Hub Group, Inc. (HUBG) Q1 2013 Earnings Report, Transcript and Summary

Hello, and welcome to the Hub Group Inc. First Quarter 2013 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 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. Eager, you may now begin.

Thank you, and welcome to Hub Group's First Quarter Earnings Call. The first quarter played out much as we expected, with single-digit revenue growth in all of our business lines. The intermodal business continues to perform well with moderate volume and revenue increases. It's our belief that consistent worldwide [ph] service coupled with the headwinds being faced by the motor carrier industry positions the intermodal business to outpace the growth of GDP and that Hub's intermodal model will allow us to surpass the overall industry. Our highway brokerage business stayed on track as well. As a truck broker, margins are generally optimized when you have either an excess of supply or an excess of demand. In today's environment, where supply and demand are at equilibrium, enhancing margins can be more challenging and the amount of overflow business from load boards and other transactional business can be minimized. We do, however, look for our highway brokerage to continue to grow as our new structure continues to provide a superior service. Lastly, both Mode and Unyson continue to produce solid results throughout the quarter. And with that, I'll turn it over to Mark to discuss the details of our quarter by business line.

Thank you, Dave. The theme this quarter was solid execution and ongoing investment in our business. We saw growth across the board despite a challenging competitive environment, a less favorable calendar, an early Easter and a late spring. We were honored with carrier awards from some of the most sophisticated shippers in the industry, including the Intermodal Carrier of the Year award from Walmart, and the Intermodal Carrier of the Year and double platinum intermodal service awards from Lowe's. Intermodal volume for the Hub segment grew 2.2%, with 12% growth in retail, 5% growth in consumer products and a 12% decline in durables. From a regional perspective, we saw a 2% decline in transcon, a 2% increase in local East and a 7% increase in local West. On a consolidated basis, intermodal volume increased 3% for the quarter. As with each biz -- bid season, pricing remains competitive. We have seen some aggressive pricing during the quarter, particularly in the local East and transcontinental backhaul markets. We worked hard this quarter to maintain the proper balance between pricing discipline and growth and will continue to do so as we enter the second half of the bid season. Despite a more challenging winter, rail on-time performance and hub fleet utilization both improved during the quarter. Fleet utilization was 13.4 days for the quarter, compared to 13.8 days for Q1 of 2012. This represents the best fleet performance for a first quarter in Hub history. As planned, we are retiring 2,000 older aluminum containers and replacing them with 3,000 new steel boxes, further reducing the age of our fleet to just over 4 years. The new containers began arriving on schedule this month. Our fleet size will be just under 25,000 units during peak, and we expect it to be fully deployed throughout the year. Our drayage operation contract continues to grow. In the first quarter, we added 135 drivers, ending the quarter with 2,609 drivers. Contract handled 93% more Mode loads and 7% more Hub loads, meeting 66% of Hub's drayage needs, up from 64% last year despite higher volumes. We are still on track to handle 75% of Hub drayage by the end of the year. Despite the somewhat sluggish truck environment, highway brokerage also continued its progress, growing volume 4%, generating more margin dollars, improving execution and adding new carriers to its portfolio. While the month of May will be an important indicator as to how the rest of the year will play out in the brokerage market as a whole, we remain confident that our truck brokerage unit will maintain margin levels and grow volume into the foreseeable future. Despite the previously disclosed loss of a customer in the second half of last year, revenue for Unyson Logistics grew 3%, while solid execution on high-value add logistics engagement produced improved margin performance. Several significant new customers are in the process of on boarding as we speak and should contribute to accelerated Unyson growth in the remaining 3 quarters. Mode Transportation, once again, delivered strong bottom line performance, while Temstar and CMO revenue declined, the IBO network continued to perform well, growing revenue by 3%, including an 11% volume growth in intermodal. Mode also added 4 new IBOs and 3 new sales agents during the quarter. Overall, we had a solid quarter. We are staying close to -- we are staying the course on key initiatives and are well-positioned for the rest of the year. I'm now going to turn the call over to Terri to review the financials.

