Hub Group Inc (HUBG) 2013 Q1 法說會逐字稿

Hello, and welcome to the Hub Group Inc. first quarter 2013 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 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 begin.

Thank you and welcome to Hub Group's first quarter earnings call. The first quarter played out much as we expected with single-digit revenue growth in all of our business lines. The Intermodal business continues to perform well with moderate volume and revenue increases. It's our belief that consistent railroad service, coupled with the headwinds being faced by the motor carrier industry, positions the Intermodal business to outpace the growth of GDP and that Hub's Intermodal model will allow us to surpass the overall industry.

Our Highway brokerage business stayed on track as well. As a truck broker, margins are generally optimized when you have either an excess of supply or an excess of demand. In today's environment, where supply and demand are at equilibrium, enhancing margins can be more challenging and the amount of overflow business from load boards and other transactional business can be minimized. We do, however, look for our Highway brokerage to continue to grow as our new structure continues to provide a superior service. Lastly, both Mode and Unyson continued to produce solid results throughout the quarter. With that, I'll turn it over to Mark to discuss the details of our quarter by business line.

Thank you, Dave. The theme this quarter was solid execution and ongoing investment in our business. We saw growth across the board, despite a challenging competitive environment, a less favorable calendar, an early Easter and a late spring. We were honored with carrier awards from some of the most sophisticated shippers in the industry, including the Intermodal Carrier of the Year award from Walmart, and the Intermodal Carrier of the Year and Double Platinum Intermodal Service awards from Lowe's. Intermodal volume for the Hub segment grew 2.2%, with 12% growth in retail, 5% growth in consumer products, and a 12% decline in durables. From a regional perspective, we saw a 2% decline in trans-con, a 2% increase in local East and a 7% increase in local West. On a consolidated basis, Intermodal volume increased 3% for the quarter.

As with each bid season, pricing remains competitive. We've seen some aggressive pricing during the quarter, particularly in the local East and transcontinental backhaul markets. We worked hard this quarter to maintain the proper balance between pricing discipline and growth and will continue to do so as we enter the second half of the bid season. Despite a more challenging winter, rail on-time performance and Hub fleet utilization both improved during the quarter. Fleet utilization was 13.4 days for the quarter, compared to 13.8 days for Q1 of 2012. This represents the best fleet performance for a first quarter in Hub history.

As planned, we are retiring 2000 older aluminum containers and replacing them with 3000 new steel boxes, further reducing the age of our fleet to just over four years. The new containers began arriving on schedule this month. Our fleet size will be just under 25,000 units during peak, and we expect it to be fully deployed throughout the year. Our drayage operation Comtrak continues to grow. In the first quarter, we added 135 drivers, ending the quarter with 2609 drivers. Comtrak handled 93% more Mode loads and 7% more Hub loads, meeting 66% of Hub's drayage needs, up from 64% last year, despite higher volumes. We are still on track to handle 75% of Hub drayage by the end of the year.

Despite the somewhat sluggish truck environment, Highway brokerage also continued its progress, growing volume 4%, generating more margin dollars, improving execution, and adding new carriers to its portfolio. While the month of May will be an important indicator as to how the rest of the year will play out in the brokerage market as a whole, we remain confident that our truck brokerage unit will maintain margin levels and grow volume into the foreseeable future.

Despite the previously disclosed loss of a customer in the second half of last year, revenue for Unyson Logistics grew 3%, while solid execution on high-value add Logistics engagements produced improved margin performance. Several significant new customers are in the process of onboarding, as we speak, and should contribute to accelerated Unyson growth in the remaining three quarters.

Mode Transportation once again delivered strong bottom-line performance. While Temstar and CMO revenue declined, the IBO network continued to perform well, growing revenue by 3%, including an 11% volume growth in Intermodal. Mode also added four new IBOs and three new sales agents during the quarter.

Overall, we had a solid quarter. We're staying the course on key initiatives and are well positioned for the rest of the year. I'm now going to turn the call over to Terri to review the financials.

Thanks Mark. We had a record first quarter, and I'd like to highlight three points. First, gross margin as a percentage of sales improved 10 basis points over last year, to 11.4%. Second, total cost and expenses were only up 2%, and third, earnings per share increased 14%. Here are the key numbers for the first quarter. Hub Group's revenue increased 4%, to $769 million. Hub Group's diluted earnings per share was $0.42 this year, compared to $0.37 last year.

Now, I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $593 million, which is a 5% increase over last year. Let's take a closer look at Hub's business line. Intermodal revenue increased 6%. This change includes a 2% increase in loads. 42 basis points of the volume increase came from Hub fleet containers sold to Mode agents. Loads from retail customers increased 12%, despite some customers experiencing a decline in their business. Prices, fuel and mix were all up.

Truck brokerage revenue increased 4%, due to 4% more loads. Prices, fuel and mix combined were flat. Loads from retail customers increased 26%, resulting primarily from success in last year's bid and landing new customers.

Logistics revenue was up 3%, due to growth from some new customers that we are excited about and more business from existing customers. Growth was muted because onboarding for several new customers were delayed.

