Hub Group, Inc. (HUBG) Q4 2012 Earnings Report, Transcript and Summary

Hello and welcome to the Hub Group Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] Any forward-looking statements made during the course of the call represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate and project. Actual results could differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dave Yeager, CEO for Hub Group. Thank you. Mr. Yeager, you may now begin.

Thank you, Regina, and good afternoon, everyone. It's my pleasure to welcome you to Hub Group's fourth quarter earnings call. Today, we're initiating a new format. To start, I'll provide you with a high-level overview of our performance. This will be followed by Mark Yeager, our President and Chief Operating Officer, who will discuss the details of our quarter by business line. Mark will be followed by Terri Pizzuto, our Chief Financial Officer who will comment on the company's financial performance. I'll then provide some closing remarks which will be followed by opening up the line to your questions. To begin, Hub Group has delivered yet another strong annual performance with improved contributions from each of our business units. We enjoyed a record fourth quarter, surpassing a revenue milestone of $3 billion for the year. We earned $1.83 per share for the full year which is an increase of 17%. Despite the challenging economic climate, we had record intermodal volumes while generating $1 per share of free cash flow. And with that, I'm going to turn it over to Mark.

Thank you, Dave. There is no doubt that we navigated through some challenges at the end of the year, including a hurricane in the Northeast and a port strike on the West Coast. Despite this, the fourth quarter saw intermodal and highway volume growth as well as significant margin improvements in all of our business lines. Intermodal volume grew 7% for the quarter and 10% for the year. Local West grew 12% and was our fastest-growing region, followed the transcon, growing at 5%, and local East at 4%. Retail and consumer products grew well while durables declined. Despite weather and labor challenges, the fleet continued to perform well. Utilization was 14 days for the quarter versus 15.1 in 2011, and 13.7 days for the full year 2012 versus 14 for 2011. Better rail service, an ongoing focus on network balance and better street execution helped us produce improved results despite managing a larger fleet. We are in the process of retiring 2,000 older aluminum containers. These retirements will eliminate the vast majority of older aluminum boxes from our fleet. In 2013, we are planning to purchase 3,000 new steel containers for a net increase of 1,000 fleet containers by peak season 2013. This will bring our average fleet age down to just over 4 years. Our projected 2013 peak fleet size will be approximately 25,000 units. Our drayage division, Comtrak, had another great year, handling 22% more dray moves this year than in 2011. We continue to focus on recruiting drivers to grow our network. We had a net add of 407 drivers in 2012, putting our driver count at 2,474 at the end of the year. We were also able to lower our turnover rate by 7% for the year, a significant accomplishment in today's competitive driver market. Comtrak…

Thanks, Mark. We had a record fourth quarter and I'd like to highlight 3 points: first, gross margin increased across the board in all 3 Hub service lines and at Mode; second, operating margin is the highest that we've seen in 2 years; and third, Logistics exceeded expectations for gross margin. Here's the key numbers for the fourth quarter: Hub Group's revenue increased 5% to $801 million; Hub Group's diluted earnings per share was $0.51; EPS is up 6% compared to an adjusted 2011 EPS; 2011 diluted earnings per share was $0.46, and after adjusting to exclude onetime costs related to integration and restructuring, it was $0.48. Now I'll talk about details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $614 million which is a 6% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 8%. This change includes a 7% increase in load. 84 basis points of the volume increase came from Hub fleet boxes sold to Mode agents. The Christmas season was cheery for us with loads from retail customers growing 15% and loads from consumer products customers up 10%. Prices in fuel were up, but were partially offset by the impact of mix. Truck brokerage revenue increased 7% due to 9% more load. Price, fuel and mix combined were down 2% driven by a 6% shorter length of haul. We continue to land new business. During the quarter, we also handled emergency loads resulting from Hurricane Sandy. Logistics revenue was down less than 1% with growth from new customer accounts being offset by the loss of a Logistics Management business for whom a customer decided to bring the work in-house. Hub's gross margin increased by $8.6 million due to growth…

Thank you, Terri. In conclusion, we're proud of our strong finish to the year. 2012 was a year in which a great deal was accomplished. We surpassed $3 billion in revenue while delivering 17% earnings growth for the year. We set record intermodal volumes with a larger fleet and better execution. Comtrak drayage moved more than 1 million loads and added over 400 drivers. We're successful in turning around our brokerage unit as Unyson Logistics had yet another year of steady growth, and Mode continued to exceed bottom line expectations. As we begin 2013, we expect to deliver another year of solid operating performance. We're staying focused on driving value for our customers, our shareholders and our employees. And with that, Terri, Mark and I are happy to answer any questions you may have.

