Pacer International Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 7.13 | About: Pacer International, (PACR)

Pacer International (NASDAQ:PACR)

Q4 2012 Earnings Call

February 07, 2013 8:30 am ET

Executives

John J. Hafferty - Chief Financial Officer and Executive Vice President

Daniel W. Avramovich - Chairman, Chief Executive Officer and President

Paul C. Svindland - Chief Operating Officer

Robert Noonan - Executive Vice President of International Logistics

Analysts

Reena E. Krishnan - Wolfe Trahan & Co.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Operator

Ladies and gentlemen, would like to thank you for standing by, and welcome to the Pacer International Fourth Quarter Earnings Teleconference Call. [Operator Instructions] As a reminder, today's conference call will be recorded. I would now like to turn the conference over to your host and your facilitator, Mr. John Hafferty. Please go ahead, sir.

John J. Hafferty

Thank you, Steven, and good morning, everyone. Thank you for joining the Pacer International fourth quarter 2012 earnings call. After my short introduction, Pacer's Chairman and CEO, Dan Avramovich, will discuss our fourth quarter overall results and highlights, then I'll review the financial results in more depth. Paul Svindland, Pacer's Chief Operating Officer, will summarize our intermodal performance and plans, and lastly, Bob Noonan, Pacer's Executive Vice President for International Logistics, will comment on our logistics segment. Upfront, we remind everyone of our normal disclosures regarding forward-looking statements and predictions of future operations, which we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's beliefs and interpretations of currently available information. Such statements and assumptions involve certain risk and uncertainties, which are described in our SEC filings, and actual events may differ materially from those forward-looking statements. Except as required by applicable law, we assume no duty to update these statements as of any future date.

Our press release this morning announced our financial results for the fourth quarter and full year of 2012, including our normal financial statements and comparisons to comparable 2011 periods. It also includes a reconciliation of GAAP revenues, gross margin and operating income to non-GAAP adjusted figures for a number of items, including the impact of realignment cost recorded in both quarters and the impact of the planned reduction in volumes from an intermodal ocean carrier customer that went direct to the railroad for rail transportation services.

In addition, the release also includes a reconciliation of certain costs that have been reclassified on the income statement from SG&A to direct operating costs and its impact on reported gross margins and SG&A for the last 8 quarters. As information, replay of this earnings release conference will be made available through March 7 in the Investors Events section of the company's website, www.pacer.com. I will now turn over the call to Dan Avramovich. Dan?

Daniel W. Avramovich

Thanks, John. We are pleased with our fourth quarter results which ends a challenging 2012 for us on a high note. Quarterly earnings per share were the highest of the year and exceeded our guidance and analyst ranges, if you exclude the changes we took to realign our organization.

Intermodal operating income was the highest in 5 quarters. Logistics revenues seem to have bottomed out with a expectation of a return to year-on-year growth in the second half of 2013. We generated significant cash flow and achieved our cash flow guidance in the quarter. We additionally brought Paul Svindland on board as our Chief Operating Officer, and during the first 60 days, initiated an organizational alignment around his new responsibilities. And lastly, we made good progress in implementing our new cross-border agreement with Union Pacific. So all in all, a very good quarter.

Intermodal growth slowed for us in the fourth quarter, with total intermodal revenue up 4% over last year. Domestic revenue grew 7% compared to high single and low double digits growth earlier in the year.

In October, we'd lapped last year's loss of a major ocean carrier customer that went direct to the railroad, putting the impact behind us for -- from a year-on-year basis. We're very pleased that our intermodal margins continue to rebound from the challenges we experienced earlier in the year.

Intermodal gross margins of 9.7% was up 70 basis points over the last year and up 120 basis points over the third quarter, which is the result of our efforts to pare down low margin freight and to better control our non-related rail cost. Paul will expand more on these points shortly.

In logistics, as we previously had discussed in prior quarters, we targeted a quarter-on-quarter sequential improvement of around $0.5 million. Reported logistics operating income was actually down $100,000 sequentially. If we exclude the unexpected cost we experienced in the fourth quarter of $300,000 with realignment and an additional $300,000 for claims and costs associated for the reorganization of our European operations, we would have achieved our expected quarter-on-quarter improvement. We remain optimistic that these -- the changes that we're making, which Bob will go through in more detail, in the logistics sales force and product mix will result in a return to profitability in 2013. As an example of this, in January, our freight forwarding business received licenses to operate directly in China, which will allow us to accelerate growth to and from China -- or to and from Asia, and Bob here, again, will cover this in more detail. Overall, as I said, we're very pleased with the fourth quarter results which showed important progress to our strategic goals. I'll now turn it back to John to walk us through the financials in more detail.

