Earnings Call Transcript - HUBG Q4 2021

Operator, Operator

Hello and welcome to the Hub Group Fourth Quarter 2021 Earnings Conference Call. Dave Yeager, Hub's CEO, Phil Yeager, Hub's President and Chief Operating Officer, and Geoff DeMartino, Hub's CFO are joining me on the call. 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 or contained in the release, represent the company's best good faith judgment as to what may happen in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project, and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form10-K and other SEC filings regarding factors that could cause actual results to differ materially from these 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.

Dave Yeager, CEO

Good afternoon. And thank you for participating in Hub Group Fourth Quarter earnings call. Joining me today are Phil Yeager, Hub's President and Chief Operating Officer, and Geoff DeMartino, Hub's Chief Financial Officer. Fifty years ago, my parents founded Hub Group. On this the 50th anniversary, we're reporting record revenue and net income for the fourth quarter and for the full year. Strong freight demand coupled with the attractive value proposition of our services has led to a record $4.2 billion in revenue, an EPS of $2.48 for the quarter, and $5.06 for the full year. We remain focused on providing value-added services by integrating our business with the needs of our customers. We will continue to diversify our non-asset based services while focusing our capital investments on technology and growth in the intermodal business. From a macro perspective, we expect positive economic conditions will continue to benefit our customers. We're very fortunate to work with customers who have been winners in today's economy. The macro outlook remains favorable with 4% GDP, strong retail sales, an declining unemployment rate, and strengthened imports. In addition, retail inventory to sales continues to be at historically low levels and our customers continue to tell us that their shelves need to be restocked. On the supply side, the outlook for truckload capacity continues to be constrained due to a shortage of drivers, backlog of imports, issues with truck production, rising insurance expenses, and a drive of regulatory changes. We believe that 2022 will be similar to 2021, in as much as our prices will increase faster than our costs as the economy continues to experience inflationary pressure. With that, I will turn the call over to Phil to review our business lines.

Phil Yeager, President and COO

Thank you, Dave. I wanted to start by thanking all of our team members across North America for all their hard work and commitment to our customers, which resulted in record financial performance and several awards for our service and sustainability efforts this year. I will now discuss our service line performance for the quarter. Intermodal revenue increased 25% in the quarter despite a 9% volume decline after 11% growth last year. Transcon volume was flat while Local West declined 10% and Local East declined 14%. Gross margin as a percentage of sales improved 960 basis points year-over-year driven by improved yield management and network balance which more than offset rising transportation costs. Network fluidity declined in the quarter both sequentially and year-over-year as rail transit and street well remain elevated. We are continuing to focus on improving our productivity while collaborating with our customers and rail partners to increase utilization of our latent capacity. Looking ahead, we anticipate a return to stronger service as investments from Hub Group, our rail partners, and customers drive greater throughput in our network. Demand remains strong and we plan to invest to support our customers by expanding our intermodal fleet by 6,550 units this year, while continuing to grow our driver fleet. Dedicated revenue declined 8% in the quarter despite improvement in revenue per truck per day and reduced third-party usage which led to a 30 basis point improvement in gross margin as a percentage of sales year-over-year. We have improved our service offering and operational discipline and have a great pipeline of strong return opportunities in onboardings, which we believe will lead to growth this year. Logistics revenue increased 13% year-over-year in the fourth quarter, driven by strength in final mile and consolidation, which was offset by lost accounts from the prior year in our managed transportation offerings. Gross margin as a percentage of sales increased 390 basis points year-over-year as new business onboardings and yield management improvements as managed transportation and final mile offset warehousing and transportation cost increases in consolidation. We continue to have extremely strong demand for our services given the dislocations in the global supply chain and anticipate continued growth this year. Brokerage revenue increased 112% year-over-year on 48% higher volume due to the acquisition of Choptank as well as organic growth in our full truckload and LTL solutions. Gross margin as a percentage of sales declined 290 basis points year-over-year, as we executed higher revenue per unit spot shipments, which comprised 51% of our volume in the quarter. The acquisition of Choptank has exceeded our expectations. We are winning with our customers and on track with our integration plan. We're off to another strong start this year and see ample opportunity to leverage our expanded network, strengthened systems, and sales force to drive growth through cross-selling. With that, I will hand it over to Geoff to discuss our financial performance.

