Dave Yeager - Chief Executive Officer Don Maltby - President and Chief Operating Officer Terri Pizzuto - Chief Financial Officer.

Ben Hartford - Baird Justin Long - Stephens Todd Fowler - KeyBanc Capital Markets Scott Group - Wolfe Research Alex Johnson - UBS Bascome Majors - Susquehanna Matt Brooklier - Longbow Matt Young - Morningstar.

Hello and welcome to the Hub Group Fourth Quarter 2016 Earnings Conference Call. Dave Yeager, Hub’s CEO; Don Maltby, our President and Chief Operating Officer; and Terri Pizzuto, our CFO are joining me on the call.

[Operator Instructions] Any forward-looking statements made during the course of the call represent our best good judgment as to what might happen in the future. Statements that are forward-looking can be identified by the use of the words such as believe, expect, anticipate and project.

Actual results could differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin..

Great. Thank you, Adrienne. Good afternoon and thank you for participating on Hub Group’s fourth quarter earnings call. With me today are Don Maltby, our President and Chief Operating Officer and Terri Pizzuto, our Chief Financial Officer. I am pleased to say that Hub had a strong fourth quarter.

Although we had not seen much of a peak at the time we reported our third quarter earnings, peak did begin its full force a few weeks later and lasted through the end of the year.

We continue to successfully execute our strategy to increase market share by focusing on targeted customers across all business lines, providing excellent service to our clients as we continue to invest in our people, thereby, providing a differentiated service.

Today, I will talk about the intermodal business and then Don will discuss the other business lines, followed by Terri, who will cover the financial results. Although volume in the domestic intermodal market was up only 1% in the fourth quarter, Hub consolidated volume was up 5%.

For the year, Hub’s volume was up over 2% after a lackluster start to 2016. Hub’s on-time performance was 200 basis points higher than Q4 of last year. This is one of the reasons that we are able to grow at a pace greater than the market. Our customers are recognizing the value of service and taking that into account when making carrier selections.

We believe that volumes should grow between 3% and 7% in 2017. As previously discussed, our goal is to increase market share with strategic accounts in corridors that complement Hub’s network. We are currently in the initial stages of bid season.

We are taking a very disciplined approach to our pricing, with the goal to increase prices between 1% and 3%. This would allow us to cover our projected rail cost increases as well as potential additional costs on the origin and destination drayage. Our fleet size is now 32,000 containers.

We placed an order for 4,000 containers, which we expect to be delivered in the spring. We will be retiring 800 containers for a net add of 3,200 this year. Our fleet turns declined to 15.6 days compared to 15.4 days last year, despite rail on-time performance improving by 5%.

We continue to execute our strategy of a balanced approach to our drayage selection. We are focused on offering the best cost service package for our clients and remain neutral as to whether to use Hub owned drayage versus outsourced. As a result, the amount of drayage that Hub performed on our business was down to 54% compared to 61% last year.

Lastly, we continue to search for acquisitions that would either compliment existing service lines or diversify our service offerings. And while we have not closed an acquisition to-date, we are making progress and are investigating several opportunities. With that, I will turn it over to Don..

Thank you, Dave and good evening everyone. For all lines of business, the fourth quarter started slow and then came on strong as the quarter progressed. With 70% of our overall business in the retail and consumer verticals, we found momentum and volume across our customer base.

The emergence of e-commerce has shortened the supply chain, thus impacting how peak is measured and managed. As I mentioned on previous calls, our strategy has been to target specific verticals and accounts in addition to providing our overall customer base with multimodal solutions.

That strategy is yielding results with the growth in our intermodal product and also with the growth of our truck brokerage and logistics business. Our efforts will continue to further develop our services to support our customers while also strengthening our operations to service all of our lines of business. Our truck brokerage.

Our truck brokerage business grew volume 33% in the quarter in a very price-sensitive market. For the year, truck brokerage revenue increased 10% to $391 million. In Q4, we experienced a strong surge in demand from our retail and e-commerce customers, along with growth from our targeted multimodal accounts.

To support our growth initiatives, we continue to enhance our relationships with our carrier partners to effectively service the dynamic volume swings and overall demand. Our strategy remains focused in our target accounts for multimodal growth opportunities and overall value-added services.

