Hub Group, Inc. (HUBG) Q4 2015 Earnings Report, Transcript and Summary

Hello and welcome to the Hub Group Incorporated Fourth Quarter 2015 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO; Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our CFO. [Operator Instructions] In order for everyone to have an opportunity to participate, please limit your inquiries to one primary and one follow-up question. Any forward-looking statements made during the course of the call represent our best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of such words 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 turn the call over to your host, Dave Yeager. You may begin.

Great. Thank you. Good afternoon and thank you for participating in Hub Group's fourth quarter earnings call. I'm joined today by Don Maltby, Hub's President and Chief Operating Officer; and our Chief Financial Officer, Terri Pizzuto. We had a strong fourth quarter, as business levels continued the positive momentum we experienced throughout the year. I'd like to emphasize that all of our business lines contributed to that success. Although the overall industry did not experience much of a peak, Hub's diverse customer base provided us with consistent volume that helped us to achieve our fourth quarter results. During the quarter, we were also focused on internal changes, as we continue to move forward with flattening our corporate organization. In January, we announced the transition of the management of our intermodal operations from our truck subsidiary to our customer service group. We made this change in order to allow the individuals that are responsible for servicing our clients to control our drayage allocations, as ultimately the control of the pickup and delivery is a major determining factor in our on-time performance. As a result of the realignment, several executive positions were eliminated. These individuals who left Hub are excellent Senior Executives who I know will do well and add value to other organizations. Geoff DeMartino, our new VP of Corporate Development, started on Monday. Geoff has 14 years of investment banking experience as well as several years in corporate development. I look forward to working with Geoff as we focus on making accretive acquisitions that will diversify Hub's service offerings. Last week we announced the closure of Hub Group Trucking's Los Angeles terminal. As many of you are aware, we've had a variety of challenges in that market. The bottom-line is that the business model of the Los Angeles terminal was not cost-competitive and despite our efforts, we've been unable to reduce the losses. As we transitioned the drayage model over the last several months, we coordinated with our outsourced draymen for the capacity required to service our clients' needs. The planning paid off, as this was the most fluid season I've seen in over a decade, with on-time performance increasing by over 200 basis points. We're certain the closure of the LA terminal will improve our economics while maintaining [excellent][ph] customer service. I'll now talk about the intermodal results for the fourth quarter. And this will be followed by Don, who will provide the details on truck brokerage, Unyson, and Mode. For the fourth quarter, our consolidated intermodal volume increased just over 2%. Local East was flat, while transcon volume grew 2%, and local West volume up 4%. We continue to see positive growth in Mexico, with a 24% increase in volume in the fourth quarter. And despite the intermodal industry slowdown and a surplus of truck capacity, we remain confident that our intermodal volume will continue to grow between 1% and 3% in 2016. A highlight of the fourth quarter was that our recently implemented load acceptance process paid dividends, as it improved our business mix through greater selectivity of acceptable business, thereby enhancing our service as well as our margins. Currently, overall rail service is back to the levels we experienced in 2013. For the fourth quarter, on-time performance improved 20% -- 24%, excuse me, on a year-over-year basis and 9% sequentially. While transit improved six tenths of a day year-over-year, fleet utilization was two tenths of a day better than last year at 15.4 days. Our fleet size is currently 29,200 containers. We intend to maintain or possibly slightly increase our fleet size in 2016. We will at a minimum be replacing 3,300 rail supplied containers with Hub fleet containers. We intend to onboard one half of the fleet order in the beginning of March, with the remainder coming during the fall peak. Pricing continued to improve slightly throughout the quarter. Again, we believe the new pricing tools we've been using this bid season have helped us to expand our margin, while growing our business and improving network efficiency by enhancing our ability to make better pricing decisions. We do expect a competitive environment in 2016. Although it's early in the bid season, we are seeing a slight uptick in volume from recent awards. Our focus, as always, will be on recovering our rail cost increases while continuing the work toward containing our operational costs. And with that I'll pass the call on to Don to guide you through the specifics of our other business segments.

