hard, and the goal this year is as aggressive as it was last year, so we look for similar returns.

Where do you stand in terms of the Mode utilization of Hub controlled equipment in the first quarter, and where do you think that can go through the balance of this year?

Well, it's continuing to grow. We finished the quarter at 15% of fleet usage, of Hub capacity, and so we're looking to have that continue to grow. I think what we had said was 15% to 20% was our goal, and we certainly obviously think that's achievable. We really want to direct it towards new opportunities as much as possible because that's minimally disruptive.

On the Comtrak side due to really more than anything to driver availability, we're at about 7% of their drayage and we would really like to see that continue to climb, but it's probably going to be dependent on our ability to continue to add more drivers and free up some level of Comtrak capacity to the IBO network. Still a lot of upside there.

Okay. When you think about the Mode strategy this year having done the purchase last April and gone through a full year of digesting those strong retention, and I think as you had said, Terri, the acquisition running ahead of expectations in the first quarter. What is the strategy with Mode over the next 12 months in terms of growth, in terms of productivity opportunities between Mode and Hub? Can you talk a little bit about that?

Yes. Sure. I mean I think that the key for Mode's success is to bring on new IBOs, right? And retain the ones that you have. The way we plan on doing that is by helping them sell a better product.

So they can now sell an asset-based fleet product on the intermodal side along with the second largest dray network in the United States. We can help them understand and price their services better, help them understand the market better. So we can bring real value to the IBO network, and if we can do that, that's going to enable them to maintain their business and bring on new business, and it's also going to make Mode an attractive place for new agents to come.

So we're making sure that the organization is doing everything it can to support that agent network, and if we do that we think they will continue to see success.

Good. And then lastly in terms of utilizing the cash and thinking about acquisitions, how strong of an emphasis are acquisitions this year, and specifically what type of offerings are you looking at?

We feel as though the integration of Mode has gone quite well. We feel as though we're in a very good place with that at this point in time. There is still some amount of integrating that needs to be done, but for the most part a lot of the heavy lifting is done. So we are right now looking for acquisition opportunities.

It's really the usual suspects. It is regional dray companies, it is other IMCs potentially, certainly some logistics products that companies may offer would be of interest. So we're keeping an open mind to it. and we do feel as though this is probably a good time with cash and an improving economy to be aggressive with acquisitions.

Okay. Good. Thanks for the time.

Our next question comes from Michael Weinz with JPMorgan. Please proceed.

Hey. Good afternoon everyone. First I was wondering if you can provide the year-over-year change in local West volumes?

Sure. I have that handy. That was up 14%, Michael.

Okay. So with transcon being much stronger than the others, how did that impact length of haul in the quarter? I mean clearly it's down, but is it down a couple percent, is it down several percent?

It's about flat with where we were at last year. So mix was actually slightly negative. It's not hugely negative.

Okay. So that's a change since -- for relative to prior quarters, I guess but.

Yes.

Okay. So switching topics towards -- well, your container fleet was roughly what, 23,000 containers at the end of the quarter?

At the end of this quarter, no. It's actually 21,942.

Approximately.

Yes. So it will be 24,000 during peak after we add those 2,000 containers Dave talked about.

You don't want to go to a couple extra digits on that one? Okay. That is helpful. After peak you are going to give a thousand of those back, right? So at the end of the year you will probably be back to 23,000?

Yes.

Right.

Okay. Good. On utilization do you think the improvements were primarily due to the rails having better service levels this quarter due to weather, or is it a mix of rail service and also customers behaving better?

I would say it was a combination of the rail service and the overall demand for the boxes. We had anticipated initially that we might have to park several hundred boxes, and we did park some for a very brief time period. But again, there was a lot of demand out there, and certainly the improved railroad service helped out a tremendous amount as well.

How would you describe the profile of demand through the quarter like months and months? Because if you didn't have any weather disruptions presumably it was more even, but I don't know if that's exactly true.

And your presumption is correct. It was more even than you might normally see because you normally see a big spike in March and it was a little more flat and even throughout the quarter.

