Hub Group - Q4 2013
January 28, 2014
Transcript
Operator (participant)
Hello, and welcome to the Hub Group Incorporated Fourth Quarter 2013 Earnings Conference Call. I am joined on the call by Dave Yeager, Hub's CEO, Mark Yeager, our President and Chief Operating Officer, and Terri Pizzuto, our CFO. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 and 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 turn the call over to your host, Mr. Dave Yeager. You may now begin.
Dave Yeager (CEO)
Great. Thank you for the introduction, and welcome to our earnings call. Our earnings for the fourth quarter were relatively flat year-over-year, despite an increase in revenue of 11%. Consolidated intermodal revenue for the quarter increased 5% on a 6% increase in volume. The peak shipping demand was somewhat softer than we had originally forecast, and pricing within the intermodal industry continues to be quite competitive. Consolidated truck brokerage revenue for the quarter was also flat year-over-year. During the fourth quarter, truck capacity was at equilibrium with demand. This type of environment continues to be a challenge for brokerage margins as well as its value proposition. I'm pleased to say that Unyson Logistics posted outstanding performance with a revenue increase of 72% year-over-year. This is a direct result of onboarding new clients.
We believe that the value that customers receive from Unyson validates our commitment to the model. With that, I'd like to turn it over to Mark to go into more detail about performance in each business line.
Mark Yeager (President and COO)
Thanks, and good afternoon, everyone. As Dave described, we had a solid quarter despite dealing with a challenging market. Consolidated intermodal volume growth was 6%, with Hub segment growth of 4% for the quarter and Mode Intermodal growth of 12%. For the Hub segment, Local West was our fastest-growing region, with volume up 8% for the quarter. Local East volume increased 4%, while the Transcon business bounced back and grew by 2%. Volume out of Southern California has been essentially flat and slower than anticipated. Mode saw 4% growth in Local East, 19% growth in Local West, and 2% growth in Transcon. We continue to see a difficult pricing environment in intermodal but are taking steps to improve margins. We are currently changing processes for equipment allocation, prioritization, and substitution, including the elimination of higher-cost drayage and equipment alternatives where appropriate.
We're refining cost projections for pricing and changing how we define and allocate transportation costs to existing business in order to better evaluate network contribution. We are aligning sales compensation to emphasize margin rather than revenue, and this quarter, we'll be launching our new load planning and dispatch system. Longer term, we are looking at yield and network optimization tools to help us gain a better understanding of the overall marketplace as it relates to our network. And as previously announced, work is underway to deploy a satellite container tracking and monitoring platform. We piloted the devices with 50 containers and are now in the process of installing ORBCOMM's devices in 500 additional containers. This will provide greater visibility and further improve our equipment utilization. We closed out the year with a fleet count of just under 26,000 containers.
Despite an influx of additional capacity during the quarter, some erosion in rail service, and several adverse weather events, the fleet continued to perform well. Fleet utilization was 14 days in the quarter, which is the same as it was in 2012. For the full year, fleet utilization was 13.5 days in 2013 versus 13.7 days in 2012. Moving on to Comtrak, we continue to see solid progress in driver growth. We added 96 drivers during the course of the quarter, bringing our year-end driver count to 2,791. Since the beginning of the year, we have added 317 drivers, growing our driver network by 13% over 2012. In 2014, we are planning to further expand our driver recruitment efforts and add 400 drivers.
Comtrak moved 13% more Hub freight during the fourth quarter of 2013 compared to 2012, and finished the year handling 70% of Hub's intermodal freight. While this was short of our goal of 75%, it was a substantial improvement over the 66% comparable of 2012. We are investing in lightweight day cabs and have received 130 of the 200 tractors we ordered last year. This equipment will allow us to handle heavier freight with better fuel efficiency. We will be opening a new terminal in Salt Lake City this quarter, bringing our total to 29 terminals. Work is also underway to rebrand Comtrak as Hub Group Trucking. This change helps promote the Hub brand and reinforces the importance of street operations to our enterprise....
We continue to enjoy success building strategic relationships with our customers. In 2013, we had 70 $10 million customers, up from 62 in 2012. We received several customer and industry awards over the course of the quarter, including the 2013 Excellence Carrier Award from LG Electronics, a special recognition award from Textron, and an Alliance Award from our multimodal collaboration with Macy's. We also received C-TPAT certification, which should help us further develop cross-border business with our security-conscious customers. Challenges in the truck brokerage market continued in Q4. While we saw sequential margin improvement, spot and project work remained soft. Hub truck, truck brokerage volume grew 5% for the quarter, and revenue increased 1%. Mode did not fare as well, with a 4% volume decline and a 1% revenue decline for the quarter.
Unyson Logistics continued to expand its client base, growing faster than any of us anticipated. Several new clients entered Unyson's top 10 account list, while we also expanded service and volume with existing customers. This led to fourth quarter revenue growth of 72%. For the year, Unyson grew 38%, putting its compound annual growth rate at 23% over the past five years. Unyson is well positioned to exceed our $500 million goal for 2014. Mode's logistics business grew 18%. Within those two segments, consolidated LTL grew to $80 million for the quarter, a 61% increase over last year, and $280 million for the year, representing growth of 42%. Mode Transportation produced top-line growth of 8% in the fourth quarter and 6% for the full year.
During the quarter, Mode added one new IBO and four new sales agents to the network. For the year, Mode is up seven IBOs and 17 sales agents, and we enter 2014 with a strong pipeline of potential additions to the Mode team. Finally, we successfully relocated Hub headquarters and its nearly 500 employees to our new building in Oak Brook, Illinois. Thanks to a dedicated team and a well-planned effort, the move went off without incident. Our new building is environmentally friendly and uniquely adapted to enhance collaboration and productivity. We anticipate obtaining LEED Gold certification, making Hub Group Headquarters one of the largest LEED Gold-certified commercial buildings in Illinois. With that, I'm going to pass the call on to Terri for financial highlights.
Terri Pizzuto (CFO)
Thanks, Mark, and hello, everyone. As usual, I'd like to highlight three points. First, Logistics hit the ball out of the park with 72% revenue growth. Second, Mode delivered a 13% increase in operating income. And third, we held our own in a competitive intermodal pricing environment, and we think we are taking the right steps to improve gross margin. Here are the key numbers for the fourth quarter. Hub Group's revenue increased 11% to $885 million. There was a $2.9 million non-cash impairment charge related to changing Comtrak trade names to Hub Group Trucking. All numbers that we're going to report are adjusted to exclude that charge. Hub Group's earnings per share was $0.50, compared to $0.51 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 $684 million, which is an 11% increase over last year. Let's take a closer look at Hub's business lines. Intermodal revenue increased 3%. This change includes a 4% increase in loads. Price was up, but was more than offset by the impact of lower fuel. Each of our three largest customer segments grew. Loads from retail customers were up 10%, loads from consumer products customers increased 5%, and loads from durable customers were up 3%. Truck brokerage revenue was up slightly. Truck brokerage handled 5% more loads. However, price, fuel, and mix combined were down 4%. The average length of haul for a truck brokerage shipment decreased 7% to 584 miles. Logistics revenue increased 72%, which beat our expectations.