Well thank you, Dave. Before reviewing our operational results, I'd like to take a moment to share with you that we continue to remain focused on our customers while immersing ourselves into all aspects of our business across all business lines, defining process improvements, and reinforcing our commitment to service. We have made several changes in our internal structure that will allow us to the opportunity to be more nimble and better poised for growth. One important milestone this quarter was that we successfully launched two new Unyson customers into our new technology platform, a solution into which we will continue to transition our customers over the next few years. As I mentioned on our last call, our goal for this initiative is to host all of our work streams within a single technology platform across all of our business lines. We look forward to continuing our efficiency gains as we move into 2016. Our new organization is aligned to provide better service, growth, and operational excellence. Now, let's talk about the business lines. Truck brokerage. Our truck brokerage unit continued to show strong results, posting a 14% increase in volume growth last quarter, a testament to the strength of our short and long-term strategy. As we move forward, the team will continue to focus on targeting core business growth, as well as expanding our value-added services and spot opportunities with both new and existing customers. At the same time, we continue to target the development of our strategic carrier relationships. I would also like to now acknowledge the exceptional job David Marsh and his team has done growing Hub truck brokerage business, despite the lingering market challenges. With all of this in mind, we are optimistic that the growth we experienced in 2015 will continue in 2016. Mode Transportation. Mode Transportation operating income grew by 22% this past quarter, which will represent the 15th consecutive quarter of increased income growth. Fueling our success in the quarter, we added 204 new customers, one new IBO, and one new sales agent, along with our IBO network adding a total of seven new salespeople. During the quarter, all of Mode's four key service lines experience growth and we again demonstrated success in cross-selling customers by shrinking the number of our top 200 customers that only buy one service. Our pipeline for new opportunities remained strong, along with a very strong recruiting pipeline for IBOs and sales agents. We remain bullish on 2016 and our ability to grow this business line. Unyson Logistics. During the quarter, we anticipated -- as we anticipated, we saw logistics revenue decline approximately 10%, largely due to several factors, including a key customer divesting a portion of its business, along with the loss of a sizable account in May of 2015. In spite of this, bottom-line growth contribution from our logistics business remains strong as we continue to provide creative logistics solutions that optimize freight shipments, producing significant customer savings and enhanced margin. In the fourth quarter, we landed a number of opportunities that will be on-boarded during the first half of 2016. Our pipeline remains strong for new business as we expect new business to be closed during the first half of 2016 with the on-boardings in the second half of the year. In addition to the new on-boardings, we have made great strides in expanding our solutions with existing customers that is allowing for organic growth. I'm also proud to report that Unyson was named the winner of the SMC3 Alliance Award for demonstrating collaboration and dynamic partnership with our customer Ascena brands. Further proof of our commitment to creating exceptional customer relationships and strong presence in the multi-modal retail vertical. As we move into 2016, the Unyson team will be focusing on organic growth with our existing clients, closing new opportunities, and improving our margin through operating efficiencies. We still anticipate topline headwinds for the first half of 2016 as we lack some lost business and wait for the new on-boardings to ramp up. However, we expect topline improvement for the full year 2016. Today, our logistics pipeline is filled with equal dollar revenue replacement but higher margin business. This, in turn, means the mix will change bringing a stronger contribution to the bottom-line. With this, I will pass the call on to Terri for the overview of our financial results.

Thanks, Don, and hello, everyone. As usual I'd like to highlight three points. First, we had an amazing quarter with every business line for both segments contributing to our best ever earnings per share of $0.63. Second, operating income increased 43% to $35 million. And third, the Hub segment gross margin was 12.6%, which is the highest it's been since 2009. Here are the key numbers for the fourth quarter. Hub Group's revenue decreased 3% to $890 million, due to lower fuel. Hub Group's diluted earnings per share increased 40% to $0.63. Now, I'll discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $669 million, which is a 4% decline compared to last year. Taking a look at our business lines, intermodal revenue was down 4%. Intermodal volume increased 1%. Price was also up. These increases were offset by a decline for fuel. The price increase this quarter was slightly higher than the third quarter. The volume growth was driven by a 5% increase in loads from retail customers, a 4% increase of loads from durable goods customers, and a 14% increase in loads from paper customers. These increases were partially offset by a 2% decline in loads from consumer products customers. Truck brokerage revenue was up 6%. Truck brokerage handled 14% more loads, but fuel mix and price combined were down 8%. Logistics revenue decreased 10%. This decline is due to losing one customer in May and another customer selling a portion of its business and then taking a portion of its business in-house. Hub's gross margin increased by $22 million or 35%. Gross margin as a percentage of sales was 12.6% or 360 basis points higher than the fourth quarter of 2014. Intermodal gross margin increased because of price increases, a 1% increase in loads, and more favorable mix. Intermodal gross margin as a percentage of sales was up 400 basis points because of price increases, improved assessorial management, lower dray cost, as well as effectively using our load acceptance optimization tool. Truck brokerage margin increased because of growth with targeted customer accounts. Truck brokerage gross margin as a percentage of sales was up 390 basis points due to more of value-added services, price increases, and better purchasing. Logistics gross margin increased due to providing additional services to existing accounts, and growth with new customers. Logistics gross margin as a percentage of sales was up 180 basis points due to operational efficiency, customer mix, and price increases. Sequentially, the Hub segment gross margin as a percentage of sales increased 170 basis points. Intermodal gross margin improved 190 basis points and truck brokerage increased 210 basis points. Hub's costs and expenses increased $13 million to $56 million in the fourth quarter of 2015 compared to $43 million in 2014. The increase relates to an $11 million increase in salaries and benefits and a $2 million increase in general and administrative expense. Salaries and benefits are up due to a $7 million increase in bonus, higher headcount, annual employee raises, and an increase in commission. General and administrative costs are higher because of an increase in IT cost, including cost for our transportation management system and satellite tracking. Finally, operating margin for the Hub segment was 4.2%, which was 150 basis points higher than last year's 2.7%. The last time our operating margin was this high was in 2012. Now discuss results for our Mode segment. Mode had a strong quarter. Revenue was $242 million, which is down 1% from last year due to lower fuel revenue. The revenue breaks down as $131 million in intermodal, which was up 1%; $77 million in truck brokerage, which was down 8%; and $34 million in logistics, which was up 3%. Mode's gross margin increased $4.9 million year-over-year due to growth in all three service lines. Gross margin as a percentage of sales was 13.4% compared to 11.2% last year, due mostly to a 135 basis point improvement in intermodal yields and a 390 basis point improvement in truck brokerage yields. Mode's total costs and expenses increased $3.7 million compared to last year, primarily because of an increase in agent commission. Operating margin for Mode was 2.9% compared to 2.3% last year. Turning to headcount for Hub Group, we had 1,597 employees, excluding drivers, at the end of December, that's up 15 people from the end of September. We also want to point out that our effective tax rate was 34.5%. We benefited from a lower tax rate, due primarily to revaluations of our deferred taxes because of changes in state tax [Indiscernible]. This benefit was about $800,000 or $0.02 a share. Now discuss what we expect for this year. We believe that our 2016 diluted earnings per share will range from $2.12 to $2.27. This guidance does not include one-time costs in the first quarter. We expect approximately $3 million to $3.5 million of one-time costs related to severance and shutting down Hub Group Trucking's LA terminal. This guidance also excludes the impact of any share repurchases. We anticipate rail service will continue to improve, and that utilization will improve one day in 2016. We expect gross margin as a percentage of sales for the year to range from 11.5% to 12.5%. The main levers to get to the high end are price increases, truck brokerage growth, Mode growth, and increased operational efficiencies. We think that our quarterly costs and expenses will range between $80 million and $84 million and that our effective tax rate will be between 37% and 38%. Turning now to the balance sheet and how we used our cash. We ended the quarter with $208 million in cash and $149 million in debt, including capitalized leases. We spent $42 million on capital expenditures this quarter. This includes $23 million for tractors and $10.3 million for containers, which were funded with debt. This brings total 2015 capital expenditures to $83 million, which includes $45 million for tractors and $21 million for containers. In 2016, we expect to purchase between 3,300 and 4,000 containers, and about 50 tractors. We're also investing in technology projects, including transportation management systems and satellite tracking. We have not decided if we'll finance the containers and tractors using debt or operating leases. If we finance them with operating leases, we estimate our capital expenditures will range from $25 million to $30 million. If we finance them with debt, we estimate our capital expenditures will range from $62 million to $73 million. And to wrap-up on a positive note, we're happy that our Board authorized a $100 million share repurchase program. We intend to aggressively execute on this plan, which could represent $0.10 to $0.15 of upside to our EPS guidance, depending on the amount and timing of repurchases. Dave, over to you for closing remarks.

