Hub Group, Inc. (HUBG) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Hub Group First Quarter Conference Call. We will begin with a discussion of the financial results led by Terri Pizzuto, our Chief Financial Officer, followed by an overall business discussion to be conducted by Dave Yeager, our CEO. The company will make its prepared presentation, followed by a question-and-answer session. Mark Yeager, our President and Chief Operating Officer, will join us for 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.

Thanks, Jeremy, and thank you all for being with us today. We had a solid first quarter with 3 main themes. First, intermodal volumes were at an all-time high with Hub segment volume, up 15% and total intermodal volume, including Mode, up 31%. Second, operating income was up 22% after adjusting 2011 for onetime costs. And third, Mode's results were better than we expected. Here are the key numbers for the first quarter. Hub Group's revenue increased 52% to $740 million. Hub Group's diluted earnings per share increased 32% to $0.37. We're proud that this was a record first quarter. 2011 diluted earnings per share, excluding onetime costs related to the Mode acquisition, were $0.31. Diluted earnings per share are up 19% when comparing to this adjusted earnings per share. Now I'll discuss details for the quarter. As a final reminder, we report 2 distinct business segments: Hub and Mode. The Mode segment includes only the business that we acquired on April 1, 2011. The Hub segment includes all business other than Mode. When we say Hub Group, as opposed to just Hub, we're referring to the consolidated results for the whole company, including both the Mode and Hub segments. First, I'll talk about the financial performance of the Hub segment. The Hub segment generated revenue of $563 million, which is a 16% increase over last year. Taking a closer look at Hub's business line, intermodal revenue increased 20%. This change includes a 15% volume increase and a 5% increase for fuel, price and mix. Directionally, fuel and price were up and mix was negative. 280 basis points of this volume increase came from fleet boxes sold to Mode agents. We're excited that this was the ninth straight quarter of double-digit intermodal volume growth. We continue to see our growing customers converting straight from truck to intermodal in both transcon and local east lane. Truck brokerage revenue was down 6% on 3% lower volumes. A lot of our volume decline results from how we fared in the bids last year. It's still early in this season this year, but we're encouraged by the results. Logistics revenue was 23% higher than last year. Most of our growth is from existing accounts, although we did start ramping up with a few new customer. Hub's gross margin increased by $4.2 million, due primarily to significant growth in intermodal margin. Intermodal margin is up because of volume growth, price increases and our focus on doing more of our own drayage. Logistics also contributed to the margin increase. These increases were partially offset by a decline in truck brokerage gross margin. Hub's gross margin, as a percentage of sales, was 10.9%. The good news is that margin is up 30 basis points compared to the 10.6% margin in the fourth quarter of 2011. However, margin is down 90 basis points compared to last year's 11.8% margin. There are a few reasons why the margin percentage is down from last year. Number one, intermodal yield is down about 95 basis points since we had higher-than-anticipated cost increases from certain key carriers; and number two, logistics margin is down 75 basis points since we're doing more transactional as opposed to management fee business. Hub's costs and expenses increased $1.1 million from $40.5 million in the first quarter of 2011 to $41.6 million in the first quarter of 2012. We had a $2.3 million increase in salaries and benefits that was partially offset by a $1.3 million decline in general and administrative expense. Salaries were up $1.4 million and restricted stock and bonus combined increased $900,000. In 2011, we had $1.7 million of onetime costs that were included in general and administrative expense related to the Mode acquisition. Finally, operating income for the Hub segment increased $3.2 million or 19%. Now I'll talk about our Mode segment. Mode's revenue was $187 million. That revenue breaks down as $82 million in intermodal, $80 million in truck brokerage and $25 million in logistics. Compared to last year, revenue at Mode was up 10%. Mode's gross margin was $22.2 million. Gross margin, as a percentage of sales, was 11.9%. Mode's total costs and expenses were $19.7 million. Operating margin for Mode was 1.4%. Turning to headcount. We had 1,356 employees, excluding drivers, at the end of March. That's only up 7 people compared to year end. Now I'll discuss 2012 full year earnings guidance. For 2012, we're comfortable that our diluted earnings per share will be within the current analyst range of between $1.89 and $2.10. Our weighted average diluted shares this year are estimated to be 37,200,000. We think that our quarterly costs and expenses, including Mode Transportation, will range between $62 million and $65 million for the rest of 2012. Turning now to our balance sheet and how we used our cash. We ended the quarter with $53 million in cash and no debt. During the quarter, we spent $17 million on capital expenditures. $10 million was for land for our new corporate headquarters, $2 million was for containers, $1 million was for our building addition in Memphis, and most of the remainder was for technology investments. We think that we'll spend between $60 million and $70 million on capital expenditures in 2012. Between $20 million and $30 million is for our new corporate headquarters, which is a 2-year project; $25 million is for containers, and the rest is for technology investments. To wrap it up for the financial section, the 22% increase in operating income and record earnings per share are a great start to the year. And now, you'll hear from our CEO, Dave Yeager.