We remain confident in our ability to grow market share and we believe the truck brokerage marketplace will stay highly competitive in 2017. Logistics. Our logistics business demonstrated strong top line growth of 17% in the quarter, while also improving margin.

This growth was driven by new customer onboardings as well as a strong growth from existing customers. For the year, logistics sales were $558 million or top line growth of 5% as we overcame the headwinds felt earlier in 2016. New accounts secured throughout the year produced the strongest new business onboardings in logistics history.

These new onboardings will continue to ramp up in the first and second quarter of 2017. We were also successful securing several multiyear contract renewals. The pipeline remains strong and we remain confident in our ability to continue to grow this business line. Mode.

Mode managed through a strong competitive environment and challenging year-over-year comparisons to finish the quarter with 6% revenue growth. Each line of business continues to grow by executing on the strategy to introduce and cross-sell all of our service offerings to our customers.

We again made progress in growing our IBO and sales network by adding 3 new IBOs, along with 23 new salespeople. Our pipeline remains strong for new recruits going into 2017. With that, I will now turn it over to Terri..

Thanks, Don and hello everyone. I would like to highlight three points. First, the truck brokerage growth that we saw at the beginning of the quarter continued, resulting in an impressive 40% increase in gross margins. Second, our intermodal business exceeded expectations because of strength in retail sales and operational efficiency.

Third, the Hub segment revenue growth of 13% resulted from our diversified services and customer-centric approach. Here are the key numbers for the fourth quarter. Hub Group’s revenue increased 10% to $979 million. Hub Group’s diluted earnings per share, was $0.55 compared to $0.63 last year.

Now I will discuss details for the quarter, starting with the financial performance of the Hub segment. The Hub segment generated revenue of $754 million, which is a 13% increase compared to last year. Taking a closer look at our business lines, intermodal revenue was up 5% due to a 5% increase in loads.

Declines in freight rates were offset by positive mix. The volume growth was driven by a 12% increase in loads with retail customers, including e-commerce customers and a 27% increase in loads with automotive customers, partially offset by a 5% decrease in loads with durable goods customers. Truck brokerage revenue was up 46%.

Truck brokerage handled 33% more loads and fuel price and mix combined were up 13%. Logistics revenue increased 17%, due primarily to growth with new customers on-boarded on 2016. Hub’s gross margin increased by $4.5 million or 5%. Truck brokerage and logistics margin growth was partially offset by a decline in intermodal margin.

Gross margin as a percentage of sales was 11.8% or 80 basis points lower than last year. Truck brokerage gross margin increased because of an increase in new business and seasonal business. Truck brokerage gross margin as a percentage of sales decreased 70 basis points due to pressure from spot rates declining and lower customer contract rates.

Logistics gross margin was up due to growth with new and existing customers. Logistics gross margin as a percentage of sales increased 10 basis points due to improved customer mix and operational efficiency. Intermodal gross margin decreased because of lower prices than last year and rail cost increases.

Volume growth, lower dray costs and improved mix and lane balance partially offset the decline. These same factors drove 140 basis point decline in intermodal gross margin as a percentage of sales. Sequentially, compared to the third quarter, the Hub segment gross margin as a percentage of sales increased 80 basis points.

Intermodal gross margin increased 100 basis points and truck brokerage increased 80 basis points, while logistics decreased 60 basis points. Hub’s cost and expenses increased $8.6 million to $64.5 million in the fourth quarter of 2016 compared to $55.9 million in the fourth quarter of 2015.

The increase relates to a $6.4 million increase in salaries and benefits and a $1.9 million increase in general and administrative expense. Salaries and benefits are up due to higher headcount, annual employee raises and an increase in bonus expense.

General and administrative costs are higher because of an increase in IT costs, including costs for our transportation management system and human resource system as well as an increase in professional fees. Finally, operating margin for the Hub segment was 3.2%, which was 100 basis points lower than last year.

Now, I will discuss results for our Mode segment. Mode’s revenue was $256 million, which was up 6% from last year. Revenue breakdown is; $131 million in intermodal, which was flat, $80 million in truck brokerage, which was up 4% and $45 million in logistics, which was up 33%.

Mode’s gross margin decreased $800,000 year-over-year, due primarily to a decrease in intermodal gross margin, resulting from a 2% decline in loads and cost increases.

