Hub Group Inc (HUBG) 2012 Q4 法說會逐字稿

Hello, and welcome to the Hub Group fourth-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question.

Any forward-looking statements made during the course of the call represent our best good-faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate, and project. Actual results could differ materially from those projected in these forward-looking statements.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dave Yeager, CEO for Hub Group. Thank you, Mr. Yeager. You may now begin.

Thank you, Regina, and good afternoon, everyone. It is my pleasure to welcome you to Hub Group's fourth-quarter earnings call.

Today we are initiating a new format. To start, I'll provide you with a high level overview of our performance. This will be followed by Mark Yeager, our President and Chief Operating Officer, who will discuss the details of our quarter by business line.

Mark will be followed by Terri Pizzuto, our Chief Financial Officer, who will comment on the Company's financial performance. I'll then provide some closing remarks, which will be followed by opening up the line to your questions.

To begin, Hub Group has delivered yet another strong annual performance with improved contributions from each of our business units. We enjoyed a record fourth quarter, surpassing a revenue milestone of $3 billion for the year.

We earned $1.83 per share for the full year, which is an increase of 17%. Despite the challenging economic climate, we had record intermodal volumes while generating $1.00 per share of free cash flow. And with that, I'm going to turn it over to Mark.

Thank you, Dave. There is no doubt that we navigated through some challenges at the end of the year, including the hurricane in the Northeast and a port strike on the West Coast. Despite this, the fourth quarter saw intermodal and highway volume growth as well as significant margin improvements in all of our business lines.

Intermodal volume grew 7% for the quarter and 10% for the year. Local West grew 12% and was the fastest-growing region, followed by trans-con growing at 5% and Local East at 4%. Retail and consumer products grew well, while durables declined.

Despite weather and labor challenges, the fleet continued to perform well. Utilization was 14 days for the quarter versus 15.1 in 2011, and 13.7 days for the full year 2012 versus 14 for 2011. Better rail service and ongoing focus on network balance and better street execution helped us produce improved results despite managing a larger fleet.

We are in the process of retiring 2000 older aluminum containers. These retirements will eliminate the vast majority of older aluminum boxes from our fleet.

In 2013 we are planning to purchase 3000 new steel containers for a net increase of 1000 fleet containers by peak season 2013. This will bring our average fleet age down to just over four years. Our projected 2013 peak fleet size will be approximately 25,000 units.

Our drayage division, Comtrak, had another great year, handling 22% more dray moves this year than in 2011. We continue to focus on recruiting drivers to grow our network. We had a net add of 407 drivers in 2012, putting our driver count at 2474 at the end of the year. We were also able to lower our turnover rate by 7% for the year, a significant accomplishment in today's competitive driver market.

Comtrak handled 63% of Hub drayage for the quarter and 66% of Hub drayage at quarter end. Our goal for 2013 is to add another 400 drivers and handle 75% of our drayage by the end of the year.

We continue to be bullish on Intermodal. As predicted, we saw a normalized peak this year with solid demand throughout the quarter. Our main rail providers, Union Pacific and Norfolk Southern, showed significant improvements in on-time performance over tough comparables. 2012 marks the fifth year in a row of improved rail service, no small feat given the economic uncertainty and volume fluctuations experienced in the industry during that time.

Looking forward, we are extremely enthusiastic about the opportunities that the new Crescent Corridor on the Norfolk Southern will offer to our customers in the East. This new service provides shorter transit times, more passing lanes and double tracks, and expanded terminals at 11 markets serving 30 new lanes. New facilities in Birmingham, Alabama and Greencastle, Pennsylvania opened recently. And we already have some of our largest customers ready to take advantage of this service.

Our Highway Brokerage division enjoyed real success in the second half of 2012. We grew volume by 9% during the fourth quarter and expanded margin. The turnaround in revenue and margin in the second half is a strong indicator that the restructuring is delivering positive results. The Highway team is pricing better, buying better, and executing better, just as we had hoped.

We saw continued growth across all major customer segments and industries as we executed on awards from the 2012 bid season. Excellent service opened more doors for us, and we expect to see organic growth with new customers throughout 2013.

We are also very proud of how our Highway group rallied to support our customers during the Hurricane Sandy relief efforts. The Highway journey has not been easy, and it is far from complete. But substantial progress has been made, and the outlook is positive.

Revenue for Unyson Logistics showed a slight decline for the fourth quarter year over year, due to loss of a customer that elected to in-source its transportation management function. On the positive side, by the end of the quarter we had already replaced that revenue stream with expanded engagements and new customers.

Scheduled on-boardings in the first half of 2013 are quite significant and the largest Unyson has experienced.

Mode Transportation delivered solid bottom-line performance during the quarter with continued pricing discipline and cost control. We successfully finished 2012 with no agency defections. Mode increased its use of the Hub fleet and Comtrak drayage power, grew Intermodal volumes and continued to expand its LTL offering.

We are pleased with what we have achieved in 2012 and believe we are well positioned for continued strong performance and growth in all of our business units. I'm now going to turn the call over to Terri for financial highlights.