Geoff DeMartino, CFO

Thank you, Phil. Q4 featured all-time record revenue at profitability levels, both for the quarter and the full year. Revenue grew 32% in the quarter and 21% for the year. Our yield management and cost recovery efforts led to a record gross margin of 16.9% for the quarter and 14.2% for the year. Gross margin performance, and our focus on operating efficiency led to operating income of $118 million for the quarter or 9.3% of revenue. For the full year, our operating income was a record $238 million or 5.6% of revenue. Salaries and benefits increased from last year due to our recent acquisitions, as well as higher incentive compensation expense. G&A declined compared to last year due to a $10 million gain on sale from the transportation equipment offset by higher expenses related to the acquisition. Our diluted earnings per share for the quarter was $2.48, which is nearly four times the prior year, highlighting the substantial operating leverage in our business. We generated $152 million of EBITDA in the quarter and $369 million for the full year. With cash of $150 million and net leverage of 0.3 times EBITDA, we continue to have substantial flexibility to invest in our business through capital expenditures and additional strategic acquisitions. We have a bullish outlook for 2022. With continued demand from our customers, driven by strong macro trends, growth in consumer spending, and low inventory level. We expect supply chain conditions will continue to be constrained and that our yield management and operational efficiencies will lead to further growth in earnings. For 2022, we are expecting EPS of between $5.90 to $6.30. We expect to grow revenue to approximately $5 billion, putting us well on our way to achieve our goal of $5.5 billion to $6.5 billion of revenue by 2025. We expect intermodal volumes will return to growth in 2022, supported by our container deliveries and improving rail service. We forecast gross margin as a percent of revenue of 13.9 to 14.3 for the year. As rate increases, surcharges, and asset turnover ratio offset higher costs for rail transport, third-party drayage, and driver wages. For the year, we expect costs and expenses of $425 million to $445 million. We expect our earnings will be roughly similar for each of the quarters of 2022 as seasonal strength and yields in the back half is offset by rising transportation costs as the year progresses. Our capital expenditure forecast is $240 million to $270 million. We have ordered 6,550 containers for 2022, which will result in net growth of 6,000 or 14% after retirements of older units. This comes on top of 8% growth in 2021. We also intend to take delivery of over 750 tractors, the majority of which are replacements for older models that have an attractive ROI with lower maintenance costs and improved fuel efficiency. We will also be finishing up a significant expansion of our headquarters campus in 2022, another example of the investments we're making for our future. In 2021, we introduced our long-term revenue and margin targets. Our recent acquisition of Choptank, NSD, and CaseStack, and the significant investments in our fleet are illustrative of the type of strategic investments we will make in our business. Adding scale, we're also introducing new service offerings with strong cross-sell potential. Dave, back to you for closing remarks.

Dave Yeager, CEO

Thank you, Geoff. Needless to say, 2021 was a strong growth year for Hub. We believe 2022 has the same opportunity as we continue to expand our service offerings while investing in our core business bringing significant value to our clients. And with that, we'll open up the line for any questions.

Operator, Operator

Thank you. We'll now begin the question-and-answer session. Our first question comes from Justin Long from Stephens. Your line is open.

Justin Long, Analyst

Thanks and congrats on the results. I'm still in a little bit of shock after seeing that. Maybe kind of start with that point. If I think back to when you gave guidance in October versus these results today that came in roughly $1 above what you were expecting, and the street was expecting. Can you just help us bridge the gap to where the upside primarily came from? And I guess more importantly, can you talk about those drivers and what you feel like is sustainable going into 2022 versus anything that is maybe more transient or one-time?

Geoff DeMartino, CFO

Sure, Justin, this is Geoff. Thank you for your comments. Q4 exceeded our expectations. We observed strength in several areas of our business. The intermodal segment benefited from holiday surcharges and our yield management actions, resulting in a higher gross margin than anticipated. Additionally, Choptank performed better than we expected in the fourth quarter. Our logistics business has effectively improved yield. While the top-line results are not yet where we want them, we anticipate improvement next year, and the team has excelled in managing gross margins. Below the line, we outperformed expectations due to strength in gain on sale, with more units sold at significantly higher gains than planned, contributing to our Q4 success. Looking ahead, we expect to maintain similar conditions regarding freight demands and constrained supply chains, and we believe we can enhance our pricing next year. However, we do foresee significant cost increases in rail and anticipate remaining competitive in driver wages, which will also increase during 2022. Additionally, we expect our usual merit increases to take effect in February, and we predict some softening in the used truck market over the year. Therefore, we do not anticipate performance to be as strong next year.

