J B Hunt Transport Services Inc (JBHT) 2018 Q4 法說會逐字稿

Good afternoon.

My name is Jesse, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the 2018 Q4 earnings call.

(Operator Instructions) David Mee, CFO, you may begin your conference.

Thank you, Jesse.

Good afternoon, everyone.

Welcome to our second earnings call.

We hope we learned a little bit from the last one.

So hopefully this will be a little bit more informative and not quite as robotic as the last one was, but we'll continue on with these things as long as everybody thinks they're productive.

I've got the team with me this afternoon.

John Roberts, CEO; Terry Matthews, President of Intermodal; Nick Hobbs, President of DCS; and Shelley Simpson, President of Highway Services, which to remind you all is both ICS and truck.

Jesse gave you about housekeeping, but again, if you'll make sure that you state your name clearly, so when you ask a question we know who's asking and how we can respond.

And again limit your question, one question and one follow-up, and we'll try to get through as many people as we can in this hour.

We do have a hard stop at 5:00 Central, 6:00 Eastern.

As far as just general comments overall, we felt it was a good quarter.

I wouldn't go so far as to say it was a great quarter, but a good one nonetheless, we obviously still have some cost and efficiency opportunities we need to address.

But the results of the 2018 bid cycle and pricing efforts and our targeted growth areas were evident in our first quarter -- fourth quarter results, excluding our preannounced charges.

In Intermodal, we saw rail service interruptions and congestion that continue to hamper our ability to react unplanned customer demand spikes.

But overall demand for the quarter was relatively consistent with a strong fourth quarter 2017.

Even though we were a little disappointed and frankly a little surprised that demand did not accelerate throughout the quarter.

That said, and I'm sure Terry, will end up commenting on this during the Q&A session, we have seen positive results on both load growth and price increases early in this current bid cycle.

In DCS, we started an additional 458 trucks in the quarter, and that's coming off of a 600 truck add in Q3, as a reminder.

And we still improved our margins around 200 basis points sequentially.

So the startups that we have begun are rolling into price profitability on time and as expected.

And our private fleet pipeline continues to remain strong going into 2019, and our agreement to acquire Cory 1st Choice Home Delivery should allow DCS to continue its growth trajectory into '19 and do it in a less asset-intensive way.

In ICS, our gross margins in the quarter reflect the state of the market where contractual pricing has remained healthy and consistent, while obviously the spot market has softened.

We'll watch customer reaction to this market mix and are prepared to help both customers and carriers whether through the swing using marketplace.

And speaking of marketplace, we were very pleased with another sequential increase in activity conducted through the platform.

And we therefore actually accelerate our spending and our investment to develop the upgraded and expanded features to be released in 2019 to allow even faster adoption and execution for both customers and carriers.

And last but certainly not least, truck was able to capitalize on the 2018 pricing environment.

But more importantly, they successfully added to their fleet for the first time in several quarters.

These power adds are independent contractors, which give us flexibilities to satisfy customer demand, while providing excellent service for customer needs.

We'll continue to pursue third-party power as a growth strategy throughout 2019.

That's the end of my prepared remarks, give you a glimpse of how we looked at the quarter and kind of a view of how we expect to go into '19.

So with that Jesse, we're ready to answer questions.

(Operator Instructions) Your first question comes from Bascome Majors.

I realized the BN arbitration situation is still very much contingent, but I mean, it does appear that at least they'll be able to or preliminarily able to extract some more value out of that relationship from you going forward.

Does this change in any way assuming that they do prevail in the way that you guys are seeing so far that you approached Intermodal business long term from a growth versus pricing perspective.

I'm just kind of curious strategically if we'll see anything different from Hunt and Intermodal over the next 3 years versus the last 3?

This is Terry.

I don't think it will change our strategy.

Our strategy has always been able to grow and grow where we're capable of growing.

As the Western network allows us to grow, we'll grow.

As the Eastern network allows us to grow, we'll grow.

Obviously, if we have cost coming at us, we'll try to price that into our product and recoup those costs from our customers.

And any unexpectations for bid season outcomes early on in Intermodal for this year?

Well, we've had -- about 20% of the first rounds of bids have been priced and most of them have been implemented.

And we're pleased with what the outcome has been.

It's been a very orderly market.

It continues to be a very orderly market.

And I believe in the future that will persist going through this year.

And the first 20% of the bids, we've seen high single-digit rate increases, and we've been able to grow some volume and we need to be able to grow some volume because we have some headwinds in the east with some of the rail rationalization that's going on with precision railroading.

And annual, we will -- probably cost us 50,000 to 70,000 loads depending on the timing on lanes that basically the railroads in the East for the most part have decided to get out of, because it doesn't meet their expectations or whatever their rationale for that is, but I can say through the first 20% of the bids, we've been able to replace half of the business that we think that we will lose during the calendar year of 2019.

Your next question comes from Tom Wadewitz.

I wanted to ask you just, kind of, within fourth quarter and then I have a follow-up.

So within fourth quarter, how much should we allocate from the charge, the $134 million charge related to BN.