Thanks, Mark. We had a record fourth quarter and I'd like to highlight three points. First, gross margin increased across the board in all three Hub service lines and at Mode. Second, operating margin is the highest that we've seen in two years. And, third, logistics exceeded expectations for gross margin. Here's the key numbers for the fourth quarter. Hub Group's revenue increased 5% to $801 million. Hub Group's diluted earnings per share was $0.51. EPS is up 6% compared to an adjusted 2011 EPS. 2011 diluted earnings per share was $0.46 and, after adjusting to exclude one-time costs related to integration and restructuring, it was $0.48. Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment.

The Hub segment generated revenue of $614 million, which is a 6% increase over last year.

Let's take a closer look at Hub's business lines. Intermodal revenue increased 8%. This change includes a 7% increase in load. 84 basis points of the volume increase came from Hub fleet boxes sold to Mode agents. The Christmas season was cheery for us, with loads from retail customers growing 15% and loads from consumer products customers up 10%. Prices and fuel were up, but were partially offset by the impact of mix.

Truck brokerage revenue increased 7%, due to 9% more loads. Price, fuel, and mix combined were down 2%, driven by a 6% shorter length of haul. We continue to land new business. During the quarter, we also handled emergency loads resulting from Hurricane Sandy.

Logistics revenue was down less than 1% with growth from new customer accounts being offset by the loss of logistics management business for a customer who decided to bring the work in-house.

Hub's gross margin increased by $8.6 million, due to growth in all three of our service lines. Intermodal gross margin growth came in the strongest, up $4.5 million, due primarily to the 7% volume growth and improved street operations. Utilization was one day faster than last year and Comtrak did 63% of our drayage work this quarter. Despite the decline in revenue, Logistics gross margin increased by $2.2 million, due mostly to yield improvement. Truck brokerage gross margin increased $1.9 million year-over-year, due to a 9% increase in the number of loads and better purchasing.

Hub's gross margin as a percentage of sales was 11.4%, the highest that it's been in 2012. The margin percentage is 80 basis points higher than last year's 10.6% gross margin. The biggest driver of the increase in the gross margin percentage is Logistics. Logistics gross margin as a percentage of sales is up 300 basis points, due to solid execution, types of shipment, and more opportunity for optimization. Truck brokerage gross margin as a percentage of sales is up 135 basis points. And Intermodal gross margin as a percentage of sales is up slightly. The margin percentage was higher than we predicted on the third-quarter earnings call, due primarily to the Logistics gross margin percentage beating forecast, and better than expected fleet utilization.

Hub's costs and expenses were $42.2 million compared to $37.4 million last year. Last year's cost included $500,000 of one-time expenses related to restructuring. Bonus expense increased by $2.2 million. Salaries and restricted stock grew $1.2 million. General and administrative expense increased $1.4 million, due primarily to higher claims and professional fees.

Finally, operating margin for the Hub segment was 4.5%, the best we've seen in two years, and 40 basis points higher than last year.

Now I'll talk about results for our Mode segment. Mode's revenue increased 2% to $199 million. The revenue breakdown is $94 million in Intermodal, $78 million in Truck Brokerage, and $27 million in Logistics. Revenue was up in all three service lines.

Gross margin increased $1 million over last year, due to growth in IBO business. Gross margin as a percentage of sales was 11.9%, compared to 11.6% last year. Mode continues to buy well.

Total costs and expenses increased $300,000 compared to last year, due to higher agency commission, which is related to higher gross margin. Mode had $500,000 of one-time costs in 2011, related to the integration.

Operating margin at Mode was 2.1%.

Turning now to headcount for Hub Group; we had 1355 employees, excluding drivers, at the end of December. That's up 16 people compared to the end of September.

Now I'll discuss what we expect for 2013. We are comfortable that our diluted earnings per share in 2013 will be within the current analyst range of between $1.95 and $2.20. We think we'll have 36,700,000 weighted average diluted shares outstanding.

Quarterly costs and expenses will probably range between $65 million and $69 million in 2013. For the Hub segment, our goal for 2013 is to improve on 2012's 11% gross margin. We expect Mode's operating margin in 2013 to continue to be close to 2%.

Turning now to our balance sheet and how we use our cash; at the end of the quarter we had $71 million in cash and no debt. During the quarter, we spent $22 million on capital expenditures, bringing 2012 capital expenditures to $57 million.

We think capital expenditures for 2013 will range between $90 million and $100 million. We are buying 3000 new containers and 4100 containers that are coming off lease, which will cost a total of about $50 million. We'll spend another $30 million to $32 million to finish our new corporate headquarters. The remainder of the capital expenditures are technology-related.

We paid $11.2 million to buy back 347,592 shares of stock during the quarter. $13.8 million remains on our share buyback authorization.

To wrap it up for the financial section, we are happy with our performance this quarter and we are optimistic about 2013 as we work to further unlock gross margin improvement. Dave, back to you for closing remarks.

Thank you, Terri. In conclusion, we are proud of our strong finish to the year. 2012 was a year in which a great deal was accomplished. We surpassed $3 billion in revenue while delivering 17% earnings growth for the year.