Hub's gross margin increased by $3.7 million, due to growth in all three of our service lines. Logistics gross margin growth came in the strongest, up $1.7 million, due primarily to improvement in yields. Intermodal gross margin grew $1.5 million, due to the 2% increase in loads and improved street operations. Utilization was about a half a day faster than last year, and Comtrak did 66% of our drayage work this quarter. Truck brokerage gross margin increased $500,000 year-over-year, due to an increase in the number of loads and better purchasing. Hub's gross margin as a percentage of sales was 11%, a touch higher than the 10.9% in the first quarter of 2012. The biggest driver of the increase in the gross margin percentage is Logistics. Logistics gross margin as a percentage of sales was up 177 basis points, due to solid execution, the mix of business, and more opportunity for optimization. Truck brokerage and Intermodal gross margin as a percentage of sales, were relatively flat.

Hub's cost and expenses were $43.9 million in 2013, compared to $41.6 million last year. Salaries and benefits grew by $1.7 million, due to pay increases and higher headcount. General and administrative expenses up $1 million, due primarily to higher IT cost, professional fees and insurance. The main reason total cost and expenses were lower than we projected was due to hiring fewer people than planned. Finally, operating margin for the Hub segment was 3.6%.

Now, I'll talk about results for our Mode segment. Mode's revenue of $187 million was up slightly over last year. The revenue breaks down as $86 million in Intermodal, which was up 5%; $74 million in truck brokerage, which was down 8%; and $27 million in Logistics, which was up 7%. Mode's gross margin decreased $66,000 year-over-year. Gross margin as a percentage of sales was 11.8%, compared to 11.9% last year.

Mode's total cost and expenses decreased $1 million compared to last year, due to agency commissions going down $200,000, salaries and benefits declining by $400,000, and general and administrative cost decreasing $400,000. We continue to see the benefits of the integration. Operating margin for Mode was 1.9%. The good news is that operating margin was up 50 basis points over last year, even though revenue was only up slightly.

Turning now to headcount for Hub Group. We had 1400 employees, excluding drivers, at the end of March. That's up 45 people, compared to the end of December.

Now, I'll discuss what we expect for the rest of this year. We are comfortable that our 2013 diluted earnings per share will be within the current analyst range of between $2 and $2.15. We think we'll have 36.7 million weighted diluted average shares outstanding. Quarterly cost 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 used our cash. We ended the quarter with $86 million in cash and no debt. During the quarter, we spent $9.5 million on capital expenditures. We think capital expenditures for 2013 will range between $95 million and $105 million. We are buying 3000 new containers, and 4100 containers that are coming off lease, for a total cost of about $50 million. We will spend between $30 million and $32 million to finish our new corporate headquarters. We will also purchase 80 tractors for $9 million, that will be delivered in the second quarter. The remainder of the capital expenditures are technology projects.

We spent $900,000 to buy back 26,591 shares of stock during the quarter. $13 million remains on our share buyback authorization.

To wrap it up for the financial section, our financial performance was in line with our expectations, and we continue to focus on initiatives to improve gross margin. Dave, over to you for closing remarks.

Great, thank you Terri. In conclusion, we continue to be focused on managing each of our business units to consistently deliver profitable growth and shareholder returns. We are pleased with our first quarter earnings growth and look forward to continued success for the remainder of 2013. With that, Terri, Mark and I are happy to take your questions.

(Operator Instructions)

Benjamin Hartford, Robert W. Baird.

We talked a little bit about the volume growth. I guess, Mark, you had alluded to the fact that the pricing environment was aggressive, I think was the term that you had used. It sounds like on the intermodal side in the first quarter pricing, the bid environment was a little more aggressive than what we saw in truck. Can you talk a little bit, I guess, about the pricing environment? Really, the sources of pressure to volumes on the trans-con side, and local East, as well?

Sure, absolutely, Ben. I would say that pricing in the first quarter certainly was competitive on the Intermodal side. I think most truck carriers would say it's been pretty competitive on that side, as well. We certainly saw some business in which we were the incumbent that went out to the market and came back at prices that were simply not compensatory for us. It's hard to walk away from business, but the right answer isn't always yes. Sometimes, the right answer is no, contrary to what many of our sales people believe.

We particularly saw competition in the local East space, and saw competition in transcon, particularly on westbound transcon. Clearly, the durables space was very competitive, from a price perspective. At the same time, I would say that we are pleased with the results that we've been getting in from the bid activity. And, do not feel that there is a longer-term volume problem with our Intermodal product. We feel like we are getting good business into the pipeline, business that carries an adequate return and obviously business that supports our network. So, while it is competitive, we feel like we are dealing with it well.

Good. In the past, I think you have talked about this being, the Intermodal business being a mid-to upper single-digit type grower, sounded like that's what you alluded to for 2013. Are those estimates still intact? You still feel like this can be a mid-to upper single-digit volume grower, the Intermodal business?