[Operator Instructions] And folks your first question today comes from the line of John Barnes with RBC Capital Markets.

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

Sure. We -- operating margin at Mode, John, was 2.1% for the quarter. We think in 2013, it'll still hover around that 2% level. And because Mode has a different model than the Hub segment, we think for -- it's going to have a different operating margin. And our operating margin at Hub was 4.5%, the highest that it's been in 2 years, which is great, but for Mode, we -- they do the heavy lifting. So our Mode agents sell the freight, they operate the freight and they can use our fleet boxes if they want to and they are compensated based on a percentage of gross margin. So just -- it's just inherently a different...

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

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

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

Yes. We have finished the year handling 66% of Hub's drayage at Comtrak. That was to close the year. For the quarter it was 63%. Our goal was 70%. We came up a little short as we saw some pretty solid growth in the intermodal side and we also began handling some level of local pickup and delivery activity in order to make our network even more efficient. So had we been able to allocate that capacity towards pure drayage, we would've gotten significantly closer to the 70% goal. Our goal for this year is 75% on the Hub side. From a Mode perspective, we handled 15% of Mode's intermodal drayage through Comtrak. That was incorrect. We handled 15% of their containers to the fleet, 11% Comtrak drayage.

Your next question is from the line of Ben Hartford with Robert W. Baird.

Could you provide, maybe Mark, a little bit of context to the fourth quarter across the units with gross margin improving. I really want to vet how sustainable it is? I know that you talked about 2013, you're hoping for gross margin improvement within Hub -- Hub core. Can you talk a little bit about the Logistics' gross margin improvement in the quarter? And then within intermodal, some of the puts and takes with gross margins being up on better-than-expected fleet utilization. How much of it was balance and volume in the quarter, and how much of that improvement, in terms of fleet utilization, do you think you can carry over into 2013?

Yes. Ben, I mean, we think that all the improvements that we saw in all 3 segments were -- are sustainable. Within Logistics, obviously, we saw a lot of good work from a carrier and modal optimization execution. We saw enhanced savings from consolidation and we saw some favorable mix benefits as well. But all those things are likely sustainable for the foreseeable future. Obviously, with the market a little bit soft, that enables us to do things like carrier optimization more effectively. So unless we see a significant turnaround, tightness of capacity, I think that Logistics is likely to continue to show solid margin performance. Highway certainly had good, solid margin performance. They were able to reduce their cost to purchase transportation. Once again, somewhat a reflection of market dynamics, but I think also a reflection of the improved execution that we're seeing out of our newly reengineered model. On the intermodal side, a lot of it was about street operations and performing better on the street. Better utilization of the boxes and reducing our dray costs by making better use of the drivers and adding to the drivers and adding to the percentage of our own dray that we're handling. In addition, we did see positive pricing which helped us improve margins as well. We think all those things are sustainable. Certainly, if the market shifts dramatically, some of those factors could be put under stress but given what we're anticipating for 2013, we think that we can continue to make the progress -- continue down the road of the progress that we've made with margin in all 3 areas.

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

Yes. I mean, you're right, Ben. We're looking -- we had 11% gross margin in the whole year 2012. So our goal is to beat that. I mean -- and we did have a lot of improvements but -- and it was 11.4% for the fourth quarter. But that -- and we think we've got gained momentum and that 11.4% certainly won't carry over to the first half of the year only because it's seasonally different, right? And so in the second half of the year, hopefully, we do better than the 11.4% in the fourth quarter, for example. But it's going to progress as the year goes on, I guess, I'd -- we'd tell you based on the seasonality. And as to how much better it can get? I mean, our goal is for -- always to get as high as it can, and it'll depend on the pricing environment and what happens there.

Your next question is from the line of Brad Delco with Stephens.