Can you identify how much of that would have applied to the fourth quarter?

And then, just in terms of fuel, if you could offer a thought of how big might be fuel timing or fuel basis benefit?

How large?

I don't know if you can ballpark that for me in terms of the impact in fourth quarter?

In -- as far as the charge, in our pre-announcement, we disclosed that $89.4 million was for 2016 and '17.

And that $44.6 million was for '18.

That would have been a full year picture.

So the best you could assume is that 25% of the $44.6 million should be applied to fourth quarter.

And as fuel, I'm really not sure where you're going with that, Tom, but we don't break down fuel by business unit, never have.

I mean, was it a meaningful tailwind to earnings or not so much?

Frankly, I don't even know what the direction is because we always consider it a wash when it all comes out.

So if we were chasing it, it would have been a headwind and if we were ahead of the curve it would have been a tailwind for the short period of time.

Yes.

Okay.

And then, I guess, the second question would just be in terms of -- I think, Terry, you gave some thoughts on rates and it sounded pretty constructive in the early part of the bid season.

So just to make sure I heard you right, high single-digit rate increases, and I think that would be with respect to Intermodal.

So how would you think the overall bid season plays out?

I mean, do you think truck and Intermodal rates end up mid to high?

I guess, that seems like that's pretty -- would be a pretty bullish outcome given that spot rates are down a bit at the beginning of the year admittedly versus tough comps.

But wondered if you could add some more color on how that is developing?

And what you might think on the kind of overall bid season?

Yes, I think, as I mentioned, in 2018, I thought Intermodal was yoked very closely to truck in terms of the elevation of rate increases as a percent.

I think this year might be a little bit different.

There is a little bit of a dichotomy going on because of what's going on in the spot market in truck.

I'll let Shelly speak to the asset and non-asset rate structures there.

But with regards to Intermodal, everything that we've seen in the orderly market that I talked about, is that everybody's facing similar challenges with regards to rail PTE, higher dray cost.

And one of the things that we're starting to see is that there's a bigger need for transload in the West Coast.

We've heard from the ocean carriers, the railroads and seen it early in the bids that there seems to be more transloading, which will support pricing power off the West Coast.

So I think you could see a scenario where Intermodal rates could be higher at the end of the year in terms of overall rate increases than truck, which is different than what we saw in 2018.

Yes.

To talk about the truck loading market in general, we see our customers really trying to create stabilization in their capacity and being able to predict what their costs will look like.

We have had good conversations through the bid season.

Early indicators for us is in the mid-single digits on price, but I think that depends customer by customer.

I think as the year plays on, we'll be able to have this conversation.

It's too early to tell for the full bid season.

But I do think that, what Terry said on Intermodal, could be a change from what the truckload market will see overall.

And I also think there's an opportunity this year for Intermodal conversions to occur as the railroads do speed up and have more capacity and they're more predictable.

I think our customers could be moving into that at maybe a higher price for Intermodal, but it would lower their overall transportation cost.

Your next question comes from Chris Wetherbee.

Wanted to come back to Intermodal loads for a minute and maybe talk a little bit about some of the potential outlook.

I know you're not giving guidance, but with -- maybe it looks like potentially a 3% headwind from some of the PSR actions from the eastern railroads.

Just give a sense of maybe how you're thinking about the outlook for 2019?

Is it still a growth assumption?

Or maybe the last couple of quarters are indicative of what demand environment is?

Well, I think I mentioned that we're going to grow in 2019 even with the headwinds that we have with the rationalization in the precision railroading that the Eastern folks are doing.

I believe, I mentioned that, that will equate to 50,000 to 70,000 loads.

And as I mentioned through the first 20% of the bids, we have been able to replace half of that volume that we're going to lose this year.

Okay, okay.

That's helpful.

I guess, when you think about the dedicated side and when you're looking at the growth into 2019, and if you can maybe strip out -- let's put Cory aside for a minute, when you think about the private fleet conversion opportunity, how should we be thinking about fleet as we move into next year to tract our calendars and move through '19?

First of all, we've come off of '18, which was a record-breaking year.

So we were excited about that.

Moving forward, we think we're going to have another good year.

It's too early to tell what it's going to look like.

We measure our pipelines and they're very consistent, but it's really too early.

People are just getting back from holidays and trying to figure things out.

So we'll be able to have a little better feeling later on.

No real reason though to suggest that it would be that the demand environment feels any different in terms of the conversion opportunities that it has been for the last couple of quarters?

No.

There's nothing out there really driving that at this point, that we see.

Your next question comes from Allison Landry.

In terms of just going back to the $134 million charge.

And Dave, I know you mentioned about $45 million was relating to the full year 2018.

Is there a way to sort of think about how much of that was attributable to the fourth quarter?

Trying to really just get a sense of what the core operating ratio was?

Well, I mean, we -- you mean, as far as in the fourth quarter, Allison?

Yes, yes.

Yes.

We don't do non-GAAP publications or discussions.

But the Audit Committee -- our Audit Committee asked that same question.