Absolutely. Nothing has changed about our view of this year or the outlying years, as well. We think that the demand for Intermodal is going to continue to outpace truck, and we think that we should be able to outpace the overall industry, as well.

Okay. And then, real quick on the gross margin side, you had talked about improving that in 2013, relative to 2012. We saw some improvement this quarter on a year-over-year basis. How should we think about the progression, I guess, of gross margin through the year? We've got some influences from mix, with Logistics, that pipeline firming up. It sounds like you had made the comment that Intermodal and truck gross margins were flat, should we think about that being the trend through the year? I guess, maybe, how should we think about gross margins from the first quarter through the balance of the year?

Yes, Ben. We think that gross margins for the first half of the year will be pretty consistent, only because we're still dealing with the same book of business that we had last year, since we're in the middle of bid season. And, for the last half of the year, our goal would be for the gross margin percentage to increase and to increase for the whole year more than we saw in 2012. So, the Hub segment had 11% gross margin for 2012, and our goal is to be higher than that for this year. But, it will be back-end loaded.

Okay. Then, one last clarification on the CapEx. It sounds like it's up $5 million relative to the expectations from the end of the year. You had said that you're purchasing 80 tractors. Are those net purchases? Or are those replacement within the 260 tractors you own in Comtrak?

Those are brand new. We are buying them to support our company drivers. Those tractors will replace tractors that we are currently using on the short-term leases, which will improve our profitability. Those tractors are also going to help service customers with heavy freight and make us more competitive.

And, is that the incremental increase in CapEx at the midpoint of about $5 million?

It is.

It is, okay. Thank you.

Justin Long.

To follow-up on the volume question, what gives you confidence that we'll see a reacceleration in Intermodal volumes as we go throughout the year? It sounds like in the first quarter, aggressive pricing was really the major headwind. So, do we need to see a change in the Intermodal pricing environment in order to get to that mid-to upper single-digit volume growth level that we're used to historically?

Hi Justin, this is Dave. You know, it's actually -- we had a fair amount of customers that were lower margin clients, that we were the incumbent on in the first quarter. Some of that came to bear when we tried to get those margins to a reasonable level. We lost the business. The bids we've seen over the last several months, we've done quite well. We believe that we are very well-positioned for it, and we do believe that we will see the volumes, overall, begin to accelerate in the second quarter and certainly the second half.

Okay. Great. Maybe on that note, in terms of the bid season, can you just provide some color? You did a little bit right there, in terms of what you've seen so far, but just in terms of how the market is from a competitive standpoint, and how you see the bid season playing out this year, in terms of timing? I know it was kind of a delayed process last year. What are you experiencing so far?

I think this year, that we've seen it actually accelerated, the timeframe. So, at this point, we are pretty much halfway through the bid season. So, we have a pretty good feel for how things are going to shake out. And again, when you're the single largest incumbent, you obviously have little to gain and much to risk. So, we are more or less through many of those bids, and again, we look for, again, to Terri's point, the gross margin to accelerate as well as volumes to accelerate for the remainder of the year.

Great. Maybe my last question. We've had some mixed data points in terms of the macro economy and on the freight side, so far in April. Can you comment on how business has trended over the last month or so? Are you seeing any changes from your customers? Are you seeing any reacceleration in Intermodal growth versus what we saw in the first quarter, despite some of these anecdotes we are hearing?

You know, I can't say that we are seeing reacceleration. I don't think that we are seeing any type of departure from normal, seasonal trends. If you look throughout, as the years progress, it's difficult with the way the calendar works. But, as predicted, March was our biggest month of the first quarter, as it normally would be. I think that spring is a little bit later this year, certainly than last year, which was absolutely optimal conditions. So, I know, for example, that some of our customers really didn't catch up until the weather started to turn in the East and in the South, which definitely came little bit later this year. I can't say that we've seen a lot of acceleration out of Sandy or that we've seen a lot of economic acceleration with housing. But, it's I would say very consistent with normal seasonal patterns.

Okay. Thanks. I will pass it along. I appreciate the time.

Anthony Gallo, Wells Fargo.

If you think about your objectives on the gross margin improvement, let's say for 2013 and then beyond, maybe if you could put it into different categories, how much of it is your ability to price above the rail cost? How much of it is from moving to more in-house drayage, how much of it you expect to come from maybe operational improvements? Those sort of three buckets. How would you see that shaking out, maybe this year and then over the next couple of years?

Certainly, Anthony, most important to us is pricing above the rail cost increases. That's key, and as Dave mentioned earlier, we had business that shook out in the first quarter, where we didn't get adequate returns on it. So, price is the key driver of our gross margin percentage. Then, the more drayage we do, that also helps. For every dray that we do, we make 10% more on that Intermodal move. Utilization helps. For one day of utilization, it's about $6 million a year. We had record utilization this quarter, at 13.4 days, which is great. And then, Truck Brokerage has been pretty strong and so is Logistics. So, we expect as that business is onboarded in Logistics, to keep the margin that we have. Logistics margin will fluctuate, depending on how many high-value engagements we have. That's also a factor. Because we do such a good job on those engagements, we've been able to land more of them.