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

I think certainly price is the key lever for intermodal gross margin. There's no question that, that is -- what has compressed margins in the past and enabled us to expand margins as well under different demand conditions. So it's clearly the biggest lever. I think we're doing very well controlling the other factors like utilization and street execution. They do have an impact on margins. So I think we've made a lot of progress there. I think those are sustainable. I don't know that we can bring a whole lot more utilization to bear. There's probably a little bit of improvement that we can realize through, once again, continued execution. We do believe that it's got to be a competitive environment out there in intermodal but at the same time, we were able to realize a positive price in both the third quarter and the fourth quarter. And with appropriate pricing discipline, we should be able to continue that trend. So we are bullish on intermodal. Rail service has been good. We aren't going to see a tremendous amount of additional capacity coming into the marketplace. It's always competitive. We anticipate it will continue to be competitive. But we do feel like we can continue to work our way back to more historic margin levels in the intermodal space.

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

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

Got you. And then maybe my follow-up, kind of focus on intermodal volumes. If I heard correct, the net of 1,000 additional boxes, peak season, for 2013. So call it an incremental 4% of capacity. So in order to see you guys have better than 4% intermodal volume growth, I guess the key is on that utilization factor. Is there any way to kind of bracket where your expectations are for intermodal volume growth for '13 versus '12?

Well, I -- we're obviously looking to do better than the 4%. That's part of the beauty of our model and also the relationship we have with Union Pacific and Norfolk Southern because we can, in fact, ramp up as well with the EMP, which is the neutral rail fleet that's jointly operated by UP and Norfolk Southern. So while it may -- there is no question that we intend to be spinning our boxes quicker from fleet, but we do have the ability to also ramp up and expand our overall volume levels by using the rail fleets.

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

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

Your next question today comes from the line of Kevin Sterling with BB&T Capital Markets.

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

Well, certainly, with bid season right now, we do see it ramping up into full swing. We do think that we're going to see a lot more bids, probably that will be earlier in the year versus later in the year. And certainly to date, the ones that we have seen have been quite competitive. As far as from our customers' perspectives, I think they obviously would like to see reductions. I think that's obviously not in our planning, but I think that there is no question with some of the regulations that are coming into effect, with the reduced hours of service, with CSA, that many of our clients are looking at conversion to intermodal. I think that's one of the key things. And because they do foresee that capacity is going to be very tight and it could drive truck prices up, not in the first half of the year but in the second half.

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

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

Your next question is from the line of Michael Weinz with JPMorgan.

I guess, first, if we think about on the intermodal business, how would you view the pricing on behalf of the rails in 2013 for expectations on what -- where the might -- where the increases might come from? And also, where would you look at intermodal's growth coming from more so in the East or would it be growth in transcon or rail? Which bucket would you see more of the growth into 2013?

Sure. Yes. We would anticipate, I think, that the rails are continuing to deliver good service. They're continuing to deliver a very good value proposition, and I think that they will be looking to get increases from the marketplace to the extent that they can. So I don't suspect that we're going to see them change their philosophy about volume versus yield. At the same time, it's always been our goal to be able to offset those increases, and we're committed to being able to do that. Obviously, as we think about where we are growing, local West was a very good grower for us this year. A lot of that was the result of progress we've made in the retail space, and that's likely to continue. Certainly, with the Crescent Corridor and the new lane pairs they're opening up. I think that it would be logical to be targeting some good solid growth in those corridors. It was a little bit slow, I think, in the fourth quarter in terms of local East growth coming in at 4%. We'd like to do better there, and we think the opportunity certainly presents itself, particularly based on the transit reductions that we're seeing in a number of these major lanes.

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

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

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

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

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

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

Your next question is from the line of Todd Fowler with KeyBanc capital.

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

I did say it probably wouldn't be the 11.4%. It would be lower than that, that's correct. And the reason is because the fourth quarter includes peak season. We had a good strong peak season. There's peak season surcharges in there. Our utilization was great, and logistics had a higher gross margin percentage than normal. But really, intermodal drives it. It's the lion's share, obviously, of our business. So that would be flat due to seasonality more than anything.

Okay. So meaning as part of that, that the expectation would be that you wouldn't get the same sort of utilization on the fleet, the intermodal fleet in the first quarter, and obviously, anything that you picked up with surcharges wouldn't be the recurring factors?