Great. Thank you, Terri. In conclusion, we're very pleased with our overall 2015 results, and particularly the fourth quarter. It was a quarter in which every business line contributed to our earnings growth. And while the economy for 2016 may be somewhat more challenging, we believe that we're well-positioned to continue to grow profitably. And with that, we'll open up the line to any questions.

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from John Barnes from RBC. Please go ahead.

So, guys, thanks for taking my question. Hey can you maybe give us a little bit more color on your outlook for pricing, just given that -- with truckload rates having come down as far and sharply as they have, is there any pressure, or are you feeling any resistance to at least the rate increases necessary to offset those higher rail costs?

Yes, John. This is Dave. For better or for worse, intermodal pricing is always a little bit lagging on truck pricing. We did not see the types of price increases that the trucks get during the good times when capacity is tight. And we really don't see the declines like the trucking industry does, as well. We're less market-driven, if you will. So much of what our pricing does is dependent upon what competitors within the industry do. So, I would say that, sure, 2016 -- I think we're early in the bid season, but we've seen some moderately aggressive pricing. Will that continue? Possibly. But we certainly -- we've also, as I said in my formal remarks, that we have also seen a fair amount -- within the existing bids that we've had thus far -- that we've been able to hold our own. So, pricing this year, it will be more challenging. Of course there's a lot of other levers, as well, to margin. There's containing our operating costs, reducing our accessorial costs, reducing our empty miles. I mean we've got a lot of levers, and it's not just price.

Okay, all right. And then my follow-up is, with the local East traffic in the fourth quarter, I think you said was up about two. With Norfolk Southern discontinuing the Triple Crown product, that's thawing up some market share availability to the IMCs. Do you anticipate local East accelerating and maybe being the driver of intermodal volume growth in 2016? Is that where we should expect some growth -- maybe the outsized growth, to come from?

That's a really good question, John. The Triple Crown network, the way that Norfolk Southern had set it up, was so that it did not compete with their existing intermodal franchise. It's actually a better overlay with the CSX franchise. We, of course, have no relationship with CSX railroad. So, we have picked up some volume. I think it's a moderate amount. It might be --.

It's a moderate amount.

6,000 or 8,000 loads.

8,000.

8,000 loads. So, we are not -- and it was 300,000 loads plus within the network that they disbanded. So, we are not going to be a big winner. What I am hopeful of is that possibly this will take some truck capacity out of the market, as a lot of this, I think, will have been converted back to truck. And as far as the question as to whether our growth will be in the local East, actually in the month of January, local East was flat. We did grow slightly in some other areas. But we're seeing -- although it's not significant, some price competition within local East, because it's a shorter haul market, it's in high density markets like Atlanta to Chicago, and Atlanta to Harrisburg. So they are short lengths of haul, which when fuel is down, there's excess truck capacity, you'll see truckers going after that type of business.