Along those lines, what are your thoughts about how rail pricing is going to trend? We heard from Union Pacific today, that they walked away from some business as they tried to price it higher, and yet in the East, there is an awful lot of build out of Intermodal terminals, et cetera, so clearly those folks are going to want to see volume. Just curious how you see these various markets shaking out, from a standpoint of rail pricing.

Anthony, this is Dave. I think the beauty of the East and some of the terminal build outs that you're seeing such as the Crescent Corridor is this is truck conversion business. So, again, we've had a fair amount of success. I wouldn't call it overwhelming, but a fair amount of success in taking business off the highway, on to the Crescent Corridor, and certainly, this is a multi year process that we believe has some tremendous upside. So, the pricing is somewhat different than what a Chicago Atlanta lane, which has been handled by Intermodal for quite some time. There's a lot of upside, as far as the overall pricing in that environment.

That make sense, okay, thank you.

Michael Weinz, JPMorgan.

I guess the first question is on your cost guidance. It sounds pretty similar at $65 million to $69 million, to what you had guided on the fourth-quarter call. And just wondering how we should think about the profile of this throughout the year, if it wasn't as high as that, because of your hiring that was pushed off to later quarters?

That's a good question, Michael. Part of the reason that the cost and expenses were lower than we projected this quarter, was due to not hiring as many people as we planned. Part of the reason for that is because we had a delay in several new customer Logistics onboardings. So, as those engagements come on, we will hire more people. To answer your question specifically, I guess the biggest increases would be related to headcount adds for Comtrak, Logistics and Truck Brokerage, which is about $2 million a quarter. And, included in the $2 million is the impact of only having the 45 new people that were in part of this quarter. Agency commission, primarily related to Mode, are projected to be up $2 million a quarter. That will only increase as Mode's gross margin increases. We expect IT cost to be about $1 million higher than we had this quarter, and our insurance costs will probably go up $500,000. Certainly we won't add those heads until we have the business, but that's what's built in our plan.

So this wasn't because of the weakness that you saw on the Intermodal side? It was primarily the Logistics side?

Correct.

Okay. Really quickly, what was the change in length of haul on average for you?

One mile.

Virtually flat?

Yes.

Okay. And, for Comtrak, are you seeing any weakness in the market, where driver availability is becoming an issue?

Driver availability is always an issue. We haven't seen anything dramatic. Usually, the first quarter is always a good time for us to be able to garner more drivers, and we did have pretty good success this quarter. Certainly, you're reading more and more with CSA scores and with some of the upcoming regulations, as far as hours of service. They're definitely going to be coming at a premium, and so, while the market's always been tight, we do believe it's going to get tighter and that there will be costs which will have to be increased and passed on to the clients.

Okay. Just a quick follow-up on Comtrak. As you have growth in the local East market, with the Crescent Corridor over the next couple of years, is it more that you would have to expand your driver pools in certain regions? Or, would you have to enter new markets that you don't currently already have? A significant driver population?

We are currently in the vast majority of locations that we would need to accommodate Crescent Corridor growth. It's actually very consistent with our regional strengths within Comtrak. So, looking to add new drivers in all of those locations, but I don't anticipate you are going to see an increase in the number of Comtrak terminals to any significant extent, as a result of Crescent or anything else for that matter. We pretty much have the footprint that we need to get up to our ultimate goal which is 85%.

Great. Sounds favorable. Thanks for the time, guys.

Todd Fowler, KeyBanc Capital Markets.

I guess I just wanted to follow-up on the gross margin conversation. When I think about the Intermodal length of haul being basically flat, but you've got revenue per load up about 4%, yet your Intermodal margins, gross margins were basically flat. You're doing more dray, the turns were down. It's most of the delta the reason why you didn't get more improvement in Intermodal gross margins the turns? Or, is it really that the rail rates right now are pretty much where your pricing is?

Well, Intermodal gross margins were pretty good. It's not like they declined. Our overall percentage went up, but the gross margins as a percentage of sales for Intermodal was relatively flat with last year. So, we did get price and we did get fuel. In order of magnitude, price was up the most, then fuel and then mix.

But, I guess, Terri, thinking about some of the earlier questions about the ability to improve gross margins year-over-year, and I know that obviously some of the comments are going to be related to the overall Hub segment. Thinking about what we saw in the first quarter, and I think this was asked s little bit, but would it be you need better pricing than what you saw in the first quarter to improve the gross margins in the Intermodal business?

Yes, to answer your question directly, but not much of our business repriced this first quarter. We won't see that until the second half of the year, because all the bids are going on right now.

Okay. That make sense. Then, I guess, Dave, can you just talk about your position with your Western rail partner? Looking at the volume growth here, it does feel, obviously, below what we saw from one of your competitors. Can you talk about their go-to-market strategy and how that positions you within the market, giving you some flexibility to grow volumes and have some flexibility with price. It seems like they are very disciplined right now with yield and price. I guess I'm kind of curious how that positions you within the market and your ability to grow right now, given what their strategy is.