So I'll tell you what I told them, and then you guys can all determine what you want to acknowledge or use or whatever.

In the -- what I told them was, in the fourth quarter, and they were looking at the entire company, not just Intermodal.

They said, how do I compare fourth quarter '17 to fourth quarter '18?

And so I said, fourth quarter '17, you got to add back the $38.9 million charge that we had in that -- $38,900,000.

And in the fourth quarter '18, you have to add back the $89.4 million and 75% of the $44.6 million.

Okay?

That would give you the operating income between the 2 quarters on a normalized basis.

Okay.

That's definitely helpful.

Thank you.

And then as far as the Transcon volume in the fourth quarter, how much of that do you think was related to the deterioration in BN service?

And is there -- how do you frame -- how would you frame the risk to 2019 loads in Transcon if this persists for some time?

Yes, the service that we received from all railroads in the fourth quarter was not what we had hoped, and the velocity was obviously down, which consumed boxes.

As we have gone around and talked with the various railroads, they believe the velocity and service will be up with all railroads.

So we're anticipating better box turns, better velocity, better service as Shelly alluded to, that should help conversion with regards to 2019.

So the rail service that we've seen so far in the first 15 days, it's early, but it's refreshing.

We've seen some of the best service we've seen in the last 1.5 years, much better than last January and hopefully that will continue.

We'll just have to see.

Your next question comes from Matt Reustle.

A bit of a follow-up to that.

You've mentioned some of the cost pressures and bottlenecks that you're seeing in the business.

Curious, if you're seeing improvement in those areas and easing in cost pressure?

And is it reasonable to expect that operating income can outgrow revenue again in 2019?

Or do you see headwinds on the cost side, which might offset that?

Are you talking only about Intermodal?

Or you're talking about...

Intermodal and broadly for the business, if you could talk on each?

Broadly for the business, I think that where you'll see is -- you'll see for us an acceleration in our IT spend, that will be buried in each of our business units as they consume that, that development of upgrading of their platforms as well as the enterprise platform that hosts all of the business units.

That's probably going to be an extra $50 million in our expectation this year.

We'll expect to get some benefit out of that, but it's probably going to be more in the back half of the year than the front half.

So I would expect those cost to increase -- that cost increase to be there.

I expect rail purchase transportation.

I'll let Terry speak a little bit more to that.

I think the rails will continue to try to recover their costs associated with their operations.

We will continue to have driver, and frankly, all salaries and wages with mechanics and front-line people and managers and things of that nature, maybe not to the pace we saw a year ago, but we certainly don't expect to see cost reductions in the labor pool by any means.

We know that the insurance capacity out there is still tight.

We've renewed some policies recently and tried to keep down our rate increases, even our safety records we're having to take rate increases to get insurance capacity.

I think, those are the big ones that I can think of.

Terry, in Intermodal, is there anything that I missed?

Well, as velocity picks up and as service gets better, you're going to see better box turns, which means you get more loads with fewer boxes.

As well as I'm hoping that, that should show up in the dray efficiency because the more on-time the railroads are, the more efficient our dray fleet would be.

So that's a -- that could be a potential upside for us.

Okay, great.

That's really helpful.

And then one follow-up on CapEx.

It looks like you came in above that $800 million target that we got on the last conference call.

Is that pulling forward dedicated business?

Anything that you would mention there?

And then, how should we think about CapEx in 2019?

Yes.

It definitely is a reflection of the amount of dedicated business we added on in the back half of the year.

We certainly try to get the equipment in, in place, so it would generate the revenue.

We were fairly successful with that.

We still have a very heavy trade cycle beginning 2019.

But we would expect our CapEx to be somewhere around $200 million less than what we had a year ago in '19.

Your next question comes from Amit Mehrotra.

Can you just offer the monthly cadence of Intermodal volume cost in the quarter?

And more broadly, just comment on the overall volume environment.

There's obviously a lot of uncertainty out there in terms of trade wars and just overall slowing growth.

If you could just help us, kind of, contextualize those concerns in terms of what you're seeing on the ground today, that'd be helpful?

Amit, I thought we just heard that Trump canceled the trade war.

Okay.

So everything is great, right?

Anyway.

To answer your question on volume on the calendar month in October, we were plus 5 year-over-year.

In November, we were minus 3 year-over-year.

And in December, we were minus 6 year-over-year.

And then as far as general demand...

Yes, the volume trend, I think, some of the tariff activity that was supposed to go in December 1 helped pre -- some pre-shipping, so we were a little disappointed, as Dave mentioned in his opening comment in December.

But now that we'll see what happens after today's announcement, But January, everything we've heard from the International steamship companies that their boats are 90-plus percent loaded here in January, which should make January equal to or from a Intermodal standpoint as well as last year.

Now there could be a lull.

Chinese New Year I think is in the first week of February, which basically plays out into this third or fourth week of February.

So are they pre-shipping now because what could possibly happen in March or is that going to kind of wash itself out?

Overall, I think when trucks get a little bit looser and Intermodal service goes up and there's an opportunity to move some trade back over to Intermodal, even though there's some rationalization going on, I think some of that has happened in the marketplace.