The increase is due to growth from new customers that we onboarded earlier in the year. Hub's gross margin increased by $661,000. Logistics gross margin growth was partially offset by a decline in intermodal and truck brokerage gross margin. Logistics gross margin growth is from new customers. Intermodal margin was down, as volume and modest price increases were offset by higher transportation costs and unfavorable mix. Truck brokerage gross margin was down because of unfavorable traffic mix, primarily less project work. Hub's gross margin as a percentage of sales was 10.3%, or about 100 basis points lower than the fourth quarter of 2012. Intermodal gross margin as a percentage of sales was down 90 basis points because of lower peak season surcharges and a change in traffic mix.
Volume off the West Coast was slightly above last year, but lower than normal seasonal trends. Logistics gross margin was down 175 basis points due to the fee structure of our new business. Truck brokerage gross margin was down 50 basis points due to unfavorable mix, including less high value-added services, as well as a tough pricing environment. Hub's costs and expenses increased to $44.9 million in 2013, compared to $42.2 million in 2012. Salaries and benefits were up about $1 million. General and administrative expense increased about $2 million. Finally, operating margin for the Hub segment was 3.7%, which is 80 basis points lower than last year's 4.5% margin. Now I'll talk about results for our Mode segment.
Mode had a strong quarter, with revenue of $214 million, which is up 8% over last year. The revenue breaks down as $105 million in Intermodal, which was up 12%, $77 million in truck brokerage, which was down slightly, and $32 million in logistics, which was up 18%. Mode's gross margin increased $1 million year-over-year, due mostly to growth in Intermodal gross margin. Gross margin as a percentage of sales was 11.5% this year, compared to 11.9% last year. Mode's total costs and expenses increased $500,000 compared to last year due to an increase in agent commission. Operating margin for Mode was 2.2%, compared to 2.1% last year.
Turning to headcount for Hub Group, we had 1,460 employees, excluding drivers, at the end of the year. That's up 47 people compared to the end of September. We added 41 employees because of a change in our corporate structure in Canada. Now I'll discuss what we expect for 2014. We're comfortable that our 2014 diluted earnings per share will be within the current analyst range of $2.01-$2.15. We think we'll have 37 million weighted average diluted shares outstanding. Our goal is to improve gross margin as a percentage of sales from the 11% that we had in 2013.
Headwinds include the challenging truck brokerage market and the mixed impact of growth in logistics, since it's our business with the lowest gross margin as a percentage of sales. Our costs and expenses will probably range between $68 million and $72 million a quarter. We'll spend approximately $2.5 million to complete our strategy project, primarily in the first quarter. Turning now to our balance sheet and how we used our cash. We ended the quarter with $69 million in cash. We spent $111 million on capital expenditures this year, including $45 million in the fourth quarter. To recap the year, we spent $59 million on containers, $26 million on the new corporate headquarters, $14 million for tractors and trailers, and the remainder for technology. We haven't finalized our capital expenditures for 2014.
Estimated capital expenditures for 2014, excluding any new container purchases, are between $60 million and $80 million. The majority of that spend is for tractors. We haven't made a decision on our new container order. During the quarter, we paid $13 million to buy 351,313 shares of stock, completing our share buyback authorization. And with that, I'll turn it over to Dave for closing remarks.
Dave Yeager (CEO)
Great. Thank you, Terri. In conclusion, we are pleased with this solid finish to a challenging year. Much was accomplished. Earnings per share for the year increased 5%, while revenue grew 8% in 2013 to just under $3.4 billion. We continue to grow intermodal volume as contracts surpassed 2,700 drivers while moving 70% of Hub's drayage. Truck brokerage reported minor growth in an unfavorable market, while Unyson Logistics increased managed spend over $1.5 billion. Mode continued to grow and exceed bottom-line expectations, and we finished construction of our new corporate headquarters on time and on budget. As we look to 2014, we expect to deliver another year of solid operating performance. Overall, our strategy is working well, and we're working diligently to enhance our market position.
We remain optimistic about our ability to improve Intermodal margins and to continue to expand market share in all lines of business. With that, Terri, Mark, and I are happy to take your questions.
Hello? Are you there?
Operator (participant)
Ladies and gentlemen. Yes, ladies and gentlemen, at this time, if you would like to ask a question, please press star one. Questions will be taken in the order received. Please press star one to begin. Our first question will come from the line of Ben Hartford with Baird. Please proceed.
Ben Hartford (Senior Equity Research Analyst)
Nice quarter. Maybe if you could talk, Dave or Mark or Terri, just talk a little bit conceptually about the business and where it's at. You talked about the difficulty as it relates to the pricing environment, and I know we've started to see some spot activity over the course of the past few months and some hope that 2014 rates can be better, rate growth can be better than 2013. But I guess, you know, if you look at the volume growth in intermodal in the fourth quarter, Hub's volume growth lagged Mode, whereas in the third quarter, it was more comparable. So you do have a divergence in volume growth.
I'm just wondering, as you think of the business, now that you had Mode in your possession for several quarters now, how do you think about allocate? How do you think about driving intermodal volume growth in the context of a still challenging pricing environment, knowing that you have Mode, knowing that you can go through Mode, and you're still dealing with some of the cost inflationary pressures from the partner in the core Hub business? Maybe can you just talk a little bit strategically about how you go to market in 2014 with the intermodal products?
Dave Yeager (CEO)
Mark, did you want to address that?
Mark Yeager (President and COO)
Sure, absolutely, Ben. You know, we were pleased with the growth that Mode posted for the quarter, and they've really developed a lot of very positive momentum in the space, and they are competing, I think, very effectively. You know, we hit the sort of mid-single digit volume growth at Hub. I think we would have liked to have seen more volume growth than we saw, but it's important for us to strike a balance, right, between price and volume. And you know, in this type of competitive environment, I think that we did a good job of making sure that we didn't get too aggressive from a price perspective.