John J. Hafferty

Thanks, Dan. Before I cover the financial details of our fourth quarter results, I want to take a moment to discuss the changes we made in this quarter's income statement. We have now reclassified certain costs between various cost categories on the income statements to better reflect how our business is being managed, and to more closely align with the industry practice. We believe this presentation provides a better view of the company's financial performance and profitability. As for these changes, first, we will no longer report depreciation and amortization as a separate line item on the income statement, rather, these costs will now be included in either SG&A or direct operating expenses depending on the type of the asset being depreciated. Second, certain expense categories have been moved out of SG&A and into other categories, for example, cartage terminal cost and logistics warehouse space. Our release today include the summary for the last 8 quarters of this impact on these quarters.

Now let's cover our fourth quarter results. In the quarter, Pacer's income from operations increased by 9%, excluding realignment expenses of $800,000 and $300,000 in 2012 and 2011, respectively. And earnings per share improved to $0.08 per share this year from $0.07 per share last year, excluding the same realignment costs. The realignment charge in this year's fourth quarter breaks down as follows: $500,000 for intermodal and $300,000 for logistics. The financial benefit from this realignment charge was considered in determining our 2013 earnings per share guidance and much of the benefit from these actions being realized later in 2013 and in subsequent years as we implement these changes throughout 2013. Total company revenues for the quarter were $351.9 million, which is 2% down from last year and up 1% sequentially from the third quarter. Intermodal revenue of $296.9 million was up 3% from last year and 2% sequentially. This intermodal growth was led by our domestic verticals, which were up 7% year-over-year. Logistic revenue of $57.3 million was down 16% from last year and 1% from the third quarter. Both Paul and Bob will discuss these revenue results in more detail later on in this call.

The company's gross margin in the fourth quarter was 10.2%, which was up 20 basis points from last year and up 110 basis points sequentially from the third quarter. Intermodal gross margin came in at $28.8 million and was up $2.7 million or 10% over last year. The intermodal gross margin rate of 9.7% for the quarter was 70 basis points higher than last year and 120 basis points over the third quarter. Similar to last quarter, our margin rate continued to rebound sequentially as a result of our efforts to improve full in freight and to control our drayage, accessorial and equipment cost. Our logistics statement of gross profit of $7.1 million was down by $2.5 million from last year, driven by the segment's revenue decline. Our logistics gross margin rate was 12.4%, which was down 170 basis points from last year, which is a result of tough pricing environment and excess warehouse capacity.

Total company selling -- SG&A -- total selling, general and administrative expenses came in at $32 million and were up by $0.5 million or 2% over last year. Again, severance charges in the quarter for our organization realignment were $800,000, and this was a $500,000 higher than the realignment cost recorded in the fourth quarter of last year.

Intermodal SG&A increased by $0.4 million or 2% from last year due to severance costs from our realignment. Logistics SG&A was down by $0.9 million or 8% as a result of cost reduction activities taken earlier this year and cost from last quarter's European organizational changes.

Operating income for the quarter increased by 9%, excluding our realignment expenses. The intermodal segment earned $12.1 million, which was up $2.3 million or 23% from last year. The intermodal results were also up 39% sequentially from the third quarter as a result of peak season activity and our margin improvement efforts. Logistics reported an operating loss of $2.4 million, which was essentially flat with last quarter's $2.3 million loss. But, as Dan mentioned, excluding the unexpected cost in the quarter, we achieved our targeted sequential improvement of $500,000.

Our debt and equity position remains very strong and continues to improve in the quarter. We ended the year with 0 debt, $20 million in cash on hand, with a borrowing capacity of $75 million. In the quarter, we generated $10.6 million in operating cash flow, which represents a 41% improvement over last year, and we used $2.1 million for capital expenditures. These results were right in line with our expectations.