Great. Thank you, Terri. We are very pleased to report the results of an exceptional quarter, which generated the greatest intermodal volume in Hub's history. We saw double-digit volume growth in all of our major geographies, and we grew with all of our major industry segments. And although we're happy with the strong growth, we have remained focused on price discipline. Our intermodal fleet is currently 22,000 containers. We'll be buying 2,000 new containers in 2012 that will be delivered prior to peak season. At the end of 2012, we intend to retire 1,000 older containers and will then evaluate our 2013 build based upon demand trends at that time. Obviously, the current rate of our volume growth is outpacing fleet growth. We intend to supplement that shortfall with rail-owned assets. We strongly believe that our ability to deploy both fleet and rail-owned capacity is a competitive advantage for Hub in servicing our customers' needs. In the first quarter, rail on-time performance was excellent on both the Union Pacific and Norfolk Southern. In fact, this is some of the best rail service that we've ever seen. Undoubtedly, this excellent service is partially due to a mild winter, but the main driver is the massive investments in infrastructure, both the Union Pacific and Norfolk Southern have made over the past 5-plus years. We believe that the enhanced service levels, coupled with rising fuel costs and the driver shortage, will continue to be strong catalysts for truck conversion. And as a result of the superior rail performance and the demand we've seen from our customers, our fleet utilization of 13.8 days was back in line with historic norms and well ahead of industry standards. Although we still have a long way to go, the bid season is in full swing. We're seeing about the same amount of bid activity this year as last with roughly 35% of our intermodal business being repriced in the first quarter. Another 40% is in various stages of the bid process and is expected to be repriced before the end of the second quarter. By that time, we expect to be through the vast majority of this year's bid activity. Comtrak had a record quarter. Volume was up 38% year-over-year with Comtrak handling 64% of Hub's intermodal business versus 52% the prior year. We had great success in driver recruitment and retention this quarter, adding 179 drivers and wrapping up the quarter with over 2,200 drivers. Our goal for 2012 is to grow our driver base by over 400. In 2011, we retooled our truck brokerage business. Now we're now poised for growth in the second half of 2012. We consolidated our network. We brought in new management, overhauled our operating model and put a performance-driven compensation structure in place. While volume declined 3% in the first quarter, margin, as a percent of revenue, improved on both the sequential and year-over-year basis. In addition, we transitioned our business to the new model without incident, and we're now actively pursuing new opportunities with our sales team. On an industry note, capacity has become tighter, which does reflect the strength of the economy and the lack of expansion by the truckload industry. We believe this environment is quite favorable for the brokerage model. Unyson Logistics also had a strong first quarter, delivering revenue growth of 23% year-over-year. We on-boarded new business with a few major retailers in the U.S. and Canada and grew organically with our existing clients. We continue to focus on strong sales and maintaining an active pipeline of prospective customers. Mode also had a strong first quarter with 10% revenue growth and solid margins, as its independent business owner network continue to perform well. Growth was particularly strong in the intermodal space, where the agent continues to capitalize on using Hub's fleet and Comtrak drayage. Additionally, Mode's management has been successful in attracting and recruiting new agents. We believe that the IBO network is well positioned to grow while showing good margin discipline. In closing, we're extremely pleased with the record-breaking results of the first quarter. We delivered strong double-digit revenue growth in both intermodal and logistics, while showing progress in the transition of our brokerage model. Our Comtrak drayage unit continues to grow, while adding significant value to our intermodal franchise. And the Mode acquisition's integration continues to move forward constructively as the agents and their customers see the positive benefits of their affiliation with Hub. At this time, we'll open up the line to any questions.

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

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

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

Got you, that makes sense. And how are you thinking about rail rate increases for the year? I know you talked about bigger-than-expected increases the past couple of quarters. When do you think we catch up to that? And just overall, I mean, it's kind of -- I think, it's been 4 years in a row of that gross yield percentage coming down. Do you think we can finally stabilize that this year? Or does it look like we'll have another year of gross yield contraction?