Justin Long, Analyst

Okay. That's helpful rundown, and maybe as my follow-up, any way we could get a little bit more color on the intermodal expectations that are getting baked into the 2022 guidance. I know you said volumes shouldn't grow, but could you give us some order of magnitude on the growth you're expecting for intermodal volumes, maybe intermodal price and the trend in accessorials?

Geoff DeMartino, CFO

Sure, we are expecting a return to growth next year on the intermodal volume side low-to-mid-single-digits, really driven by the container deliveries, a lot of which we got in Q4, and then we're starting to take delivery right away in Q2 here in 2022, that will help with our volume. We expect rail service will continue to improve, that will help create some capacity in our network to be able to handle that volume that we think will be there. And on the price side, we're expecting for the full year we'll realize mid-single-digit price, we'll start off stronger in the first part of the year, and then the year-over-year increases will come down into the low single digits by the time we get towards the end of the year.

Justin Long, Analyst

That's helpful. Thanks again.

Geoff DeMartino, CFO

Welcome.

Operator, Operator

Next question comes from Scott Group from Wolfe Research. Your line is open.

Scott Group, Analyst

Thanks. Good afternoon, guys. You said at the beginning that you think pricing outpace costs, but when I look, the guidance is for gross margins to be flattish year-over-year. Can you help us understand those two comments and maybe just along those lines, if you have thoughts on first half versus second half, gross margins on the guidance?

Geoff DeMartino, CFO

We expect the margins to remain approximately stable. We plan to address our cost increases through pricing adjustments. However, we anticipate that transportation costs will continue to rise year-over-year, particularly in the latter half of the year. As we approach that period, we expect to see typical surcharges and seasonal strength, which we believe will be counterbalanced by the rising transportation costs throughout the year.

Scott Group, Analyst

What do you think that roughly means for first half, for second half, gross margin?

Phil Yeager, President and COO

Gross margin percent, I think it's going to be pretty consistent throughout the course of the year.

Scott Group, Analyst

Okay. And then on the volume guidance low to mid-single-digit, I think if we're thinking about this right, the container count is going to be up over 10% and it sounds like you're assuming some improvement in service and then maybe some reduction in accessorial. So in planning, improved fluidity lies in the volume better.

Phil Yeager, President and COO

Well, the containers come in throughout the course of the year. So on a full-year basis we're expecting that low to mid-single.

Scott Group, Analyst

Okay, and then just one last thing. Could you share what you're currently observing at the ports? Are you seeing any improvements? Also, what are your thoughts on the shifts in market share for this year or next year? Thank you.

Dave Yeager, CEO

Okay. This is Dave. As far as some of the new entrants that are coming on to the Union Pacific, we've been competing with them for many, many years. And so we really don't foresee a significant competitive change. I'd point out that Hub as the largest intermodal partner on the UP, in fact, we're twice the size of Schneider Intermodal and five times the size of Knight Intermodal. And we also have 40% more drivers that we have allocated towards intermodal than either of our competitors. We have a great relationship with the UP. And I think on a very positive note is that we have a long-term contract that featured benefits that come with that kind of scale. I would suggest to you it's also on the positive side that UP is gearing up for additional business by investing $600 million of capital in 2022, targeting specifically chassis as well as terminals. So bottom line is, we view these commercial changes to be basically a net neutral for Hub and not a major competitive change.

Geoff DeMartino, CFO

This is the only other thing I'd highlight is that with one of the other providers coming onto UP being aligned with Norfolk Southern that will give us maybe a little bit more density than the two other asset-based providers that are aligned with UT and CSX. So we think with NS, we have a better reach, more density, and a lot more interline options that will provide a good service. On the port side of your question, I think we aren't seeing a rapid improvement in congestion there. Demand for international remains very strong. And we're seeing that in the import of our own containers. So if we even see some improvements over the next few months, you're in Q2, Q3, you're already back in peak season again. So at this point we don't see a massive improvement in port congestion this year, and that should continue to provide opportunities for us to grow well into 2023.

Scott Group, Analyst

Thank you, guys. I appreciate it.

Operator, Operator

The next question comes from Todd Fowler from KeyBanc.