Now turning to our 2013 guidance. We are reconfirming our earnings per share guidance for the full year to be in the range of $0.25 to $0.35 per share, which more than doubles our 2012 performance. Like we discussed last quarter, this guidance includes the change in our revenue makeup as a result of our new cross-border agreement with UP, continued improvements in the intermodal margins and logistics returning to profitability in the second half of 2013. We expect mid single-digit growth in intermodal volumes coupled with improved pricing environment in which we're able to pass along more moderate rail cost increases than we experienced in 2012. Logistics is expected to grow throughout the year as a result of above improvement efforts. We also expect to continue to manage our SG&A and leverage it for profitable growth. Throughout the year, we expect to earn 20% to 30% of these earnings in the first half of the year and the remainder, over the second half. We estimate our cash ending balance will range between $40 million to $45 million, and as we discussed previously, we will offer further revenue guidance at the end of our first order once we have implemented significant components of our UP cross-border agreement. With that, I'll turn the call over to Paul Svindland, our Chief Operating Officer. He will provide more information on the intermodal results and plans. Paul?

Paul C. Svindland

Thanks, John, and good morning, everyone. Intermodal revenues in the fourth quarter were up 2% from last year and also up 2% sequentially over third quarter. In the fourth quarter, we lapped last year's migration of a major ocean carrier customer's move to go direct to the railroad. And so our year-over-year comparisons are only affected by partial month and last year's fourth quarter. Excluding this partial month of 2011, our overall intermodal revenue growth was 4% over last year. Domestic intermodal revenues grew by 7% in the quarter, which is slower than in prior quarters. That revenue growth came from 2% from volume, 3% from pricing and 2% from fuel, with mix not being much of a factor overall. By geography, domestic volumes were down high single-digits in Transcon lanes and up mid single digits in north/south lanes. Unlike prior quarters, east-to-east lanes were down mid single digits. The declines in Transcon lanes were largely a function of our efforts to rationalize freight in low margin lanes. East-to-east lanes declined partly due to the impact of the Hurricane Sandy, and partly because we lapped higher growth in last year's fourth quarter.

Our international intermodal revenues were down year-over-year by 11%, after excluding the partial month of the ocean customer departure. As in prior quarter, the decline was primarily driven by port drayage in the Pacific Northwest where a customer moved from off-dock to on-dock services, along with tight inland ISO box capacity for reloading with domestic freight.

As Dan and John stated, intermodal margins improved in the fourth quarter on both a year-over-year and sequential basis by 70 and 120 basis points, respectively, and we are pleased with the improvement. We have made intense efforts in the second half to move higher margin freight which somewhat impacted our volumes. We also made improvements in our handling of accessorials, equipment per diem, and our street drayage cost. These areas will continue to be a focus for us in 2013. The margin improvement would have been greater were it not for margin compression that we continue to experience in the quarter from our inability to pass on rail cost increases, which cost us approximately $1.3 million in our retail vertical for the quarter.

Thankfully, this was less of a squeeze than in prior quarters, and as a result of our repricing and lane rationalization efforts. Intermodal container trends in the quarter were flat year-over-year and sequentially at 1.7% per month. We continue to look at what the optimum mix of private versus rail asset is for us in light of our growth outlook and the relative all-in rail cost for the alternative forms of container capacity. For 2013, we are anticipating volume growth in line with market in a low to mid single digits. The first half should be softer given our focus on margin improvement in the second half of 2012, and we expect growth to ramp for the second half of the year coming out of bid season. Industry prediction [indiscernible] slower growth rate environment in 2013, but we still see opportunities for conversion from over the road to intermodal. We also fully intend to price through rail cost increases, which we are unable to do in 2012. I want to take a moment and discuss our internal initiatives that our realign intermodal team is laser-focused on delivering in 2013 to improve Pacer's performance towards long-term strategic goals. First, we will continue to successfully implement our new cross-border agreement with UP, and we're off to a great start. Second, we are focused on retail volume growth through bid season responses and by expanding our sales channels. Third, we intend to continue to improve retail margins by improving our network balance, drive further efficiencies on the street and by better accessorial and per diem management. Finally, we are continuing to streamline our internal processes in order to be able to grow volumes without adding significantly to SG&A. We are setting aggressive internal goals for ourselves for each of these initiatives that, if met, should position us well to exceed our plans. I will now turn the call over to Bob Noonan, who would discuss results and plans for logistics.