Thanks, Mark. We had a record first quarter, and I'd like to highlight 3 points. First, gross margin as a percentage of sales improved 10 basis points over last year to 11.4%. Second, total cost and expenses were only up 2%. And third, earnings per share increased 14%. Here are the key numbers for the first quarter. Hub Group's revenue increased 4% to $769 million. Hub Group's diluted earnings per share was $0.42 this year, compared to $0.37 last year. Now, I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $593 million, which is a 5% increase over last year. Let's take a closer look at Hub's business line. Intermodal revenue increased 6%. This change includes 2% increase in loads. 42 basis points as a volume increase came from Hub fleet containers sold to Mode agents. Modes from retail customers increased 12% despite some customers experiencing a decline in their business. Prices, fuel and mix were all up. Truck brokerage revenue increased 4% due to 4% more loads. Prices, fuel and mix combined were flat. Modes from retail customers increased 26%, resulting primarily from success in last year's bids and landing new customers. Logistics revenue was up 3% due to growth from some new customers that we're excited about and more business from existing customers. Growth was muted because on-boardings for several new customers were delayed. Hub's gross margin increased by $3.7 million due to growth in all 3 of our service lines. Logistics gross margin growth came in the strongest, up $1.7 million, due primarily to improvement in yield. Intermodal gross margin grew $1.5 million due to the 2% increase in loads and improved street operations. Utilization was about a half a day faster than last year, and Comtrak is 66% of our drayage work this quarter. Truck brokerage gross margin increased $0.5 million year-over-year due to an increase in the number of loads and better purchasing. Hub's gross margin, as a percentage of sales, was 11%, a touch higher than the 10.9% in the first quarter of 2012. The biggest driver of the increase in the gross margin percentage is logistics. Logistics gross margin, as a percentage of sales, was up 177 basis points due to solid execution, the mix of business and more opportunity for optimization. Truck brokerage and intermodal gross margin, as a percentage of sales, were relatively flat. Hub's cost and expenses were $43.9 million in 2013, compared to $41.6 million last year. Salaries and benefits grew by $1.7 million due to pay increases and higher headcounts. General and administrative expenses up $1 million due primarily to higher IT costs, professional fees and insurance. The main reason total cost and expenses were lower than we projected was due to hiring fewer people than planned. Finally, operating margin for the Hub segment was 3.6%. Now I'll talk about results for our Mode segment. Mode's revenue of $187 million was up slightly over last year. The revenue breakdown is $86 million in intermodal, which was up 5%; $74 million in truck brokerage, which was down 8%; and $27 million in logistics, which was up 7%. Mode's gross margin decreased $66,000 year-over-year. Gross margin as a percentage of sales was 11.8%, compared to 11.9% last year. Mode's total costs and expenses decreased $1 million compared to last year due to agency commissions going down $200,000, salaries and benefits declining by $400,000 and general and administrative costs decreasing $400,000. We continue to see the benefits of the integration. Operating margin for Mode was 1.9%. The good news is that operating margin was up 50 basis points over last year even though revenue was only up slightly. Turning now to headcount for Hub group. We had 1,400 employees, excluding drivers, at the end of March. That's up 45 people compared to the end of December. Now I'll discuss what we expect for the rest of this year. We're comfortable that our 2013 diluted earnings per share will be within the current analyst range of between $2 and $2.15. We think we'll have 36,700,000 weighted average diluted shares outstanding. Quarterly costs and expenses will probably range between $65 million and $69 million in 2013. For the Hub segment, our goal for 2013 is to improve on 2012's 11% gross margin. We expect Mode's operating margin in 2013 to continue to be close to 2%. Turning now to our balance sheet and how we used our cash. We ended the quarter with $86 million in cash and no debt. During the quarter, we spent $9.5 million on capital expenditures. We think capital expenditures for 2013 will range between $95 million and $105 million. We're buying 3,000 new containers and 4,100 containers that are coming off fleet, for a total cost of about $50 million. We'll spend between $30 million and $32 million to finish our new corporate headquarters. We'll also purchase 80 tractors for $9 million that will be delivered in the second quarter. The remainder of the capital expenditures are technology projects. We spent $900,000 to buyback 26,591 shares of stock during the quarter. $13 million remains on our share buyback authorization. To wrap it up for the financial section, our financial performance was in line with our expectation, and we continue to focus on initiatives to improve gross margin. Dave, over to you for closing remarks.