So with regards to volumes even with the rationalization, it's difficult in January, February, March, but it's pretty well inline so far with what we've -- what we anticipated for the first half of January.

Okay.

That's very helpful.

Thanks.

Just a follow-up on, I guess, incremental margins.

What's the right way to think about incremental margins for both the Intermodal and dedicated business in 2019?

I'd assume for Intermodal, it's a tale of 2 halves.

If you can just kind of give us some color of how to think really about the dynamics of that in really the second half of '19?

And then, the dedicated incremental spiked up pretty significantly.

The startup costs have weighed down that for several quarters now.

What's the right way to think about that in 2019?

That's it for me.

Yes.

Well, I mean, just generally, I would tell you -- well, I mean, Nick, talk about your base business on dedicated.

We'll start there and then we'll go to Intermodal.

Yes.

We're very pleased with how '18 turned out for our base business.

We operated our base business and dedicated within the guidelines that we say we want to operate, which is the 11 to 13 operating margin.

So we're pleased with that, and that's with startups loaded in there and everything.

So we're just very pleased with the base business.

We're facing some headwinds with growth in Final Mile, and that provides some challenges to us, but the base dedicated business is performing within our guidelines.

So all said, I mean, if Nick shut down growth completely, he'd be running in that 11% to 13% margin range.

It is really how we look at it and that's how it's priced, and that's how it's always been.

In Intermodal, as far as just general aspect, again, we haven't moved our margin targets just yet.

We think that 11% to 13% is the right long-term margins.

We have some room to get up there.

So the incremental margin in the short term, I don't know how to answer that because we have to get back to the base case before we can talk about what an extra load is to get to our -- to cover our overall cost nut inside of Intermodal.

But at this point in time, we have to inch back into that 11% to 13% margin range.

And we do have some cost headwinds we'll have to overcome in order to get there.

Your next question comes from Jason Seidl.

This is Adam on for Jason.

I guess, I just wanted to ask you guys about your thoughts on Last Mile delivery, particularly in light of the Cory's 1st Choice purchase.

Is this an area where you guys feel pretty good where you are now with this purchase?

Do you feel like you maybe want to kind of grow a little bit more in Last Mile and maybe look for other acquisitions?

Maybe just a little bit about your thoughts and strategy here surrounding Last Mile delivery?

This is Nick.

We're very pleased with our acquisition.

It gets us into the furniture side of Final Mile in a big way.

We're pretty heavy on the appliance side, and so this gets us into the furniture side.

And if you look at the Final Mile, big and bulky delivery, we think it's $12 billion to $14 billion spend.

$5 billion is the largest and that's in the furniture area.

So we're excited about what that can do.

And then $3 billion of that is in appliance, and then you get smaller on medical and exercise equipment.

But where we're focused is on the big ones right now, and we're excited about that.

We're not planning on any more acquisitions.

We think we'll take this one on and it will really launch us into the big segments, and we're excited about that.

We think we're one of the larger players in the big and bulky delivery, and give great service and Cory was a great match.

They've got a great reputation on the service side, and their culture matches ours very well.

So I've been on the call with all of their customers, and it's been a great transition, setting up for a great transition [we'll buzz] on that next month.

But we're going to be able to do a lot of integration, I think, with Shelley's team and even Terry's on some Intermodal inbound.

So I think there's going to be some extra revenue picked up from that from our relationship.

So I think it's going to be beneficial to a lot of different divisions.

Great.

And then maybe just a quick follow-up.

And I know you guys spoke a bunch about Intermodal already and a little bit about precision scheduled railroading as well.

But I was just wondering if there's anything else that you guys might be able to share regarding PSR?

And specifically with the rollouts at NSC and UP, just any other details maybe that you can share about the rollouts there?

And maybe how it's affected you guys or your customers?

Well, I would say that obviously the CSX is all-in on precision railroading.

And I think the others have taken pieces of it and implemented it in various stages.

It looks like the UP is going to accelerate with what they were doing and some of the things that they do.

I don't know if they've all been done yet, so there may be some new things that developed on the Union Pacific side of things with regards to some of their rationale as they precision their [railroad].

Precision railroading by definition is -- should be better on-time service, and better on-time service means that Intermodal should grow.

And then the quality of the revenue should also follow that as well.

So I think one of the things that, I think, you're seeing why pricing is going -- is holding and going up is that if all these railroads are trying to get to a [55 OR] as quickly as they can, it's difficult to do that if you're slashing rates.

So that's one of the reasons why I think it's an orderly market because everybody has some of those PTE opportunities in front of them, along with the dray as I'd mentioned.

And it's going to create an environment similar to last year and we'll see what kind of level it settles out in the next months ahead.

Your next question comes from Brad Delco.

Can you hear me?

Yes.

John, I got a question for you about the broader portfolio, another acquisition that Nick just spoke about.

But when you look across the portfolio, where do you want -- or what do you wanting these businesses to represent of the total pie?