Robert Noonan

Thank you, Paul, and good morning, everyone. As Dan mentioned on the logistics segment's native target of sequential improvement of $500,000 after taking into consideration the unexpected cost outlined by Dan. But our overall revenue was down by $11 million or 16% from the same quarter last year, it was down by less than $1 million from the third quarter. This small sequential decline signals a significant reduction in churn and demonstrates the minimum comp retention in building new business through our new U.S. sales force and our agency development group. Our efforts to rebuild our sales channels and diversify our product mix from traditional wholesale NVOCC operations into custom's house brokerage, airfreight and retail freight forwarding direct to customers, will allow us to build top line momentum in the -- throughout 2013, and we are targeting across the threshold of year-on-year revenue growth in the second half of the year. Another demonstration of this momentum is our receipt in early January of the necessary licenses that will allow us to operate directly in China, which will become a growth platform for us in 2013. Lastly, our project to implement a unified IT platform in related processes to facilitate scalable growth is progressing well. We expect to launch them ahead of schedule later this year starting with Asia as the result of securing the China operating licenses 12 months ahead of schedule. Our Pacer Distribution Services and highway brokerage business had positive quarter and are gaining their own momentum. Our efforts to implement a new highway brokerage sales model and culture began early 2012. It gained traction in the second half of the year resulting in improving fourth quarter operating income. Similarly, our PDS business improved profitability throughout the year and into the fourth quarter through better utilization of its warehouse space. Overall, we continue to expect our segment to be profitable by the second half of 2013 as a result of growing revenues and managing expenses in each of our logistic businesses. We're enthusiastic that we'll make great progress in 2013. With that, I will now turn -- open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Mr. Scott Group of Wolfe Trahan.

Reena E. Krishnan - Wolfe Trahan & Co.

It's actually Reena Krishnan sitting in for Scott Group. So just to get an update on the UP contract, so you don't have any clarity at this point -- or any sort of additional guidance to give on how revenue should look for the year? Any -- I know previously, you guys had just mentioned that they're obviously -- you expect net revenues to be sort of flattish, but is there any additional color you can give us at this point with -- at the start of the year?

John J. Hafferty

Reena, no. I mean, we're still going through the implementation. We're comfortable with where we're at, but we'll have a better visibility right after our Q1. And that's why we told everyone in our next earnings call, we will give revenue guidance and give clarity from that perspective.

Reena E. Krishnan - Wolfe Trahan & Co.

Okay. Okay, I understand. Just in terms of at what point you can start to compete directly for some of the auto business, when does that happen exactly? I mean, is there some sort of period where that needs [indiscernible] where you are able to compete for that directly?

Daniel W. Avramovich

Reena, no. This is Dan. It starts currently and actually, we have had good success on a number of opportunities that have occurred so far. So we -- we're after it right now.

Reena E. Krishnan - Wolfe Trahan & Co.

Okay. Are there any major auto contracts that are coming up for bid this year that you can give us some color on?

Daniel W. Avramovich

No, the wholesale business that we -- the business that we used to handle on a wholesale basis is tied into longer term agreements. And there's other aspects of those agreements that create opportunities for us that we are capitalizing on now. So those -- the longer term agreements are actually kind of embedded in kind of what we're managing as a network manager.

Reena E. Krishnan - Wolfe Trahan & Co.

Okay. Just in terms of your outlook for intermodal gross yields. Could you -- I mean, you mentioned that you expect to pass on some moderating rail pricing, can you give us an expectation of what your -- what you expect rail pricing to be this year versus last year, and what you're seeing in terms of pricing on the intermodal side?

Daniel W. Avramovich

So clearly, the rail pricing has moderated with what we've experienced in the market. So we're anticipating essentially about a 2% to 3% ability to get pricing in the marketplace, which will be essentially aligned with what we're expecting from the railroads as well.

Reena E. Krishnan - Wolfe Trahan & Co.

The 2% to 3% rail cost and 2% to 3% pricing is what you're expecting?

Daniel W. Avramovich

Exactly.

Reena E. Krishnan - Wolfe Trahan & Co.