Todd Fowler, Analyst

Great, thanks and good evening. I wanted to ask your views on rail service, and I guess in the context of how important I understand from the volume guidance and the expectations that you're embedding improvement in rail service. When I look at the fourth quarter and I think about the results you're able to put up, there is a message that if rail service doesn't improve materially, you can still get to a similar answer and it's just a movement between volume and price. And I guess, how important do you view your rail service in the context of your guidance? I understand that's important from a service perspective, but just from an outlook standpoint, how are you thinking about that?

Phil Yeager, President and COO

Yes, you're absolutely right Todd. We do want to see improved service long term, that's the right thing that's going to allow us to convert more business from over the road. I think as our customers get their inventories in better order, they're going to look to extradite fewer shipments, going to convert more intermodal. So having capacity and a better service product and a more consistent one available is really going to help. We have seen at least at this point a slight deterioration from Q4 to Q1. I think that's winter weather-driven as well as we just haven't seen the investments really take hold. We're hoping as weather really starts to subside that we can see that improvement. I think the other piece for us is we've actually seen an improvement year-over-year in our end service product to our customers. So we're really excited about that, though even in disruptive times, we're able to improve our service products. They're really pleased with that. I think with the question around margins, and does that deteriorate a service improve? I don't see that at this time given the demand that is out there, given the constraints in the driver market. And it really with accessorial revenue potentially subsiding at this point, we'd much rather be moving that volume. The opportunity cost is much higher. And so we think that'll be a good formula for us going forward.

Todd Fowler, Analyst

Now, Phil, that makes a lot of sense and it really was more in the context of, it seems like with the business that the guidance isn't so much dependent on the improvement in rail service. We certainly understand that the service component of itself that's helpful. I guess just for my follow-up, how do we think about the 2020 guidance in the context of the 2025 guidance. And I know that 2025 wasn't supposed to be a straight shot but when I look at the high end of your revenue guidance for '22 and the low end of your guidance for '25, you're pretty close. Would your expectation be that things level off post '22 or is it something that you feel more confident in achieving the '25 targets maybe on the earlier side? Thanks.

Phil Yeager, President and COO

No, I mean, we did give a range. Though, I think the guide is going to get a big chunk of the way there. I mean, part of the way we are getting there is both organic, but also through the benefits of the acquisition of Choptank, which I think we're going to continue to do. So if we can continue to make acquisitions like that, we would anticipate being towards the higher end of the range by 2025.

Todd Fowler, Analyst

Okay. Thanks for the time.

Phil Yeager, President and COO

Welcome.

Operator, Operator

And the next question comes from Elliot Alper from Cowen. Your line is open.

Elliot Alper, Analyst

Great. Thank you. So on the brokerage side of the business, last quarter, you discussed some of the cross-selling opportunities for Choptank. Can you discuss some of those wins in the quarter and whether most of that low-hanging fruit has materialized and how we should think about the brokerage margins in '22?

Phil Yeager, President and COO

Sure, yes. This is Phil. We are really excited about the Choptank acquisition, it’s been a great cultural fit thus far. They have a great team and move with a lot of speed with that group in particular. And so that's been phenomenal. We've actually seen three record months from the Choptank organization, right out of the gate, which is phenomenal and we want to continue to see that. We're ahead of schedule on our cross-sell targets, but to me, we've only really scratched the surface of that. I think the only other interesting thing I'd share with you is that sometimes during an acquisition you get a little nervous around shared customers and how that will play. We've actually seen a real positive come out of that where we have a joint relationship with those customers and we're actually able to create even more value, not actually deteriorate the existing relationship. And so I'd say all in all, we're really excited about the progress we're making and think there's a huge opportunity that we're really just getting started on. The only other piece I'd share is the refrigerated market continues to have a significant amount of demand. And we're actually going to be investing in 550 incremental refrigerated containers this year, to help support our selling into that market. To support existing Choptank customers and also our existing Hub customers building that real refrigerated product offering. So feeling very good about that as well.

Elliot Alper, Analyst

Okay. And should we think about that margin structure of the brokerage business staying relatively the same this year?

