Hub Group, Inc. (HUBG) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Hub Group Fourth Quarter Conference Call. We will begin with a discussion of the financial results, led by Terri Pizzuto, Executive Vice President, Chief Financial Officer and Treasurer, followed by an overall business discussion to be conducted by Dave Yeager, our Chairman and CEO. The company will make its prepared presentation, followed by a question-and-answer session. Mark Yeager, Vice Chairman, President and Chief Operating Officer, will join us for a question-and-answer session. [Operator Instructions] Comments made by Dave, Mark or Terri during this conference call may contain forward-looking statements. Actual results could differ materially from those projected in these forward-looking statements. Our SEC filings contain additional information about factors that could cause actual results to differ materially from those projected in these forward-looking statements. Copies of these SEC filings may be obtained by contacting the company or the SEC. Now I would like to introduce Terri Pizzuto, the Chief Financial Officer of Hub Group.

Thanks, Jeremy, and thanks, everyone, for being with us today. I want to begin by covering 3 main themes: first, Intermodal volumes were strong, with Hub segment volume up 16% and total Intermodal volume, including Mode, up 34%; second, Mode's profitability continues to improve; and third, we completed our restructuring in truck brokerage and the new organization is energized. Here are the key numbers for the fourth quarter. Hub Group's revenue increased 59% to $763 million. Excluding one-time cost of $1 million, Hub Group's diluted earnings per share increased 41% to $0.48. Now I'll discuss details for the quarter. As a reminder, we now report 2 distinct business segments: Hub and Mode. Mode segment includes only the business that we acquired as of April of 2011. The Hub segment includes all business other than Mode. When we say Hub group as opposed to just Hub, we're referring to the consolidated results for the entire company including both the Mode and Hub segments. First, I'll talk about the financial performance of the Hub segment. Hub segment generated revenue of $577 million which is a 20% increase over last year. Taking a closer look at Hub's business line, Intermodal revenue increased 23%. This change includes a 16% volume increase and a 7% increase for fuel, price and mix. Directionally, fuel has a larger increase in price and mix was negative. 250 basis points of this volume increase came from fleet boxes that we sold to Mode agents. We're excited that this was the eighth straight quarter of double-digit Intermodal volume growth. We continue to see growing customers converting freight from truck to Intermodal. A large part of the truck conversion freight is in our local east market, which was up 19% for the quarter. Because of the growth in this market, our average Intermodal length of haul was down 1%. Truck brokerage revenue was up 3% on 3% lower volume. The truck brokerage business unit went through a restructuring this year. The team is very confident that we'll be successful winning new business that will result in growth in the second half of the year. Logistics revenue was 27% higher than last year. Most of that growth came from existing customers. The Hub segment's gross margin increased by $4.5 million, due to significant growth in Intermodal gross margin and slight growth in logistics margin, partially offset by a small decline in truck brokerage margin. Intermodal margin is up because of volume growth and our focus on doing more of our own drayage. Hub's gross margin, as a percentage of sales, was 10.6%. That's down 120 basis points compared to last year's 11.8% margin. There are 3 main reasons why the margin percentage is down from last year: #1, logistics' margin is down 200 basis points since we're doing more transactional as opposed to management fee business; #2, truck brokerage yield is down 85 basis points; and #3, Intermodal yield is down since we had higher than anticipated cost increases from key carriers, and our equipment did not turn as quickly as last year. Hub's costs and expenses were flat at $37.4 million in the fourth quarter of 2011 and 2010. Salaries and benefits includes $330,000 of severance-related expenses that we classified as a one-time cost. We also recorded $170,000 of one-time expense related to office closure. Finally, we're happy that operating margin for Hub increased from 4% last year to 4.2% this year, excluding one-time costs. Now I'll discuss results for our Mode segment. Mode's revenue was $195 million. The revenue breakdown is $94 million in Intermodal, $76 million in truck brokerage and $25 million in logistics. Compared to last year, revenue at Mode was up 6%. Mode's gross margin was $22.7 million. Gross margin as a percentage of sales was 11.6%. Mode agents decided to use Hub fleet containers for 12% of their Intermodal loads. Mode's total cost and expenses were $19.2 million. Included in these costs are one-time expenses totaling $500,000 that relate mostly to technology transition. To summarize our one-time costs, on the Hub side, we had the $330,000 of severance-related costs and the $170,000 of office closing costs. On the Mode side, we had a $0.5 million of mostly technology transition-related costs, for a grand total of $1 million. Operating margins for Mode was 1.8%. If you exclude one-time costs, it was 2%. Turning to our headcount, we had 1,349 employees, excluding drivers, at the end of December. That includes 1,188 Hub employees and 161 Mode employees. Hub headcount went up 17 people, and Mode headcount went down 22 people since September. The majority of the increase in employees at Hub were in the logistics group. Now I'll discuss 2012 full-year earnings guidance. In 2012, we're comfortable that our diluted earnings per share will be within the current analyst range of between $1.85 and $2.20. Our weighted average diluted shares for 2012 are estimated to be $37 million. We think that our quarterly cost and expenses, including Mode, will range between $61 million and $63 million in 2012. Turning now to our balance sheet and how we used our cash. We ended the quarter with $49 million in cash and no debt. During the quarter, we spent $19.6 million on capital expenditures. $16 million was for containers, $1 million was for our building addition at Comtrak and the remainder was for technology investments. We think that we'll spend between $50 million and $60 million on capital expenditures in 2012. Between $20 million and $30 million is for our new corporate headquarters, which is a 2-year project. $13 million is for containers, and the remainder is for technology investments. To wrap it up for the financial section, the 41% increase in operating income for the quarter was a great finish to the year. And now, you'll hear from our CEO, Dave Yeager.