Gross margin as a percentage of sales was 12.3% compared to 13.4% last year due mostly to a 100 basis point decline in intermodal yields and a 340 basis point decline in logistics yields. Mode’s cost and expenses went down $400,000 compared to last year, primarily because of a decline in agent commission.

Operating margin for Mode was 2.5% compared to 2.9% last year. Turning now to headcount for Hub Group, we had 1,784 employees, excluding drivers, at the end of December. That’s up 38 people compared to the end of September. Now I will discuss what we expect for 2017. We believe that our 2017 diluted earnings per share will range from $2.35 to $2.50.

We estimate high single-digit to low double-digit top line growth for all three business lines. We expect gross margin as a percentage of sales for the year to range from 12.2% to 12.8%. We believe that our quarterly costs and expenses will range from $86 million to $89 million.

There are three key assumptions that will impact our earnings in this year. Number one, intermodal pricing increases, as Dave said, our goal is to increase prices between 1% and 3% during the bid season.

Number two, higher operating costs and capital expenditures, due partially to the investments we are making in technology, including our transportation management system, where we will operate our logistics, intermodal and truck brokerage business. We believe these investments will give us a strategic advantage and support our customer needs.

Number three, higher interest expense, because we intend to fund a portion of our equipment purchases with debt. Turning now to the balance sheet and how we used our cash. We ended the quarter with $127 million in cash and $174 million in debt, including capitalized leases.

We spent $47 million on capital expenditures this quarter for containers, land, tractors and IT projects. That brings total year-to-date capital expenditures to $107 million. Capital expenditures are expected to range from $155 million to $165 million in 2017. We ordered 4,000 containers.

We expect to purchase between 100 and 150 tractors and about 1,300 chassis and to expand our corporate headquarters. We are evaluating whether it’s best to finance our equipment purchases with leases or debt. We will also be investing in technology projects. Dave, over to you for closing remarks..

Great. Thank you, Terri. We are pleased with the 2016 results and we are looking forward to 2017. As I hope we effectively conveyed in our prepared remarks, we believe the pricing environment will improve as we progress through the year and we remain committed to grow in all of our lines of businesses and believe that we are well positioned to do so.

And with that, we will open up the line to any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have Ben Hartford from Baird on the line with a question. Please go ahead..

Hey, good evening everybody.

I will stay on the intermodal side I guess, for my 2 – or 1.5, Dave as you think about growing the business again maybe provide some perspective on the sources of the volume growth of 5% this quarter and the 3% to 7%, presumably both above markets, what are the sources of these, is the volume winning back business that you have lost in prior years or are they new highway conversions?.

No. Some of it will definitely be highway conversion. We are very focused on that right now Ben and believe that the timing as fuel prices would go – continue to increase, spot market pricing appears to be adjusting upward a bit that this is a good time for truckload conversion.

It’s also a part of our overall strategy of focusing on specific clients and working to gain their business in areas that will help our network, so that we can actually give them a good price service combination, thereby allowing them to use us.

And so this has worked out very effectively, broadening the services that we are offering not just intermodal, but introducing the truck brokerage product, Unyson, were appropriate. All of that helps us to grow the core intermodal business. So we think that we have got a lot of momentum behind us at this point..

Okay.

And then more strategically Dave, as you have kind of – as you have been reevaluating I guess the business over the past several months now, talking about the Eastern intermodal strategy specifically, could you provide any context of kind of how you view your situation with your current partner and to what extent might there be opportunities to potentially alter that strategy, diversify, etcetera, I mean any changes on that Eastern intermodal market in particular as you think about Hub intermodal?.

Well, I think that the main thing is we do think that the Local East, that again, the truck prices are rising a bit, we do think that it’s a good time to be able to expand and convert business from over the road. So I wouldn’t see any major changes.

I think that the environment in 2017, particularly as we progress through the year, is going to become more and more favorable for intermodal. And we will make it a lot easier for us to in fact convert some of that business, which we didn’t lose two trucks as the fuel prices had declined..

Ben, that will be the first market that will tighten up when trucks do get tight in the third and fourth quarter, Local East..

Okay, thank you..

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

Thanks. Good afternoon and congrats on the quarter.

So obviously, we saw a substantial pick up in brokerage during the quarter, but I was wondering if you could give us a sense for how much of that growth in brokerage was e-commerce related? And looking ahead, could you just provide a little bit more color on your expectations for truck brokerage from both the revenue and margin perspective in 2017?.