Well, if you're specifically referring to our Western partner --

Yes.

They're very focused on price. They're very focused on enhancing the margin, so that they can get back to reinvestability with Intermodal, which I think they are pretty close to. Where it positions us, is that we do need to be able to pass on any cost increases we may see. We can do that in a variety of ways, one of the ways is we can obviously increase prices to our clients in certain corridors. But, price is not our only weapon that we have here, in order to become more efficient and expand the gross margins. We can also do that through operating efficiencies. We can do it through better balance within our dray network. We can do it by handling more of our own drayage. We can do it through better turn times. So we have a lot of tools with which we can work. I think, right now, that from an overall cost perspective, that we are very well-positioned for the remainder of this year, and candidly, I think that our model is structured as such that we are very well-positioned for the long-term.

I think, just to add to that, we actually had good success in the West this quarter. We were up 7% in local West as we talked about. If you adjust that for same business days, it's around 9%. So, I feel like that was actually very solid performance and that we are working very well with Union Pacific.

Yes, and obviously Mark, compared to what they're talking about with their domestic Intermodal volumes, you're obviously one of the main sources of growth there. I guess when they are talking about doing some Highway conversion and go-to-market, I mean, are they working with you, and when you get some of the feedback about where some of the pricing is on the low margin business, I mean, is that an open dialogue for where rates can be and to allow you to grow with what's going on, obviously, in the overall market?

Very much so. I think we are having a very open dialogue with them. I think they are working well with us. Obviously, they want to find truck conversion version freight as do we. We think we are really uniquely positioned because of the size of our Truck Brokerage unit, to really give them a good view into the truck market. That's really not necessarily the case with all of their partners. So, we feel like we are working well, working constructively with them. There's no question that they want to get rates up and they're going to continue in that direction. At the same time, I feel like we're working very well and they have a good understanding of the marketplace dynamics right now that are out there.

Okay. Thanks for the time. I'll get back in line.

Scott Group, Wolfe Trahan & Co.

Good afternoon guys. So, just going back to volumes for a minute, I just want to make sure I'm understanding here. It sounds like you walked away from some lower margin business in the first quarter, but based on some bid activity and you're confident that we can more than overcome that and get back to that mid-to high single-digit volume run rate. Is that kind of what you guys are saying?

That's correct.

So, maybe, Dave, can you give us -- are we starting to see that already in April? Maybe you can give us a sense on April volumes and where -- the bids that you are winning, can you give us some color on what regions they are coming from and how we should think about pricing and mix element of that growth? Meaning, can you get the volume and sustain 3%, 4% price mix? Or does that have to slow down?

I think I would say that April is really a continuation of the trends that we saw in the first quarter and the wins that we've been experiencing or getting visibility to haven't kicked in as of yet. They will kick in during the second quarter, and obviously, in the second half of the year. We think it's going to be a positive pricing environment. We don't comment of give specific guidance on how much pricing we think we are going to get. We've been able to get increases in the majority of instances and we did get some price in the first quarter. And, anticipate that that's going to continue.

Okay. In terms of brokerage, I think you said you are hopeful to keep margins there -- margin percentages there relatively flat. Is that comment more on, you think, the market is going to be flattish? Or you guys are doing enough internally, where you think it's more you doing better than the market?

We're doing a lot internally. We think our team has done a great job since they've restructured. The margin percentages are pretty good now, so we'd be happy maintaining those.

Right. And we are not sure -- obviously, there are some others in this marketplace that saw some compression in the quarter. We did not see that. I'm not sure if that's mix. We hope that that's, in part, due to some good operating discipline with our new structure.

Are you holding that so far in second quarter?

Yes.

Okay. Then, just last thing. Can you talk about your Mexico strategy and where -- is Mexico getting reported in local West, and maybe what percent of the businesses is Mexico?

About 2% of our business. It's not in local West, it's in its own bucket called Other.

Right.

In Mexico, it does continue to be a headwind for us. It was a good grower in 2011 and the first part of 2012. It is a headwind until some issues get resolved between rail partners. So, at this point in time, it's an area of our business that's been down the last two quarters. It was down 15% in the quarter.

Do you have -- is there any additional color you feel comfortable giving there or when you think that gets resolved?

It's just not up to us and hopefully sooner rather than later.

Okay. All right. I appreciate it, guys. Thanks a lot.

William Greene, Morgan Stanley.

I was wondering if you could comment a little bit about how you think improving rail service sort of effects your strategy. So, what I mean there is that it would seem to me if the rail service levels get quite a bit better, the turn times can get better, perhaps you get more turns out of your assets, et cetera. Can you just sort of walk through how you think the key buckets there get affected by improving rail service? Does that allow you to take CapEx out, that sort of thing?