We set record Intermodal volumes with a larger fleet and better execution. Comtrak drayage moved more than 1 million loads and added over 400 drivers. We were successful in turning around our Brokerage unit. Unyson Logistics had yet another year of steady growth. And Mode continued to exceed bottom-line expectations.

As we begin 2013, we expect to deliver another year of solid operating performance. We're staying focused on driving value for our customers, our shareholders, and our employees.

And with that, Terri, Mark, and I are happy to answer any questions you may have.

(Operator Instructions) John Barnes, RBC Capital Markets.

Hey. Thank you. Two quick questions. First, can you talk about the disparity between the operating margin at Mode and the operating margin at Hub, and where you see that potentially closing -- what the opportunities are to close that gap in 2013, please?

Sure. Operating margin at Mode, John, was 2.1% for the quarter. We think, in 2013, it will still hover around that 2% level. And because Mode has a different model than the Hub segment, we think it's going to have a different operating margin.

And our operating margin at Hub was 4.5%, the highest that it's been in two years, which is great. But, for Mode, they do the heavy lifting. Our Mode agents sell the freight, they operate the freight, and they can use our fleet boxes if they want to. They are compensated based on a percentage of gross margin. So it's just inherently a different --

And this is actually quite an improvement for them, because when we first acquired the company, it was under 1%, was it not?

Yes. That's right. And, you know, do we think it could get higher than that 2%? Sure, but it probably won't be until 2014.

Okay. All right. Very good. And then, secondly, could you just remind us where you finished the year for both Mode and Hub, in terms of internal drayage for both of those, and what your targets are for 2013 on that?

Yes, we finished the year handling 66% of Hub's drayage at Comtrak. That was to close the year. For the quarter, it was 63%. Our goal was 70%. We came up a little short as we saw some pretty solid growth in the Intermodal side.

And we also began handling some level of local pickup and delivery activity in order to make our network even more efficient. So, had we been able to allocate that capacity towards pure drayage, we would have gotten significantly closer to the 70% goal.

Our goal for this year is 75% on the Hub side.

From a Mode perspective, we handled 15% of Mode's intermodal drayage through Comtrak. I'm sorry. That was incorrect. We handled 15% of their containers through the fleet, 11% Comtrak dray.

Okay. All right. Thanks for your time, guys.

Ben Hartford, Robert W. Baird.

Good evening, guys. Could you provide, maybe Mark, a little bit of context to the fourth quarter across the units, with gross margin improving? I really want to vet how sustainable it is. I know you talked about 2013 you are hoping for gross margin improvement within Hub -- Hub core.

Can you talk a little bit about the logistics gross margin improvement in the quarter? And then within Intermodal, some of the puts and takes with gross margin being up on better than expected fleet utilization, how much of it was balance and volume in the quarter? And how much of that improvement, in terms of fleet utilization, do you think you can carry over into 2013?

Yes, I mean, we think that all the improvements that we saw in all three segments are sustainable. Within Logistics, obviously we saw a lot of good work from a carrier and modal optimization execution. We saw enhanced savings from consolidation and we saw some favorable mix benefits as well. But all those things are likely sustainable for the foreseeable future.

Obviously, with the market a little bit soft, that enables us to do things like carrier optimization more effectively. So unless we see a significant turnaround, tightness of capacity, I think that Logistics is likely to continue to show solid margin performance.

Highway certainly had good, solid margin performance. They were able to reduce their cost to purchase transportation. Once again, somewhat a reflection of market dynamics, but I think also a reflection of the improved execution that we are seeing out of our newly reengineered model.

On the Intermodal side, a lot of it was about street operations and performing better on the street, better utilization of the boxes, and reducing our dray costs by making better use of the drivers and adding to the drivers, and adding to the percentage of our own dray that we are handling.

In addition, we did see positive pricing, which helped us improve margins as well. We think all those things are sustainable.

Certainly if the market shifts dramatically, some of those factors could be put under stress. But given what we are anticipating for 2013, we think that we can continue to make the progress -- you know, continue the down the road of progress that we've made with margin in all three areas.

Okay. And I guess when we look at 2013, the drivers of that improvement, is it fairly -- is it fair to say that it's spread -- the contribution of the improvement on a year-over-year basis is spread evenly across the units? Or is it weighted toward any single vertical? And any sense on what the order of magnitude of the level of improvement that you have in mind for 2013 on the gross margin side? Thanks.

We had 11% gross margin in the whole year 2012, so our goal is to beat that. It was 11.4% for the fourth quarter. We gained momentum, and that 11.4% certainly won't carry over to the first half of the year, only because it is seasonally different.

And so in the second half of the year, hopefully we do better than the 11.4% in the fourth quarter, for example. But it's going to progress to get better as the year goes on I guess we'd tell you, based on the seasonality. And as to how much better it can get? Our goal is for it always to get as high as it can, and it will depend on the pricing environment and what happens there.

Okay. Great. Thanks. I'll get back in queue.

Brad Delco, Stephens.