It was a – our growth in this quarter, the 33% volume growth, Justin, was primarily new customers and seasonal business. Some of that seasonal business was e-commerce, to answer your question on that.

And then, in terms of their growth in truck brokerage growth in 2017, it’s tough to say because we are not sure what’s going to happen with capacity and the market. But our best guess is that for the full year, top line might be up, between 10% and 15% and margin could be up anywhere between 5% and 10% in brokerage..

Yes, Justin, this is Don. So at the end of the day, what we have tried to do over the last few years is to penetrate our customers across our business lines. And we are seeing the fruits of that with brokerage and logistics. So we have grown with our existing customers. We have added new customers that we haven’t had last year in 2016.

So what we are seeing is a mix of that. And of course, e-commerce is part of that also..

We had 11 new customers in truck brokerage at the top 50 growing customers..

Great. That’s all helpful.

And Terri, maybe one clarification on your comment on truck brokerage margins, could you maybe talk about what your expectation is for that margin percentage within truck brokerage for this year?.

Yes. It’s – for the – it’s hard to say because we are not sure what’s going to happen with capacity. Capacity is pretty loose right now as it tightens up with ELDs go into effect at the end of the year. We are not sure how that’s going to impact the markets.

But I can tell you that overall, our best guess for margin percentage is what we said in our guidance for the whole company, is the 12.2% to 12.8%..

Okay, but kind of hard to tell, within truck brokerage, what that will be. You referenced the 5% to 10% improvement.

I thought that might be gross margin dollar improvement versus gross margin percentage?.

That was the dollar improvement, yes. I mean, we think we could get squeezed. We did – year-over-year, truck brokerage margins were down 70 basis points, that was because of lower customer contract rates..

Exactly..

And it was up sequentially from Q3 to Q4 80 basis points. That was predominantly because of more value-added services..

Okay.

And lastly maybe to just follow-up on the trend that we have seen in e-commerce and the pickup in your business, can you help us give us a sense for how margins in that e-commerce business within truck brokerage compare to consolidated truck brokerage margins, is it a favorable mix?.

Yes, I would say it’s slightly higher than our everyday business at brokerage, because we are providing more services. It’s 24/7, it’s additional capacity. So it would be higher, but I wouldn’t say it’s significantly higher..

Okay, great. That’s helpful. I will leave it at that and pass it on. Appreciate the time..

Thank you, Justin..

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

Great. Thanks. Good evening, everyone.

Dave, just on the pricing expectations, the 1% to 3% in 2017, is that where the market’s at? Is that where the market’s at now or is that something that you think is more achievable because of your targeted focus and kind of the fact that you are targeting certain customers in certain lanes? I am just trying to get a sense of kind of your view on achieving kind of that low double-digit pricing range for this year?.

Yes. I think that’s a really interesting question, Todd, because part of it is due to our targeting specific lanes where we believe we may have a competitive advantage in specific clients. But I would say we are obviously very early in the bid season, but what I have seen thus far is not particularly how I would originally forecast everything.

We have a competitor that is showing very aggressive behavior in and out of California. Now this could be an aberration but that will certainly, if that continues, it will make it much more difficult for us to get to the high end of the range..

Okay.

So what you are saying is that when you set up the 1% to 3% and now, with what you are seeing with certain participants within the market, maybe it makes the 1% to 3%, it’s a little bit more competitive now than maybe what you thought when you think about the 1% to 3%?.

Yes, Todd, obviously, it’s very, very early in the bid season. And so we don’t want to just judge the first two dozen bids we have seen and the reaction to that on what the entire season. We started out last year with a very aggressive pricing environment that did kind of lapse as time went on through the year.

But I am just saying and it’s just one competitor that is being particularly aggressive into Southern California that in a market that all candor at this point in time, we are so far under truck that it doesn’t seem to be very compelling or to make any sense whatsoever, but that’s the environment we are in.

We do think that pricing will rise as we go through the year. And so we are still comfortable with that range. As I said though, it will just be more difficult to get to the higher end of the range if in fact the existing pricing of that one competitor continues..

Okay, good. No, I would agree with that about building momentum throughout the year. Just for my follow-up, Terri, on the gross margin guidance, the 12.2 to 12.8, I think in the past, you talked about first half versus second half.