Obviously, the enhancement in service levels being faster does definitely help us. The biggest single factor that works in our benefit is consistency of service. It allows us to better service the customer, given the realistic transit time, doing what we say we're going to do. It also allows us to do an awful lot of planning as far as deliveries and gives us broader windows. So, that does greatly enhance our overall productivity of our drivers, of our fleet. Speed of transit for the most part is pretty competitive. The improvement that I think we are seeing. It's more the consistency that's the key for us, at this point in time. Yes, it does enhance everything as far as our productivity. You're not fixing as many problems, therefore you don't need as many customer service people. It's a snowball effect.

Yes, does it allow you to price up? We often sort of talk about the Intermodal discount, is there an example where you can look around and say, well, we've actually been able to price competitively or even at a premium to truckload because of the consistency of service?

I'm not so sure you are seeing a price above truckload, but with a lot of progressive clients, with the consistency of service, it makes it much easier and less of a discount to truck when you're converting business from over the road. So, I think that's where you get the advantage. Again, it's the more sophisticated clients that are looking and saying, we may not have a problem with drivers right now for over the road, but we know that the demographics are such that we are going to. So, we're going to begin conversion now. If the service is consistent enough, again, you don't need that 40% difference between truck and rail. You can have a much smaller difference.

Right. And just lastly, can you remind us, I think you talked about trying to get to 5% margins. Can you just talk a little bit around kind of what the key puts and takes are there? Is that going to be primarily cost driven at this point? Or do you need help from the economy, or how do you think about that progression? Thank you.

Primarily getting price from our customers to offset the rail cost increases. That's the biggest driver. Then, continuing to stay efficient with utilization, continuing to do more of our own drayage, continuing to fill up those empty miles by getting a more balanced network, which is something that we are looking to do during bid season, to better match the inbound and outbound flows. And, feed more business through the pipeline that makes sense for us.

Yes, but those things are secondary to the price. The price is the key driver, right? That's what you're saying?

Yes.

Got you. Okay. Thank you.

Jeff Kauffman, Sterne Agee.

Sal Vitale on for Jeff. Just a quick question. You gave a breakdown of the volume trends by region, or by route, rather. Can you give a breakdown of what the volume breakdown is, so transcontinental, what percentage of your overall volume is that?

Sure, trans-con is 20% of our volume, local West is 36%. Local East is 33% and Other, which includes Mexico, for example, is 10%.

10%, okay. Then, the other question I had was on your agent fees. I noticed agent fees came down pretty significantly year-over-year. Was there any trend that drove that?

Agency fees fluctuate with Modes gross margin. So, depending on what their gross margin is, it's how those fluctuate.

Okay. Thank you.

Nate Brochmann, William Blair & Company.

I wanted to go back a little bit, just to the competitive environment and talk a little bit -- certainly we hear a lot of people are trying to get into quote-unquote multimodal solutions and sell more Intermodal services, even though it might not be their core bread-and-butter. Are you guys seeing some of the competition from some of those new entrants? Or, some of the truck guys trying to do it? Or, is the competition and the pricing issues more from, maybe, some of the traditional top players that you would normally kind of swap some market share with here and there?

There are some new players. This is a business of scale and scope. Understanding how to effectively operate in an Intermodal environment is not a simplistic thing for a new entrant. So, the vast majority of the competitive environment is driven by the traditional players. Again, we include ourselves in that, and one other large provider, we think -- are the two largest in the space and I think at this point, the most efficient. So, again, it's difficult for a new entrant with 1,000 or 2,000 containers to really do much of anything, because you can't necessarily market that. It's not a large enough network to have much of an impact on your customer base.

And I would absolutely agree with that. I just wanted to see if anybody was trying to make any dents in terms of stealing some business based on that to gain a little bit of scale. So, that make sense. Then, in terms of the Truck Brokerage side, obviously, you guys are putting together a couple nice quarters after kind of restructuring that. Where are you guys kind of like internally with your expectations? How much further do you think you need to get along the curve to really get where you want to be with that?

I think we've come a long way. Obviously, we've made a lot of major changes to the model, to the processes that support that model. We feel like we have moved up the learning curve pretty quickly. But, there is certainly a lot of work in progress. But, we've been encouraged with the service level that it's producing, the purchasing improvement that we've seen, and we're also encouraged by the pipeline that we see, as well. So, we remain confident that we're on the right track, but still a lot of work to do on the highway side, there's no doubt.

Okay. Just one thing in terms of the pipeline and some of the new business you are seeing in that segment. Are a lot of those coming from some of your current Intermodal customers that you are able to go and have better discussions with, because the better service levels that you're at now? Or, are those even outside your traditional Intermodal where you're starting to have opportunities?

We get both, certainly we do get business in that is not occurring to a customer of Hub. I would say the vast majority of our business, though, comes from folks who have developed a relationship with Hub on the Intermodal side. One of the big reasons we undertook the realignment was to make sure that our salesmen doing business with our Intermodal customers, had faith in our ability to execute for those customers on the highway side. So, what we are seeing is a more significant willingness of our sales force to sell the highway product, now that it's a better product. But, I would say the majority of our customers are existing Hub customers who now broaden the services that they are willing to consider us for.

Great. Hey, I appreciate the time.

Matt Booklier, Longbow Research.