Do you see any benefit from having the Easter holiday earlier this year versus last?

Not really. I mean Easter does bring some noise about just because of good Friday and then the Monday following Easter, but really I would not say that it was really of any benefit, no.

Okay. And then another question related to the eastern rails. Obviously there was a big shift of [Maersk] traffic from Norfolk to CSX, and so CSX added some new trains into some new destinations. I'm not sure how Norfolk reacted to some of that business going away, if that impacts some of their delivery schedules. But I was wondering if you could provide some commentary on what you're seeing as the net result of that from your perspective.

We certainly haven't seen any deterioration in service on Norfolk Southern. In fact they were the most improved of our rail partners on a percentage basis in the first quarter.

They continue to provide excellent service for us. They're very committed to domestic intermodal, and we're really excited about the improvements that they're making which are really just coming on board now and will continue throughout the year. So we think that their service has been good, and it's going to continue to get better.

And I know you don't do a whole lot of business with CSX, but does the new train schedule that they are operating on open up some new opportunities for you, or is it just more on the margin than anything?

Yes. There are some opportunities for us, no question, on CSX. Their service also improved. And so we saw them continue to offer good service as well.

Any time that the intermodal map is expanding that's a good thing for Hub, and it's a good thing for our customers. So new routes are definitely something we want to tap into and take advantage of.

Right. Okay. Switching to brokerage for just a couple quick questions. Volume growth was down 3% in this quarter versus, I guess it was down 9% last year. You have a similar comp in second quarter. How should we start thinking about that? Did you have an acceleration in the quarter, or can volume still be down next quarter?

It could still be down next quarter, yes, because really we have to get through bid season and that's not done for the most -- The majority of that will be done at the end of the second quarter, so we expect similar trends in Q2 and really not to see the growth until the second half of the year.

Okay. And then last question for you is just a broader question, I guess. John Wiehoff made some comments in a Minneapolis newspaper suggesting that brokerage growth could be lower going forward than historically, and I was just wondering if you thought that was due to less outsourcing or more competition in the marketplace from players like yourself?

Yes, I would say if anything that would have to be due to the latter. I think we've seen more and more customers willing to do business with high quality brokers, not the old traditional broker that people think of maybe from years past. More customers who are looking to limit the number of carriers that they do business with are willing to bring a broker in to act in a supplemental role.

So I think they are more people willing to use high quality brokers who are doing a good job of vetting their carrier base. Obviously that's critical.

There's no question there are new entrants in the marketplace, particularly with transactional brokerage. And our model's a little bit different, and we think our space is a little bit less crowded. We anticipate that we can get brokerage back to that low double-digit growth pattern that we saw earlier in this decade. So we have not mitigated or pulled back on those growth expectations with the brokerage as a result of the new entrants.

Okay. Good to know. Thanks a lot for the time.

Our next question comes from Brad Delco with Stephens. Please proceed.

Thank you. Good afternoon, Dave and Mark and Terri. Thanks for taking my question. I guess help me understand a little bit just some industry dynamics. Obviously your big competitor has already reported. Seems as if the pricing environment in intermodal is maybe not as robust as what expectations were a little while ago. How do I think about that in the context of you guys wanting to add capacity, and just overall your outlook I guess on pricing maybe in particular in the back half the year?

Yes. I don't really think that our outlook has changed from a price perspective. We didn't anticipate that we were going to see major upticks in price this year, but we did feel it was going to be a positive price environment. We continue to believe that.

We were concerned that our fleet might be a little bit on the large side. As Dave mentioned, that did not in fact turn out to the be the case, so we don't feel like we're in any way going to have more capacity than we need, and that is in fact why we upped our order a bit.

Our largest competitor is fairly conservative in their projections. I think they certainly have some pieces of business that they're going to maybe feel like they need to protect and that may have an impact on their ability to realize price in the market. That may be at least in part why they're maybe on the more conservative side than they were going into the year. But we haven't seen any change in the marketplace.

I guess is there any way to take your pricing commentary there, and how do I compare that to whatever pricing expectations you expect from the rails? I mean do you feel like you have the ability to price above the rails to get that margin expansion that people have been looking for in this story for the past couple quarters?