Can you just help us think about, because I know that some of this is going to depend on when the new contract rates are put in and the comparisons are different on a year-over-year basis, but do you have a sense of maybe where gross margins would be in the first half of the year versus the second half of the year?.

Sure. We expect that gross margin dollar growth will accelerate as the year progresses. And we will continue to see the headwinds from the decrease in the freight rates, resulting from bid season last year and the first half of this year.

We expect gross margin as a percentage of sales in the first half of this year to be similar to or slightly higher than the fourth quarter of 2016. And there are a lot of moving parts for the back half of the year and that’s why we have a range.

It will depend on the pricing environment that Dave talked about, rail cost increases and capacity in the truckload market..

Okay, that helps. One last one, if I could just sneak it in.

Do you also have the dollar amount for the higher incentive compensation for the fourth quarter – for this quarter?.

Compared to the third quarter sequential?.

Yes.

I just feel – I thought in the prepared remarks, there were some comments about additional bonus or expense here in the fourth quarter and I just wasn’t sure if you had a number for that?.

I do. Year-over-year, that was up about $1.6 million. Sequentially, from Q3 to Q4, it was up about $5 million..

$5 million, okay. Okay, thanks a lot for the time and nice quarter..

Thanks, Todd..

Thanks, Todd..

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

Hey, thanks. Good afternoon everyone. So, just wanted to follow-up on that last question.

So Terri, if we had gross margin percent in that, call it, like 12.5% range, give or take, in the first half of the year, do you think that gross margin dollars can be higher or is all of the gross margin improvement and I guess earnings improvement more in the back half of the year?.

Yes, good question. It’s more back-end loaded, to answer your question. It will be challenging with the decline in the freight rates that we have carrying over from last year’s bid season to see gross margin dollar growth in the first half of this year. And we are hopeful we will see that accelerate as the year progresses.

And so our earnings would do the same thing..

Okay.

And then can you just kind of share with us kind of early take on what you are expecting for rail cost increases this year? And what that should mean for intermodal gross margin percents?.

Yes. Scott, this is Dave. We, of course, we know where we are with our Eastern carrier and we are still in discussions with our Western partner. And so we think we have a range of where we think it’s going to be and it will fall within our budgeting. So – but at this point, we don’t have an exact amount for 2017 with the Union Pacific..

Okay.

But your guidance suggests you think you will get intermodal gross margin expansion this year, percent?.

At the high end of the guidance, right. At the high end of the guidance is where we cover our rail cost increases with our price increases. That’s our best guess. And we are projecting anywhere between 3% and 8% growth in intermodal margins at the Hub segment..

Okay.

And just lastly real quick, can you just remind us how your model in intermodal works with respect to fuel higher this year, is it a pass-through, does it helps earnings, hurt earnings?.

It’s pretty much neutral. We obviously pay the rails, what their fuel surcharges and then our clients. It’s been so long since I have looked at it, but I think it’s 70% or 80% of our clients have their own fuel surcharges that – and some of them are punitive and we build that into our rates upfront.

Some are realistic and we obviously then give them lower rates, so it’s really all over the ballpark and it’s really very customer specific..

And it’s basically a flush [ph], I mean it’s….

Okay. Thanks so much, guys..

Thanks Scott..

And our next question comes from Thomas Wadewitz from UBS. Please go ahead..

Good afternoon, it’s Alex Johnson on for Tom..

Hi Alex..

I wanted to go back to the question and comments about a particular competitor being aggressive out West and I guess try to tie that also to maybe some demand commentary, what you are seeing in demand in January and I guess even into the first couple of days here February, you provided great commentary in terms of the progression of demand in the fourth quarter, but any thoughts in terms of demand in January and then if that’s having an impact out West, I think there has been some weather out West?.

And of course, the weather impacts everybody, whether it’s truck, rail, etcetera. But it certainly did have an impact on some of our service levels. As far as overall demand right now, I would say it’s up a little bit versus what we have seen last year, if you look at January 4, January was up a bit.

It was actually up close to 5%, but it had an extra business day. Although January extra business days don’t really count for much in all candor, but nonetheless it did, so it’s up a bit. This is the 2 February, I don’t really have any commentary on February..