Phil Yeager, President and COO

I think you'll see Choptank typically has had a lower gross margin percentage, mainly because of moving higher revenue per unit spot shipments that have that lower gross margin percentage. So you might see that come down, I think, but we will be consistently focused on getting that higher throughout the year. I think our existing brokerage between LTL and truckload, you'll see that remain relatively similar depending on what the spot market does throughout the year. But our forecast is at least coming out of the gate we'll continue to see a similar sort of trajectory.

Elliot Alper, Analyst

Okay, great. Thank you.

Operator, Operator

The next question comes from Bascome Majors with Susquehanna Financial.

Bascome Majors, Analyst

Thanks for taking my questions. Into what were strong fundamental years before you certainly saw some conservatism in the initial outlook. And I guess that argument could be made on the back of what you just did for 4Q, and the idea that not a lot of market conditions are changing near-term. Can you talk about the puts and takes where might there be some conservatism, where might people risk getting ahead of themselves when we think about projecting out the next four quarters for your business? Thanks.

Geoff DeMartino, CFO

Sure. I'm glad to provide that. Our forecast was designed to reflect the existing market conditions alongside some inflation in costs and inputs. We might see additional strength in areas like increased surcharge revenue in the latter half of the year. We are definitely aiming to grow intermodal volumes at a rate exceeding mid-single-digit growth. If the truckload market continues to tighten, it will positively impact our pricing. Well service represents another possible area of growth, as it could lead to more conversions from truck to intermodal. Additionally, we might see increased strength in the used truck market, resulting in more gains from sales for us. We are also looking for strategic acquisitions that could provide further opportunities for growth. On the downside, any decline in consumer spending could occur if consumers redirect their spending towards services. There is a significant backlog of inventory that needs to be addressed, which we believe will support us for a while. However, a sustained shift back toward services could pose a challenge. If there's an oversupply in the truckload market, it would negatively affect pricing, and any increase in driver turnover that we fail to address in 2022 could also be detrimental. These factors represent the major positives and negatives influencing our guidance.

Bascome Majors, Analyst

Thank you for that. Do you expect anything fairly normal for seasonality this year?

Geoff DeMartino, CFO

Coming out of the gate to start the year we're seeing very strong demand. We don't foresee a change at this point from conversations with our customers and what we're seeing in the data. So, yes, feeling like market conditions will continue, which gives us confidence in the guidance.

Bascome Majors, Analyst

Thank you.

Operator, Operator

And our next question comes from Tom Wadewitz from UBS.

Tom Wadewitz, Analyst

Good afternoon and congratulations on the impressive results. I wanted to hear your thoughts on the current M&A landscape. With your significant momentum and capacity for more deals, should we anticipate any actions from you in 2022? I think that's probable. Additionally, you recently acquired a high-quality brokerage firm, which has a lot of positive momentum. What are your next potential targets for business expansion?

Geoff DeMartino, CFO

Sure. We definitely expect to be active on the M&A front. We've got a very solid pipeline. We've got engagement from a lot of our business unit leaders. We've had really good success when we are out just knocking on the doors of companies that we think fit our profile, and we spent a lot of upfront getting to know the management team and the ownership. And I think that's what really has led to the successes we've had recently with Choptank, with NSD. The commercial synergies that we're penciling out in diligence, we're finding those are coming to fruition. We've got a great customer base with our existing business, and they're willing to give us opportunities to sell new services to them. And so that really will form our strategy going forward. Choptank was a great example of both adding scale to an existing business as well as adding a new capability. So we scaled up in brokerage and we now have a very, very solid refrigerated transportation platform to build off. Areas for targeting for future acquisition, really going to be non-asset-based logistics providers. We have a great footprint with non-stop and the final mile space, really around the big and bulky as an example. But what we don't really have today is the ability to do appliance deliveries installations. That would be an area of interest to us. Things like e-commerce fulfillment with our customer base being retail and CPG. We think there's a lot of opportunity there. That's another example of an area that we'll target growth.

Tom Wadewitz, Analyst

Okay, yeah, great. I wanted to ask you on the volume side as well. I guess, can you give a little more perspective on the timing of the container ads, and then maybe just what should we really pay attention to in terms of the constraints that if they get better, you can do upside on the volumes and are important inputs. Is it your own drayage capacity, is it rail terminal operation, what are some of the key factors that feed into the intermodal volume output?