Yes. Good afternoon. Thanks for taking my questions. Mark, I guess the first question, to dig into the gross margin piece a little bit more, what are your expectations for Intermodal gross margins? And do you see that more a function of pricing levers that you can pull, or is there some change of mix issue that we need to be cognizant of, with potentially seeing more growth in the Crescent Corridor?

You know, I think, certainly, price is the key lever for Intermodal gross margin. There's no question that that is what has compressed margins in the past and enabled us to expand margins as well, under different demand conditions. So it's clearly the biggest lever.

I think we're doing very well controlling the other factors, like utilization and street execution, that do have an impact on margin. So I think we've made a lot of progress there. I think those are sustainable.

I don't know that we can bring a whole lot more utilization to bear. There's probably a little bit of improvement that we can realize through, once again, continued execution.

We do believe that it's got to be a competitive environment out there in Intermodal. But, at the same time, we were able to realize positive price in both the third quarter and the fourth quarter. And with appropriate pricing discipline, we should be able to continue that trend. So we are bullish on Intermodal.

Rail service has been good. We aren't going to see a tremendous amount of additional capacity coming into the marketplace. It's always competitive. We anticipate it will continue to be competitive, but we do feel like we can continue to work our way back to more historic margin levels in the Intermodal space.

Just to add on a little bit to what Mark said, I think the other key levers in street operations, and as much as we've improved our street operations and eliminated empty miles, we still have a lot of room for improvement. So I think that's the other key lever to us being able to enhance our gross margins.

Yes, our utilization for the year was 13.7 days. I think our best utilization ever was in the second quarter of 2010. It was 13.3 days in 2010 and we had a much smaller fleet then, and equipment was really tight. So, certainly, our plan would be to get better than the 13.7 for this year and we think we can do that.

Got you. And then maybe my follow-up will kind of focus on Intermodal volumes. If I heard correct, it's a net of 1000 additional boxes peak season for 2013, so call it an incremental 4% of capacity.

So in order to see you guys have better than 4% Intermodal volume growth, I guess the key is on that utilization factor. Is there any way to kind of bracket where your expectations are for Intermodal volume growth for 2013 versus 2012?

Well, we are obviously looking to do better than the 4%. That's part of the beauty of our model and also the relationship we have with Union Pacific and Norfolk Southern because we can, in fact, ramp up as well with the EMP, which is the neutral rail fleet that's jointly operated by UP and Norfolk Southern.

So while it may -- there is no question that we intend to be spinning our boxes quicker from fleet, but we do have the ability to also ramp up and expand our overall volume levels by using the rail fleets.

Got you. But no range in terms of internal expectations for volume growth this year?

We have goals in the budget, but I don't ever disclose them.

Thought I would try. Thank you, guys.

Kevin Sterling, BB&T Capital Markets.

Good evening, Dave, Mark, and Terri. Dave, how should we think about bid season coming up? As you talk to your customers, what are their expectations in terms of pricing, particularly in light of kind of a sluggish truckload environment?

Well, certainly, with bid season right now, we do see it ramping up into full swing. We do think that we are going to see a lot more bids, probably, that will be earlier in the year versus later in the year. And certainly, to date, the ones that we have seen have been quite competitive.

As far as from our customers' perspectives, I think they obviously would like to see reductions. I think, you know, that's obviously not in our planning. But I think that there is no question, with some of the regulations that are coming into effect, with the reduced hours of service with CSA that many of our clients are looking at conversion to Intermodal. I think that's one of the key things, and because they do foresee the capacity is going to be very tight and it could drive a truck prices up, not in the first half of the year, but in the second half.

Right. Okay. Thank you. And, Terri, when looking at your tax rate, I think, for the fourth quarter, it's a tad higher. How should we think about that for 2013?

We think it'll be about 38.5% in 2013. And you're right; it was a little higher in the fourth quarter because there was a change in the California income tax laws.

Okay. Good old California.

Yes.

Okay. Thank you for your time this evening.

Thanks, Kevin.

Michael Weinz, JPMorgan.

Hey. Good afternoon. I guess, first, if we think about on the Intermodal business, how would you view the pricing on behalf of the rails in 2013 for expectations on where the increases might come from? And, also, where would you look at Intermodal growth coming from? More so in the East or would it be growth in trans-con, or which bucket would you see more of the growth into 2013?

Sure. Yes, we would anticipate, I think, that the rails are continuing to deliver good service. They are continuing to deliver a very good value proposition, and I think that they will be looking to get increases from the marketplace to the extent that they can. So I don't suspect that we're going to see them change their philosophy about volume versus yield.

At the same time, it's always been our goal to be able to offset those increases, and we are committed to being able to do that. Obviously, as we think about where we are growing, Local West was a very good grower for us this year. A lot of that was the result of progress we've made in the retail space and that's likely to continue.

Certainly, with the Quarter Crescent Corridor, and the new lane pairs they are opening up, I think that it would be logical to be targeting some good, solid growth in those corridors. It was a little bit slow, I think, in the fourth quarter in terms of Local East growth coming in at 4%. We'd like to do better there, and we think the opportunity certainly presents itself, particularly based on the transit reductions that we are seeing in a number of these major lanes.