Right. And you have seen the [indiscernible] trucks have gone after the local East business.

An enormous windfall for them, but we have seen some slight erosion.

Right.

Okay, all right. That makes sense. All right, thanks for taking the questions. Appreciate the time.

Thank you.

And your next question comes from Ben Hartford from R.W. Baird. Please go ahead.

Hey, thanks. Dave and Don, I guess this is for both of you. Don, having been in the organization -- back in the organization for a few months now, do you foresee any need for additional management structure changes or have you done what you think you need to do?

From a senior level, we are done with what we need to do.

Anything more, above and beyond that?

I don't think that we're going to see any massive changes. No, I think that we have -- and I'll let Don speak to this, as a lot of the organization falls under him. But for the most part, in intermodal, I think we're stable. If anything, we've added some new resources which I think are very, very capable; some really solid assets. Did you want to comment on --?

No, I think the senior level changes we made are final. It's a matter of now focusing on the efficiencies without that -- within the whole organization. We may see some changes throughout the year, but I would not say they'd be dramatic.

Okay. Terri, the buyback -- is it an either/or proposition with acquisitions? Obviously you haven't given specificity on the timeline. Good job getting it done, I suppose, getting the authorization out there. But is it a situation where you're going to -- you brought in some talent to look at acquisitions. You're going to evaluate those and depending on how those opportunities play out, then you'll do the buyback? Or could you do both tracks simultaneously?

We did some modeling, Ben, out for five years and we think we can do both to answer your question. So, we modeled doing $1 billion of acquisitions over five years as well as executing on the share buybacks this year. And that's what -- and with those results, our debt to EBITDA was still below 2. We have a lot of room.

Right. When we talked to the Board, that was one of their basic questions is can you do both? And we would not have gotten the authorization to aggressively buy back 100 million shares if, in fact, we couldn't do both, because we are very committed to go down the acquisition path.

And we're -- to buyback.

And we're very committed to -- yes, Terri.

You're absolutely correct.

And when we gave that guidance of $0.10 to $0.15 of upside to our EPS guidance how we computed that was we said we'll buy 75,000 shares a day. And it will take us the first quarter to get that done and that was our assumption on the $0.10 to $0.15.

Okay, good. And then last one, Dave, and Don as well, from a higher level perspective, there's been a lot of talk about the state of the U.S. economic cycle. I'm curious if you have a view on inventory levels. There's a lot of talk about retail inventories being a little bit elevated in 2015. Do you get that sense, talking to shippers? Is there any appetite or desire to -- for them to destock in the first half of the year? Any context on that?

Yeah, no. I mean inventory levels are high. We don't see -- and our customers are also very cautious right now. It is a very choppy economy. Capacity, as you well know, is abundant anywhere. So, yeah, we see it to be a tough 2016.

Okay. Thank you.

And our next question comes from Todd Fowler from KeyBanc Capital Markets. Please go ahead.

Great. Thanks. Good evening and congratulations on a strong results. Terri, the gross margin guidance that you gave, the 11.5% to 12.5%, that's consolidated or company-wide?

It is. Todd, that's right.

Okay. And if we wanted to focus on the Hub segment, what would your expectation for gross margins be in the segment? I guess I'm trying to get a sense that the real strong gross margins here in the fourth quarter. I know you gave some numbers on what drove that. But do you view that as being a sustainable level? Or were there some things in there that just really kind of went your way? I would think that truck brokerage was probably pretty favorable. I guess how are you thinking about Hub segment gross margins as you move through 2016?

Well, as we move through 2016, we hope to improve from where we were in 2015. And so in 2015, we ended up at 11%. We hope to improve on that. And to answer your question about -- on a consolidated basis, our margin in the fourth quarter was 13.1%. It would be pretty difficult for us to beat the margin we have this quarter. We had strong margins in all business lines, at both segments. And we had a fairly strong peak season, more opportunity for value-added services. Our margin depends on the freight environment, which impacts volume and pricing. We're going through bid season now. So, certainly, that 13.1% has seasonality in it.

Right.

Okay. Historically, I used to think about seasonality that you could see some gross margin expansion in 1Q. But it sounds like that the fourth quarter, things really are aligned for you. Maybe not to think about that carrying forward into 2016.

Right.

Okay. And then just for a follow-up, Dave, can you give your sense or an update on where that dray strategy is? It feels like that that's been something that's been moving around throughout 2015. And going back several quarters, there was a targeted level, and I think you have moved off of that. And it feels like that, this quarter, dray was one of the contributors to the results here. How are you thinking about internal versus external dray, going into '16? And particularly, if the environment is favorable from a capacity standpoint right now, if that changes, how does the model react if the market starts to tighten on the dray side?