Geoff DeMartino, CFO

We've received all of our 2021 orders at this point, with less than 5% carrying over into the beginning of this year. The rest of the 2022 orders will come in throughout the year leading up to peak season, with final deliveries expected around November. The growth will follow a steady trajectory throughout the year. We're optimistic that we will experience favorable growth assuming there are no disruptions in service, turnaround times, or any new COVID variants that may lead to staffing shortages. We expect to see an improved percentage growth throughout the year. While we began January down 6%, we are now up 3% on a sequential volume basis. We're confident that if this trend continues and we start to overlap with the shutdown Union Pacific had in February of last year, we could see growth momentum building as we move beyond the first quarter and into the rest of the year.

Tom Wadewitz, Analyst

So you might be able to see an increase in March, something along those lines.

Phil Yeager, President and COO

Yeah, I agree, yes. And then service continues to improve like we think it will, as Norfolk Southern starts to get staffing up and more chat is online and our customers become more fluid and we do as well. We think we're going to see upside to that, so that's growth trajectory. That volume percentage growth trajectory should be moving progressively upwards throughout the year.

Tom Wadewitz, Analyst

Great, okay. Thank you. I appreciate it.

Phil Yeager, President and COO

Thanks, Tom.

Operator, Operator

And the next question comes from Allison Poliniak from Wells Fargo.

Allison Poliniak, Analyst

Hi, good evening. Just want to ask about Choptank. It sounds like it's going better than you anticipated. Is there a way within the context of your revenue guidance in terms of what the contribution from core versus the acquisitive growth would be for '22? Any color there?

Geoff DeMartino, CFO

Sure. At the midpoint, we're looking at about 19% growth in total. We would be at about 10% organically.

Allison Poliniak, Analyst

Got it. And then just going back to the question on M&A, it sounds like a pretty active pipeline. Could you maybe talk your comfort level with leverage? It certainly seems like you have a lot of capacity today, but where your comfort level would be within that leverage range, just given the active pipeline?

Geoff DeMartino, CFO

Sure, yes, we're at about 0.3 times net leverage in EBITDA basis today, which we think gives us a lot of flexibility to pursue investments both in capital expenditures in the containers and tractors, but also to give us the capacity to do acquisitions. We're comfortable going up kind of north of two times, maybe 2.5 times EBITDA for the right deal. But we'd like to maintain our leverage closer to one time, EBITDA over time.

Allison Poliniak, Analyst

Great. Thank you.

Geoff DeMartino, CFO

Welcome.

Operator, Operator

And our next question comes from Jon Chappell from Evercore, ISI.

Jon Chappell, Analyst

Thank you. Good afternoon. Phil, there's been a lot of focus in the industry on logistics, and the growth across the entire industry has been pretty remarkable the last couple of quarters. Your revenue has made a little bit lighter than expectations, but your gross margin on the logistics side up 390 basis points was huge. Are you trying to be a bit more disciplined with the onboarding of the customers onto your platform to focus a little bit more on margin as opposed to just growing the top line as fast as you can?

Phil Yeager, President and COO

No, that's exactly right. When we look at our logistics segment, we have scale in the LTL and truckload space, allowing us to be selective due to our purchasing power. We aim to find customers that align with our profile and are committed to a long-term partnership. This approach enables us to generate a strong return on our investment. We have indeed been more disciplined in our strategy, which has helped us attract the right business that we believe will be more sustainable in the long run. Sometimes, high revenue but low profit engagements can be volatile, so we have been more selective in that regard. This strategy has proven to be beneficial for us.

Jon Chappell, Analyst

Great. And then just for my follow-up, I don't want to just keep harping on the short-term here, but you are one of the last year report this quarter and we've heard about sticks out by employees and at shippers as well, labor shortages, terrible weather. The volume will be showing up in the real data. And yes, I think it was pretty interesting that like Geoff said like the gross margin and EPS be pretty ratable on a quarterly basis throughout the year. Should we just think about as the big needle mover, intermodal pricing will continue to be what it was in the second half of the year, those huge 26% to 37% increases and that offsets a lot of these macro headwinds that you're facing in the early part in the back half of the year, it's really a more normalized operational backdrop?