We were able to realize some positive price on the quarter and on the year, something I'm not sure a lot of our competitors did. So while that probably cost us some volume growth and our limiting our exposure to low contribution freight also probably contributed to a lower volume growth than we'd otherwise liked, I think we did a pretty good job in the end of achieving that balance. I'd certainly like to see us grow at industry levels or exceed industry levels, but we have to make sure that we maintain our pricing disciplines, because at Hub, pricing discipline is much more important than volume growth for volume growth's sake.
Dave Yeager (CEO)
And I think also, as far as going to market, for 2014, I think Mark outlined some of the current initiatives that we have begun. And I think as our strategic engagement clarifies a few more issues, that again, we do believe that we'll be able to focus on where we grow effectively, that will allow us to grow profitably and continue to grow at the current pace of the industry.
Ben Hartford (Senior Equity Research Analyst)
So I guess, as you think about, yeah, implementing some of the sales compensation changes for 2014, focusing on yield within core Hub, so this divergence between Mode and Hub's, intermodal volume growth, we should think about there being a separation in 2014 as you do focus on yield management within core Hub. Is that right?
Dave Yeager (CEO)
Well, I think we, we will be focused on yield, but there's a lot of ways to get yield and get growth at the same time, and I think that that, that'll be our focus. As Mark had said, yield is always, a bigger driver of earnings per share. But at the same time, we do want to continue to grow in the markets that, in fact, we're profitable in.
Ben Hartford (Senior Equity Research Analyst)
Okay.
Mark Yeager (President and COO)
We certainly would love to see Mode continue to grow double digits.
Dave Yeager (CEO)
Yes.
Mark Yeager (President and COO)
We don't feel that we have to match that at Hub, right? If there's some divergence, that's okay, too.
Ben Hartford (Senior Equity Research Analyst)
Okay. And I guess last point on this, when you made the comment about improving growth margins in 2014, I assume that's assuming an intermodal pricing environment that continues to be challenging, maybe doesn't worsen from current levels, but certainly doesn't inflect more positively. Growth doesn't accelerate as it relates to intermodal pricing growth in 2014. Is that the assumption? Is that right?
Dave Yeager (CEO)
Well, we're certainly hoping that it doesn't deteriorate. Yes, the assumption is that it remains a very competitive marketplace from a pricing perspective.
Ben Hartford (Senior Equity Research Analyst)
Okay. And, and then last one, just on, on the balance sheet, Terri, obviously, you've, you've got, a nice cash flow situation materializing. You talked about exhausting, the repurchase. Can you talk about how you think about growth through acquisitions versus, versus stepping in more forcefully with another buyback? Obviously, you've guided to, a share count for 2014 that's flat from year-end 2013 levels. So can you tell, tell us a little bit about how you're thinking, about the deployment of excess cash in 2014 and beyond?
Terri Pizzuto (CFO)
Sure. Our first use of cash would be for an acquisition, so we're always on the hunt for what's best for us, something that's a good cultural fit, immediately accretive. And, you know, if we don't find a good acquisition, we'll also—we would then use our cash to buy back stock. One of the topics at our February 20th board meeting that's coming up will be to talk about share buybacks and what we're going to do this year in terms of perhaps buying back some stock and doing an acquisition and saving enough cash for an acquisition.
Ben Hartford (Senior Equity Research Analyst)
You've obviously historically carried very little debt on the balance sheet. I mean, would you think about structurally changing that? You have the cash flow now with the headquarters out of the way to support debt and debt service. Will you take a closer look at what the capacity of the balance sheet can be in 2014?
Terri Pizzuto (CFO)
Yeah, that's a good question. Back when we tried to buy a company in the summer, you know, we were gonna put a couple of $100 million of debt on our books, so we would be happy to put on debt for the right acquisition. And the tractors that Mark talked about that we ordered near the end of the year, we are putting on $25 million of debt for the tractors as well.
Ben Hartford (Senior Equity Research Analyst)
Okay, good. Thanks for the time.
Operator (participant)
Our next question will come from the line of Thomas Wadewitz with JPMorgan. Please proceed.
Michael White (Equity Research Analyst)
Hey, good afternoon. Thanks, thanks for taking the question and good job on the quarter. I was wondering if you could take a moment and just kinda help us understand a little bit the expected profile of Unyson Logistics revenue next year, because you had a nice acceleration here, a nice pickup in you know absolute revenue in fourth quarter. Is there further room for growth? Is this the new level that's reasonable going forward? Or you know how should we think about the growth next year?
Terri Pizzuto (CFO)
It probably won't continue at the level we saw this quarter, but we do expect strong growth from Logistics again in 2014. It could be, you know, anywhere between 15% and 20%. Most of that growth occurs in the first part of the year, since we have carryover growth from the new engagements that we brought on in 2013.
Michael White (Equity Research Analyst)
But most, most of the revenue, revenue growth that you had in fourth quarter was because of the new customers that came on board in third quarter, right? Or were there additional customers in fourth quarter that came on board?
Terri Pizzuto (CFO)
It was actually most the customers that came on as new customers in the first half of the year. So the growth that we had was just more than we expected. So we try and guesstimate when we bring a new customer on, how much business we're gonna get, and it ended up in some cases, we got a lot more than we originally thought we would.
Michael White (Equity Research Analyst)
Understood. Okay. And then on utilization, Mark, I was wondering if you could talk a little bit about the ramp-up and some of the technological rollouts that you have in front of you. I guess you're gonna be going up to 500 containers. You know, what's the next step after that, and what could that timing be for the first rollout?
Mark Yeager (President and COO)
Sure. Right. With the satellite tracking program.
Michael White (Equity Research Analyst)
Yes
Mark Yeager (President and COO)
we are going from 50 containers. We had a successful beta site, or beta test, with the 50 containers. And we're going up to 500. Assuming that that is working well, we are targeting completion of the program, in other words, having our entire fleet with the satellite tracking device on them by the middle part of 2015. In addition, we are launching what we call One System, which is a single operational and dispatch and load planning system, which will be on board in the first half of this year. So two pretty big technology projects that both have equipment utilization improvement as a part of their goal.
We're pretty confident that despite the fact that we have, I think, best-in-class utilization right now, we can improve it even further with these tools.
Michael White (Equity Research Analyst)
Have you quantified the potential, cost savings from these two programs?
Terri Pizzuto (CFO)
We have, and of course, you know, the satellite tracking will – we won't have the full benefit of that until next year, because this year, it won't be fully rolled out. It could be millions of dollars in savings there. And then in terms of One System, as Mark mentioned, we hope to roll that out sometime near the end of the first quarter, probably be completely done rolling it out by the end of the second quarter. So we'll only have half a year benefit from that, and it could be between $1 million and $2 million of benefit this year.