Great. Thank you, Terri. As expected, the fourth quarter reflected a traditional peak shipping season for the truckload market. In fact, our demand remained quite strong through mid-December, when business levels finally tapered off. This strong demand was felt in all of our business lines, but it was particularly strong in Intermodal. In the fourth quarter, we achieved a 16% Intermodal volume growth, which translates into an overall increase of 13% for the year. We had record Intermodal volumes in the fourth quarter of 2011, with October being the largest month in Hub's history. Most of that growth came from Intermodal conversions in the Eastern region and Texas, with 20% and 16% year-over-year growth, respectively. While pleased with growing market share, we did remain very focused on our price discipline. Our fleet was 27% larger year-over-year in the fourth quarter. With a fleet of 23,000 containers, we were in a great position to handle the significant demand from our customers. In 2012, we intend to retire approximately 1,000 to 1,500 older containers and replace these retirements with new containers. The new construction will maintain our fleet size, the same as it is today, while reducing the average age of the containers. We are planning to utilize rail-owned assets to feed our projected growth for 2012. 2011 was quite an extraordinary year in terms of the amount of natural disasters that hit various parts of the country. From flooding along the Mississippi River to hurricane Irene, mother nature dealt our rail partners numerous challenges in 2011. These natural disasters devastated certain regions of the country and resulted in some service issues. But the good news is that the rails quickly recovered, enabling Hub to satisfy our customer service or expectations. In large part, these quick recoveries reflect a positive impact of the significant investments that have been made in the railroad infrastructure. Our drayage company, Comtrak, had a record quarter and a record year. Through an aggressive recruiting campaign, we were able to add over 400 drivers this year, which is a 26% increase. This enabled us to reach our 2011 goal of handling 60% of Hub's Intermodal volume in the fourth quarter. In 2012, we intend to continue to expand Comtrak through a combination of organic growth and acquisitions. 2011 was a year of retooling for our brokerage business. Volume declined 3% for the quarter and 8% for the year, while revenue grew 3% for the quarter and 1% for the full year. We now have a more scalable model, which will enhance the service we offer to our customers, while retaining specialized expertise. In addition to altering the geographic composition of our brokerage model, in 2012, we introduced a new compensation plan to tie performance to individual goals. While we expect 2012 to be a year of transition, much of the structural realignment is behind us. New programs are ramping up and we believe our current initiatives will reinvigorate growth in the second part of the year. Unyson Logistics had a record breaking year, exceeding $290 million in sales, which is up 36% over the prior year. Most of the growth came from expanding the scope of our engagements with several large accounts, including retailers, manufacturers and pharmaceutical companies. Our logistics pipeline is strong, and we anticipate another good year in 2012. Mode performed much better than expected, with fourth quarter revenue growth of 6%. For this year, Mode will continue to focus on recruiting new agents while supporting existing agents in their efforts to grow their business. In conclusion, 2011 was a solid year for Hub, with numerous accomplishments. We grew earnings per share by 35%. We increased market share organically, as well as through the Mode acquisition. We added 4,000 containers to our fleet, while maintaining good fleet utilization rates. We successfully completed 3 acquisitions. We restructured truck brokerage. And finally, we maintained our pricing and cost disciplines. At this time, I will open up the line to any questions that you may have.