Phil Yeager, President and COO

Sure. Yeah, I think that's right. Yeah, we are seeing a strong start to bid season. And just to give you a cadence around it, 44% of our business intermodal is going to be re-pricing Q1, 34% in Q2, and then 19% Q3. So that Q2 is actually a little heavier than is typical in years past. And so given where pricing is currently, and we forecast it's going to continue to be in the second quarter. That could be a little bit of upside for us, but there's a benefit to customers in that they want a working capacity right now, right? And so automating these investments is going to allow us really to do that. So I would anticipate you to see a little bit more of a normalized peak season next year, but we also thought that that was going to occur this year. So if these issues and challenges and supply chain issues persist, you could continue to see these conditions, well, throughout the year.

Jon Chappell, Analyst

Okay, that's great. Thank you, Phil.

Operator, Operator

And the next question comes from Brian Ossenbeck from JP Morgan.

Brian Ossenbeck, Analyst

Yeah, thanks good evening. Appreciate taking the question. Maybe just to follow-up on the pricing commentary it sounds like shippers obviously pulling forward some of the contracts a little bit, trying to lock in capacity. Is there anything else that you would say is different this time? Obviously, quite a few things are different, but at least from a contractual perspective, longer-term agreements, different forms of pricing. How do you think that this whole experience over the last couple of years will change or has changed how some of these transactions get done, especially on the intermodal side?

Phil Yeager, President and COO

I think that's exactly right. We're seeing a lot of customers be very interested in moving into more of a multi-year framework with floors and ceilings related to publicly available data. And those are contracts that we're comfortable with the right customers. And we will continue to pursue those and especially with business that we define as base load or that's network beneficial. And so we might not beatable lock in in a higher network with the customer. But we might dare, okay half the business is really good business for us that we feel comfortable with, locking in these prices for a multiyear period. So we are taking that approach, and for customer, for a lot of customers, they're very interested in it as well. The other thing that we're seeing right now is a consolidation of providers whether it's in brokerage or intermodal. And so for the providers, we think like ourselves with our strategic customers that we've really stepped up for. We're going to see some benefits coming out of that and opportunities to continue to grow with our strategic accounts through that process.

Brian Ossenbeck, Analyst

Okay, great. Maybe just one quick follow-up on that. On the second list, the ESG part of the conversation. At this point, at least in a more material way than it's been in the past.

Phil Yeager, President and COO

Certainly, I think every supply chain team had a large Fortune 500 company life, which is our customer base, is thinking about how can they contribute to the sustainability efforts of their company. And we provide them with a lot of data around carbon emissions savings and what business could potentially convert through to intermodal, and that is going to continue to be, we think, a story for several years to come. We need to continue to get our service to the right level to fully take advantage of that. I think the other piece that is going to continue to play into conversion to intermodal is fuel prices as well. So if you see that continuing to move up order, that could be another good tailwind that comes into conversion to intermodal as well. So all those factors we think are going to continue to drive a nice conversion opportunity for the next year, and we think beyond.

Brian Ossenbeck, Analyst

And then can you just talk briefly about the IT spend within that $40 million total including the headquarters. What you're focused on there is still transitioning over to Oracle, anything integration wise on Choptank. Maybe some of the bigger projects you're working on be helpful.

Phil Yeager, President and COO

We have shifted to a by-commodity, built-for-differentiation approach to better serve our customers, vendors, and team members. Our focus has been on using satellite tracking to enhance end-to-end visibility. We have automated our workflows and improved the intelligence available to our teams and drivers to optimize their tasks. A notable initiative in our brokerage has led to an 18% productivity increase on a volume basis over the last year due to a customized workflow management tool we developed. This is an impressive outcome, and we plan to continue investing in such initiatives throughout the organization. As a result, we expect to become increasingly efficient and responsive to our customers. Additionally, we have successfully integrated our acquisition of Choptank into our ERP and human capital management systems. Moving forward, we will prioritize timely and effective integrations for future acquisitions. We are also assessing our investment in electric trucks and conducting autonomous vehicle tests, along with exploring other exciting opportunities beyond our workflow management tools.

Brian Ossenbeck, Analyst

Okay, great. Appreciate, Phil. Thank you.

Operator, Operator

The next question comes from Fadi Chamoun from BMO. Your line is open. Fadi if your line is on mute. Could you unmute your phone?

Fadi Chamoun, Analyst

Yes. Hi. Good afternoon. Congrats on the results, first of all, and thanks for the question. Can you remind us about the box turns that you have currently in the intermodal network and what would that look like in normal times?