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

So Mark, what's different this year than the past 4 years that gives you that confidence?

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

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

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

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

Sure. CapEx guidance went up by about $10 million, you're right, Scott. That was for additional containers. So we decided to order an additional 1,000 containers this quarter that will come in before peak. And we had already ordered 1,000. So in total, we'll be getting 2,000. And then on the costs and expense guidance, you're right, that also went up a couple of million. That's primarily related to increased agency commission because we think we're going to see growth at Mode. And a lot of that growth will come from the agents network. And corresponding with that growth, we have to pay out more agency commission, so that's the bulk of the increase there.

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

We -- probably kind of what it was last year, if not more. It was about 10% last year, and so we're hoping to that again this year.

And as it is the first quarter, right?

Yes.

Our next question comes from Alex Brand with SunTrust.

This is Sterling in for Alex. Did you -- unless I missed it, can you give us a local east and transcon volume?

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

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

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

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

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

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

This is actually Ryan in for Todd. I appreciate the call. The first question I had is, on the fleet, you guys' decision to use rail-owned boxes for growth versus your own fleet, and particularly if the environment is looking good. I just wanted to get maybe some color around that, in terms of the decision to approach the market that way?

Well, we have in fact, we did make the decision to grow the fleet by an additional 1,000 boxes for peak this year. So we originally had anticipated, yes, 1,000 new builds, and we're going to move that up to 2,000. Now we think it's a real strategic advantage for Hub, that in fact, we can offer both the rail assets, as well as our own fleet. And we very frequently, once we get our rail asset within our network, we treat it like a fleet box. We were moving it without ever bringing it back to the actual rail ramps. So it gives us that nice flexibility. And it gives us the ability as we take on more business also to continue to grow the percentage, and the railroads like it. I mean, we focus on our railroads partners' needs. They feel very strongly that they need to supply equipment to the IMC industry, and we're very supportive of that fact.

Okay. So Dave, if I heard you right, I think, last quarter you guys were looking to maintain the size of the fleet, and now we're looking to add an additional 1,000 here by the end of the year.

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

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

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

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

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

Okay, that's fair. Maybe just a follow-up on that, maybe any color you guys can give on what you're seeing in the pricing environment. Maybe particularly with, I think, some of those a smaller IMCs. And it seems like everyone is being disciplined right now. Maybe just the initial view of the current pricing environment within intermodal year-to-date.

Sure, I mean, I think it's been an aggressive bid season, but we've seen all bid seasons are relatively aggressive, nothing unusual there, nothing that we didn't anticipate. We are not seeing a lot of aggressive activity out of smaller IMCs. That's something that has not been a factor in the market for some time. It's predominantly the larger players. And we have -- we've been able to secure increases with most -- the vast majority of our customers at this point in time. So we have no reason to think that we're seeing a situation that is unusual, unusually aggressive or, for that matter, unusually opportunistic.

Our next question comes from John Barnes with RBC Capital Markets.

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

Yes. I think that in order for it to really negatively impact intermodal pricing, we have to see a pretty significant drop off in over the road pricing, as opposed to just maybe a disappointing increase, right? I think there's a large enough gap at this point, and rail service is good enough that there is, it's unlikely that truck pricing is going to put a lot of pressure on the intermodal price. The thing that really impacts intermodal is the competitors within that particular space. So the major participants in intermodal are more likely to have a positive or negative impact on pricing than the truckload sector.

Okay, all right, very good. Terri, when you gave the volume on the local east traffic versus the transcon, I'm a little surprised at that mix just because we've typically viewed transcon as may be a little bit more mature. Can you talk a little bit about how you see those growth rate progressing through the year? Should we expect at some point that local east becomes a growing piece as we move through the year.

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

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

Yes.

Okay, all right. And then lastly, could you just give us an update as to where you stand in terms of the amount of drayage you're doing internally with your own drayage companies?

64%.

Yes. With 64%, it was 52% first quarter of last year.

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

Our -- well, we do intend to add 400 drivers. And so we are focused on 70%, as far as the amount of Hub business the contract will handle.

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

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

Sure, as it relates to contract, you mean the productivity gains around drayage?

Yes, specifically -- yes, sorry, specifically on the intermodal side. When we think about Comtrak, when you think broader productivity gains on the intermodal side, any reason to think that this year should be better or worse than years past?