Right. And that Local East 4% growth, was there any Sandy impact in there?

A little bit, yes. Sandy, there was a little bit of impact, particularly on outbound in the Northeast, that did not recover nearly as quickly. So there was a 2 to 3 day freight embargo. And then outbound in the Northeast did not recover nearly as quickly as inbound. So that certainly had an impact.

Okay. Great. And as a quick follow-up here, since you mentioned the Crescent Corridor, how should we view, I guess, the plan for growing that business? Is there any kind of incentive that the railroads provide to get you to maybe have a lower cost in those segments for a period of time in order to drive that business and get the service running? Or is it just normal pricing similar to the rest of the lanes?

I think obviously, the rails -- this is Dave -- are looking at what the highway market pricing is, and they don't actually offer us any specific reductions or incentives. I think they just rely on our drive to, in fact, convert business and create more business for our Hub Group to handle intermodally. So more so than anything else, I think that's what Norfolk Southern is looking at.

So if we think of a spread of like 15% between truck and rail, Intermodal is continuing going forward, is that reasonable broadly?

Certainly in the East, that seems like it has been reasonable. The West, it has been wider spreads for many years. And, as much as anything else, it's not necessarily driven by truck competition as much as Intermodal competition.

Understood. Thanks a lot for the time.

Todd Fowler, KeyBanc Capital.

Hi. Good afternoon. Thank you. I guess I just wanted to start to clarify. Terri, did you say that you expect gross margins in the Hub segment to be down sequentially from 11.4% in the first quarter? And I guess if that's the case, seasonally, I thought the gross margins went up in the first quarter. I guess I'm just trying to reconcile why that would be.

I did say it probably wouldn't be the 11.4%. It would be lower than that; that's correct.

And the reason is because the fourth quarter included the peak season. We had a good strong peak season. There are peak season surcharges in there. Our utilization was great and Logistics had a higher gross margin percentage than normal. But really Intermodal drives -- is the lion's share, obviously, of our business. So that would be why, due to seasonality more than anything.

Okay. So, I mean, is part of that that the expectation would be that you wouldn't get the same sort of utilization on the fleet -- the Intermodal fleet in the first quarter, then obviously anything that you picked up with surcharges wouldn't be the recurring factors.

Correct.

Okay. And then, on the operating expense guidance, the $65 million to $69 million, is that an expectation that we should see something in that range for the first quarter or is that something that builds to that level throughout the year? And if that is the case, what's the step function between where you ended the fourth quarter and the first quarter to move up to that higher level?

Yes, that's a good question, Todd. The biggest increases relate to headcount adds which, of course, Dave still approves every single person we hire.

But given the growth that we're planning, that would be $2 million a quarter add, and then agency commissions might be up $1.5 million a quarter. That's for Mode. And then we'd have our wage increases that don't go into effect 'til January 1st. That might be another, call it, $1 million; and bonuses, higher IT costs, and higher insurance of another $1.5 million.

So obviously, those increases only take place if, in fact, we are generating more business and more gross margin.

Right.

Yes. That makes sense to me, (multiple speakers) especially the commission piece would be moving in sync with the Mode revenue, I would assume. But there's no depreciation, then, do related to the new headquarters? Is that something that isn't being depreciated yet? Or has that come in later in the year, or when do we see that?

You'll see that in 2014, after we move in our new building at the end of 2013.

Okay. Got it. And then the last one I had is, Mark, if you get the drayage up from the mid-60s to the mid-70s, I think in the past it you have given a metric for what drayage can do on the gross margin -- the impact on gross margins from doing more to dray internally. Can you refresh our memory what that metric is and how we should think about the potential gross margin dollars from doing more dray?

Sure. I'll be Mark for a minute. We make 10% more gross margin per load.

Just trying to incorporate everybody.

We make 10% more on that Intermodal load if we do our own drayage.

Okay. Thanks a lot for the time. Good luck.

Anthony Gallo, Wells Fargo.

Hi. Can you hear me okay?

Sure.

Quick question on truck brokerage in the legacy Hub group. What's the mix now between transaction versus spot growth in terms of how you are buying in the marketplace and how you are contracting with the shipper?

Yes, Anthony, about 80% of our business is contractual and about 20% is that traditional brokerage spot business.

Okay. And is that similar to what you're buying, capacity in the marketplace?

You know, generally speaking, we have capacity lined up, committed to that business, because it is repetitive, consistent business across-the-board.

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

William Greene, Morgan Stanley.

Hi there. Good afternoon. You know, can I just ask one point of clarification? Sorry to come back to this. But, Terri, you mentioned that the margins should fall sequentially. Historically, they've gone up.

Is that at all related to sort of the hurricane effect and creating tightness in the markets that allowed you to sort of take some extra revenue or get better utilization? I'm just trying to figure out how much of that might be one-time.

No, it's really due to seasonality more than anything. And if you remember, in 2011 in the fourth quarter it was 10.6% gross margin, which was kind of low, right, and lower than we had hoped because we had the impact of our cost increases more than our price increases. So that's why it got better than 2011. But this year we had a pretty rock-solid gross margin percentage.