Phil Yeager, President and COO

Yes. So for the full year in the fourth quarter we were up about 10% year-over-year. We actually saw a decline sequentially from the third quarter to the fourth quarter of 3%. The year-over-year deterioration mostly was driven by rail service. There's a mix component in there I think you can see that our Transcon volumes continue to outperform the remainder of our network that alone gets your transit a little bit, but that's not really a massive impact, it might be a percentage point or two. On the sequential decline that was mostly driven by customer pool when unloading time to customers, as I think that makes sense that demand was up and staffing levels were coming down. And so we saw some longer dwell in our customer pool. So I think if you look at normalized levels, there's a lot of upside here and could be as much as 15% on our turn times as we get back to more normalized service levels, it could be even higher than that. So we're excited to see that take place and I think that as the year progresses, we'll see that improvement take hold.

Fadi Chamoun, Analyst

Okay. And the second question is going back to the volume guide on the intermodal side. I mean, if I look back a few years now, five, six years it feels like we've gone through multiple cycles where fuel prices were up or down and truck market was loose and tight, and throughout that volume and intermodal have really struggled to grow. And here we are today with a record saving for intermodal versus truck load, and yet the volume picture looks not all that impressive. What needs to happen on the intermodal service products side to really start to see the structural growth opportunity that intermodal play out?

Geoff DeMartino, CFO

I think for a capacity, commitment perspective, the intermodal industry is there are tender acceptance rates versus the truckload industry, which have been in the high 70s, low 80s. Typically intermodal were in the low to mid 90s. So the commitment to capacity, I think is there. What is not there, particularly in shorter haul lanes right now is a consistent service product. I don't think our customers are looking for necessarily at the fastest transit. They're okay with two days extra to capture those savings, but it needs to be two days. It can't be seven days longer one time and two days after the next, it has to be consistently two days forward that truck. And so I think that on a consistent basis is what we need, and I know we're all along with our partners very focused on delivering that. That's why I think you continue to see our Transcon business perform better than our local business as well, is that is where you can more consistently capture that service, and those savings versus those shorter lengths of haul where you have maybe less of a room for error.

Fadi Chamoun, Analyst

Okay. Thank you. I appreciate that.

Operator, Operator

And our next question comes from David Zazula from Barclays. Your line is open.

David Zazula, Analyst

Hey, congrats on the quarter and thanks for taking the question. Just wanted to ask and you'd alluded a little bit to it in one of the previous answers about your use of rail-owned equipment. I think you talk about it in the ease, but maybe can you discuss a little bit more your use of rail-owned equipment during the quarter, what, if any, challenges that presented and what challenges and opportunities you might have for that in the coming year?

Geoff DeMartino, CFO

Yes. That is part of the volume decline we are experiencing. Last year, around 93% of our business was conducted using our own fleet, while this year that number is closer to 99%. This shift allows us to manage our fleet more effectively and reduces costs, particularly as we optimize our operations. Consequently, we have minimized our reliance on the rail network, with rail boxes now accounting for less than 1% of our volume. This strategic change is a significant factor contributing to the year-over-year volume decline you are noticing.

David Zazula, Analyst

Great. And then as a follow-up, I don't know if you have handed the sequential headcount number for 4Q, but related to that. I guess you didn't note labor as being a constraint to volume kind of anywhere throughout any of the businesses. So maybe touch a little bit about what you're doing in human capital to keep the labor count up and challenging labor times.

Geoff DeMartino, CFO

At the end of the year, our non-driver headcount was 2,300. Last year it was just under 2,000, which is an increase of 300, and we also added about 400 employees through the acquisition of Choptank. From a human capital perspective, we truly value our culture and have a strong human resources team. We have skilled individuals in our organization and have worked diligently to create an excellent environment for our team, which helps minimize turnover. We're also focused on providing better tools to enhance their effectiveness and offering progression opportunities in their careers. This will remain our priority. While we recognize that we are not perfect and there are always areas for improvement, our turnover has been somewhat higher, though it hasn't significantly impacted us. Overall, our organization is committed to seizing opportunities to serve our customers and drive continued growth.

David Zazula, Analyst

Thanks.

Operator, Operator

And we have no further questions. I'll turn the call back over to Dave Yeager for final remarks.

Dave Yeager, CEO

Okay. Well, thank you for joining us for the Fourth Quarter Earnings Call. As always, if you do have any additional questions, Geoff and Phil and I would be available. Thank you.

Operator, Operator

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