And to the extent there is more inorganic growth opportunities out there, what would you be looking at?

I don't have anything specifically in mind right now other than something that would be very logically adjacent to services that we're providing today that presents us with something we can't do organically.

I think the 2 acquisitions that we have made, we saw in both of those companies something that we could use quickly and would take us a long time to build.

We don't really have -- we got a lot of things in the works right now that are very complementary.

And we haven't really had conversations here that say here's a big gap, we really need to be looking to fill that gap.

I think we did feel that way on the delivery side, particularly on this contractor delivery in the furniture side.

So Cory was a real good add-on for us.

But nothing is a burning platform that we don't have internal activity cooking around.

And we do have a lot of projects going right now.

So I would want us to be careful of getting deal fever.

I'd like to see us finish off some of the bigger projects that we're pretty late-stage on and see what they present.

Dave's opening comments, he remarked about increasing our investments on our technology platform.

We're pleased with what we're seeing there.

You can't get too many plays up on too many sticks at once.

I think we want to be thoughtful about that, be very careful.

Now that's not to say that if one of these folks comes in with a deal they really like, when we do this now, having done it a few times, said no to several and yes to 2. We have a little bit more of a program internally that seems to work for us.

So if one of these division heads comes in with an idea they really like and they have some passion for it and they have a good story to tell around it, then we'd be listening.

But I wouldn't say that we have anything that's current at the moment.

Okay, great.

And then maybe if I can follow up to that.

For you, Dave, you gave us the capital budget plans for 2019, $200 million less than '18.

How should we think about that capital being deployed amongst the segments whether...

Oh, I think the biggest -- yes, I think -- obviously, the biggest user is still going to be Dedicated.

But even Intermodal's got a heavy trade year.

So I would say that they're going to be obviously a large consumer of that as well.

And then part of that -- part of our overall CapEx spend is an additional $50 million in technology spend that we're going to end up as we develop our enterprise software and the hardware associated with being able to run these platforms, these digital platforms, that requires capitalization.

We'd looking at.

Intermodal is looking at yard expansions, things of that nature, which are our high-cost, one-time items.

But as far as breaking out how much goes where, it's in our plan, but that would have been guidance had we decided to issue guidance.

Your next question comes from Brian Ossenbeck.

Shelley, just wanted to elaborate on ICS a little bit, specifically Marketplace.

It's generating, it looks like, about 50% of revenue.

Can you just walk us through the next rollout for -- will you pick control tower and optimizer?

It sounds like those are increasing and the margins were pretty healthy, but the revenue per load was down.

Do you think that -- is that a function of just the lower cost to serve with 360?

Well, that's a great question, lower cost to serve with 360.

So we definitely see a lower cost to serve with what we're executing in the platform.

There is a delta between traditional brokerage and executing in the platform.

So that has happened in general.

But I would say the softness in the spot market impacted us, specifically in ICS, in particular in December but just all of fourth quarter as well and continuing into January.

If we think about what's coming out in the platform, we do have -- I think, Dave has mentioned the acceleration that's happening.

We have quite a few features that we are working on inside the 360 platform, really to drive more efficiency inside the network but also to be very predictive.

So we did just roll out our very first piece of machine learning, so using the data points that we have from carriers coming and searching.

And so what we do with that information in turn and how we create better matches for carriers and also for shippers, that's something that we've implemented in the platform, and we will continue our work on the data science piece, so a large investment happening inside that space.

We're also working on the small and midsized market inside 360 for them to have access to the platform, so that's another key component inside the 2019 budget in total, and then really just expanding the services so really that our entire organization can gain, benefit from the platform.

And you will start to see the rest of the segments coming on to the platform here in 2019.

Okay, great.

Just to go back for a follow-up, just a bigger picture question for you, Shelley and Terry.

Why do you think we could see rate increases that are higher for Intermodal this year than truck when there's a pretty tight -- tighter correlation than we've seen in the past last year given how strong the market was?

So is that a base effect?

Is that a mix shift?

Maybe you can just walk through a little bit more of the logic behind that.

I think it's the cost headwinds that all the Intermodal providers are up against.

And I mentioned the rail PTE, the higher dray cost.

And then we think the tightness in the West Coast will continue with more transloading as the international players don't want their boxes in certain points inland.

And they're -- I think they're going to be pricing in such a way that they're going to -- option maybe better to transload.

So you got a supply-and-demand situation on the West Coast, which is positive for price, and you have higher dray cost and higher rail PTE so -- and improving service.

So with that, we might have a fuss right here and there and some backhaulings in the East.

But generally speaking, there's many lanes in the East that are -- have 2-day lanes that were priced maybe for a day, 1.5 days, that I think that Intermodal will be able to hold its ground with.

And as I said, it's a dichotomy.

Normally, it doesn't do this.

But I think this year might be different and -- for those reasons.

And I might add to that.

I feel like in the truckload sector that from a customer perspective, there is more stabilization happening from bid awards.

And so if you look at what happened in 2018 and in '17, the freight market was very volatile.

Customers were churning in lanes that fit.