Okay. So if you look back over the quarter of 2012, do any of them stand out as having kind of squeezed you, due to the rail increases, assuming rails just follow what they have been doing the last few years? I just want to make sure we think about 2013 quarterly modeling it correctly.

No. We recovered those cost increases and, like Mark said in his remarks, prices were up each quarter.

Okay. And then the tightness that you sort of saw in the fourth quarter that you are able to take advantage of, one of the things we've talked about in the past is one of the things that will get you back to peak margins is kind of greater tightness in the markets. Now, I know it's just one quarter. But does it have kind of sort of trend rate that you could say, like as we look out to 2014, that we could get back to those levels? Or is it kind of too much to hope for?

Well, if you think back to 2011, I believe that we had 26% increase in overall equipment capacity.

Yes.

It was a substantial increase.

Yes, that's right.

And so, while it did get tight for a period, it was not what I would call a prolonged and protracted time period. So, no, I don't think it was enough to send the client base towards being overly concerned about capacity at this point in the Intermodal business. It certainly was tight for a period there, and certainly the ILA had a bit to do with it, but it wasn't anything which was of the order of magnitude as some of the peaks we've seen.

Okay. All right. That's great. Thank you for the time.

Nate Brochmann, William Blair.

Good evening, everyone. Wanted to talk a little bit, just in terms of -- I mean, obviously, again, seeing the nice peak demand, part of that was the overall market. I just want to break that down a little bit in terms of any new customer wins that you might have seen, or greater penetration, or just in terms of kind of breaking that down in terms of where that strength is.

You know, as I mentioned, we certainly saw a good solid growth in the retail sector. Some of that was with existing customers; some of that was with new customers. That grew, I think, 15% on the quarter.

Consumer products continued to grow double digits, coming in at 10%. Durables was off, predictably, I think, and that was centered around a few specific customers rather than being a broader trend.

We saw a lot of success off of the West Coast. Saw good solid demand off of the West Coast. Saw good solid demand in the Texas market as well.

And then, just conceptually, there's a lot of debate about this kind of, I think, out in the marketplace. But just wanted to hear your opinion of where we stand now in terms of the potential Mode conversion opportunities. Not your Mode group, but just going from truck to rail. Still kind of out on the trans-con lanes and how much further growth in penetration we can get there from a conceptual standpoint. Thanks.

Yes, we continue to believe that the opportunity is probably substantially larger than the system could realistically absorb. We think that there is clearly significant opportunity in the East, and Crescent should help us tap into that potential opportunity.

And, in addition, as we get better at street operations and as we improved execution with the dray piece, we are able to get out further and further away from the rail ramp and bring business into Intermodal throughout the country that, historically, it really wasn't feasible and didn't represent enough of a cost advantage to justify modal conversion. So our belief is that the opportunity is very significant.

Intermodal is probably handling something like 8% of loads over 550 miles, and there is certainly room to go well beyond that. So we remain very optimistic about the potential for Intermodal conversion, particularly with what's likely to occur over the long-term in terms of over the road costs.

Great. Thanks.

Scott Group, Wolfe Trahan & Co.

Hey. Good afternoon, guys. Dave or Mark, can you give us a sense on Intermodal and brokerage volumes early in January?

Yes, sure. Scott, I think what we've seen is a pretty much continuation of the trends that we saw over the course of the second half of the year. Demand for Intermodal continues to be pretty solid. And the truck market has yet to firm up, but I think because of some of the wins that we brought in, in the second half of the year, that trend continues to be positive.

Similar with 7% and 9% in the fourth quarter, then?

Yes, it's obviously early to tell. We can't really tell if -- January is always a little bit of a squirrelly month with the holiday and Chinese New Year, which I think falls in February this year versus January, and all that craziness. But so far, it looks like that we are not seeing any change in market condition that would be unusual.

Okay. That's helpful. In terms of brokerage in the quarter, you mentioned there is maybe a volume benefit after the hurricane. Any way to think about if the hurricane and the tightness, how that impacted the gross margin percentages within brokerage? Did it get tight enough where you were able to actually pass it through, and saw a margin percent boost as well?

And is there any way to maybe think about the total impact of the hurricane on brokerage or the net impact of the hurricane on brokerage?

Scott, I really don't think it had a major impact either on our margins or -- it had slight impact on our volume levels because, as Mark had said earlier, the Northeast and did not get back up to producing in shipping quite as quickly as into the Northeast. So I don't think it really did much.

I think that all of the work that's gone into revitalizing our truck brokerage market is really what had the impact where we are buying better, we're pricing better, we are operating more efficiently, we are broadening our carrier base. So all those positive trends, I think, had a much more material impact on brokerage's results than did the hurricane.

Okay. So you view this as a pretty good run rate to go from into 2013.

Yes.

Okay. Great. And then, just last thing, for Terri, I know you typically just say you're comfortable with the range of expectations, but it feels like it's a wider range than normal for the year.

I think Dave said he could drive a truck through it earlier.

Yes (laughter). Can you give us some color on what you think it takes to get to the higher end or where are the risks that get you to the lower end, or if you feel more comfortable on one side or the other?