Michael White (Equity Research Analyst)
Right.
Mark Yeager (President and COO)
Generally speaking, for each day of equipment utilization improvement, it's a $6 million annualized benefit to the company. And as the fleet gets bigger, obviously, then that return gets larger.
Terri Pizzuto (CFO)
Yeah, and for, for One System, we hope to improve our empty, or reduce our empty miles, improve loaded miles. And for every 1 percentage point change in empty miles, we get another $2 million of profitability.
Michael White (Equity Research Analyst)
Okay, that's, that's great color. And if I can just ask one more on cross-border, since you mentioned you have this new certification. Is that gonna require some additional investment or new hiring to lever up? Or, you know, how should we think about the opportunity there?
Mark Yeager (President and COO)
No, I don't think so. I think we're well positioned in Mexico. You know, we have a good-sized operation there. I think that they have the ability to scale up beyond. We may have to add a few incremental resources there, but between our Laredo operation and our Mexico City operation, I think we're ready to bring on some more business cross-border.
Michael White (Equity Research Analyst)
So, what exactly does this do, allow that you did not, that you didn't have access to before or you weren't able to do before?
Mark Yeager (President and COO)
Well, there are some customers with significant amounts of cross-border freight that really only want to do business with C-TPAT certified partners. And, by getting this accreditation, you know, it validates that we have the operational processes and disciplines in place to ensure a secure outcome for that cross-border activity. So it's really just a way of validating that, we know how to do business, and we know how to do business safely, predominantly between Mexico and the United States.
Michael White (Equity Research Analyst)
Understood. Thanks for the color, and, congratulations again.
Mark Yeager (President and COO)
Thanks.
Operator (participant)
Our next question will come from the line of Kevin Sterling with BB&T Capital Markets. Please proceed.
Kevin Sterling (Equity Research Analyst)
Thank you.
Good evening, Dave, Mark, and Terri. Hope you're staying warm in Chicago.
Dave Yeager (CEO)
[audio distortion]
Kevin Sterling (Equity Research Analyst)
Hey, you guys spend a lot of time talking about pricing. As you think about the pricing environment, what's the biggest competitive pressure in your opinion? Is it the growth in, you know, the nation's 53-foot boxes? Is it another IMC, or is it the truckload market? I imagine it's probably a little bit of a combination of both, but if you had to rank them, what would you say is the biggest competitive pressure you see right now?
Dave Yeager (CEO)
Kevin, I'd say that the single largest, this is Dave.
Kevin Sterling (Equity Research Analyst)
Yeah.
Dave Yeager (CEO)
The issue is, disciplined pricing by our competitors. We think that, if in fact, we saw more discipline, that, in fact, we may see the opportunity for, prices to increase. And secondly, you had mentioned the, disciplined pricing within the truckload market as well, and that certainly is another, factor that would probably rank as number two. And certainly we haven't seen it to date. We have, over the past month of January, we have seen a lot of volatility with, the spot pricing market for truck. Now, is that a function of, a capacity shortage or more demand, or is it more so an issue of the storms taking out capacity? I guess that'll play out a bit, because the weather has been just so horrific, in much of the country.
So, but we certainly believe that capacity within the truck market is not growing. As we begin to see that to tighten, we think that price increases would spill over into intermodal as well.
Kevin Sterling (Equity Research Analyst)
Yep. Okay. Do you think on the pricing front from your competition, do you think a stronger truckload environment, obviously, maybe will help them find some discipline or, you know, maybe just a general pickup in demand, I would imagine, would help as well?
Mark Yeager (President and COO)
Yeah, we certainly hope that's the case, Kevin. You know, at the same time, we've seen three years of pretty good domestic demand, and we still have not been able to gain the kind of pricing momentum, I think that we would like to see, and that I think the market is capable of absorbing. So, we certainly hope that they become encouraged and disciplined enough to take advantage of the opportunity that's out there. You know, rail service has been reliable now for a number of years. I don't think we have a significant glut of intermodal capacity as we saw yet another year of solid growth. And, you know, with the truck market hopefully firming up, this should be the right environment for price increases.
But it probably won't be unless the major players within the industry believe and are determined to get some level of increase.
Kevin Sterling (Equity Research Analyst)
Right. Okay. And, kind of switching gears here, was there any specific reason? I think you said Mode's truck brokerage volumes fell, I believe, 4% in the quarter. Do I have that right? Was there any specific reason for that volume shortfall?
Mark Yeager (President and COO)
No, there really wasn't. That's the right number. Volumes did come off about 4%. I think, you know, a lot of that was a pretty challenging brokerage environment in general. There were a couple of business losses with a couple of agents, but nothing, you know, nothing significant. I think more than anything, the decline was mostly just due to, you know, the challenging value proposition that brokers face, when we're in a state of equilibrium that Dave alluded to earlier.
Kevin Sterling (Equity Research Analyst)
Okay. Well, thanks for your time, and as evidence that misery loves company, it's snowing in Richmond, Virginia, so.
Operator (participant)
Our next question will come from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.
Todd Fowler (Equity Research Analyst)
I feel that bad for the people in Virginia right now, I guess. I wanted to start with the CapEx comments. I guess I'm curious why you haven't finalized the container plans for 2014, and what the container growth, or maybe the fact that if you don't grow the container fleet, what that would be contingent on?
Mark Yeager (President and COO)
Well, you know, I mean, we've opted, we have not made the decision yet because we have the option at this point, right? We are, you know, wanna defer the decision as long as possible, so we can really get a feel for what the pricing dynamics are gonna be like in the industry, what the demand dynamics are gonna be like in the industry. We don't think there's gonna be a tremendous amount of capacity ordering, so we do feel at this point, we don't have a lot longer that we can defer this decision. But being able to postpone it as long as possible will help us make the best order possible, and that's really the thinking here.
You know, right now, we're looking at, you know, we're watching the pricing environment closely, we're watching bid activity and trying to get a sense of where the economy is going before we lock into something.
Terri Pizzuto (CFO)
Yeah, we can still get them all before, you know, peak season starts. That won't be an issue.
Mm-hmm.
Todd Fowler (Equity Research Analyst)
But I guess to understand some of the earlier comments about balancing, you know, yield and volume growth, I mean, it, based on what you see in the bid season, I mean, is there the potential that this is an environment maybe where you don't want to as aggressively grow the fleet and aggressively grow the volumes, and maybe you go back to, you know, kind of the approach that you had in the mid-2000s, where you look at the network and you focus more on the yields and, and make the strategic decision to, to sacrifice some, some share as a result of what the market's doing on the pricing side?