No, I think we're going to see continued similar trends. We're looking at capturing a pretty similar percentage of our dray and bringing it in and should see similar productivity improvements. Obviously, it helps us reduce our cost to purchase transportation. It also helps us improve utilization of our fleet. And as we've said before, every day of utilization on our fleet is about $1.5 million per quarter. And it also, as we get better at managing street operations, we can reduce our percentage of empty miles. And for every percent there, that also translates into $1 million. So there's a lot of really important aspects in terms of economic impact of doing more and more of our own drayage. So we're going to keep pushing that hard, and the goal this year is as aggressive as it was last year, so we'd look for similar returns.

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

Well, it's continuing to grow. We finished the quarter at 15% of fleet usage, of Hub capacity. And so we're looking to have that continue to grow. I think what we have said was 15% to 20% was our goal. And we certainly, obviously, think that's achievable. We really want to direct it towards new opportunities, as much as possible because that's minimally disruptive. On the Comtrak side, due to really more than anything, driver availability, we are about 7% of their drayage. And we would really like to see that continue to decline. But it's probably going to be dependent on our ability to continue to add more drivers and free up some level of Comtrak capacity to the IBO network, still a lot of upside there.

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

Yes, sure. I mean, I think that the key for Mode's success is to bring on new IBOs, right, and retain the ones that you have. And they way we plan on doing that is by helping them sell a better product. So they can now sell an asset-based fleet product on the Intermodal side, along with the second largest dray network in the United States. We can help them understand and price their services better, help them understand the market better. So we can bring we will value to the IBO network. And if we can do that, that's going to enable them to maintain their business and bring on new business. And it's also going to make Mode an attractive place for new agents to come. So we're making sure that the organization is doing everything it can to support that the agent network. And if we do that, we think they'll continue to see success.

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

We have -- we feel as though the integration of Mode is going quite well. We feel as though we're in a very good place with that at this point in time. There's still some amount of integrating that needs to be done. But for the most part, a lot of the heavy lifting is done. So we are, right now, looking for acquisition opportunities. It's -- and really, it's the usual suspects. It is regional dray companies. It is other IMCs' potentially, certainly, some logistics products or logistics that the company may have offer would be of interest. So we're keeping an open mind to it, and we do feel as though this is probably a good time with cash and an improving economy to be aggressive with acquisitions.

Our next question comes from Michael Weinz with JPMorgan.

First, I was wondering if you can provide the year-over-year change in local west volumes?

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

Okay. So with transcon being much stronger than the others, how does that impact your line to fall in the quarter? I mean, clearly, it's down. But is it down about a couple of percent? Is it down several percent?

It's about flat with where we were at last year. So it's -- so mixed with actually slightly negative, it's not hugely negative.

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

Yes.

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

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

Approximately.

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

You don't want to go to a couple of extra zigzags on that one? Okay, that is helpful. And I guess, after peak, you're going to give 1,000 of those back, right? So at the end of the year, you're probably back to 23,000?

Yes.

Right.

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

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

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

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

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

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

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

We certainly haven't seen any deterioration in service on Norfolk Southern. In fact, they were the most improved of our rail partners on a percentage basis in the first quarter. They continue to provide excellent service for us. They're very committed to domestic intermodal. And we're really excited about the improvements that they're making, which are really just coming onboard now and will continue throughout the year. So we think that this is -- that their service has been good and it's going to continue to get better.

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

Yes, there are some opportunities for us, no question on CSX, their service also improved. And so we saw them continue to offer good service as well. And any time that the intermodal map is expanding, that's a good thing for Hub and it's a good thing for our customers. So new routes are definitely something we want to tap into and take advantage of.

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

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

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

Yes, I would say, if anything that, that would have to be due to the latter, I think we've seen more and more customers willing to do business with high-quality brokers, not the old traditional broker that people think of maybe from years past. More large customers, more customers who are looking to limit the number of carriers that they do business with are willing to bring a broker in to act in a supplemental role. So I think there's more people willing to use high-quality brokers who are doing a good job of adding their carrier base. Obviously, that's critical, there's no question. There is new entrants in the marketplace, particularly through with transactional brokerage. And our model is a little bit different, and we think our space is a little bit less crowded. We anticipate that we can get brokerage back to that low double-digit growth pattern that we saw earlier in this decade. So we don't -- we have not mitigated or pull back on those growth expectations with brokerage, as a result of the new entrants.

Our next question comes from Brad Delco with Stephens.