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

[Operator Instructions] Your first question comes from the line of Benjamin Hartford with Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Can we talk a little bit about the volume growth? I guess, Mark, you had alluded to the fact that the pricing environment was aggressive, I think was the term that you had used. It sounds like on the intermodal side in the first quarter pricing the bid environment was a little bit more aggressive than what we saw in trucks. Can you talk a little bit, I guess, about the pricing environment and then really the sources of pressure to volumes on the transcon side and local East as well?

Sure, absolutely, Ben. Yes, I would say that pricing in the first quarter certainly was competitive on the intermodal side. I think most truck areas would say it's been pretty competitive on that side as well. We certainly saw some business in which we were the incumbent, that went out to the market and came back at prices that were simply not compensatory for us. And it's hard to walk away from business, but the right answer isn't always yes. Sometimes the right answer is no, contrary to what many of our sales people believe. We particularly saw a competition in the local East space and saw a competition in transcon, particularly on westbound transcon. Clearly, the durable space was very competitive from a price perspective. At the same time, I would say that we are pleased with the results that we've been getting in from the bid activity and do not feel that there is a longer-term volume problem with our intermodal product. We feel like we are getting good business into the pipeline, business that carries an adequate return and obviously, business that supports our network. So while it is competitive, we feel like we're dealing with it well. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Very good. I think in the past you have talked about this being -- the intermodal business being a mid- to upper single-digit type grower. It sounded like that's what you had alluded to for 2013. And are those estimates still intact? Do you still feel like that this can be a mid- to upper single-digit volume grower in the intermodal business?

Absolutely. Yes, nothing has changed about our view of this year or the outlying years as well. We think that the demand for intermodal is going to continue to outpace truck. And we think that we should be able to outpace the overall industry as well. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then real quick on the gross margin side. You had talked about improving that in 2013 relative to 2012. We saw some improvement this quarter on a year-over-year basis. How should we think about the progression, I guess, of gross margin through the year? We've got some influences from mix with logistics that pipeline firming up. It sounds like you had made the comment that intermodal in truck gross margins were flat. Should we think about that being the trend through the year? And I guess maybe how should we think about gross margins from the first quarter through the balance of the year?

Yes, Ben, we think that gross margin for the first half of the year will be pretty consistent only because we're still dealing with the same book of business that we had last year since we're in the middle of bid season. And then for the last half of the year, our goal would be for the gross margin percentage to increase and to increase for the whole year more than we saw in 2012, so the Hub segment with its 11% gross margin for 2012 and our goal is to be higher than that for this year. But it will be back-end loaded. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then one last clarification. On the CapEx, it sounds like it's up $5 million relative to the expectations from the end of the year. You had said that you're purchasing 80 tractors. Are those net purchases? Or are those replacement within the 260 tractors you own in Comtrak?

Those are brand new, and we're buying them to support our company drivers, so those tractors that we -- will replace tractors that we're currently using on short-term leases, which will improve our profitability. Those tractors are also going to help service customers with heavy freight and make us more competitive. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: And is that the incremental increase in CapEx at the midpoint of about $5 million?

It is.

Your next question comes from the line of Justin Long.

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

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

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

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

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

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

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

Good evening. If you think about your objectives on the gross margin improvement, let's say 2013 and then beyond, maybe if you could put it into different categories forward. How much of it is your ability to price above the rail cost? How much of it is from moving to more in-house drayage? How much of it do you expect to come from maybe operational improvements? Those are sort of 3 buckets. How would you see that shaking out maybe this year and then over the next couple of years?

Well certainly, Anthony, the most important to us is pricing above the rail cost increases. And that's key. And as Dave mentioned earlier, we had some business that shook out in the first quarter where we didn't get adequate returns on it. So that's the key driver of our gross margin percentage. And then the more drayage we do, that also helps. For every dray that we do, we make 10% more on that intermodal move, so that certainty helps. The utilization helps. So for 1 day of utilization, it's about $6 million a year. And we had record utilization this quarter at 13.4, which is great. And then truck brokerage has been pretty strong, and so has logistics. So we expect as that business is on-boarded in logistics to keep the margin that we have. Logistics margin will fluctuate depending on how much high-value engagements we have. So that's also a factor. And because we do such a good job on those engagements, we've been able to land more of that.