Dave Yeager (CEO)
I think that what we'll do, end up doing, Todd, is we'll have somewhat of a build, and again, we're just trying to figure out how large it will be. But no, we certainly are going to continue to focus on yield. But again, my earlier comments, I do believe that we can, in fact, increase yield while increasing overall revenue and volume at market levels.
Mark Yeager (President and COO)
Yeah, the other variable for us, of course, which is not, doesn't impact a traditional asset-based carrier, is we need to figure out exactly what path the rails are going to go down, so we know how much rail capacity we're likely to put into our mix.
Todd Fowler (Equity Research Analyst)
Okay. And then, Terri, I think that the comment that you made on gross margins for 2014 was for consolidated Hub, basically to improve upon the 11%. Do you have any thoughts on the Hub segment and the Mode segment, what we, what we should expect for gross margins within the respective segments?
Terri Pizzuto (CFO)
Sure. Mode segment, we think, will be pretty consistent with where it was this year. And then for the hub segment, we hope to improve it a bit over what it was this year. And, you know, we're still assuming a challenging truck brokerage market in our forecasting and growth in logistics, which naturally brings our gross margin as a percent of sales down because it's our lowest, it's our business with the lowest gross margin as a percent of sales, and our mix of business is now a lot more logistics than it used to be.
Todd Fowler (Equity Research Analyst)
The expectation is that legacy Hub Group intermodal gross margins should expand in 2014?
Terri Pizzuto (CFO)
That's our plan, yes. That's our goal.
Todd Fowler (Equity Research Analyst)
That's, yeah, okay, that's what's embedded with the plan. Okay, and then just the last one I have, you know, talking about the weather. You know, can you give any sort of color on the first quarter? I mean, I know that you've talked about, you know, full year 2014, range of analyst expectations, but, you know, we've heard a lot of things about the weather, particularly in Chicago, and the impact it's having on the network. I guess, is there anything that we should be thinking about from a modeling perspective as it relates there to, you know, lost volume opportunity or weather-related issues, into the first quarter?
Dave Yeager (CEO)
Well, I think, you know, obviously, it's very, very early yet. Certainly the weather has not been very cooperative. We've had more snow and cold weather than I can remember in many, many years. But thus far, the volume's hanging in there. It kind of gets kind of chunkier, if you will, or in blocks. Several last week, on Monday and Tuesday, we had about 20% of our truck drivers available in Chicago. When that backs you up, and it takes a little bit more time, and so there's some customer dissatisfaction with that. But obviously, they're also, well, living through the weather, so I think for the most part, they understand that, we're trying to get everything done as quickly as possible.
So it hasn't really negatively impacted our volumes as of yet, but certainly the winter is young yet, and we'll see what it has for us.
Todd Fowler (Equity Research Analyst)
The winter is actually very old here at this point, but okay, thanks a lot for the time. Thanks, guys.
Dave Yeager (CEO)
I agree with you.
We are.
Operator (participant)
Our next question will come from the line of Cleo Zagrean with Macquarie Capital. Please proceed.
Cleo Zagrean (Transport and Logistics Analyst)
Good evening. My first question relates to the intermodal margin outlook. We were just hearing on the call how you're still waiting to refine your plan for capital spending there and how a part of your hope for margin improvement is the rationalization in the competitive environment. Can you help us understand what you see as the biggest drivers of change between the 13 performance and 14, and your degree of confidence in each? So I'm a bit puzzled as to how you can be confident about margin improvement, whereas you're still looking to assess the market situation.
Mark Yeager (President and COO)
Yeah, I don't think that we're really banking on significant margin improvement. I think, you know, what we had said was we don't anticipate seeing a deterioration in the pricing environment from where we are right now.
It's been a very competitive market. Many of our, many of the folks in the industry were not able to get any price at all. We were able to get some. But I think our belief here is that, while we aren't anticipating a substantial change in the economy or anything along those lines, probably a continuation of a modest recovery. Some folks in the over-the-road sector who really have little choice but to be more aggressive about price. And those two things translating on top of what's been a continued demand environment into somewhat better, pricing fundamentals, though we certainly are not banking on an aggressive turnaround in the marketplace.
Cleo Zagrean (Transport and Logistics Analyst)
In terms of the dynamic with your rail partners, how do you see conversations going, and what can you share with us from the bid cycle so far?
Dave Yeager (CEO)
Well, with the rail partners, I'm sure that they'll be looking for somewhat of an increase. So obviously, job one for us is to cover, minimally cover those costs. And again, with some of the initiatives we have to, reduce our costs internally, coupled with, our pricing strategy, we believe we'll be able to accomplish that goal. I'm sorry, what was the second part of the question?
Cleo Zagrean (Transport and Logistics Analyst)
The bids. If you could share any insight from the bid cycle.
Dave Yeager (CEO)
The bids, it's still really, really early.
Cleo Zagrean (Transport and Logistics Analyst)
All right.
Dave Yeager (CEO)
It's obviously a very competitive bid season once again, as we start out. So we don't think it's going to be a heck of a lot different than 2013.
Cleo Zagrean (Transport and Logistics Analyst)
Appreciate that. Then, my follow-up is related to truck brokerage. We've been getting used to hearing about the tough competitive environment being here to stay as some kind of a new normal. I was wondering whether you have adjusted your expectations for
... the long-term outlook for this market, throughout the year, how you are looking at it as we sit here beginning of 2014, especially with the progress that you've achieved by turning around that business, how you find yourself competing as a restart, as a new kind of operation with a new beginning? And thank you very much.
Mark Yeager (President and COO)
Yeah, I mean, I think that we remain committed to truck brokerage. We still think it's a great service providing for our customers. It's a logical adjacency for us. It helps us broaden our scope of services for our customers and stay in touch, you know, with the highway market. It's certainly been competitive, and there's a lot of new entrants into that space. I think that we're in the right sector of that space because it's really a part of the solution that we're offering to our customers, maybe more so than a traditional you call, we haul kind of a truck broker environment. Nothing wrong with being in that business, that just isn't, you know, what we happen to do.
So this is a very complementary service, I think, for the services we're performing at Unyson, as well as in the intermodal space. We haven't adjusted our expectations in a material way. Certainly, we still believe that this can be a growth, a growth engine. I think we have become more realistic in this type of an environment where supply and demand match each other, you know, the value proposition isn't as strong. So in order for us to really see, I think, you know, substantial progress with the highway product, we probably need to see a little bit more demand and a continued or maybe tightened capacity environment.
Cleo Zagrean (Transport and Logistics Analyst)
Maybe one more follow-up, if I could squeeze. Can you share anything in terms of the focus for M&A, if it is truck brokerage or operations in intermodal, if they're agent-based, or what kind of strategic fit are you looking to complete your portfolio?