Following with January, I would say it was okay, but it wasn’t at what we have seen obviously the third and fourth quarter..

But we are encouraged because it does appear certainly that the inventory levels are much leaner than they were last year. Last year, there is no question, we had an inventory surplus in [indiscernible] and a lot of that has been sold off.

And so as a result of that, we do believe that we are going to volumes and demand will pick up as New Year goes on..

Okay, great.

And yes, sorry, I didn’t mean to expect that you would have commentary on February at this point, but...?.

No problem, Alex..

And then, just another question, in terms of the logistics on-boardings, how would you expect that to ramp through the first half of the year, is it pretty steady through the first half of the year, more geared towards first quarter or second quarter, just any thoughts you can provide there, I would appreciate it..

We got just on-boarding is going on right now through the first and second quarter. So what we saw in 2016 was not only the on-boardings that we had throughout 2016 that were robust, we also see 2017 starting out the same way. So our on-boardings are strong for the first and second quarter..

Great. Thanks for the time..

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

Hi, this is Dan [indiscernible] on for Brandon. Congrats on the great quarter, guys.

Just wanted to quickly ask about your capital plan going forward, CapEx is coming up pretty significantly and just curious to hear what that means for debt issuance and maybe buyback expectations going forward?.

Our CapEx, you are right is we projected about $155 million, $265 million in CapEx. And in terms of debt issuance or leases, for that CapEx, we haven’t decided yet, which we are doing, we are evaluating our options now. But our guess is we will use a combination, some debt, some leases.

And in terms of share buyback, we are probably going to save our cash for acquisitions, that’s our preferred use of cash. And we did our $100 million share buyback last year, so – but we likely will not be doing one this year..

Appreciate it.

And then on the intermodal side, just given that rail service metrics are kind of starting to deteriorate as volumes pick up a little bit, could you talk little bit about how that might impact your repositioning in drayage costs for the intermodal business, is that going to be…?.

If I look at the fourth quarter it actually, service impact was slightly better, about 5% better than it had been year-over-year. January, it really is a crapshoot. Obviously, when you have massive snowstorms, such as we have had out West that creates avalanches, there is going to be some deterioration in service.

But thus far, we haven’t seen anything that has really negatively impacted us from a financial perspective in as much as additional costs with drayage or storage or anything else. So I mean we have seen worse, certainly 2014 was much, much worse, but those types of unforeseen events.

So I would say that, I believe that the rails our Western partner has recovered well from some of these avalanches, which have been pretty horrific. And just with the size and volume of snow that’s going on out West, so it really has not had an impact on us to-date..

I would call it a blip. It’s not really impactful..

Okay. Thank you..

And our next question comes from Bascome Majors from Susquehanna. Please go ahead..

Thanks for getting me on this evening.

It’s been about a year since you hired Geoff to lead the M&A strategy, you made some comments earlier, but I was just curious if you can give us an update, have you been close at this point on multiple opportunities and maybe what the sticking point has been in those that you chose not to go forward with?.

We have looked at multiple potential acquisition targets. We have ongoing discussions with a few. Probably, some of it, as you get – dig in deeper, that there can be cultural fits that are an issue. It can be issues with the business itself because we have some very basic criteria, some of which is that it can’t to be a fix or upper.

It’s going to have good management. We have to have good cultural fits. But we have some discussions going on now that I think we feel good about. I think that when Jeff first came onboard, we discussed how would we define success in 2016.

And I think from a number of properties and the way that we have refined our focus on acquisition targets, I think it was a very successful 2016 and I am looking forward to actually getting something under our belt in 2017..

Thank you for that.

So to your last comment, it sounds like the pipeline here is as good or better, can you just give us a sense of how it looks today versus six months ago?.

I would say that the opportunities that we are looking at are much more – the fit is good and I think the discussions are very fruitful right now.

So I think that – I think we are going down the right path on this and again as we anticipated, Geoff brought a lot of expertise in this area and he has done a great job in finding these candidates and moving forward on..

To add to that, I think we have added the a process now that we have got into place where we can look at company better. We can move quicker and do the evaluation faster. So it was a process and I think Geoff has done a good job of bringing us through that..

Thank you for all the detail there..

Okay, thanks..

And our next question comes from Matt Brooklier from – I apologize, Ben Hartford from Baird is online. Please go ahead..