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

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

Your next question comes from the line of Michael Weinz with JPMorgan. Michael R. Weinz - JP Morgan Chase & Co, Research Division: Good afternoon, everybody. I guess the first question is on your cost guidance. It sounds pretty similar, the $65 million to $69 million, to what you had guided to on the fourth quarter call. I'm just wondering how we should think about the profile of this throughout the year if it wasn't as high as that because of your hiring that was pushed off to later quarters?

That's a good question, Michael. Part of the reason that the costs and expenses were lower than we projected this quarter was due to not hiring as many people as we planned. Part of the reason for that is because we had a delay in several new customers, logistics, on-boardings. So as those engagements come on, then we'll hire more people. But to answer your question specifically, I guess the biggest increases would be related to headcount ads for Comtrak logistics and truck brokerage, which is about $2 million a quarter. And included in the $2 million is the impact of only having the 45 new people part of this quarter. Agency commissions, primarily related to Mode, are projected to be up $2 million a quarter. That will only increase as Mode's gross margin increases. We expect IT cost to be about $1 million higher than we had this quarter. And our insurance cost will probably go up $0.5 million. So certainly, we won't add those heads until we have the business, but that's what's built in our plan. Michael R. Weinz - JP Morgan Chase & Co, Research Division: So this wasn't because of the weakness that you saw in the intermodal side? It was primarily the logistic side?

Correct. Michael R. Weinz - JP Morgan Chase & Co, Research Division: Okay, and really quickly, what was the change in length of haul on average for you?

1 mile.

Is it virtually flat?

Yes.

Yes. Michael R. Weinz - JP Morgan Chase & Co, Research Division: Okay. And then for Comtrak, are you seeing any weakness in the market where driver availability is becoming an issue?

Driver availability is always an issue. So we haven't seen anything dramatic. Usually the first quarter is always a good time for us to be able to garner more drivers, and we did have pretty good success this quarter. Certainly, you're reading more and more with CSA scores and with some of the upcoming regulations as far as hours of service that are coming up. They are definitely going to become at a premium. And so while the market has always been tight, we do believe that it's going to get tighter and that there will be drayage cost which will have to be increased and passed onto the clients. Michael R. Weinz - JP Morgan Chase & Co, Research Division: Okay, and just a quick follow-up on Comtrak. As you have growth in the local East market with the Crescent Corridor over the next couple of years, is it more that you would have to expand your driver pools in certain regions? Or would you have to enter new markets you don't currently already have a significant driver population?

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

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

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

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

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

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

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

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

Yes.

No, they do -- I mean, they're very focused on price. They're very focused on enhancing the margins so that they can get back to reinvest-ability with intermodal, which I think that they're pretty close to. Where it positions us is that we do need to be able to pass on any cost increases we may see. We can do that through a variety of things. One of the items is we can obviously increase prices to our clients in certain corridors. But price is not our only weapon that we have here in order to become more efficient and expand the gross margins. We can also do it through operating efficiencies. We can do it through better balance within our dray network. We can do it by handling more of our own drayage. We can do it by better turn times. So we have a lot of tools with which we can work. And I think right now that, from an overall cost perspective, that we're very well-positioned for the remainder of this year. And candidly, I think that our model is structured as such that we're very position -- very well-positioned for the long-term.

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

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

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

Your next question comes from the line of Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So just going back to volumes for a minute, I just want to make sure I'm understanding here. It sounds like so you walked away from some lower-margin business in the first quarter, but based on some bid activity and you're confident that we can more than overcome that and get back to that mid- to high single-digit volume run rate. Is that kind of what you guys are seeing?

That's correct. Scott H. Group - Wolfe Trahan & Co.: So maybe, Dave, can you give us -- are we starting to see that already in April? And maybe if you can give us a sense on April volumes? And where -- and the bids that you're winning, do you have a -- can you give us some color on what regions they're coming from? And then how we should think about the pricing and mix element of that growth, meaning can you get the volume and sustain 3%, 4% price/mix? Or does that have to slowdown?