Correct.

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

Yes, that's a good question, Todd. The biggest increases relate to headcount add, which of course Dave still approves every single person that we hire. But given our growth that we're planning, that would be $2 million a quarter add. And then agency commissions might be up $1.5 million a quarter. That's for Mode. And then we'd have our wage increase that don't go into effect. That might be another, call it, $1 million, and bonuses, higher IT costs and higher insurance of another $1.5 million.

So obviously, those increases only take place if in fact we're generating more business and more gross margins.

Right.

Yes, that makes sense to me. I mean, especially -- Yes, the commission piece would be moving in sync with the Mode revenue, I would assume. But there's no depreciation then related to the new headquarters? Is that something that isn't being depreciated yet? Or is that coming in later in the year? Or when do we see that?

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

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

Sure. I'll be Mark for a minute. We make 10% more on that intermodal load if we do our own drayage.

Your next question is from the line of Anthony Gallo with Wells Fargo.

A quick question on the truck brokerage in the legacy Hub Group. What's the mix now between transaction versus spot both in terms of how you're buying in the marketplace and how you're contracting with the shipper?

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

And is that similar to the way you're buying capacity in the marketplace?

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

Your next question comes from the line of William Greene with Morgan Stanley.

Can I just ask one point of clarification? Sorry to come back to this but, Terri, you mentioned that the margins should fall sequentially. Historically, they've gone up. Is that at all related to sort of the hurricane effect in creating tightness in the markets that allowed you to sort of take some extra revenue or get better utilization? I'm just trying to figure out how much of that might be onetime.

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

Okay. So if you look back over the quarters of 2012, do any of them standout as having kind of squeezed you due to the rail increases, assuming the rails just followed what they've been doing the last few years? I just want to make sure we think about '13 quarterly, modeling it correctly.

I mean, no. We recovered those cost increases. And like Mark said in his remarks, prices were up each quarter.

Okay. And then the tightness that you were -- you sort of saw in the fourth quarter that you were able to take advantage of, one of the things we've talked about in the past is one of the things that will get you back to peak margins is kind of greater tightness in the markets. Now I know it's just one quarter, but did it have the kind of sort trend rate that you could say like, as we lookout maybe to '14 that we could go back to those levels or is it kind of too much to hope for?

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

Yes, yes, that's right.

So while it did get tight for a period, it was not what I would call a prolonged and protracted time period. So no, I don't think that it was enough to send our -- the client base towards being overly concerned about capacity at this point in the intermodal business. It certainly was tight for a period there, and certainly the IL-8 had a bit to do with it, but it wasn't anything which was of the order of magnitude as some of the peaks we've seen.

Your next question is from the line of Nate Brochmann with William Blair.

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

As I mentioned, we certainly saw a good solid growth in the retail sector. Some of that was with existing customers, some of that was with new customers that grew, I think, 15% in the quarter. Consumer products continue to grow double digits, coming in at 10%. Durables was off predictably, I think. And that was centered around a few specific customers rather than being a broader trend. We saw a lot of success off of the West Coast. I saw a good solid demand off of the West Coast. I saw a good solid demand in the Texas market as well.

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

We continue to believe that the opportunity is probably substantially larger than the system could realistically absorb. We think that there's clearly significant opportunity in the East, and Crescent should help us tap into that potential opportunity. And in addition, as we get better at street operations and as we improve execution with the dray piece, we are able to get out further and further away from the rail ramp and bring business into intermodal throughout the country that historically it really wasn't feasible and didn't represent enough of a cost advantage to justify modal conversion. So our belief is that the opportunity is very significant. Intermodal's probably handling something like 8% of loads over 550 miles, and there's certainly room to go well beyond that. So we remain very optimistic about the potential for intermodal conversion, particularly with what's likely to occur over the long term in terms of over-the-road cost.

Your next question is from the line of Scott Group with Wolfe Trahan & Co.

Dave and Mark, can you give us a sense on intermodal and brokerage volumes early in January?

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

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

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

Okay, that's helpful. In terms of brokerage in the quarter, you mentioned there's maybe a volume benefit after the hurricane. Any way to think about if the hurricane and the tightness, how that impacted the gross margin percentages within brokerage? Did -- was -- did it get tight enough? Were you able to actually pass it through, and you saw a margin percent boost as well? And is there any way to maybe think about the total impact of the hurricane on brokerage or the net impact of the hurricane on brokerage?