Terri Pizzuto (CFO)
It would be something that would, you know, be asset-light. It could be in one of our current service lines with logistics is kind of exciting right now, and so that could be a potential opportunity or, you know, another intermodal marketing company. There are several privately held ones that that could potentially be for sale someday. And then we're always looking for drayage opportunities to expand our drayage network as well.
Operator (participant)
Our next question will come from the line of Scott Group with Wolfe Research. Please proceed.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Good afternoon. So I just want to follow up on that last line of questioning, just about the intermodal gross margin outlook for 2014. And, you know, maybe just if you can—if there's anything specific you can point to or any additional color on kind of what what's giving you that confidence that you'll finally be able to get that margin improvement. Is there something new or different coming out of the strategic review? Is there maybe something that's changing with your rail contracts that that's allowing the margin performance to be different? I just want to get a little bit more comfort or visibility on that.
Mark Yeager (President and COO)
Sure. You know, no, I mean, I think there's some external factors that we've been talking about in terms of the truck market as well as the intermodal market. In addition, we've got a lot of internal initiatives that we're pushing hard on to improve our efficiency on the things that we can control. So we're pushing very hard on our street operations. We're pushing very hard on the decisions we're making from a pricing and operating perspective, how we're selling our product, making sure that we're doing a better job of selling to our network strength. All these types of things, I think, should enable us to get a better return and lower our costs at the same time.
There isn't, you know, there isn't a fundamental shift in the tides here, I don't think that we can point to, but incremental improvement that's facilitated really by some tools that we have been working on for quite some time. I mean, One System, for example, is a project that's been in the works now for two years. And when you look at what some incremental decision support can do to our bottom line and to the profitability of our intermodal franchise, I mean, we feel pretty confident that it's going to more than justify the investment that we've made, which has been sizable to date. So, you know, just keeping our pricing disciplines, understanding our business, marketing better, and operating better.
Scott Group (Managing Director and Senior Analyst)
Just to follow up on that, Mark or Dave, maybe talk about the last time we saw truckload pricing start to move up. How quickly after that historically does intermodal pricing recover? And are we right in thinking about that your pricing is going to be a little bit more elastic than what you're paying to the rail? So, if intermodal pricing is getting better, that maybe is just what we need to see the margins finally start to improve again. Is that a fair way to think about it?
Mark Yeager (President and COO)
Absolutely true, Scott. If you look back at Hub historically, we've always done better in a rising rate environment, right? That's where we're able to get a better return, and to allocate our capacity in the most efficient manner possible. So I think, you know, unfortunately, you have to go back a ways, right, at this point, 'cause this freight recession really began in 2006. But I think 2007 was probably a good example of a year in which, you know, truck rates were going up, and we were able to get some traction from an intermodal price perspective. 2008 was moving along quite well, and then, you know, of course, the end of capitalism hit us all and set us back for several years.
I think 2007 is probably a good comparable, and, you know, that would be our goal. If we can get some positive price momentum, our goal would be to expand margins and not just, not just keep them flat.
Scott Group (Managing Director and Senior Analyst)
Okay. And just last thing for Terri, the quarterly operating expense guidance implies a nice little step up from where we're at. Can you just talk about the drivers to build up to the new quarterly guidance?
Terri Pizzuto (CFO)
Sure. It's about $1 million a quarter in wage increases. It's about another $1 million a quarter in bonus, because this year we didn't achieve 100% of our target, and we're planning on achieving 100% of our target next year. It would be about $1 million a quarter for increase in agent commissions that result from increased gross margins at Mode, and then probably $500,000 of additional expense related to One System amortization and implementation costs.
Scott Group (Managing Director and Senior Analyst)
That's super helpful. All right, thanks, guys. Appreciate it.
Terri Pizzuto (CFO)
Sure.
Operator (participant)
Our next question will come from the line of Justin Long with Stephens. Please proceed.
Justin Long (Managing Director and Research Analyst)
Thanks, and good afternoon. You gave some helpful color on some of the strategic changes that are being implemented in 2014, but is there a way to think about longer term targets on both utilization and empty miles as these initiatives are put in place?
Mark Yeager (President and COO)
Well, there certainly is. We haven't really gone public with those numbers as of yet. What we do know is that there's certainly multiple points we believe on the empty mile front that we think are currently being achieved by at least one player in the industry. So there's room there. You know, when you think about street operations and where we're at right now, 13-14 days, right? You know, clearly, 5 days are eaten up by rail, right? And so the remainder is really what you have left. We have gotten down into the 12s at certain points, and with some additional tools, you know, there's no reason why you couldn't get down to those levels again.
Now, when we achieved that, that was a unique supply-demand dynamic. That was in 2010-
Terri Pizzuto (CFO)
Right.
Mark Yeager (President and COO)
When things were, you know, equipment was very tight. So that was a bit of a unique dynamic, but we did not have the assistance of some of the tools that we're bringing on board here. So we definitely think that there is, you know, there is at least a day and probably more from a utilization perspective that can be squeezed out further.
Justin Long (Managing Director and Research Analyst)
Okay, great. That's helpful. And on the empty miles, where do those stand today?
Mark Yeager (President and COO)
We just aren't public with that. That's something that none of our competition shares, and that's something we just keep internally, but we do track it.
Justin Long (Managing Director and Research Analyst)
Okay, that's fair enough. And just as a quick follow-up, so you seem more optimistic on pricing headed into 2014, but is there any way to think about the magnitude of the increase you think is possible at this point? I mean, on a year-over-year basis, do you think pricing can be up 50 basis points to 100 basis points or something higher than that?
Terri Pizzuto (CFO)
You know, we haven't broken out price separately, Justin. We definitely think that we can increase prices enough to cover our cost increases. And if the truck market gets better and truck prices go up, that will only help our intermodal prices. So, we're gonna be very disciplined and look for freight that's good and beneficial for the network and price accordingly. So, some of the low contribution freight that, you know, Mark referred to earlier, we'll get rid of and replace it with good freight that's more beneficial for the network and filling up those loaded miles with empty miles in addition to getting price. So it's a win-win, really.
Mark Yeager (President and COO)
Yeah, and just to be clear, we, you know, by no means are bullish on price. We don't think we're suddenly gonna see an environment in which we just see, you know, an easy path to price increases. We think that's gonna continue to be challenging, but we think we can do a better job with our mix, and we think we can do a better job operationally to take costs out of our system. So I think it's gonna continue to be a very challenging price environment, but we don't think it's gonna get worse, let's put it that way, from, from where it's been the last couple of years.