[Operator Instructions] Our first question comes from Scott Group with Wolfe Trahan.

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

Sure, Scott. This is Mark. I think as most of you are aware, the rails were pretty aggressive in seeking increases this year, and that was certainly true in the second half. And so as a result, the increases that they were looking for, out in the marketplace, were more aggressive than we had anticipated. The way our fleet pricing works, it tracks the market. And as the market moved up more quickly than we thought, as did our fleet pricing. We would anticipate that this year is going to be a positive pricing year. But due to the fairly significant influx of capacity, probably not as progressively positive as we've seen in the last 2 years.

Right. And how do you think about kind of your ability to get pricing in the market relative to, give or take, 3% to 4% pricing in '11? Do you think you can get similar to that in 2012?

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

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

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

And I would add that the only negative could be, in fact, if it's just the broader economic issue, which obviously, would affect pricing for the entire truckload segment.

Right.

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

As far as with the fleet, we -- our strategy has always been that we, in fact, had used a combination of our fleet and the rail fleet. And last year, the Union Pacific, the Norfolk Southern and CSX added about 13,000 boxes. And so -- since over the last 5 years, the percentage of our overall fleet versus rail assets percentage got a little bit out of kilter, if you will. And so we think that this is probably a one-year reset, so that in fact, we can get it back to normalcy. Because again, we really view this strategy as a competitive advantage because we do have the excess capacity during peak with that mix. As far as the economics, they're relatively comparable. I mean, it's -- I don't look to see a large decrease in our margins as a result of using more rail equipment at this point.

Okay, that's helpful. And just last thing, real quick. The 22 people that left at Mode, were those agents or is that something else?

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

Those were corporate administrative people. So no, it was not any -- we're pleased to say that we have not lost any agents.

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

And 8 operating.

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

Yes.

And our next question comes from the line of Alex Brand.

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

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

And they were significant.

Yes.

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

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

Okay. And so having said that, putting pricing aside, your volume was good, very good. Can you talk about maybe what verticals we're seeing the growth and also talk about local east versus Transcon growth?

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

Yes, I think one of the good things about this quarter is that our big 3: consumer products, durables and transports -- our consumer products, durables and retail, all grew in the double-digits, which I think reflects a good balanced growth portfolio, as opposed to being dependent on a particular customer or on a particular industry.

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

And Terri, what was east versus Transcon?

Our local east was up 19%, and our Transcon was up 21%.

And our next question comes from Todd Fowler with KeyBanc Capital Markets.

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

I think that's what the cost increases are.

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

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

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

Okay, good. That's helpful. And then Terri, I think you also mentioned that container turns were part of the issue with the gross margins during the quarter. Did you say specifically what the turns were?