Scott, I really don't think it had a major impact either on our margins or it has slight impact on our volume levels. Because as Mark said earlier, the Northeast did not get back up to producing and shipping quite as quickly as into the Northeast. So I don't think it really did much. I think that all the work that's gone into revitalizing our truck brokerage market is really what had the impact, where we are buying better, we're pricing better, we're operating more efficiently, we're broadening our carrier base. So all those positive trends, I think, had a much more material impact on brokerage's results than did the hurricane.

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

Yes.

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

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

Can you give us some color on what do you think it takes to get to the higher end? Or what are the risks that get you to the lower end? Or if you feel more comfortable on one side or the other?

Sure, yes. You're right. I guess the biggest impact is pricing in intermodal, like we talked about before, so that would get it to the very high end. And in terms of the low end, it would be not meeting our budget. And then we do our budget, we try and be very certainly realistic, but also shooting for what we think we can do. And that's generally the target that the board approves. So it's aggressive somewhat, but also realistic. So the middle of the range, say if we get our budget and the more pricing we get in intermodal to the high end.

Your next question is from the line of Matt Brooklier with Longbow Research.

Just wanted to walk through the on-boarding of new containers. I think you're purchasing 3,000 new boxes, but there is roughly 2,000 that are getting retired, and we're left with 1,000 net adds at the end of the year. But it sounds like there's -- from a timing perspective, if you walk through the quarters, it's obviously going to look a little bit differently end of peak. So I just wanted to understand kind of the progression of when we add boxes roughly and then when we think about retiring those 2,000 older boxes.

Every year, when we are in fact going to either order boxes or in fact return some of the aluminum boxes, we have a tendency to return boxes early on in the quarter, obviously, when demand is less and we really don't need them. And then we'll begin to gear up in the beginning of the third quarter to receive the 3,000, even at the end of the second quarter of this particular year. And then you always -- it's always subject to production, it's always subject to chartering vessels because they are made in China. But we really enjoy having them there during August, September and October, when it's the key shipping period out of Southern California. So you'll see us right now reducing the fleet size, and then it'll begin to increase at the end of the second quarter.

I mean, is there -- you're on schedule to reduce the fleet size at this point or if, let's say, the first half of '13 is potentially a little bit stronger than anticipated. I mean is there some flex there with respect to when you're reducing or retiring containers? And then obviously, adding is a little bit more difficult, getting them over from China, but just curious to see if you do have some flex in the first half?

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

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

Yes, I think Mark mentioned it in his prepared remarks, Matt, that we have business that we're ready to onboard now that we've won -- that we'll onboard in this first half of the year to replace the business that a customer decided to take in-house. So we think, to answer your question directly, I guess that logistics revenue could be up high single-digit to low double digit next year.

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

Right.

Your next question is from the line of David Tamberrino with Stifel Nicolaus.

I think you just touched on it a little bit my first one in terms of how large the customer that you lost was in TTM revenue.

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

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

Mode is -- did not put the kind of growth numbers that Hub did. I don't think there were many players in the industry that are growing at the kind of rate that Hub is growing at. Mode's customer base tends to be a lot -- they do have some large customers, no question about it, but a lot of smaller and midsized customers, who, I think, have been particularly challenged by the current economic environment. There had actually been a trend at Mode of declining intermodal volumes for some time. So for us to see positive intermodal numbers in the post-acquisition world, we view as a positive trend. I don't think you're going to see Mode grow intermodal volumes as quickly as you see Hub grow intermodal volumes. But we certainly do believe that with access to the fleet and access to Comtrak, they can continue to grow that, albeit probably not as quickly as Hub does.

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

And then I guess while I have you here kind of towards the end of the call, you touched on a little bit earlier that improving your street and dray operations, you should be able to touch endpoints a little bit further away from the railheads. We've heard that generally the Dray should be circuitous to the rail move by only about 20%. Further than that kind of -- the pricing kind of breaks down. It's no longer competitive with a long haul trucking move. I'm interested in knowing if you care to speak to how long away from the railhead your typical dray move is now and where do you think it could go?