I think I would say that April is really a continuation of the trends that we saw in the first quarter, and the wins that we've been experiencing or getting visibility to haven't kicked in as of yet. They will kick in during the second quarter and obviously in the second half of the year. We think it's going to be a positive pricing environment. We don't comment or give specific guidance on how much pricing we think we're going to get. We've been able to get increases in the majority of instances and we did get some price in the first quarter and anticipate that that's going to continue. Scott H. Group - Wolfe Trahan & Co.: Okay. In terms of brokerage, I think you said you're hopeful to keep margins there, margin percentages there relatively flat...

Yes. Scott H. Group - Wolfe Trahan & Co.: Was that comment more on you think the market is going to be flattish, or you guys are doing enough internally, or you think it's more you doing better than the market?

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

Right. And we're not sure. Obviously, there are some others in this marketplace that saw some compression in the quarter. We did not see that, not sure if that's mix. We hope that that's in part due to some good operating discipline with our new structure. Scott H. Group - Wolfe Trahan & Co.: All right. Are you holding that so far in the second quarter?

Yes. Scott H. Group - Wolfe Trahan & Co.: Okay. And then just last thing. Can you talk about kind of your Mexico strategy and where -- is Mexico getting reported in local West and maybe what percent of the business is Mexico?

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

Right. Yes, and Mexico does continue to be a headwind for us. It was a good grower in 2011 and the first part of 2012. It is a headwind until some issues get resolved between rail partners. And so, at this point in time, it's an area of our business that's been down the last 2 quarters. It was down 15% in the quarter. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: And do you have a -- can you -- is there any additional color, you feel comfortable giving there or when you think that gets resolved?

You know, it's just not up to us. And hopefully sooner rather than later.

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

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

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

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

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

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

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

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

Yes, yes.

Your next question comes from the line of Jeff Kauffman with Sterne Agee. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: This is Sal Vitale on for Jeff. Just a quick question. You gave a breakdown of the volume trends by region or by route, rather. Can you give a breakdown of what the volume breakdown is? So transcontinental, what percentage of your overall volume is that?

Sure, transcon is 20% of our volume, local West is 36%, local East is 33% and other, which includes Mexico, for example, is 10%. Salvatore Vitale - Sterne Agee & Leach Inc., Research Division: 10% percent, okay. And then the other question I had was on your agent fees, I noticed that agent fees came down pretty significantly year-over-year. Was there any trend that drove that?

Agency fees fluctuate with Mode's gross margins, so depending on what their margin, gross margin is, is how those fluctuate.

Your next question comes from the line of Nate Brochmann with William Blair and Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to go back a little bit just to the competitive environment and talk a little bit -- I mean, we certainly hear a lot of people are trying to get into "multimodal solutions" and sell more intermodal services even though it might not be their core bread and butter. Are you guys seeing some of the competition from some of those new entrants or some of the truck guys trying to do it? Or is the competition and the pricing issues more from maybe some of the traditional top players that you would normally kind of swap some market share with here and there?

There are some new players. This is a business of scale and scope and understanding how to effectively operate in an intermodal environment. It's not a simplistic thing for a new entrant. So the vast majority of the competitive environment is driven by the traditional players. And again, we include ourselves in that. And one other large provider we think is kind of -- are the 2 largest in the space and I think, at this point, the most efficient. And so again, it's just -- it's difficult for a new entrant with a 1,000 or 2,000 containers to really do much of anything because you can't necessarily market that. It's not a large enough network to have much of an impact on your customer base. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And I would absolutely agree with that, I just wanted to see if anybody was trying to make any dents in terms of stealing some business based on that to gain a little bit of scale, so that makes sense. And then in terms of the truck brokerage side, obviously, you guys are putting together now a couple of nice quarters after kind of restructuring that. What are you guys kind of like internally with your expectations and how much further do you think you need to get along the curve to really get where you want to be with that?

I think we've come a long way. Obviously, we've made a lot of major changes to the model, to the processes that support that model. We feel like we have moved up the learning curve pretty quickly, but there is certainly a lot of work in progress. But we've been encouraged with the service level that it's producing, the purchasing improvement that we've seen. And we're also encouraged by the pipeline that we see as well. So we remain confident that we're on the right track, but still a lot of work to do on the highway side, there's no doubt. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay. And then just one thing in terms of the pipeline of some of that new business that you're seeing in that segment. Are a lot of those coming from some of your current intermodal customers that you're able to go and have better discussions with because of the better service levels that you're at now? Or are those even outside your traditional intermodal where you're starting to have opportunities?