Well, I think that, first and foremost, our strategy with dray has changed. We were very focused on having more and more internal, up to 70%, 75% of our overall drayage being handled by Hub Group Trucking. And I want to emphasize, Hub Group Trucking is very, very important to us, to our future. Because in many, many markets, it is far more competitive than any other way to pick up and deliver our customers' products. With that being said, that's not true in all markets, and that's not true in all lanes. I mean in the Los Angeles market, we had a high-cost operation in what is a low-price market, and it just was not sustainable. We were losing money on a monthly basis. We worked it hard. We attempted to change the model to be able to make it more competitive. It just didn't work. That is the only area where you'll see us closing a terminal. Every other terminal is, in fact, profitable versus what we can do with the outside. But so what we're going to do is focus on -- number one is always making sure that our customer service is that we're on time, 100% of the time. That's not possible, but that is our focus. So that's the first criteria. But then we do look at costs. And they're just plain and simply is always going to be some markets that outside drayage is less expensive, as they may have a lot of velocity in that market. They may have a backhaul we don't. And so, with that, we're going to take advantage of that. So we don't have an exact percentage that's a goal, because we're going to do what's right on a case-by-case basis. Again, making sure that, A, service is there; but B, the price is going to be there as well. So, the 70-75%, yes, you are absolutely right, Todd. It's out the window. Last quarter, I believe we were at 61%, so it had actually dropped 700 basis points year-over-year. And I don't think you'll see that kind of a downward trend again this year, but it will move around a bit. And, again, we're going to do it to optimize the service and cost.

To your point, on the growth side of it, is being able to flex. We want to be able to flex in markets by using outside drayage. So, in the past, it was 100%. So what we're finding in markets is that we want to balance our trucking with being able to go on the outside, to be able to flex to our customer demand.

Okay. Incidentally, is it easier to flex if you have that relationship in place? Is that kind of the message from that comment?

Absolutely.

It is because you're an existing large client, which makes you a lot more important than if you're calling them a spot basis.

Okay. All of that makes sense. I appreciate the time and congratulations again.

Thanks Todd.

And the next question comes from Kelly Dougherty from Macquarie. Please go ahead.

Hi, guys. Thanks for taking the question. Just a quick clarification, I think you talked about the macro backdrop in 2016 could look tough. So I guess that means you're pretty upbeat more based on the internal initiative you've got in place, alerts it's the pricing tool or a load optimization, more than the macro backdrop. So it would be great if you could walk us through what some of the cost improvements that you expect from those different initiatives might be this year.

Yes, Kelly. The load optimization tool that we have, that allows us to take the most beneficial freight for the network; looking at what requirement we've give into our customer as to how much volume we're going to have. It looks at profitability. It looks at market constraints. So that is a driver. Certainly improved accessorials are a driver. Probably the biggest driver is lowering our dray costs. And as Dave just talked about, we intend to again go through a sourcing event this year. And we think that we will be able to lower our dray costs. And then the final bucket of costs that we'd like to reduce is reducing our empty miles. We need to make some progress there. As well as with utilization, with the satellite tracking devices that we have on the containers, and the improved rail service, we should be able to improve utilization by one day.

Right. And I would just add that also I think that our realignment of the organization so that Hub Group Trucking is no longer handling the intermodal operations, but that goes with customer service who, A, we think is going to be more responsive to our clients; but B, we think will be able to be get better economics out of it as well. So it's really a very solid win. And, again, it's something that we're fully prepared for. It's fully implemented, at this point in time.

That's great, thanks. And just switching gears a little bit to talk about the brokerage business. How do you think about the outlook there this year against what looks like to be relatively loose TL market, at least in the first half? And how do you think ELDs may impact that business? And is that something that that's longer tail that's probably more of a 2017 event? Or is it factoring into how you are talking about things with customers already, at this point?

Yes, good question. Obviously it's a tough market out there we said from -- but at the end of the day, we've stayed with a strategy I'd say the last few years on truck brokerage, where we have identified what we need to do to be successful. And you are seeing the results of that. So, A, we're focused on what we can do for our customers; B, we're selling solutions to them; and, then, C, we have targeted accounts that we have been able to land in 2015 that will carry into 2016, and allow us to grow with new customers that we're going to be on-boarding. So we're bullish on truck brokerage.

Don, did you want to elaborate a little bit, because for so long we were mostly contractual in this transactional component?

Yes. So, 80% of our business on the truck brokerage side is contractual business, and we found that we were locked in certain markets. So in early 2015, we opened up a transactional operation that really took off. So, we now have a balanced business line across our truck brokerage model that is really allowing us access into customers that we could not get into before.

And is that 80% number you want to keep, or is it something more 60/40, 50/50, or kind of the transactional stuff is above the market?

We're going to grow both lines. I'd say it balances out around 70/30 at the end of the day. But we're going to grow each business segment has equal opportunity to grow.

Okay, great. Thanks very much.

Thank you.

And the next question comes from Kevin Sterling from BB&T. Please go ahead.

Thank you. Good afternoon. Congratulations on a nice quarter.

Thank you.

Thanks Kevin.

Dave, what kind of acquisitions are in your sights? I think Terri had mentioned you guys are, maybe over the next five years, looking at possibly $1 billion worth of acquisitions. If you had your wish list, what's at the top of your list to grow your platform?