Okay. And then just on the logistics side of it. So you mentioned that excluding some one-time cost related to realignment that you met your target -- improving income sequentially by about $500,000. In terms of meeting the target to be profitable by second half of the year, I mean how are you expecting -- how should we expect operating income for the segment to trend over the first half relative to the year-ago period and sequentially?

John J. Hafferty

As we talked about before, we will improve every quarter. And as we talked about, Reena, we will cross the line beginning the fourth quarter of this year. So we're confident on where we're going and that's the guidance that we've given, that we will have improvement every quarter, year-over-year until we get to the breakeven in the fourth quarter. That's the way you need to think about it.

Daniel W. Avramovich

And I think also -- I think what we will do, Reena, is -- John and I haven't talked about this but I think similar to what we did in terms of going quarter-to-quarter, we'll -- and maybe in the first quarter, we'll provide more clarity on specifically what we're anticipating there on a revenue basis and provide [indiscernible].

John J. Hafferty

Right, right.

Daniel W. Avramovich

So yes, we're confident and we'll continue to trend going into next year, but we'll give you kind of a better view of that at the end of the first quarter.

Operator

Our next question will come from the line of Michael Weinz of JPMorgan.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Following up on the pricing question, you indicated 2% to 3% is what you're expecting from 2013, I think you got 3% this quarter, I mean how -- what was 2012 like because I thought you were expecting an acceleration next year or a better pricing environment next year?

Daniel W. Avramovich

No. No. We've been fairly consistent in kind of what we expected for next year. The pricing environment -- I'll actually -- got to take you even back even further. If you look at kind of how we came out of '11 and then into '12, we were running 7%, 8%, 9% essentially in the second half of 2011. I believe it dropped to about a 3% price improvement, to about a 2% in the second quarter and fairly flat in the third quarter so -- or maybe 1 point or 2 in the third quarter. So it started to ramp down really in the second quarter of 2012 and into the third quarter. So now that we see a little bit of a pickup and kind of continuation of our -- of what we're experiencing -- or what we experienced in the fourth quarter into next year.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

All right, that's very helpful. When we think about 2013, what are you looking for, for containers? I think in the past, you were looking for about 1,500 additions in peak season. Is that still the case?

Paul C. Svindland

Yes, this is Paul Svindland. Yes, that's still the plan is to add 1,500 more units in this year.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Okay. I think that's like a high single-digits growth rate. Are you -- is that a good expectation for how we should think about revenue in addition to factoring and pricing or are you expecting to make utilization improvements that could propel you into like the low double digits growth?

John J. Hafferty

Yes. As we talked about, we're going to be in mid single-digits growth rate, and that's pretty much what we're planning. Remember, we have a flex capacity, we can get rid of some of our free runners and use more of our own boxes. So again, it's really the mix of the boxes within in our network.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Right. Okay, that's a very good point.

John J. Hafferty

I mean you guys remember that, you can't forget that point, yes?

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Okay. And how should we think about the leverage on your expense lines with like SG&A for how much growth you can support without the need to add new headcount or other expenses?

Daniel W. Avramovich

We don't expect significant, if any, increase in the SG&A line. We -- we're -- or significant. We'll have some moderate increase there, but most of the increase that we have there is really focused on revenue-generation opportunities.

Robert Noonan

And Michael, as we talked about in previous calls, the high proportion of our SG&A, even with the realignment of our cost now, is fixed in nature. So that's the way you should think about it.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

The fourth quarter is probably a pretty good base to you as for now?

Robert Noonan

Yes. Yes, I would say, that's probably a pretty good base, yes.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

Okay. And then last question, you've picked out today on income statement, you had an other income line, what's flowing into that? And is that considered part of your corporate segment or what?

Robert Noonan

That's just for -- in last year, that was really the sales of our railcar. And then if we have any subleasing type of arrangements there, that's really what flows into that line. So it's -- look, it's minor. There should be minor amounts into that line.

Michael R. Weinz - JP Morgan Chase & Co, Research Division

So they're pretty close to 0 unless you have...

Robert Noonan

Yes, I mean that's the way I would think about it. Unless we have a sale of an asset, but that's really what flows in that other line.

Operator

Our next question will come from the line of Mike Baudendistel from Stifel.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to ask on the logistics segment what your expectation of that turning profitable by the end of this year. What are going to be the main areas and which businesses within the logistics segment do you think are going to be the biggest drivers of that improvement?