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

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

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

Yes, Matt, if the top line started to pick up, we certainly could get the operating margin north of the 2%. Basically if Mode grows top line 10% a year and just inches up in terms of gross margin as a percentage of sales, we guess we could get to the 3% in 5 years. But so it all is dependent on Mode's top line growth as well as enhancing the gross margin as a percentage of sales because you're right, most of the cost cutting is done.

Okay, makes sense. And I think someone mentioned in their prepared comments that you had added, I think it's 3 new sales agents. Just curious to hear about when those sales agents came on board, maybe the size of their potential book of business, those sorts of things.

Yes, I think it was actually 4 new IBOs and 3 new sales agents.

Right.

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

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

No, I definitely think that that's the case. We were going down a path with systems for one thing that really inhibited our ability last year, I think, to get people to sign up if they couldn't really see a system that they were going to be operating with. I think there was some reluctance. So I think we've gotten past that hurdle. And I also think that they are seeing that Hub can be a good host, that Hub can be a good partner. With the agent community, they're seeing that there's real value in being able to access Comtrak and being able to access the fleet. And that is our intention to let them continue to manage their business but to help them succeed. And so I think that enough time has gone by now that those that were thinking about coming with the organization can now see that it's good to be a Mode agent and that there's a lot of opportunity for them to grow their business if they become a part of our network.

Okay. And at this point are we dedicating more resources to attract incremental agents? Or are we -- maybe talk about kind of internally what you're doing to potentially grow that side of the business.

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

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

It depends on the environment. And yes, we want good-quality agents.

Right. They do have a target. It's just not a public target.

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

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

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

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

Yes.

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

Mostly driver count.

Network balance has come into play to a degree, but it really is securing drivers in the right areas and the right markets where we need them right now. And that's really the key right now.

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

Right, right. But that's something that we work at very aggressively, but you need the drivers in order to have to solve for the backhaul issues.

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

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

Your next question comes from the line of Kelly Dougherty with Macquarie Capital.

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

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

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

Yes, as Mark had said earlier, yes, I really do, and I agree 100%. We are working very collaboratively. I mean, we have 1 western rail partner basically. So we work very closely with them. We're committed to working with them, and 1 eastern rail partner. And again, with the Norfolk Southern, we have a very collaborative approach and together have been able to grow share pretty well over the years.

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

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

Fair enough. And can you just help us think about though, if capacity were to tighten and prices were to go up, there is more you can do on the internal operational improvement side of things in the truck brokerage business to maybe help offset that? Is that fair enough to say?

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

[Operator Instructions] Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

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

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

Okay. And then just a follow-up on that. I mean, as I think about the kind of the profitability of some of those lanes out of the gate, my assumption would be that, I mean, if you moving one load, and you don't have the balance that it's going to be as profitable if you're moving in 2 or if you're moving 50,000. How do you gate the process as far as ramping up in those lanes to kind of match getting the service and getting the volume up and also making sure that you're profitable?

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

Okay, good.

That's it from a rail perspective. It takes more time to develop density and realize the kind of returns on a per-train basis that they'd like to see.

Your next question comes from the line of Scott Group with Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: I just got 2 quick things. First, Terri, when I look at the net revenue margins, historically, from first to second quarter, it looks like they contract a little bit. Are you thinking -- but I think I heard you say you think they can be flattish. What's different that's allowing you to keep them flattish in second quarter? That's the first one. And then can you just talk in terms of Mode, how you're thinking about operating margins there, longer-term? Feels like there's some decent synergy showing up in the numbers here.

Sure, Scott. Yes, if you look at 2012, the gross margin as a percent of sales in the Hub segment was actually 10.9% for the first 3 quarters. So pretty consistent last year. That's why we think, again, it will be consistent this year with our book of business. And then in terms of Mode and improving the operating margin, 1.9% this quarter. We still think it will hover around that 2% for the rest of 2013. And how we get to 3% is by growing the top line. So for example, if we grow the top line 10% and the gross margin as a percentage of sales for Mode stays about what it is or just goes up a touch higher, it'd take us 5 years to get to that 3%.

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

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

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

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