Question on Mode. We are kind of already near your 2% op margin target for the year. You guys are doing a really nice job on the cost side of it. Just curious to hear -- what would inhibit you from potentially getting or surpassing that 2% target? Especially if the top line starts to pick up.

Yes, Matt, if the top line started to pick up, we certainly could get the operating margin north of the 2%. Basically, if Mode grows the top line 10% a year, and just inches up in terms of gross margin as a percentage of sales, we could definitely get to the 3% in five years. So, it all is dependent on Mode's top line growth, as well as enhancing the gross margin as a percentage of sales. Because you're right, most of the cost cutting is done.

Okay. That makes sense. I think someone mentioned in their prepared comments that you had added, I think it's three new sales agents. Just curious to hear when those sales agents came on board, maybe the size of their potential book of business, those sorts of things.

I think it was actually four new IBOs and three new sales agents. So, that's progress. It typically takes an agent some time to ramp up unless they come with a large book of business. The IBOs all have a book of business, but they aren't particularly large at this point. Typically it takes a couple of years for an IBO to really hit their stride and make a significant contribution to the top line at Mode. But we do view it as a positive sign here if we could keep that kind of momentum going throughout the year, we'd consider it a pretty successful year from an agent recruitment perspective.

Okay. That's good to hear. I guess, what were the selling points? How were you able to attract these agents, and I feel like there's been a pickup in terms of your ability to attract sales agents or is that not the case?

No. I definitely think that's the case. We were going down a path with systems, for one thing.

Right.

That really inhibited our ability to get people to sign up last year. They couldn't really see a system that they were going to be operating. There was some reluctance. I think we've gotten past that hurdle. I also think that agents are saying that Hub can be a good host. That Hub can be a good partner with the agent community. They are seeing that there's real value in being able to access Comtrak and being able to access the fleet. That it's our intention, to let them continue to manage their business, but to help them succeed. I think that enough time has gone by, now, that those that were thinking about coming with the organization can now see that it's good to be a Mode agent and that there's a lot of opportunity for them to grow their business if they become a part of our network.

Okay. At this point, or we dedicating more resources to attract incremental agents, or maybe talk about kind of internally what you are doing to potentially grow that side -- that side of the business.

We have. We've got more resources dedicated to getting the new agents, as well as we have some new programs in place that will hopefully incent agents to come our way.

Okay. Is there a target, in terms of how many new agents you want to add to Mode? Or, is it just -- it all depends on kind of the environment and who is potentially available?

It depends on the environment. We want good quality agents.

Right. We do have a target -- it's just not a public target.

I've got you. Thank you for the time.

Ryan Bouchard, Avondale Partners.

Given your goals on keeping Truck Brokerage margins flattish and your internal realignment and the competitive nature of that business in a balanced market, do you feel like volume can accelerate from the 4% growth rate that you posted in the first quarter? Or, is that business kind of too competitive to start growing that real aggressively?

We absolutely think it can accelerate from the 4%. We've got some on boardings in place now that should help to accelerate our growth in the last 75% of the year.

I would just add, it not only can; it will. We feel very confident about that for the remainder of this year.

Yes.

Okay. Good. Can you remind me, what are the most important variables in getting more volume moved by Comtrak? Is it just driver count or are there issues like network balance?

Mostly driver count.

Network balances come into play to a degree, but it really is securing drivers in the right markets where we need them right now. That's really the key.

The balance would come into play for filling up the empty miles.

Right. Right. That's something we work at very aggressively. You need the drivers in order to have to solve for the backhaul issues.

Okay. Then, real quickly, lastly, any reason why the tax rate was a little bit lower than normal in the first quarter? Will that continue throughout the year? Or should it step back up?

There was a reason. The tax rate was a little lower due to an R&D credit that we're getting, as well as a settlement on a state tax audit. We expect the effective tax rate to be about 38.1% for the full year.

Okay. Well, thank you. I appreciate it.

Kelly Dougherty, Macquarie.

I understand you don't want to talk about the absolute level of pricing, but can you give us a sense through how the bid conversation has gone so far? What do you expect to be able to get pricing of a similar magnitude to the rail cost increases?

That certainly is always our objective. Obviously, if we don't, the shrink comes out of our pockets. We focus very strongly on that. I think, as Terri had said, if you look at the order of magnitude of our revenue, that price was the single largest driver for our first quarter. And, so it is critically important and it's very important that we do outpace our railroad costs, because we are going to see some additional costs in the dray side, and dray represents 30% of our overall costs, 45% in local East. So, price is definitely an issue that we are very, very focused on, at this point.

So, being a little bit more collaborative with the rail partners in the pricing process gives you additional comfort that you will be able to match those two? Is that fair to say?

As Mark had said earlier, I really do. We are working very collaboratively. We have one Western rail partner, basically. So, we've worked very closely with them. We are committed to working with them and we have one Eastern rail partner. Again, with the Norfolk Southern, we have a very collaborative approach and together, we've been able to grow share pretty well over the years.