Robert Noonan

I think, Michael, as we had kind of outlined previously, right in the previous quarters, the strategy has always been to grow the inbound Asia business, both on the airfreight side, certainly, on the FCL side and the LCL side along with order management. That's the strategy that we haven't wavered from and we accelerated the process of getting our licenses by 18 months. We secured those in late December, early January, and that will be the catalyst that will really take us forward for that growth. So you can look at that as really being the retail platform migration that we are going from the NVOCC wholesale model.

Daniel W. Avramovich

And additionally, Mike, to that regard, we are starting to experience some good growth numbers in our highway brokerage aside of the equation. It had actually contributed positively on a quarter-on-quarter basis in the fourth quarter for us, and we expect that to continue going into this year actually.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay, good. And also within logistics, are there a few businesses within logistics that are sort of wildly profitable and few that are wildly unprofitable, or they are all mostly sort of somewhat unprofitable aside from what you just mentioned?

Robert Noonan

Well, the highway brokerage model is a profitable business. The international segment and the PDS, which is really the distribution of warehousing portion of the business, one that we had been working on to correct, then we'll get those in the proper correction in 2013 in the fourth quarter.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay, good. And also for Paul, since it's the first time Paul's on a quarterly conference call, I believe. Paul, I was wondering if you could share with us any initiatives in the operation side that you have maybe identified in your first quarter. So is there a way to improve the container turns from 1.7x to over 2x or take advantage of some of that intermodal terminals that some of the railroads are developing?

Paul C. Svindland

Yes. No, I -- so there's a couple of things, right? I think first, and probably most importantly, we are really focused on improving and driving down our drayage cost, right? So if the cost on the street to move the containers to and from, there are ramps to the doors, right? We have a very focused approach to go after that area and identify ways to drive cost down, and within our own fleet, to drive down our empty miles. I think secondly, if you look through how we're approaching the bid season, we have a very well defined and we're being very disciplined about the lanes that we're going after. So we have a very strong understanding of our network and we don't want to stray from being within our network. And so if we're able to do that and be disciplined, what you will see is an uptick on the turns, on the container turns, per month by keeping that type of discipline. And then secondly, kind of follow-up on the question to Dan, we realigned the organization so there's a lot better collaboration between customer service group and then the planning dispatch group. And so we believe that, that group is well prepared to scale, so we think that we can add a lot more capacity without having to add a lot more headcount and a lot more cost. We also just think that there will be a lot further collaboration between those groups, which will also drive out further efficiencies and drive our cost down.

Operator

[Operator Instructions] Our next question will come from the line of Todd Fowler with KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

This is actually Ryan on for Todd. The first question I had is on the pricing for intermodal into 2013, I appreciate the color on the 2% to 3%. I just was curious maybe if you guys can give some additional color on what you're seeing, just sort of the overall level of bid activity and maybe just about the competitive nature of the pricing bid that you expect are coming through may be relative to this time last year.

Paul C. Svindland

This is Paul Svindland. So I think what we're seeing, it's still a very competitive bid market out there, right? They're -- our competitors are pricing aggressively. I think the customers are looking for anything they can do to drive down their cost because they have a lot of pressure on them. There is still a decent amount of capacity available, so I think it's still a pretty tough marketplace to bid in. What we have been doing is we have been very, very aggressive on making sure we stay focused on responding to a portion of the bid that fit our network, so we can maintain our margins. And so we're at a point where we will even sacrifice volume in order to maintain the margins, given what's going on in the marketplace. But we still also believe -- Dan had mentioned, we anticipated 2% to 3% increase from the railroad. We do believe we should be able to pass those cost increases on, but I think we expect much above and beyond that given the market conditions are probably isn't realistic.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay, great. And also maybe if you'd just give some color on how volumes, intermodal volumes, trended throughout the quarter, was there any unusual seasonal activity that you guys benefited from, or was it relatively in line with your expectations? And then also, I know it's early in the year and probably not the best gauge, but any sort of color around volume and demand dynamics here in the month of January?