Sure. Yes. I guess the biggest impact is pricing in Intermodal, like we talked about before. So that would get us to the very high end.

And in terms of the low end, it would be not meeting our budget. And when we do our budget, we try and be very, certainly, realistic, but also shooting for what we think we can do. And that's generally the target that the Board approves.

So it's aggressive somewhat, but also realistic. So the middle of the range, say, if we hit our budget, and the more pricing we get in Intermodal to the high end.

Okay. That's helpful. Appreciate it. Thank you.

Matt Brooklier, Longbow Research.

Hey. Good afternoon. Just wanted to walk through the on-boarding of new containers. I think you are purchasing 3000 new boxes, but there's roughly 2000 that are getting retired and we are left with 1000 net adds at the end of the year.

But it sounds like, from a timing perspective, if you walk through the quarters, it's going to -- it's obviously going to look a little bit differently into peak. So I just wanted to understand kind of the progression of when we add boxes, roughly, and then when we think about retiring those 2000 older boxes.

Every year when we are, in fact, going to either order boxes or in fact return some of the aluminum boxes, we have a tendency to return boxes early on in the quarter, obviously when demand is less and we really don't need them. And then we'll begin to gear up in the beginning of the third quarter to receive the 3000. Even at the end of the second quarter, this particular year, and then it's always a subject to production. It's always subject to chartering vessels because they are made in China.

But we really enjoy having them there during August, September, and October when it's the key shipping period out of Southern California. So you'll see us right now reducing the fleet size, and then it will begin to increase at the end of the second quarter.

Okay. I mean, is there -- you are on schedule to reduce the fleet size at this point or if, let's say, the first half of 2013 is potentially a little bit stronger than anticipated. I mean, is there some flex there with respect to when you're reducing or retiring containers? And then obviously adding is a little bit more difficult, getting over from China, but just curious to see if you do have some flex in the first half.

We definitely do have some flex with -- if we saw a really strong demand, we would slow down the turn-in process. But as we had said earlier, also, we do have that unique business model whereby if we do not have fleet boxes available, we can go to the EMP fleet and utilize that for additional capacity needs.

Right. Right. Okay. And then just with Unyson, flattish revenue, but it sounds like you have a nice full pipeline of potential new business. Should we assume that you get back to growing that particular business and you do win a certain amount of those contracts?

Yes, I think Mark mentioned in his prepared remarks, Matt, that we have business that we are ready to onboard now that we won. We'll onboard that in the first half of the year to replace the business that a customer decided to take in-house.

Okay.

So we think, to answer your question directly, that Logistics revenue could be up high single to low double digits next year.

Okay. So that's business that has been won at this point and is being on-boarded, and that should kick up the growth rate. Okay.

Exactly.

Very good. Appreciate the time.

David Tamborino, Stifel Nicolaus.

Hi. Good evening, and thanks for taking my question. I think you just touched on it a little bit, my first one, in terms of how large the customer that you lost was in TTM revenue.

Sure. It was about $40 million in annualized revenue in Logistics.

Got it. And then, second one, a little bit more detail. Digging through the Mode business segment and looking at Intermodal, it looks like the Intermodal segment only grew by less than a percentage versus the Hub revenue that was up by 8%. Can you comment on kind of the different growth rates and how Mode intermodal is kind of decelerate in a little bit faster than Hub's intermodal throughout the year?

Yes, Mode did not put the kind of growth numbers that Hub did. I don't think there are many players in the industry that are growing at the kind of rate that Hub is growing at. Mode's customer base tends to be a lot -- they do have some large customers; no question about it, but a lot of smaller and midsize customers who, I think, have been particularly challenged by the current economic environment.

There had actually been a trend at Mode of declining intermodal volumes for some time. So for us to see positive intermodal numbers, in the post-acquisition world, we view as a positive trend.

I don't think you're going to see Mode grow intermodal volumes as quickly as you see Hub grow intermodal volumes. But we certainly do believe that, with access to the fleet, and access to Comtrak, they can continue to grow there, albeit probably not as quickly as Hub does.

Yes, and actually, Mode's intermodal volume was up 6.5% in the fourth quarter so, you're right, David. Even though revenue was up some, they had a different mix of freight. And so, even though the revenue wasn't up as much, certainly loads were.

Right.

Okay. And then, I guess while I have you here kind of towards the end of the call, you touched on a little bit earlier that improving your street and dray operations, you should be able to touch endpoints a little bit further away from the rail heads.

We've heard that generally dray should be circuitous to the rail move by only about 20%. Further than that, kind of the pricing kind of breaks down. It's no longer competitive with a long haul trucking move.

I'm interested in knowing if you'd care to speak to how long away from the railhead your typical dray move is now, and where do you think it could go.

About 80 miles.

Yes, typically it's about 80 miles, but we serve markets that are substantially farther than that. We serve a number of markets that are a full day's trip, it's not unusual.

In order to do that effectively, you need to have balance and you need to have density so that you're not making a 300-mile dray, accompanied by a 300-mile empty move. So you really have to avoid that kind of dynamic. And it's very important that you have balanced freight loads and that you have density if you want to be able to service those more remote markets.