Thanks for getting me back in.

Terri, just a few quick points, so when we think about kind of the run rate CapEx, you give a number for ‘17, but going forward, is this – I imagine the $160 million is a little high for run rate, perhaps not, but how are you thinking about ‘18 and beyond?.

We are thinking a normal year of CapEx would probably be between $100 million and $125 million. That comprise of a couple of different areas. Our technology costs will be elevated for the next few years for our transportation management system because we believe that’s a differentiator and a critical investment.

So we estimate our CapEx for technology could range between $15 million and $20 million, prospectively. We will also continue to invest in equipment, which includes tractors, containers and chassis. And our best guess there is we buy between 2,500 and 3,000 containers each year, which translates to between $25 million and $30 million.

And then, we will replace our tractors when they are 5 years old and purchase tractors to support our growth in key markets where it makes sense.

Our best guess there is we buy between 250 and 350 tractors a year, which equates to between $35 million and $50 million and then assuming we continue to invest in chassis that could be around $15 million a year..

Okay, that’s helpful.

And so on the back of that D&A, 20% inflation this year, so is that a good annual D&A inflation number to think about as CapEx is rising here?.

Yes..

Yes.

And then, lastly, tax rate, I don’t know if you gave that for the first quarter or for the full year either, both of those for ‘17?.

For ‘17. We think it will be between 38% and 39%, assuming all else being equal we don’t have changes in the tax laws..

Although we are rooting for 15%..

We are..

Thanks for the time guys..

Okay, Ben..

[Operator Instructions] And our next question comes from Matt Brooklier from Longbow. Please go ahead..

Hey, thanks. Good afternoon.

I wanted to circle back to potential M&A and just ask a question, what does an ideal target for you guys look like from a transportation mode perspective, from a structure perspective? Would you prefer a company owned model versus an aging model? I am just trying to get a sense for what you are shopping for in the marketplace right now..

Sure. I think that part of our focus is to continue to diversify our service offerings to our clients. So, diversification play is something that would be critically very relevant to us, such as dedicated trucking. We certainly are willing and have focused on adding on businesses on to some of our core businesses. That certainly isn’t out of it.

But I think that if we look at it, we would prefer to be company-owned versus agent-based. We feel as though we have a very strong agent model with mode.

We really do think it’s the best agent model out there today and to throw levels of complexity of it, at the management and take them away from focusing on bettering the agents and driving the agents forward to be able to grow and make more money. I think we would probably be doing them at the service. So, it would be company-owned.

As I said, we have got some pretty basic criteria with cultural fit and management teams and now the fixer upper immediately accretive to earnings is critically important to us. So, it’s not an in – there aren’t insignificant hurdles that we have self imposed upon ourselves..

Okay, that’s helpful.

And your – I guess with the dedicated trucking comment, you are comfortable with potentially getting more heavy from an asset ownership perspective?.

We are. We do think that it’s a critical component to what Hub will look like in 5 and 10 years. We think that the dedicated space is one that has tremendous opportunities. We will continue to see it grow at a very rapid pace.

And again, we would – particularly with something where you have more asset intensity, where you have more truck drivers, etcetera we are very focused on safety culture and being able to make sure that it really is very much culturally aligned with us..

Okay, that’s all I got. Thank you..

Okay. Thanks, Matt..

And our next question comes from Matt Frankel from Cowen. Please go ahead..

Hi, guys. Two things for you. One on the TMS, it’s going to touch seemingly everybody at the company, clients internally. Each of the three business lines, I am wondering if you can talk about the timing of this rollout, how it’s going.

If you can give some examples on the way it’s going to enhance the business, make it more seamless, just anything on that front, because it seems to be pretty important and we haven’t touched on it yet?.

This is Don. So we went down the path of implementing TMS with our logistics business and we are roughly 60% into that. Meaning we are converting all of our existing clients on to the new platform and taking them off the old platform. And any new business that comes on on-boardings in 2016 and 2017 will be on-boarded with our new TMS.

So the endgame of this is to provide our operating systems where we have visibility across the network, across our intermodal product, our truck brokerage and logistics, to be able to see capacity in the marketplace and to be able to give our customers visibility to that and also our operators to do that.

So down the road, we will see a one platform across visibility, across all our businesses..