And that, in turn, made -- the truckload carriers had to churn what freight they could accept or what really worked for the network.

I think there is a more stable network today, so less churn in the bid business.

That is favorable, I would say, that prices don't have to move at the same clip.

And then you look at the disruption happening in Intermodal.

Terry talked about the lane closures and the rail rationalization.

That alone will create those cost pressures that are happening.

And so I think the disruption happening in Intermodal is different from what's happening inside the truckload space.

Your next question comes from Scott Group.

So I wanted to just follow up on the arbitration.

Dave, is there a better number to use for the forward-looking impact than the $44 million from '18?

Is there anything more specific you want to tell us?

And then I guess, I just wasn't clear on your answers earlier if you think Intermodal margins can still improve in '19 even with the impact of arbitration.

And then just adding to that, you had a comment, "We haven't changed our 11% to 13% margin targets yet." And I wasn't sure if -- what you really meant by that.

Is there -- did something change because of arbitration with the 11% to 13%?

Or am I misreading and you still feel good about 11% to 13% longer term?

That's 3 questions in one, so that's incredibly clever, Scott.

And now I've forgotten exactly all 3 of them, but let's start with the margin.

At this point in time, 11% to 13% is still our margin target for a long-term basis.

However, we'll have to wait and see.

And we're not pinning this down on arbitration, the other rail cost pressures are also out there.

Let's not forget that we ride all but one of the big railroads.

And so we have to look at, as rails pass their cost on to us and then as our customers accept price increases, where those margin targets will end up being.

But as it stands today, we still think 11% to 13% is the right long-term range.

As far as the arbitration itself, I don't have any other information that's not what we've already issued public as far as cost.

And then the other part was just given that, do you think you can improve margins this year in Intermodal?

In the short term, again, it happens.

Don't hang it on just one railroad.

We have to look at our entire mix and see what our rail PTE will look like from all the railroads.

And we are expecting some cost increases.

And whether we can capture all that back in a one-period bid cycle, we'll have to wait and see.

Your next question comes from Todd Fowler.

Just a follow-up on the Dedicated comments.

I think a comment was made that the expectation is that Dedicated is going to continue to grow at the recent run rate, which has been around 25%.

Is that a thought that that's really what the revenue for Dedicated should grow throughout all of 2019?

And then if you could also follow it up with kind of the expectations for the cadence of the margin improvement, understanding the business isn't coming through right now with where the targets are for that business, at what point -- do you see that in the second half of '19?

Or is that more pushed into 2020 with some of the growth?

Todd, that would be asking for guidance.

That's clever.

However, before I allow Nick to answer, I just wanted to make that point very clear, he will not give you guidance, okay?

Right.

I think if we say directionally in how to think about it, which we always try and do, that's not really guidance, you're just helping us think about stuff.

Well.

I mean, Nick is looking at me.

I will tell you that when we do -- Dedicated is probably the most volatile because, frankly, their growth is all dependent on when a game customer signs a contract, right?

So for lack of a better scheduling, when they do their budgets and hand them into me, it's pretty ratable throughout the year, okay?

Now...

The growth is ratable, the trucks?

The growth is ratable, that's right, throughout the year.

That's -- here we are, what, January 17, we don't have any data that says anything otherwise.

But the good part about it is we've seen him, when he ain't [flaring] on this revenue, we're overcoming the startup cost because the startups are coming out as scheduled and priced.

So I wouldn't expect a huge lag in their margin improvement as they go on.

I think their biggest headwind in the margins, and I'm going to let Nick speak to this because he can talk about growth in the -- in this area, is as they mix in or getting start to -- they're starting to get to a size in the nonasset piece that as that mixes with the asset side, that will put pressure on their OR, those great phenomenal things for their ROIC, which is what we want.

But we'll have to discuss that as we start to see that happening.

Yes, I would just say, particularly once we get the acquisition on, it's 90-something percent nonasset.

So it's going to come on.

And then just the growth in general that we already have on the nonasset side, in Final Mile, it's going to be a bigger percent of our portfolio when it's climbing.

And so that's going to put pressure on our overall margin in Dedicated that has both Final Mile and Dedicated in it.

And so that's what I was trying to allude to.

We're very pleased.

We break it out internally.

We're very pleased.

And it is hitting the margin targets that we have shared numerous times.

So we feel very good about it.

Okay.

Yes, and obviously the questions are -- I mean I think that we all want to get our expectations directionally correct.

We don't want to have the volatility, and so that's I think at least where I'm coming from in the questions.

And I guess, for my follow-up, and I think that Brad Delco asked something directionally about this earlier.

But John, when you think about again the portfolio of businesses, the investments that you're making, should we read into that, there just is more growth outside of the Intermodal business going forward?

Is that by design?

Is that a reflection of the opportunities that you see?

Or is that just something that's been opportunistic recently?

I think as a whole, we're really listening to the customers and the systems that we work in.

If it's Intermodal, it's what's going on with our rail networks and how fluid are they, how responsive are they to that customer need; if it's in developing new technologies or creating Final Mile services, I really think we've been very open-minded and open here to what is it that we're hearing from that base of people we serve.