About 80 miles.

Yes, typically, it's about 80 miles. But we serve markets that are substantially farther than that. We serve a number of markets that are a full-days trip, right? Is not unusual. In order to do that effectively, you need to have balance, and you need to have density, so that you're not making a 300 miles dray accompanied by a 300-mile empty move, right? So you really have to avoid that kind of dynamic. And so it's very important that you have balanced freight flows, and that you have density if you want to be able to service those more remote markets. But we have a number of markets, where we're serving, particularly over some areas like the Chicago Gateway, serving well into the Ohio Valley and regions like that.

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

1,625 miles.

And how does that compare to the prior year?

Up 9 miles.

Your next question is from the line of Ryan Bouchard with Avondale Partners.

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

Well, I mean, I think we believe that intermodal will continue to outpace GDP, right? It's done that the last few years. There certainly is the capacity within the network from a terminal perspective, certainly from a line capacity. There's no shortage of line capacity. So we believe that it'll continue down a good solid growth trajectory, similar to what we've experienced the last couple of years. So what we saw there was mid-single digits to high-single digits. I think we're likely to see more -- we're more likely to see that mid-single-digit growth out of the industry than the high-single-digit growth out of industry this year unless we see a significant economic turnaround or a large jump up in fuel prices or something along those lines. But I think it'll continue to outpace GDP, and it'll continue to outpace growth in the truckload sector.

You have a follow-up question from the line of Ben Hartford.

Terri, I think you said that you ended the year with $13.8 million remaining of the share repurchase authorization, is that right?

That's correct.

Have you bought any stock in the first quarter?

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

Okay. When would you expect the CapEx for the building to be done? Is that ratable throughout the year? And when would you expect this authorization to be completed? And then thirdly, what if and when you get it completed, and you get through this CapEx year, this year you'll have obviously free cash flow accelerating in '14. So how will you think about uses of cash once you have these 2 items finished?

Let's see, I'll try and make sure we answer all the questions. In terms of when we expect to complete our share buyback authorization, we have a plan in place. And so we certainly hope to complete it. We're just going to buy stock opportunistically. And in terms of when we're going to spend the money on our new corporate headquarters, the $30 million or $32 million this year? It'll be ratably throughout the year because we don't intend to move in until the end of the year, which is when it would be completed. Kind of be pro rata. And then our expected uses of cash for 2013, I mean are -- we're going to spend $90 million to $100 million on capital expenditures, $50 million for containers, call it $30 million for the building, and the rest for technology. Our first use of cash would be acquisitions. We're still hunting for good acquisitions, and hopefully, we'll find some even with the capital expenditure that we're going to have in 2013. We'll still have a good amount of cash left at the end of the year, and we have a $50 million untapped credit line that we could always use. So plenty of cash in our bank.

Okay, good. And then just real quick on brokerage in '13. I mean, it looks given the results that certainly you guys have restored momentum in that business. Are you at kind of full cadence in that business? Should we be thinking about that as a mid- to upper single-digit revenue growth or if not something better in a better environment in '13 and moving forward? Is that how we should think about it?

Yes, that's how we would think about it.

You do have a follow-up question -- actually you have a first question from the line of Chaz Jones with Wunderlich Securities.

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

Yes. Close to that, 23,867, so rounded up for a few hundredths, yes.

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

So if I look at the core Hub gross yields, gross margin percentage of 11% and look at past peak, give or take 14%, is there a way of thinking about each of the 3 when we just -- so when we think about that and the opportunity, how do each of the 3 segments compare versus past peak? Meaning is intermodal more than 300 basis points below past and brokerage less than 300? Can you directionally talk about that?

Yes. Intermodal would've been -- it's lower because it got driven down by prices in '08 and '09. So that's where we get the biggest bang for our buck by getting higher yields in intermodal.

The other 2 areas are fairly comparable to what they were performing at, at that time.

Yes, they are.

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

And intermodal is still -- when we think about ranking the 3, it's still brokerage margin percentage is the highest, then intermodal, then logistics?

Actually, that's what we expect. Actually for this quarter, logistics was higher than intermodal.

Is that something you think is ongoing?

By a tiny bit. Probably not.

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

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

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