Justin Long (Managing Director and Research Analyst)
Okay, that makes sense. I appreciate the time. I'll pass it along.
Mark Yeager (President and COO)
Sure.
Operator (participant)
Our next question will come from the line of William Greene from Morgan Stanley. Please proceed.
William Greene (Managing Director)
Hi there. Good evening. You know, I wanted to ask about a comment you made earlier in the call about the rails will kind of be seeking some pricing increases you suspect, and that makes sense given what rails have sort of said so publicly. Can you remind us how the relationships with the rails work? Are they kind of on annual contracts, or are they longer-term contracts? Is it more like a master contract, and then you kind of negotiate pricing each year? How does exactly that relationship work?
Dave Yeager (CEO)
we, of course, don't go into a lot of depth with our contracts, but certainly you can consider them to be longer-term agreements that, with price being, negotiated, on an annual or close to an annual basis.
William Greene (Managing Director)
So, so do they typically run sort of five years? Is that sort of thing, because obviously, you kind of favor one rail over another in certain regions. So is that the sort of thing when it opens up, that it could be a more significant change for you, or does it not really work that way?
Dave Yeager (CEO)
Well, the Union Pacific, of course, is our partner in the West, and Norfolk Southern is our partner in the East. Most railroads don't really like to go to a five-year agreement. You know, they're mostly a little bit shorter in term than that, for the most part, I think just as a result of some of the legacy contracts that they had in the past. But certainly, we've got very good relationships with our two railroad partners, and feel as though that we can continue to all be reasonable and increase price and move forward together. So-
William Greene (Managing Director)
Yeah.
Dave Yeager (CEO)
Overall, our relationships are excellent with the rails.
William Greene (Managing Director)
That's helpful. Do you disclose when those contracts come up for rebid?
Dave Yeager (CEO)
No, we do not.
William Greene (Managing Director)
Okay. One last question on this line. Is the fact that the comments you made about intermodal pricing being a little bit less rational than perhaps you might like, does that suggest that if you wanted to shift volumes among the railroads in more significant ways, that there wouldn't really be much point in that because of that relationship you've got with UP and NS, that other IMCs have other relationships with other rails, so you wouldn't be advantaged or disadvantaged through that movement? You'd rather stick with kind of the relationships you have and try to maximize that to the fullest. Is that a logical conclusion?
Dave Yeager (CEO)
We really feel as though there's a lot of reasons that we selected the two partners we have, and certainly price is always a component. But we do believe also that the Union Pacific and Norfolk Southern are better networks and better service networks for intermodal. And so we can offer our customer, we think, a lot more flexibility, ease of recovery in the case of natural disasters, those types of things. So and if in fact we were to contemplate leaving, I don't know exactly what, how positive the economic impact would or would not be.
William Greene (Managing Director)
Yeah. Okay, that makes sense. Do the issues we saw in Burlington Northern this past quarter with service levels, is that something you can take advantage of, or is it too short to matter so far?
Mark Yeager (President and COO)
You know, yeah, it really depends on the length and severity of the service disruptions. I think, you know, not having a lot of visibility into just the manner of those disruptions and how significant they were, it's a little tough for us. You know, we haven't seen a lot of customers who are at a point where they would, you know, move away from doing business with the BN if they were existing and currently doing that. You know, at the same time, we think we have a very good service proposition, and we think it matches up extremely well with the BN.
So we do think that there are customers that prefer the Union Pacific, and also there are customers that prefer to have a balanced portfolio and not have all of their freight on a single rail line. You know, generally speaking, if you look back when there were service issues, most of those have to be somewhat prolonged in nature to really cause a share shift of any significant amount.
William Greene (Managing Director)
Yeah, that makes sense. Last question, just on Pacer is being sold. Do you think this changes the competitive dynamic for you in ways we need to keep in mind as we think about modeling the forward outlook?
Dave Yeager (CEO)
You know, overall, I think that if XPO's playbook is similar in intermodal to what it was in truck brokerage, we might see a little bit of competitive pricing. But you know, Pacer's been around a long time. We've competed with them for a long time. They've competed with us. So we don't look for any market change in the industry dynamics there.
William Greene (Managing Director)
Okay, that's great. Thank you so much for the time. Very helpful.
Operator (participant)
Our next question will come from the line of Matt Brooklier with Longbow Research. Please proceed.
Matt Brooklier (Senior Equity Research Analyst)
Thanks. Good afternoon. So wanted to go back to truck brokerage. The margin compression that you guys experienced in the quarter, how much of that would you attribute to just a more competitive brokerage environment, i.e., competing with, you know, other brokers for freight versus potentially some margin compression from your actual underlying transportation costs moving up in the quarter?
Terri Pizzuto (CFO)
The majority of it was due to less high-value added services that we provide. So, that would be the main reason for the decline. We also had, you know, competitive pricing from the carriers that we're buying from, but, and very little load board activity. There was a lot more load board activity last year. Load boards, you can generally get a higher margin than normal. So that's really the main contributors.
Matt Brooklier (Senior Equity Research Analyst)
Okay. So truck pricing rising maybe towards the end of the quarter and driving up purchase transportation costs, that was less of a factor in the quarter?
Terri Pizzuto (CFO)
Correct.
Matt Brooklier (Senior Equity Research Analyst)
Okay.
Mark Yeager (President and COO)
It was still a factor.
Terri Pizzuto (CFO)
Yeah.
Mark Yeager (President and COO)
We certainly saw some pockets of tightness.
Terri Pizzuto (CFO)
Yep.
Matt Brooklier (Senior Equity Research Analyst)
Okay. And then how should we... And you've been pretty explicit in terms of, you know, the competitive environment continuing within truck brokerage. But... How should we think about brokerage margins if we're in a better overall macro environment, and, you know, freight picks up, but at the same time, you know, capacity is going to get squeezed and likely rate moves up? Is that that type of environment, is that a good or a bad environment for truck brokerage margins at Hub?
Mark Yeager (President and COO)
Well, I think generally speaking, you know, the three potential outcomes, equilibrium is the worst potential outcome for margin.
Matt Brooklier (Senior Equity Research Analyst)
Right.
Mark Yeager (President and COO)
Right? When things are very soft, you have the opportunity to buy lower. When things firm up, you have a stronger value proposition for your customer, and they're generally willing to pay a little bit more in order to secure the capacity that they need. So sort of breaking either way would be better from a margin perspective for truck brokerage.