Interestingly, we did a survey not too long ago, and with one of the questions with our clients was what other services would you like to see Hub enter into? The number one was dedicated trucking. So that is certainly an area that we have the most -- the highest degree of interest in, and want to proceed in. We do believe the dedicated not just because of what our clients want at this point in time. But with the pending driver shortage with ELDs, and the amount of regulations that are coming into the trucking industry, that's a segment that it's going to continue to grow; it's going to grow well for a long time, we believe. Some of the other areas -- well, the second that the clients wanted was for regional trucking, and we are not doing that. We just think that that's a difficult business model that we're not equipped for. But also other logistics services that are more non-asset-based. And you do have to pay a higher multiple for those, but obviously they don't require as much capital on an ongoing basis. And that could be transportation management. It could be cross-docking. It could be reverse logistics. There's such a wide, broad definition of logistics and logistics opportunities, we'd be very open to any and all of those. And of course, truck brokerage …

That has size.

Right, that has size; it has systems that would assist us in continuing to grow that business, would be a great deal of interest, as well.

Very great. Thank you. And last question here. A lot of talk about pricing and I know you're not seeing the pricing weakness that the truck market is seeing. Can you maybe talk a little bit about better rail service, and how that may be offsetting some potential slowing highway conversion? And now how your customers see that rail service has improved, and maybe slowing the conversion process.

Kevin, thank you, yes. That's a really, really good point, because it does set us up because what our clients want, we've always found, is it's not necessarily speed. It's a small percentage that require that. For the most part, it's consistency. And as the railroads are much more on time right now, as I said in my formalized remarks, we're back to 2013 service levels. That type of consistent service is incredibly important for our large customers. In addition to that, just from a selfish standpoint, if you will, an efficient network, and on-time network, makes us so much more efficient. It's extremely costly from internal operations for us to operate in an environment when we don't know when the train is going to arrive; we don't know when to schedule appointments. We end up with excess costs for accessorials, for chassis costs, disappointing our clients and rescheduling. Rescheduling takes more people. There's just so much, that the costs are overwhelming, in fact, when service is bad. So that's a major impact for us in the coming year, we believe; and something our clients also -- they are more willing -- they look at intermodal, the service is consistent, they are more willing to commit their volume and their product to us.

Got you. No, that makes sense. Thanks for your time this evening and congrats on another nice quarter.

Thanks Kevin.

And the next question comes from Justin Long from Stephens Incorporated. Please go ahead.

Thanks, and congrats on the quarter. First question I had was on rail cost increases. Could you maybe talk about the visibility that you have to what those rail cost increases will be this year? And on that note, thinking about the 2016 guidance, does it assume that you cover those costs with price increases?

As far as the price increases from the railroads, we are completed with our Eastern carrier. We understand what those costs will be. And the Western carrier, we are still uncertain, although I think we have a pretty good idea of where we stand with that. And with the projections -- I'll let Terri speak to that, as far as from a budget perspective, what we have included.

Yes, with the guidance that we have from $2.12 to $2.27, we assumed we did cover the cost increase from the rails with a price increase, when you factor in a little bit of the cost savings that we had from the other initiatives that we're working on.

Okay, great. So, if you look at intermodal margin, specifically in the Hub segment, what are you assuming for the year-over-year change in 2016?

We don't give guidance into that specifically.

Okay, fair enough. And I also wanted to ask, you mentioned the benefit of seasonality in the fourth quarter. And it seems like you saw a pickup during peak versus a lot of other companies that didn't see much of a pickup. So I wanted to ask, what do you think drove that discrepancy? And is that driver to the relative outperformance something you think is sustainable in 2016?

Well, I think that it's our customer mix, is really the key. We're 37% retail. And it so happened to flow that our major retail customers were peaking at slightly different times which A, it helps us with just our flows of equipment, et cetera; and allowed us also to contain some of our cost that we incur in a traditional peak season. So, again, it's customer mix. We're very fortunate we've got some great customers, many of which ship a lot of product in the fourth quarter.

Okay, great. I'll leave it at that. Thanks for the time.

Thanks Justin.

And the next question comes from Scott Group from Wolfe Research. Please go ahead.

Hey, thanks good afternoon, guys.

Thanks Scott.

So, Dave, I think you mentioned that local East volumes were flat in January. Do you have a total intermodal volume number for January?

It was down a little bit, with one less business day. So if you factor in the business day, it was actually up a bit.

Yes, it was not a lot, like 1% to 2% it was up, on a same basis day level.

Exactly.

Okay, perfect. So, just going back to the question on the rail cost increases. So I know you're not going to give a number. But maybe directionally, can you share with us if you are seeing similar, higher, or smaller cost increases from the rails this year? I'm trying to get at, do they understand that it's a tougher pricing environment for you, and you have less sort of cost increase? Or is it the rails are the rails, and that's a separate panel?

Well, as you know, Scott, we've got some great rail relationships with UP and Norfolk Southern. But they are also facing certain pressures. Their energy, obviously, is down substantially. It's really intermodal and auto that’s driving their business right now, and allowing them to make the capital investments that they need to. Long and short of it is, is that the price increases are slightly higher than what we would've seen last year.

Okay. That's helpful. Terri, can you help us think about the difference in brokerage versus intermodal gross margins, just on an absolute basis? You say you've got this -- seeing a little bit better growth in brokerage than intermodal right now, so that helps gross margins. But what's that delta on gross margin?

Our highest-margin business is still truck brokerage, and then intermodal, and then logistics.

And can you share order of magnitude, or not really?

Not really. We don't disclose the margins by segment.

Okay. And then just last question. So, Dave, you mentioned dedicated as kind of the primary focus on M&A. So that comes with a different return and cash flow profile than kind of your core business. How do you balance what the customer wants versus returns and cash flow?