Yes. I mean the main thing for us is to recapture to make sure that we offset the increases, and hopefully, get back to more reinvestible yield levels as a result of our ability to pass increases on to the market. We still feel that we're going to be able to do that. It's not going to be easy. It never is, but we feel like given what we know about rail expectations and what we know about market expectations we think that we can make some progress there.

Got you. And then maybe from a timing perspective, I guess when do you lap the price increases you took last year? I guess if you expect to be what 70% of the way through intermodal bid season by the end of the second quarter, I mean is fair to think that gross margin should expand throughout the year? Is that correct?

Probably not till the second half of the year because we're not through bid season until July.

So gross margin is more flat?

Well, it will stay pretty consistent with where it's at we think because we really won't see the growth in truck brokerage which is our highest yield business until the second half, and because the intermodal price increases for the most part don't kick in until the second half the year.

Okay. And then, Terri, I did have a small one for you, I guess. I saw that SG&A on the Hub side was up $3.2 million I think sequentially from the fourth quarter. Anything that stands out there as that sort of level of increase?

Sure. Sequentially the change was about $2 million in bonus, $1 million in payroll taxes and $0.5 million in restricted stock.

Okay. So we're at a level you expect to be going forward on the Hub side at least?

Yes. Right. Assuming that we don't add any headcount.

And then I guess, Dave, one clarification and then, Terri, you too. I thought, Terri, you said that same commentary about truck brokerage being down on a year-over-year basis, but I thought, Dave, you said something about it being up year-over-year and up sequentially. I just wanted to make sure I understood the commentary there.

You heard exactly right, Brad. Yes. I said truck brokerage margin dollars declined and they did. They were down about $0.5 million.

But margins expanded year-over-year.

But the margin percentage. So gross margin as a percent of sales was actually up year-over-year and sequentially.

Okay. Great. Thank you. Thanks for the time.

Next questions comes from Anthony Gallo with Wells Fargo. Please proceed.

Thank you. Could you talk about the railroad rate increase on the line haul portion of what they charge you versus what's happening on say a per diem basis with boxes?

Well as we said, while there is some changes in rail per diem for rail assets, right, there are some cost increases going in there for both UMAX and EMP. And then we anticipate that the rails on the line haul portion are going to be looking for some level of increases. That's going to vary by lane, it's going to vary by customer and we think that in the aggregate they will be looking for some level of increases, but they probably will not be looking for increases as aggressive as what they were seeking last year.

But are they moving up at the same rate? Because we had heard that the per diem was moving at a quicker pace than -- and I'm just curious if you can put some color around that.

I think per diem is going up $2 a day.

Right.

Does it stop, though, at some point? I hope. You don't mean $1 every day.

Oh, no, no . She means the charge that we receive for a box, the per diem charge is going

A day.

Per day.

Per box.

per box so.

Okay.

Right. Hopefully it's not going to go up -- we won't be using a lot of rail boxes if it goes --

We never know with the railroads.

Right.

Just a slightly different question. You mentioned price fuel and mix, and mix being negative. What are the components of mix? And I would have thought with growth in transcon that mix would have actually helped, suggesting a normal length of haul. What are the components when you say mix, and how does that tie to the change in local East versus transcon?

It's really change in business mix. So it's what customers we have and what lanes they're in as well as length of haul. It's both of those components. It's customer churn and length of haul.

I'm sorry. I don't quite follow you on the customer churn piece.

We can only measure price on the business that we've had before. That we've priced before.

Oh, I see. Okay. So on a same store sale basis.

Right.

You are capturing this rate.

Right.

Exactly.

Okay. I will keep it to two questions. Thank you.

Our next question comes from Keith Schoonmaker with Morningstar. Please proceed.

Yes. Thanks. Terri, would you comment, please, on strength in various verticals?

Sure. Yes. Retail was up 11%, consumer products 12%, durables 14%, paper 10%.