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

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

No, I think that -- Todd, this is Dave. It really was more so than anything else. There's just a -- there was a large influx of equipment that came in with all the big 3's, the UP [ph]and the guys in Arkansas. And so I think, as a result, while demand was strong, we didn't have the shortages that we actually had in 2010. We do think that demand will continue to be strong this year as there is more conversion business. So that's partially why we're approaching this. We're going to grow. We believe in the mid- to high-single digits. But we do believe that overall, using more rail assets this year, will make a lot of sense for Hub.

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

Sure. In terms of your first question, what would drive the high end of the range versus the low end of the range would be pricing and what happens with pricing and cost, and then secondarily, volume. And then also, we think we have a lot of opportunity, as Mark said, on the drayage side of the house to improve 3 operations do more of our own drayage. That also helps to the extent we can make a lot of progress there. We were able to do this past year, so we think we'll be able to do in 2012. And then in the terms of the cost and expenses going from run rate at the fourth quarter to the guidance of $61 million. We have our pay increases, which go into effect on January 1. Those are a little over $1 million. Restricted stock expense is up about $0.5 million. We have headcount adds in about $0.5 million. And then bonus would probably be $1.5 million more than it was in the fourth quarter.

And those are all the annual -- are those all the annualized numbers that you just...

Yes.

Okay. And then how are you thinking about Mode for 2012?

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

And our next question comes from John Barnes with RBC Capital Markets.

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

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

And is that for both Mode and for Hub?

That's for Hub. And then on the Mode side, we didn't do a lot only because we were using so much for Hub and continually adding drivers. So there's just not an opportunity to provide drayage as much to Mode.

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

Okay. So the goal is still in that 70% in kind of continuing to work it up?

Absolutely. We're thrilled with the progress we've made so far and feel like that's really a very realistic goal.

And where do you think -- for Mode, is there an opportunity to start doing more for them? Are you -- and so for -- with the core Hub business that Mode is just going to have to continue to kind of do business as they've been doing?

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

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

Yes, it was 12%. You're right, John, in the fourth quarter of their Intermodal loads.

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

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

Okay. Very good. And then my last question is just -- your comments around pricing. You led with the comment of given that the amount of capacity that's coming to the market, you were worried or concerned that you might not be able to realize the same type of pricing power you've had in 2010 and 2011. I'm just kind of curious. Can you clarify kind of what you see from an industry capacity perspective? And maybe even provide us a little insight into where you think that capacity situation may evolve as 2012 progresses?

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

Our guess is that it will go up by maybe 5% at most.

Yes.

Okay, 5% industry growth?

Yes.

And just remind again I'm sorry if I missed it but your plans on container additions in '12?

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

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

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

And our next question comes from Ben Hartford with Robert W. Baird.

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

Yes. Sure, Ben. Actually, we've been seeing the benefits of that, really, for the last probably 18 months or so. And it certainly has been something that's led to the expansion of local east for us as well as for Hunt. It's now about 1/3 of what we do. But the good thing is, the market share in a lot of those lanes that are going to be really opened up by this terminal expansion remains below 5%. So there's tremendous opportunity for us to continue to grow volume through modal conversion out of local east. I think that you'll see it. It is something that is taking place over the course of the year. So it isn't a big bang. It isn't as if we're suddenly going to have a whole new array of services but you're going to see services opening up throughout the course of the year, and we're certainly out with our customers talking about the potential there and trying to work with them to look at their supply chain and look at conversion opportunities. So it's going to help us this year. Throughout the year, I think it's going to help the whole industry for years to come. So it's probably a bigger opportunity than the system would ever be capable of handling. But it is, I think that DNS [ph] is calling this a transformational year in terms of their ability to offer service local east. So it's very exciting.

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

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

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

Good. And then one last clarification, I think Dave, you have mentioned mid to a high single-digit growth. It was specific to Intermodal. Is that volume for next year?

That's volume.

And our next question comes from Michael Weinz with JPMorgan.