I guess help me understand a little bit just some industry dynamics. Obviously, your big competitors already reported-- seems as if the pricing environment in intermodal is maybe not as robust as what expectations were a little while ago. How do I think about that in the context of you guys wanting to add capacity? And just overall the -- your outlook, I guess, on pricing maybe particularly on the back half of the year.

Yes. I don't really think that our outlook has changed from a price perspective. We didn't anticipate that we were going to see major upticks in price this year, but we did feel it was going to be a positive price environment. We continue to believe that. We were concerned that our fleet might be a little bit on the large side, as Dave mentioned. That did not, in fact, turn out to be the case. So we don't feel like we're in any way going to have more capacity than we need, and that's in fact why we upped it -- upped our order a bit. So our largest competitor is seeing or is -- are fairly conservative in their projections. I think they certainly have some pieces of business that are -- that they're going to maybe feel like they need to protect and that may have an impact on their ability to realize price in the markets. So that may be, at least in part, why they're maybe on the more conservative side than they were going into the year. But we haven't seen any change in the marketplace.

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

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

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

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

So gross margin is more flat or...

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

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

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

Okay. So we're at kind of a level you expect to be going forward on the upside at least?

Yes. Yes, right, assuming that we don't add any headcount.

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

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

But margins expanded year-over-year and...

That's the margin percentage. So gross margin, as percent of sales, was actually up year-over-year and sequentially.

Our next question comes from Anthony Gallo with Wells Fargo.

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

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

Are they moving up at the same rate? Because we have heard that the per diem was moving at a quicker pace. And I'm just curious if you could put some color around that.

I think per diem is going up a couple of dollars a day.

Right.

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

No, no, no. The charge that we receive for a box, the per diem charges going up a couple of dollars.

A day.

Per day.

Per box.

Per box, and so right. Yes, hopefully it's not going to up that.

No.

We won't be using a lot of rail boxes.

You'll never know. We'll never know with the railroads.

Yes, all right.

And then just a slightly different question. You mentioned price, fuel and mix and mix being negative. What are the components of mix? And I would have thought with growth in transcon, that mix would have actually help suggesting a long length of haul. Can you -- what are the components when you say mix? And how does that tie to the change in local east versus transcon?

It's really change in business mix. So the -- what customers we have and what lanes therein, as well as length of haul. It's both of those components, so it's customer churn and length of haul.

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

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

I see. Okay, So on a same-store sale basis, that the prices are capturing at that way?

Yes, right.

Exactly.

Our next question comes from Keith Schoonmaker with MorningStar.

Terri, would you comment, please, on strengths in various verticals?

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

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

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

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

Yes, it shouldn't be too -- it shouldn't be very significant, yes.

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

Well, this is Dave. I would think that, A, we -- the actual restructuring itself of putting in new management, moving to regional operating centers is accomplished, it's done. Now it's a focus on gaining back some of the share we may have had and focus in our -- the energies of our sales and marketing group to, in fact, continue to drive that business and get it back to a good growth rate. One thing I would impress is that while we did, in fact, changed the structure of it, our truck brokerage operation is actually quite profitable. It just was not growing at the kind of rate that we felt was appropriate. And that we think that ultimately, that this model, in fact, should support.

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

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

Yes, it helped avoid the MTL [ph].

Right, exactly.

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

[Operator Instructions] We do have a follow-up question from Scott Group.

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

No problem, Scott. It's just we think that the growth rate that we're now seeing and the demand that we believe will be there for this peak season, that it was appropriate to, in fact, buy an extra 1,000 containers for this year. And again, we have the ability to, in fact, retire 1,000 boxes in the first quarter of 2013. So it's basically just accelerating the purchase that we were going to make anyway in 2013.

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

Well, certainly, our goal would be to have them turn positive. We have been able to do that historically, quite frequently. We weren't able to do that last year. We thought that we have recaptured enough to regain some of the ground that we gave away in 2009 as a result of the economic pressure that everybody was feeling. So the goal would be to turn those back into a positive trend. And there isn't any particular reason why we shouldn't be able to do that. Once again, it is a challenging environment out there. But we do feel that we can regain some ground, if we apply the proper disciplines.

Okay, great. And then just last thing. Dave, can you talk about what you're seeing trends, in terms of transloading and whether or not that's picking up or slowing down?

Overall, the West Coast ports have been kind of mixed as you're aware. But I think that's transloading activity does continue. It's been very strong. We have the combination of our clients who are actually trying to convert more of that as well as the carriers promoting the transload at the port. So this again, it is something that will benefit us over the longer term as it continues to create more demand for domestic boxes.

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

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

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