Okay. Thank you. And with just $1.7 million of acquisition costs in the period, are you now expecting both the Mode integration and brokerage restructuring to be modest the rest of the year?

Yes. That was actually for last year, the $1.7 million. So that was for 2011. We just had called that out last year, so we thought it was appropriate to mention it again just to remind everybody that we had it. But we don't anticipate any significant integration costs for this year that we're going to call out.

Neither in Mode integration or the brokerage restructuring? Those are both going to be done, or at least not disclosed?

Yes. It shouldn't be very significant. Yes.

And finally, I guess on the subject of brokerage restructuring pretty significant last year. What's left to do in brokerage restructuring, and have you identified margin targets or other benefits from the undertaking?

Well, this is Dave. The actual restructuring itself, the putting in new management, moving to regional operating centers is accomplished, it's done. Now it's a focus on gaining back some of the share we may have had and focusing the energies of our sales and marketing group to in fact continue to drive that business and get it back to a good growth rate.

One thing I would stress is that while we did in fact change the structure of it, our truck brokerage operation is actually quite profitable. It just was not growing at the kind of rate that we felt was appropriate, and that we think that ultimately that this model in fact should support.

Okay. Great. Thanks. And my last one if you don't mind. We've talked about the Mode's use of Hub containers a little bit and possibilities of targeting 15% to 20% as a potential goal. Is this margin neutral but gives you better ability to serve your clients? Or maybe you can explain the benefits of having greater use of Hub assets within Mode.

It pretty much is margin neutral for Hub at the end of the day. So we want to encourage use.

We use it in a couple of different ways. We want to make the fleet available to the IBO community. One, as a way for us to build density and build volume. It also can be used where we have imbalances to help us correct imbalances. So in those circumstances it may in fact operate at a lower margin than a traditional hub, but would help us avoid significant costs associated with repositioning.

Yes. Help to avoid the empty haul?

Right. Exactly.

Great.

I would add-on that also from a Mode agent's perspective they can actually compete with a bimodal carrier, they can commit to assets, they can commit to dray power that's actually owned by a parent company. So it gives them, from a competitive perspective, a real strong footing.

Great. Thank you. That's all I have.

(Operator Instructions). We do have a follow-up question from Scott Group. Please proceed.

Hey, guys. Thanks. Just a couple more quick ones if I can. I'm not sure if I missed it. Can you talk about the decision to add the new containers, and what's really driving that relative to the thinking last quarter? Sorry if I missed that.

No problem, Scott. It's just we think that with the growth rate that we're now seeing and the demand that we believe will be there for this peak season that it was appropriate to in fact buy an extra thousand containers for this year. And again, we have the ability to in fact to retire a thousand boxes in the first quarter of 2013. So it's basically just accelerating the purchase that we were going to make anyway in 2013.

Okay. That is helpful. And then just wanted to clarify, I guess something that you said, Mark. Is the thought that if you pass-through the rail rate increases that you can stabilize the gross yields, or they can actually turn positive year-over-year?

Well, certainly our goal would be to have them turn positive. We have been able to do that historically quite frequently. We weren't able to do that last year. We thought that we had recaptured enough to regain some of the ground that we gave away in 2009 as a result of the economic pressure that everybody was feeling.

So the goal would be to turn those back into a positive trend, and there isn't any particular reason why we shouldn't be able to do that. Once again, it is a challenging environment out there, but we do feel that we can regain some ground if we apply the proper disciplines.

Okay. Great. And just last thing, Dave. Can you talk about what you're seeing in terms of trans loading and whether or not that's picking up or slowing down?

Overall the west coast ports have been mixed as you're aware, but I think the trans loading activity does continue. It's been very strong. We have the combination of our clients who are actually trying to convert more to that as well as the carriers promoting the trans load at the port. Again, this is something that will benefit us over the longer term as it continues to create more demand for domestic boxes.

Okay. Great. Thanks for the time.

At this time there are no questions queued. I would like to hand it back to CEO, Dave Yeager.

Great. Well, thank you everyone for participating on the call. As always, if you have any questions or follow-ups please don't hesitate to call any of us.

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