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

Well, we certainly wouldn't say that it's the new norm. And most of our pricing, the way it works, we're in bids right now and will continue to be in the majority of our bids throughout the second quarter. We'll price in the rail increases at that time for the second half of this year and the first half of next year. Both what we've already experienced and what we're anticipating. So it's certainly not a permanent condition, and we are planning on going to the marketplace for increases with this next round of bids.

Okay. So maybe it'll last a quarter, almost 2 quarters and then you -- it moderates?

Yes. But -- about 10% of our business reprices in the first quarter and 60% in the second quarter. So yes, the first half of the year is where we'll get reprices.

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

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

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

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

Right.

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

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

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

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

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

I mean, that makes sense. But does it seem like maybe concerns have moderated because there has been pushed out to 2013 and they've -- there was not change from 11 hours to the 10 hours of drive time?

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

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

It's normal. Normally, we true up our tax provision to the tax return in the fourth quarter, and we do that every year. And so that's what it relates to. It would be going forward -- it will be about 38.5%.

Our next question comes from Brad Delco with Stephens.

You talk a little bit about, I mean, you give us some color on 2012 and the outlook on some growth. But if we think about I guess, the 2 segments, Hub being one and Mode being the other, how do you think about growth between those 2 segments? And then I guess, the ultimate question is, what does that do to your margin expectations on a consolidated basis?

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

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

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

We did.

And then you want to expand that going forward, which is -- with the margin a little bit lower than Hub. But if that segment is growing faster than your, it will be sort of legacy Hub business, how do we think about the impact on margins going forward?

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

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

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

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

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

But it's fair to say if East is growing faster then you should be able to inherently turn boxes faster. Is that right? Is that same with the market dynamic?

If you think about it, it's really -- if you're going Chicago to New York or Chicago to Los Angeles, you're talking 1 day or 2. So it's really the street turns and how quickly how you can get -- it's on the rail for just a very small amount of time in the overall picture.

And our next question comes from Jeff Kauffman with Sterne Agee.

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

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

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

This is Dave, Jeff. We're looking right now. So we've been very fortunate. We did, in fact, in addition to Mode, we did make 2 small drayage acquisitions, but we are actively in the market right now. We believe that the integration of Mode is going quite well. We've got our IT team very, very focused, as well as, of course, we kept the -- most of -- in fact, all of Mode's management. So it's allowed for a very easy integration, and we will be active in the market as soon as something else comes up that's attractive to us.

Our next question comes from Art Hatfield with Morgan Keegan.

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

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

Okay, okay. Now that's fair. And then Chris I want to make sure you had mentioned the impact on the gross margin from truckload, but you didn't get specific about the basis point degradation on Intermodal. Did you share that in any time? Did I miss it? And if not, could you share that with us.

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

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

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

Our next question comes from Keith Schoonmaker with MorningStar.

I note your progress in exceeding 60% internal Hub duration. I heard you mentioned that driver recruiting is a challenge. Assuming volume continues to expand somewhat, what barriers do you have at this point to overcome, to achieve targeted hire internal durations here?

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

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

Well, we have a pretty good-sized operation in Canada and Mexico. The Mexico operation, we just opened just about 2 years ago I guess, our physical presence there, and that has grown steadily. And so we will continue to put resources there. That is certainly a very large potential market for us, and one that we're committed to continuing to grow. And it continues to grow quite well for us. Canada has also been very successful. And in addition, we have 2 very successful Mode agents operating in the Canada market in addition to our Hub operation in Toronto. So that has also -- we are firmly committed to participating in the cross-border business.

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

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

We have a -- we do have a follow-up question from Scott Group with Wolfe Trahan.

So I think I heard that east -- local east volumes are up 19% and Transcon volumes were up 21%. Is that right?

That's right.

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

Local West was up 10%.

Okay. And with the -- I guess, I would have thought if Transcon is up 21%, if that's how fast it's growing, I wouldn't have expected to see the negative mix?

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

Right. And when you think about it, Transcon, is only about 20%. It's not nearly as large as the other 2 pieces.

Correct.

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

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

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

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

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

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

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