If I may just add to that is that this is based on Oracle’s TMS, we are not building this. We have – we are not – we see building software, well, we did a lot of research over the last several years on [indiscernible] platform and Gartner and everything that we saw with it said that Oracle was the best product to build upon.

And so we are going down that path. As I am sure you are aware, the upfront software expense is really not that great.

It’s the implementation costs and the amount of money you have to spend on consultants and advisors to make sure you get them right, because there is so much power within the system you need to make sure that you are using it effectively. And I think that we are going down that path properly..

Thank you.

Do you have a timeline in terms of when you want to have this system touching every part of the business and having that clear visibility across all business lines? Is there by 2018, ‘19, ‘20, something like that?.

Yes. We will have our intermodal business on-boarded the latter part of 2017, beginning of 2018. And shortly thereafter, we will start on-boarding on truck brokerage. So by the end of 2018, beginning of 2019, we should have all the businesses online..

Got it. Thank you.

And the last thing I want to ask about was cross-border Mexico, can you just remind us, what percentage of your revenue or can you give us a number is cross-border?.

I am going to go to Terri to give you the exact percentage, but I will talk about that..

It’s about 3% of our total volume..

So, we have an emphasis on you talked about growing our business across our business units. We have a strong push right now to grow our cross-border business, not only in Mexico, but also Canada. To have a push and pull system, we were pushing business into Mexico and then pulling it back into the states. Same is true with Canada.

So we have a strong emphasis on that. It’s too small a percentage of our business and we need to grow it..

Okay, alright. Fair enough. Thank you..

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

Thanks. Good afternoon. Just quickly here. I am guessing this is hard to gauge, but wondering if you have come across any hints from international intermodal customers that they are beginning to shift or have been shifting more cargo from the West Coast to East Coast through the Panama Canal.

And I am guessing, any impact over time would dissolve in the Transcon business?.

We see very little of that. The only thing we have seen a shift of is north of LA, where Seattle has become more prevalent in 2016, but we have not seen a shift to the East Coast ports yet..

Are you hearing more chatter about that or is it still mostly the way it’s been?.

I have not. Our customers have not..

I think the East Coast ports, they have very strong years..

Yes..

And the west might have been a little more flattish for the overall 2016, but there is no doubt, at least some conversion, but it doesn’t seem to be anything that’s really monumental at this point..

Great. That’s all I had. Thanks..

And our next question comes from Thomas Wadewitz from UBS. Please go ahead..

It’s still Alex here. And just a quick follow-up for Terri, I think interest expense was one of the three key assumptions in the guidance that you outlined earlier.

What interest expense should we model for 2017?.

Yes, Alex, we are thinking that if we financed everything with debt, it could be up to $1.5 million more in interest expense..

Okay, great. Thank you very much..

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

Thanks for taking the follow-up. Just wanted to ask or clarify something on intermodal pricing. You talked about a 1% to 3% increase this year, and I am guessing that your realized intermodal pricing in the first half might be worse in that range, just given the competitive environment we saw during the bid season last year.

So does this guidance actually imply that pricing during the 2017 bid season is above that 1% to 3% range?.

The guidance in the – that’s guidance for the second half of the year? So during....

So that’s for the bids – it’s for the 2017 bid season..

Correct..

Correct..

Okay, that’s helpful to clarify.

And then lastly, Terri, you gave guidance on consolidated gross margin expectations, but I was wondering if you could talk about your gross margin expectations for the Hub segment and should the quarterly trend be pretty similar to what you talked about on a consolidated level?.

Sure, Justin. We expect the gross margin dollars for the Hub segment will increase between 5% and 10% and we expect more margin growth in the last half of the year than the first half of the year because of the decline in freight rates resulting from last year’s bid season.

Q4 gross margin as a percentage of sales should be sustainable for the first half of the year and same as for the consolidated guidance, the full year – the second half has a lot more moving parts and that’s why we have the range because that will depend on the pricing environment, the rail cost increases, what happens to capacity and the truckload market.

And at the high end of the guidance range, we assumed we cover the rail cost increase with the price increase..

Great. That’s very helpful. Thanks, again..

I will now turn the call back over to Dave Yeager for closing comments..

Great. Well again, thank you for joining us on our fourth quarter earnings call. As always, Terri, Don and I are available if you have any further questions or follow-ups. Thank you again for joining us..

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..