And even some new customers that we're reaching now with things like Marketplace that historically, we've been kind of a big shipper provider.

And I think we're opening some doors that get us into smaller shippers, which we can now serve more efficiently with some of the platforms that have unique needs across their whole supply chain.

And so one of the things that we discuss here is, is there a need, who else is providing that service, are they good, is there a return.

And for us, it's also can that service, can that offering grow to a meaningful enough size that's going to move our needle?

And because I think we've learned from some of our past that you can't let your management team get distracted with ideas that aren't going to present you meaningful growth along the way and take away that talent of things that are not going to be big enough to really matter.

So again, it just comes back to what do we need to be doing today based on what our customers are telling us, where do we have gaps.

And overall, I think we've always enjoyed organic growth here.

We have the cash flow to support us, a good capital program, if it means investing in equipment or properties or systems.

I think we've brought on a lot of really good stuff over in the last few years, some from the outside that have helped us think a little differently.

And that's been real good for us, it's been a little disruptive.

But we hired a lot of people this year to support the growth that we brought on.

And I just find that's kind of a self-fulfilling system in a lot of ways, so I -- we don't have a preconceived notion.

We know that the best return for us is going to be organic growth.

And we've always been keenly aware of that.

But we also are not allergic to looking in other places, whether that's an acquisition or like our recent announcement with the -- working with some outside people that can help us do things that we can't do on our own.

We just -- again, I'm pretty simple-minded about this, what does the customer need, can we make a good return?

It would be great if what we're doing is big enough to matter.

Your next question comes from Ken Hoexter.

Terry, just you mentioned your thoughts on preshipping impact to volumes.

I just want to understand as -- if we have this continue until the end of February, do you expect a kind of sizable lull as you move into March or April, May, just given the preshipping activity at the ports?

And then, Dave, just wanted to understand your comment on the container ad, you said accelerated due to the state of market demand or because congestion chewed up your boxes.

Well, the congestion, when it's relieved and the velocity goes up, it leaves more boxes.

I think we talked about that the rail velocity -- or the slow rail velocity last year consumed 5,000 or 6,000 of our containers, and we're getting some of those back rather quickly.

With regards to the tariff, March 1, the potential tariff, I do think it's -- could be similar to December.

We're seeing some preshipping going on.

You always see some preshipping before the Chinese New Year.

So you might have not only the normal Chinese New Year lull, but you might have some -- or less activity because of the tariffs.

Where Easter stands, sometimes that kind of washes itself out.

So we'll just have to see what happens with regards to the tariffs.

So it's not like you've already seen a significant oversupply or preshipping that is significantly [ample]?

What I said is the steamship companies that we've been in contact with said that they are -- their boats are more full in January and the reservations they have versus what they had last January coming to the West Coast.

Your next question comes from Matt Brooklier.

So not a guidance question but could you give us some color in terms of how much revenue Cory 1st Choice did over the trailing 12 months?

And you also talked to there's potentially a mix impact on the margins, it's a business that uses a lot more owner operators.

If you could talk to kind of the relative margins to help us think about Dedicated as a whole next year from a margin perspective, that would be pretty helpful.

Okay.

Yes, the trailing 12 months would be between $155 million and $165 million in revenue that they did in the trailing 12 months.

And we had conference calls with all those customers and thinks -- they're very pleased with the acquisition.

I think we can help them grow a lot faster when they have a lot of pent-up demand that Cory didn't quite have the capital to grow with.

So they're -- the customers are excited about that.

And then the other question was our margins in there.

It depends on the capital required.

If it's all nonasset, we're going to be -- in the 5 to 7 range is what our operating margin targets are going to be in that business.

Okay, helpful.

And then you mentioned shifting over to Intermodal.

You're looking to grow volume in '19.

Curious if that volume growth potential factors in negative headwinds from PSR at Union Pacific.

And if there are service-level disruptions, and they are meaningful, what's the potential for J.B. Hunt to maybe take on additional volume in the West?

Well, we should have the boxes available if the BNSF continues the way they have started the year with their increased velocity.

So as long as there's boxes, I think we can -- and the terminals can stay fluid, we will have the necessary power at origin/destination due to pickup and deliveries.

So I would say it's good as long as the rail network stays stable.

And to specifically answer your question, Matt, the -- yes, the growth expectation in 2019 is in spite of the rail rationalization and the loss of those loads.

Your next question comes from David Vernon.

You gave us some good color on sort of how you're feeling about the rate environment.

I was -- wanted to ask sort of the same question in a different way.

Are you seeing any sort of signs on the hiring side, that it's getting easier to seek drivers?

Is the labor market losing in any material way?

And then I just have a quick follow-up.

I'll let -- we'll let -- since Nick has to hire the most drivers, we'll let Nick take that one directly.

Yes, I would just say that it's still a challenge out there.

There are some markets that are still really tight.

But I would say it's eased slightly, but it's still difficult to find good quality drivers.