Matt Brooklier (Senior Equity Research Analyst)
Okay, so anything being better than kind of what we saw all year here. And then my, my last question, a pretty heavy potential year for CapEx. Terri, you mentioned that, a good portion of that could go towards, tractor purchases. How should we think about the contract fleet, or I guess I should call it, Hub Trucking, in 2014? What, what does it look like, and, and what does that imply for, the percentage of, of intermodal, moves that you guys are, are doing, the drayage component on?
Terri Pizzuto (CFO)
Sure. You're right. A lot of that, about $50 million of that $60 million-$80 million of capital expenditures that we've estimated would be for tractors. And we're doing a couple different things with the tractor fleet. One, we're replacing older equipment. Two, we're replacing equipment that we lease currently that's pretty costly. So one benefit of that is cost takeout. So we save about $10,000-$15,000 annually per tractor when we buy it versus either leasing it or having old costly equipment that we're going to have to repair. And so this coming year, we're going to add another, you know, 250 or so tractors. They're day cabs, they're light, they're efficient, fuel efficient. We save money on fuel. We're more, we can haul heavy freight, so it's more opportunity for business.
We end the fleet in 2014 at about 650 tractors.
Dave Yeager (CEO)
Right. And if, if you look at when we first acquired Comtrak, it was basically 40/60, 40% being company drivers, 60% being owner-operators.
Matt Brooklier (Senior Equity Research Analyst)
Mm-hmm.
Dave Yeager (CEO)
We fully intend to continue to grow our owner-operators. There's no question about that, but we do think that, having a good sized fleet of day cabs that are company drivers, that are fuel efficient, that are lightweight, is a good, solid competitive advantage for us within versus our traditional competitors. So you'll see us over the next few years, and again, we, we intend to purchase these through debts, and, we would then turn them over every five years as you should, before the maintenance gets too excessive.
Matt Brooklier (Senior Equity Research Analyst)
Right. And that potential 650 number of company tractors, what does that compare to at the end of this year?
Terri Pizzuto (CFO)
At the end of this year, it was 350.
Matt Brooklier (Senior Equity Research Analyst)
350. Okay.
Terri Pizzuto (CFO)
Yeah.
Matt Brooklier (Senior Equity Research Analyst)
Sorry, go ahead.
Terri Pizzuto (CFO)
But we are leasing about 130 at the end of the year on a short-term basis.
Dave Yeager (CEO)
Which is very expensive.
Matt Brooklier (Senior Equity Research Analyst)
Okay. And then with the tractor company-owned and also growing the owner-operator component of it, what does that imply for how much of your own drayage you can do?
Terri Pizzuto (CFO)
Our goal is to get to 75% by the end of this coming year. So it's factored into that guidance at the end of 2014.
Mark Yeager (President and COO)
That would require some addition of owner-operator capacity as well.
Dave Yeager (CEO)
Yes.
Terri Pizzuto (CFO)
Exactly, which is very important to us.
Matt Brooklier (Senior Equity Research Analyst)
Gotcha. Okay. Thank you for the time.
Operator (participant)
Our next question will come from the line of Anthony Gallo with Wells Fargo. Please proceed.
Anthony Gallo (Managing Director)
Thank you for taking my question. Roughly what percent of your intermodal growth do you think comes from truck conversions?
Terri Pizzuto (CFO)
That's a really good question. It's very difficult for us to track that, but a lot of our local lease growth, which was up 4% for the quarter, comes from truck conversion freight and some of the local west growth as well.
Anthony Gallo (Managing Director)
Thank you. How do those opportunities typically present themselves? Are you invited into a general bid for all the freight, or are you invited in to look at intermodal, and you work your way into truck? Does the truck brokerage operation typically initiate this? I'm just curious how that opportunity typically manifests for you.
Mark Yeager (President and COO)
You know, Anthony, usually it's with a customer who we're doing business with, many times intermodal business. Sometimes it will come in the way of an RFP, well, where they'll present their highway and intermodal lanes and ask us to analyze and make sure that they've got the modes allocated correctly. Many times, it's outside of an RFP, and we really urge our customers to open up their traffic flows for us, and we're happy to put some resources to determining whether they're optimally using the intermodal product. So we find our best success from a conversion process generally occurs where we have that kind of collaborative relationship with our customers.
Terri Pizzuto (CFO)
I would say another source would be our logistics business. Logistics is always looking to save our customers money, and so that's been another opportunity for us to look at truck freight and convert it to intermodal.
Mark Yeager (President and COO)
Yeah, typically, a part of our value proposition with a full outsource to our customers in logistics is that we will help them optimize their use of intermodal.
Anthony Gallo (Managing Director)
So in most instances, do you think you initiate it or do they initiate it?
Mark Yeager (President and COO)
I think in most circumstances, we're probably initiating. They're almost every customer out there is attempting to figure out how to use intermodal more. But I would say that most of the time we're their success, they're bringing us in as a trusted partner, but we're the ones that are, you know, looking at the specific markets.
Anthony Gallo (Managing Director)
Okay. And then I was gonna go back to the Virginia weather question, but I won't go there. Thank you.
Operator (participant)
Our final question will come from the line of Matt Young from Morningstar. Please proceed.
Matt Young (Senior Equity Analyst)
Good afternoon, guys. Thanks for squeezing me in here. Just a quick question on the brokerage front. What are you seeing from the brokerage divisions among the asset-based carriers? So clearly, many of the truckers have been trying to penetrate the space in recent years. Just wondering if they're becoming more of a factor in your experience in the bidding environment and so forth.
Mark Yeager (President and COO)
You know, I don't doubt that, that they are, more of a factor in the traditional brokerage market. I think that that's really where they're trying to compete. You know, our brokerage arm is a little bit different. We're really more of a transportation manager. So we're typically actually competing more frequently, with the trucking arm of those asset-based carriers, as opposed to the brokerage arm of the asset-based carriers. But I think certainly, many of them are, you know, very active in bids, very active in, in the marketplace. That space has become, you know, definitely more competitive, but we don't tend to run into, that type of a broker, as frequently as others probably do.
Matt Young (Senior Equity Analyst)
And then you guys are more contractual than spot, correct, on that front?
Terri Pizzuto (CFO)
Yeah, we're about 80% contractual.
Matt Young (Senior Equity Analyst)
Okay. All right, that's all I had. Thanks.
Operator (participant)
With no further questions, I would now like to turn over for closing remarks to Dave Yeager.
Dave Yeager (CEO)
Great. Well, again, thank you for joining us for our fourth quarter earnings call. As always, if you have any additional questions or thoughts, Mark and Terri and I are always available. So again, thank you for joining us today.
Operator (participant)
Ladies and gentlemen, this concludes our presentation. You may now disconnect.