But we have a number of markets where we are serving, particularly over in some areas like the Chicago Gateway, serving well into the Ohio Valley and regions like that.

Okay. And then, one last one. What was your average length of haul in Intermodal for the quarter?

1625 miles.

And that how does that compare to the prior year?

Up 9 miles.

Okay. Thank you very much.

Ryan Bouchard, Avondale Partners.

Hi. Thanks for taking my question. I understand that you don't want to comment on what you think your Intermodal volumes will be in 2013, but I wondered if you could maybe give us an idea of kind of the range that you're comfortable with. It would imply some sort of industry intermodal volume growth for the year. Can you give us that? Or maybe kind of frame it in terms of what type of macro environment your range is based on?

Well, you know, I mean, I think we believe that Intermodal will continue to outpace GDP.

Right.

It's done that the last few years. There certainly is the capacity within the network from a terminal perspective. And certainly from a line capacity, there is no shortage of line capacity.

So we believe that it will continue down a good solid growth trajectory, similar to what we've experienced the last couple of years. So what we saw there was mid-single-digits to high single digits. I think we are likely to see -- we're more likely to see that mid-single-digit growth out of the industry than the high single growth out of the industry this year, unless we see a significant economic turnaround or a large jump up in fuel prices or something along those lines.

But I think it will continue to outpace GDP and it will continue to outpace growth in the truckload sector.

Okay. Thank you.

Ben Hartford.

Thanks. Terri, I think you said that you ended the year with $13.8 million remaining on the share repurchase authorization. Is that right?

That's correct.

Have you bought any stock in the first quarter?

Yes, we have. We bought about 26,000 shares, about $900,000 worth of stock.

Okay. When would you expect the CapEx for the building to be done? Is that ratable throughout the year? And then when would you expect this authorization to be completed?

And then, thirdly, when you get it -- if and when you get it completed, and you get through this CapEx year, this year you'll have obviously free cash flow accelerating in 2014. So how will you think about uses of cash once you have these two items finished?

Let's see. I'll try and make sure we answer all the questions. In terms of when we expect to complete our share buyback authorization, we have a plan in place, and so we certainly hope to complete it. We are going to buy stock opportunistically.

And in terms of when we're going to spend the money on our new corporate headquarters, the $30 million or $32 million this year, it will be ratably throughout the year because we don't intend to move in until the end of the year, which is when it would be completed. So that will kind of be pro rata.

And then our expected uses of cash for 2013. We are going to spend $90 million to $100 million on capital expenditures, $50 million for containers, call it $30 million for the building and the rest for technology.

Our first use of cash would be acquisitions. We are still hunting for good acquisitions and hopefully we'll find some. Even with the capital expenditure that we're going to have in 2013, we'll still have a good amount of cash left at the end of the year, and we have a $50 million untapped credit line that we could always use, so plenty of cash in our banks.

Okay. Good. And then, just real quick on brokerage in 2013. I mean, it looks like, given the results, that certainly you guys have restored momentum in that business. Are you at kind of full cadence in that business? Should we be thinking about that as a mid-to-upper single-digit revenue grower, if not something better in a better environment in 2013 and moving forward? Is that how we should think about it?

Yes. That's how we would think about it, yes.

Okay. Good. That's helpful. Thanks.

Follow-up question -- actually you have a first question from the line of Chaz Jones, with Wunderlich Securities.

Yes. Thanks for taking my question. Actually, they've all been answered, but I did have one clarification. Did the container fleet actually end the year at 24,000?

Yes. Close to that -- 23,867 so round it up for a few hundred, yes.

Your final question is a follow-up question from Scott Group.

So if I look at the core Hub gross yields, gross margin percentage of 2011, and look at past peak, give or take, of 14%, is there a way of thinking about each of the three? So when we think about the opportunity, how do each of the three segments compare versus past peak? Meaning is Intermodal more than 300 basis points below past and brokerage less than 300? Can you directionally talk about that?

Yes, Intermodal would have been -- it's lower because it got driven down by prices in 2008 and 2009. So that's where we get the biggest bang for our buck, by getting higher yields in Intermodal.

The other two areas are fairly comparable to what they were performing at, at that time.

Yes, they are.

Although our percentage of highway freight, I think, was higher at that point because Intermodal has grown fairly quickly since then.

Right. Yes.

And Intermodal is still -- when we think about ranking the three, it's still Brokerage margin percentages are the highest, then Intermodal, then Logistics.

Actually, that's what we expect. Actually for this quarter, the Logistics was higher than Intermodal.

Is that something you think is ongoing?

A tiny bit. Probably not.

Okay. Thanks a lot. I appreciate it.

Ladies and gentlemen, this does conclude the question and answer portion of our broadcast today. I'd like to turn the call back over to Dave Yeager for some closing remarks.

Great. Well, again, thank you for taking the time to participate in our earnings call. As always, if, in fact, you have additional follow-up questions, et cetera, Terri, Mark, and I will be available. So thank you again.

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation. You may now disconnect. Have a great day.