And we're still needing quite a few of those, so they're still higher on bonuses that are out there, so that tells you that it is still tight.

There is not as many, but there is some out there.

So I would say the market is still very tight, particularly in our Dedicated side.

So...

And Nick, I would just note that our costs to hire are still at a high level.

Absolutely.

So we talked about hiring, bonuses.

But just our cost in total W-2 also came from those hiring bonuses of -- [those maturing].

We announced our cost to acquire new talent, new drivers is done in an elevated price.

It's a good point.

All right, that's helpful.

And then Dave, I kind of do want to ask you a question about guidance.

I understand that there's uncertainty around the year.

But I think one of the things that -- one of the pieces, the pushback that we often get on J.B. Hunt as a stock is we don't have a lot of visibility around the company.

They don't -- they used to not hold earnings calls, and so I think this is helpful.

But is there a point in the year here where you're going to feel more comfortable in giving us some directional guideposts so that we can sort of make sure that we're not letting our wildest models run away from us with 15% pricing?

And is there any point where you're going to able to tell us, at least kind of timing-wise, when this arbitration stuff may come off as an overhang?

And yes, I did fit 2 in as a follow-up.

Yes, it is not likely that we will talk about guidance in 2019.

Even when we tried to get more visibility, it's either been ignored or caveated depending on who's reading it.

And then it's never updated, so we're always behind the curve.

So we never used to issue guidance.

And when we thought people were getting out on a limb too far, we started doing it.

It worked for about 2 years and then we're back out to where we were before even putting our numbers out there.

So I doubt if you're going to see us issue guidance definitely in 2019.

And as far as the arbitration, the information that we have issued to the public is all the information that we intend to issue to the public.

When we get more information, we'll issue more information to the public.

Your next question comes from Casey Deak.

A question for Shelley, it's more long term in nature.

If you're looking at more revenue, more growth coming from Marketplace over time, does that change how you look at the general ICS business in the brokerage model?

Does that change your needs on the labor front of how many brokers you need or the footprint that you have in that business?

And then kind of along those lines, if you can just comment on how you view margins and return profiles going forward.

If I could take your questions a little differently because I thought you were going to say I think differently about brokerage having Marketplace.

And I would say I think that our ability to grow share should continue to accelerate now that we have better data, more real-time visibility in really understanding where the [infrastructure deals] are happening so we could fill the gaps in that.

So I would expect ICS to continue to have strong growth but also expect that organizationally because we use that data to help customers know how to transition into Intermodal that are a pretty dedicated fleet or find backhaul for [owner operators].

I would expect that to continue to prove beneficial to our bottom line here over the next several years but also long term.

And then from a labor perspective, we do think that margins, a larger portion of the margins go to [plan the extent] of labor.

So people do the business.

We aren't expecting in the near term to lower our total headcount.

We've actually accelerated that headcount.

We think the platform will be successful when we put our experienced people with great technology.

And so we think we need both really to accelerate what the platform can do for our customers and carriers.

So we think our gross margin percentage will shrink over time, but our bottom line percentage should still be in the range of brokerage as we get efficiency and then computers doing really a lot of the work that's not that fun to a broker.

So brokers will transition and use their more creative side in problem-solving skills where the computer can't do that and whereas the computer collects the bids and do things that are more automated.

Okay, thanks.

And does that change the type of person that's going to take that job over time or kind of change your labor force of who you are looking at for hiring to come into that business?

Yes, we definitely have started to segment the work of our ICS sales team.

And so we are looking for different skill sets for carrier sales versus carrier procurement.

And so I do think that, that will change over time.

Those jobs can be shared at times, but I do think we're going to be talking to carriers about the platform, the adoption and the features, the benefits of saving them money, giving them more time to drive and giving them a better experience versus [picturing] at the moment when something needs to happen.

And presenters, do we have enough time for another question?

Yes, we'll take one last question.

Your next question comes from the line of Ben Hartford.

Terry, just your perspective on the inventory levels across the channel.

I mean, you made the comment about transload activity in the first quarter.

It sounds like warehouse capacity is tight, particularly in the L.A. Basin.

But overall, give a sense as to what customers are saying as it relates to inventory levels and planning for '19?

Yes, I think inventory levels from the latest data that I've seen are down versus what we saw maybe 1.5 years to 2 years ago.

I'm really curious to see what the new data would say in December and January.

But I haven't seen any spike up with regards to that.

We know that there's various warehousing shortages throughout the country in certain markets, which is why some of our freight sits on our trailer.

And that's why we pursued like others assessorials not only for dwell but also for storage.

So it's -- I don't think it's changed materially from anything that I've seen in the last 2 or 3 months, but we'll have to see the new data when it comes out here in the next couple of weeks.

And this is all the time we have for questions.

I'll turn the call back over to our presenters.

Thank you all for joining us.

I'm sure we'll see you out on the circuits, and I know a bunch of you have got scheduling from our -- are scheduled to come on down and see us, and we're excited to talk to you about where we'll take this company in 2019 and beyond.

Thank you.

This concludes today's conference call.

You may now disconnect.