That's a very good question, Scott. And we run the cash flow analysis on the set business very closely. We do believe that -- and we realize there is greater asset intensity. But at the same point in time, we think it will make us a stronger, better supplier for our clients. And then, over the long run, we really need to be in that space in order to be competitive. So, we’ve looked at the cash flow; we believe it's acceptable. So, again, we feel very strongly that it's a necessary part of our portfolio.

Okay. All right, thank you for the time, guys.

Thanks Scott.

And the next question comes from Brandon Oglenski from Barclays. Please go ahead.

Hi. This is actually Eric Morgan on for Brandon. Thanks for taking my question. I was wondering if you could give us your view on rail M&A specifically. Since service is so important to your business, how do you think a merger of two Class I railroads would impact service during the transition, and a little bit longer term?

I think, A, it's our opinion, at this point, that it's unlikely to happen. I do think if you ended up to go down that route, that ultimately there would be two transcontinentals probably for North America, period. If you look historically when there have been railroad mergers, historically service levels have declined. And I think it's very difficult and very complicated to try and combine the systems, the IT systems, as well as just the infrastructure within the two rail systems, regardless of it's an outright acquisition or a merger of equals. So, that's kind of where we are. I have not seen a seamless rail merger. But needless to say, that is something that the STB would have to consider. It doesn't appear as though the STB is of a mindset, at this point, that something like that would move forward.

Great. Appreciate it.

And the next question comes from Alex Vecchio from Morgan Stanley. Please go ahead.

Good evening. Thanks for taking the question. Dave, I just wanted to come back to the M&A topic. Can you maybe talk a little bit with respect to the kind of size -- are you looking to -- there's obviously the Journal article quoting that you are looking for -- to do one large acquisition per year, between $150 million and $350 million. But does that mean that you would really not look at any kind of smaller tuck-ins, or are you kind of hard set on that one larger transaction per year? And then with respect to the discussions you are having with potential targets right now, are you finding that, just given the valuations have come down across the space in the last few months, there's a bit more reluctance to sell here? Or is that not happening so much? Maybe a little bit more color on the dialogue you are having right now with potential targets would be helpful.

Okay. That's a fair question, Alex. In all candor, at this point, there's not a lot of discussions. We've been not necessarily putting it off but we've been waiting for Geoff to come on board to really guide us through the acquisition process, and then through the integration process. As far as size, we would like -- we've always had some basic things that we have looked for in acquisitions that it's not a fixer-upper, there's a good cultural fit, immediately accretive, and a strong management team. Our preference would be to get something of size, and then have add-on acquisitions. If something of size was not available, yes, we would be open to a roll-up strategy, with the first one being a very solid operating entity with really good systems. So we could go either way. Our preference would be for a larger entity to give us a foundation.

Okay, that's fair. And then I know you're focusing on expanding into dedicated, primarily. But would you be also willing to maybe expand your intermodal presence a bit, if an interesting IMC opportunity came up? Or is that really not what you're looking for?

Dedicated is certainly the one at the top of the list, but that doesn't mean that that has to be the first acquisition that we make. We could be interested in some intermodal acquisitions. There's not a lot of those out there that would be of interest, in all candor, but there is a couple. And certainly if there were some good logistics opportunities available and I think that's probably a broader universe if that came first, we'd be very open to it because we do want to get into dedicated, but we're not going to pay some ridiculous number to get into a single entity. So, we will be focused on dedicated, but also on logistics opportunities; highway opportunities, as far as truck brokerage; as well as intermodal opportunities, if they, in fact, would raise their heads, or if Geoff, through his efforts, finds ones that of interest.

Makes sense. Appreciate the time. Thank you.

Thank you, Alex.

And the next question comes from Matt Brooklier from Longbow Research. Please go ahead.

Hey, thanks, good afternoon. The LA terminal closure, when did that take place?

We announced it officially as of January 29.

Okay, so it took place in first quarter. I was just trying to get a sense for if there was any impact on 4Q, from a margin perspective. With the closure of that particular terminal, is that a net benefit on a go-forward basis? And if it is, if it's meaningful, are you able to talk to what the benefit could look like this year? Because it sounded like it was running at a loss, and that was the reason for closing it.

That is correct. It was running at a loss. We're not going to disclose the amount of the loss, at this point in time. But it was running at a loss, so it will be a net benefit going forward. I think the one thing that you may have seen in the fourth quarter that you had not seen in the prior year was that we went from being 70% company deliveries in Los Angeles to 20% in 2015. And, yes, that did improve substantially the economics. But still, even at that level of only handling 20% of our business, it was a substantial loss at the terminal.

Okay. So, structurally, as you migrated away from doing company moves in LA during fourth quarter, there was some benefit. You just hadn't officially closed the terminal, at that point in time.

That's exactly correct. And there was some benefit in -- not to go back too much through ancient history, but in 2014, there was a lot of excess costs, as we had to fly drivers in from all over the country.

Right.

Because of a shortfall in driver capacity. We had a lot of added expenses that we did not incur in 2015.

Okay. Are there any other terminals in other cities where you are contemplating potentially going away from company moves, and more to this outsourced model, if it would be beneficial?