Great. Thanks. then just a question on the brokerage side of things. You tend to be more contract. So, just wanted to see how you think about the risk of margin pressure, maybe what you can do to offset it if capacity tightens and prices do increase later in the year? Or, are you similarly contracted on the purchase transportation side, as well?

We believe, actually, that even for a contracted model, a tight capacity environment is better for a broker because it really enhances your value proposition to the shipper community. We do take measures to make sure that we have commitments from our carriers that back up the commitments that we're making to our shippers. You know, like all contracts in transportation, they're really not worth the paper that they're written on, but as a matter of doing business, we certainly have expectations that the carriers that we're giving business to now will continue to provide capacity for us in the future, whether it's a loose or a tight capacity environment.

No. That's fair enough. Can you just help us think about, though, if the capacity were to tighten and prices were to go up, there is more you can do on the internal operational improvement side of things in the Truck Brokerage business, to maybe help offset that? Is that fair enough to say?

Sure, absolutely. There's a lot of operational improvement, there's a lot of things that we're working on right now to improve how we purchase, to improve our visibility into the truck markets, to improve our relationship with our core carriers. So, we are going to great lengths to make sure that when the truck market tightens up, because I don't think it's a question of if, I think it's a question of when, that we are prepared and we are able to maintain our margin levels, but still provide a good value proposition to the customer.

That's helpful. Thank you.

(Operator Instructions)

Todd Fowler, KeyBanc Capital Markets.

Just one follow-up. Dave or Mark, I was wondering if you could talk a little bit about the Crescent Corridor. Your expectations here in '13 and kind of what you're seeing with some of the acceptance or the conversion rates, now that the lane pairings are out. Our impression is it's going to be more of a gradual implementation as those lanes come online, but it's more of an opportunity in 2014. I was wondering if you could talk a little bit about your experience at this point.

Todd, I think we would say that we would agree with your thesis. I think it probably is more of an opportunity in 2014. We have had some success, particularly with some of our more nimble or more sophisticated shippers who have gotten on board. The encouraging thing we are seeing there is we are seeing really good service. It is as promised. Now, it's a matter of educating the shipper community about the service that's out there. And, bringing them on board. So, like anything, it takes time to develop. It's something that over the course of time, we will build more and more volume in those core lanes. But, we are very encouraged with the service that were getting out of Norfolk Southern, and we continue to believe that the Crescent over the course of several years has the opportunity to bring the kind of million-plus loads to the rail system that was originally promised.

Okay. Then, just a follow-up on that. As I think about the profitability of some of those lanes out of the gate, my assumption would be if you are moving one load and you don't have the balance, it's not going to be as profitable if you are moving two, if you are moving 50,000. How do you gate the process, as far as ramping up in those lanes to kind of match getting the service and getting the volume, but also making sure that you are profitable?

I think everybody is kind of feeling out those markets, the rails included, to determine just what it takes to build some additional density onto those trains. I don't think that anybody wants to start really low, with really good service. That probably doesn't make a whole lot of sense. So, that process will be a learning curve for everyone involved. Certainly, we have thresholds and profitabilities that are acceptable. Right now, what we are seeing with the limited freight that we have moving in the Crescent, is that there's opportunity for a good solid return, very much consistent with the rest of the business that we are handling.

Okay. Good.

From a rail perspective, it takes more time to develop density and realize the kind of returns on a per train basis that they like to see.

Yes, that make sense. Okay. That's what I had. Thanks again.

Scott Group, Wolfe Trahan & Co.

I just have two quick things. First, Terri, when I look at the net revenue margins historically from first to second quarter, it looks like they contract a little bit. Are you thinking -- I think I heard you say you think they can be flattish. What's different that's allowing you to keep it flattish in second quarter? That's the first one. Then, could you just talk, in terms of Mode, how you're thinking about operating margins there longer-term? It feels like there's some decent synergies showing up in the numbers here.

Sure, Scott. Yes, if you look at 2012, the gross margin as a percent of sales in the Hub segment was actually 10.9% for the first three quarters. So, pretty consistent last year. That's why we think, again, it will be consistent this year with our book of business. Then, in terms of Mode and improving the operating margin, or the 1.9% this quarter. We still think it will hover around that 2% for the rest of 2013. How we get to 3% is by growing the top line. So, for example, if we grow the top line 10%, and the gross margin as a percent of sales for Mode stays about what it is or just goes up a touch higher, it will take us five years to get to that 3%.

Right. And the way we would accelerate that, I think, would be to help them improve their gross margin line through better purchase transportation. I think there's a lot we can do from a reporting perspective, from of visibility perspective to help them understand their business. They do a very good job understanding their business, but to have even more insight into their business and where they have opportunities to expand their margins.

Okay. I appreciate it, guys, thank you.

At this time, we have exhausted all questions in queue. I would like to hand the presentation back to Mr. Yeager for closing remarks.

Great. Well, again, thank you everyone for joining us on our first-quarter conference call. As always, Terri, Mark and I are available if you have any follow-up questions. Thank you again.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now all disconnect. Good day.