Paul C. Svindland

I think for 2012, I think the volume has trended as expected. I think we ended the year from a volume perspective, based where we thought we would be. As we look to 2013, I think across the industry, right, it's been a little bit soft in January. I think we're comfortable with where we are and we still feel comfortable and I would say this, cautiously optimistic about the rest of the year, that we should be able to hit the volume target that we set for the organization.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. And then was there any -- can you guys quantify the impacts from Sandy on you network or, just your volume impact in the quarter?

John J. Hafferty

That's what we talked about on our east-to-east being down. So therefore, it had some impact on our volume, but from a financial aspect, it wasn't significant. I mean, we work -- we do experience double-digit growth in our East, but it's on a smaller base. So it didn't have a significant financial impact to us.

Daniel W. Avramovich

Yes. There was some modal shift as it relates to some of that, to some of the terminal shutdown. And then we ended up picking up some of that actually on the brokerage side to kind of as a modal shift, if I ever got to work through that situation.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. And then you're -- sticking with the east, obviously it was down here in the quarter, as you've mentioned, they were impacted some by Sandy. I guess maybe if you can just refresh us on the focus there for you guys into 2013, does that remain an area where you guys will just to continue to seek opportunities for growth. And what sort of growth are you expecting in the east in 2013?

Daniel W. Avramovich

Clearly, it's an area for us to continue to improve our truck conversion going forward. We haven't really kind of broke that out in terms of what we're expecting, but we do clearly would expect that to grow a little higher than what we see on a Transcon basis.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. And then the last one I have is, that's for John. Is there any additional severance or realignment costs here, into 2013? Or I'm sure we -- you're pretty much done with that at this point?

John J. Hafferty

Right, well, to answer your question, the realignment is what we anticipated in '13. There will always be some severance costs as we go through anything, as we continue to look at rationalizing SG&A, but again we have not anticipated any significant amount in 2013 moving forward.

Operator

Our next question will come from the line of Ryan Bouchard of Avondale Partners.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Intermodal volumes industry-wise seem to be doing quite well year-to-date. So I wondered if maybe you could explain why you think that rail pricing will be 2% to 3% this year. I would just think if it started off so strong, then maybe they're going to continue to get some real pricing power.

Daniel W. Avramovich

Well, a big part of what our issues would be incurred in 2012 was a misalignment between what we are able to get in the marketplace versus what we absorbed from a rail provider perspective. We actually had a fairly significant impact on that from a margin perspective. We have since, worked with the railroads to get that more in line. So when we completed those discussions with the railroads really in the fourth quarter of this year. So we got out of the line in the second, third quarter, between what their expectations were and what we saw in the marketplace and what we're able to achieve in achieve in the marketplace, and we realigned that in the fourth order. And we're confident that we'll have that aligned for the foreseeable future and clearly within 2013.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then I wondered if you can talk about kind of what you see in the Mexico near sourcing -- near-shoring opportunity? Is that in general, is that kind of picking up or is it leveling off right now?

Daniel W. Avramovich

It still stays very robust, all right? And I think, it'll stay that way for a long time, at this point in time, anyways. Clearly an area for growth and continued strength.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then lastly, I just wondered if you could expand on highway brokerage margins, were they -- did they expand year-over-year or was it down a little bit year-over-year?

Daniel W. Avramovich

Actually, it dipped a little bit, okay, in the quarter about 0.5 to 0.75 of 1 point. But overall, the volume was fairly good. So we -- as we mentioned that was a component of our quarter-on-quarter improvement in logistics. So while the margins -- we had little squeeze in the margins, we're able to overcome that with the higher growth.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay, can you tell us how much volume growth?

Daniel W. Avramovich

I don't think we break that out. I'll just -- suffice it to say, that we have significantly invested in resources necessary to drive growth and we will be continuing that in 2013.

Operator

There are no further questions in queue at this time. Please continue.

John J. Hafferty

Okay. That concludes Pacer's fourth quarter 2000 (sic) [ 2012 ] and earnings call. We thank you all for your participation and your continued interest in Pacer International. Thank you, and goodbye.

Operator

Ladies and gentlemen, that does conclude our conference call for today. In behalf of these panel, I'd like to thank you for your participation, and thank you for you using AT&T. Have a wonderful day. You may now disconnect.

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Pacer International (PACR): Q4 EPS of $0.08 beats by $0.08. Revenue of $351.9M misses by $8.62M. (PR)