Well, as Terri had said, is that we are having some bid activities throughout the US. My prediction, at this point in time -- and this is, in fact, based at this point -- but is that our Hub Group Trucking will grow in 2016. I do think that we will have some additional outsourcing in certain markets. But I think for the most part, in the aggregate, it's going to grow. And it's a very important part of our intermodal strategy going forward.

Okay. So it's a part of the strategy, and it doesn't sound like there's the need for drastic measures, at this point, to potentially change the profile of your terminal structure. Last question. There's been a number regarding potential M&A going forward. Does it make a difference the type of the model? And I say that with respect to -- as you are looking through deals, are you looking for something that is based upon a foundation, where it's more company-owned offices, or something that's more kind of the sales agent model, i.e., the Mode acquisition? Because the Mode acquisition really changed kind of Hub's profile, given the fact that you guys were a company, and Mode was the sales agent in non-company-owned offices. I'm just curious to hear your thoughts on the potential second go-around of a meaningful acquisition, if the operating structure of that particular target matters, or does it not?

I think we're very open to structure, and would take a look at it. The mode acquisition has turned out extraordinarily well for Hub. But also for the agents, because what we brought to the agents is -- they can still remain independent. They are one of the -- in fact, one of the major users of our largest competitor in intermodal, which is Devine. But they, at the same point in time, can come back to Hub and rely upon us to furnish them the assets -- whether it's the tractors, the containers. And so it's really the best of both worlds for the Mode agents, as they remain independent and yet they have a parent who has assets, if in fact they require them.

Yes, so we're open to ideas for open to suggestions on the agent network versus a company firm, versus a company. It's worked out.

Okay. Congrats on the quarter. And, as always, appreciate the time.

Thanks Matt.

Thank you.

And the next question comes from Matt Young from Morningstar. Please go ahead.

Thanks, good afternoon. I just had one quick question here on intermodal. With fuel where it is, and excess truckload capacity, I guess you could say with the loosening capacity, where would you say the optimal length of haul cutoffs is trending for truck to rail conversions? Just on average. I'm guessing that that length of haul has come up recently with those other factors I mentioned.

That's a really interesting question, Matt, because our average length of haul is over 1,600 miles. But we, of course, do have a lot of local East. What we are seeing is in the -- is more competition in the 600 to 750-mile range at this point. Again, the Chicago-Atlanta, Chicago-Harrisburg, where there is large densities and relatively short mileages. And it's two reasons, is A, we're seeing that because of the low cost of fuel; and, B, because of the surplus of equipment and drivers. So that combination -- this is not the first time that we've seen that. That's a normal trend in any kind of a soft -- or softer, I should say -- freight market in which fuel prices are somewhat contained.

That's fair. So then the battleground or the opportunities, often show up in the under 800-mile length of haul?

That's exactly right. Particularly because if the -- in fact if the customer's location, if they are 100 miles from the ramp, versus 20, that will impact it because obviously a truck, it doesn't mean that much it increases. In intermodal, it increases the dray quite a bit. And so, yes, it is that 800-mile length of haul which really is the battleground.

Great. That's helpful. And I just had one quick follow-up on -- for the Hub Brokerage pricing to customers, was that up or down, if you exclude the fuel impact?

Well, you have to exclude mix, too. A lot of our business is different than last year, so it's really hard for us to measure that. And so I couldn't tell you. I'm sorry.

Length of transactional to contracts.

Yes.

And new business.

Exactly.

Okay, all right. Thanks. Appreciate it.

And the next question comes from Ben Hartford from Baird. Please go ahead.

Just as a quick follow-up, Terri, it looks like -- or maybe correct me if I'm wrong -- but the guidance for the -- during the third quarter for the fourth quarter, for overhead -- or for operating costs was, what, $73 million to $74 million. It came in at close to $81 million. You provided some context to incentive comp. Is that the variance? Do I have those numbers correct, and is that the variance?

It sure is, Ben. That's exactly right. It relates out to bonus. And sequentially, if you were to look Q3 versus Q4, about $6 million of that change is bonus, because we achieved a higher bonus than we thought we were going to, because all the business lines really beat our expectations.

Right.

So that was a good thing.

Okay. Well done. Thanks.

And this concludes the Q&A session. I will now turn the call back over to David Yeager for closing comments.

Great. Well, again, thank you, everyone, for joining the call. We are pleased with 2015, the results on that. Of course, very importantly, 2016, we do see that it's going to be somewhat more challenging. But we really firmly believe that we are well positioned to hold our own on price, as well as increasing market share as we do have a very strong presence within the intermodal market with our assets, with our great rail partners. And intermodal, over the longer-term, is very well positioned, just as an industry-wide, as the driver shortage is real. It is something that's coming upon us; and, again, intermodal is positioned very well there. And our other lines of business -- our highway operation, which had a tremendous year, and is really poised for growth in 2016, as well as Unyson, which is a great pipeline and we believe it's strong. And that coupled with Geoff coming on board to help us with accretive acquisitions, and our commitment towards the stock buyback, I think it just gives us a lot of energy within the organization, moving into this year. So, again, thank you for joining us on the call. And if you do have any questions, Terri, Don, and I are always available for comments. Thank you.