J B Hunt Transport Services Inc (JBHT) 2019 Q4 法說會逐字稿

Good morning.

And welcome to J.B. Hunt's Fourth Quarter 2019 Earnings Conference Call.

(Operator Instructions) Today's webcast is being recorded and will be available for replay after the call on the company's website at jbhunt.com.

I would now like to turn the conference over to Brad Delco, Vice President of Investor Relations.

Mr. Delco, please go ahead with the presentation.

Good morning, and thanks for joining us.

Hopefully, everyone had an opportunity to review our earnings release that was issued earlier this morning.

If not, you should be able to access the release on the Investors section of our website at jbhunt.com.

Before I introduce the speakers on today's call, I would like to take some time to provide some disclosures regarding forward-looking statements.

This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements.

These statements are based on J.B. Hunt's current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements.

For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission.

That out of the way, I would like to introduce the speakers on today's call.

This afternoon, I'm joined by our CEO, John Roberts; our CFO, David Mee; Shelley Simpson, Chief Commercial Officer and President of Highway Services; Darren Field, Executive Vice President of Intermodal; Brad Hicks, Executive Vice President of Dedicated; and our Chief Accounting Officer, John Kuhlow.

At this time, I'd like to turn the call to our CEO, Mr. John Roberts, for some opening comments.

Thank you, Brad.

During our last call, my comments were focused on the key steps taken over the past several years that have charted our course.

We highlighted how we prioritized 2 key growth initiatives, our technology platforms known comprehensively as J.B. Hunt 360 and our Final Mile service offerings.

We also confirmed our commitment to Intermodal, Dedicated and Highway Services as a part of our long-term strategy.

In 2019, we grew total revenue by 6% and operating income by 8%.

This data includes a downward shift of approximately $60 million in op income opportunity for ICS, in part driven by our stated position to move forward with the developmental strategies we have for our digital freight management platform, 360.

We called out a challenging pricing cycle through fiscal 2019 impacting our comparative data.

And it should be observed that the financial data between 2018 and 2019 is rather noisy due to several onetime charges that occurred in 2018.

Even still, we see the results for the year is confirming our ongoing portfolio approach to the markets we serve.

A key to the improvement shown in 2019 for the company, overall, come from our DCS business unit.

As the growth initiated in 2018 predictably moved into more stable performance for DCS, we experienced 25% top line growth and 39% operating income growth.

In part, these increases are enhanced by the 2 previous acquisitions made for our Final Mile services, along with a strong trend in organic growth of private fleet conversion, which we anticipate will continue in 2020.

We also enjoy an extremely high retention rate, approximately 98% with this business, which we attribute to the closeness we maintain to our customers in operations and shared data used in managing the services we provide.

We are also pleased to have recently announced our third acquisition for Final Mile.

Through 2019, Intermodal continued to strive to return to load growth and demonstrated a slight directional uptick through the third and fourth quarters.

As we are in the early stages of bid season, we will watch closely for a balanced approach to growth and rate quality.

We continue to experience cost headwinds and utilization challenges, both of which keep pressure on desired near-term margin improvements.

Hopefully, with much of the PSR work behind us, we can work with our rail providers to increase the transit velocity and service reliability needed to convert more business from the highways going forward.

In addition, we will keep a close watch on freight patterns with newer customers in 360 for Intermodal conversion opportunities.

Our highway services lines, ICS and truckload, continue to monitor the pricing cycle challenges presented through the fourth quarter and the beginning of bid season.

Our truckload business delivered a solid year given the conditions in 2019 and continues its march toward a more asset-light model into 2020.

ICS will continue to work through current bids, and we expect the investment in technology, particularly for the marketplace and shipper and carrier programs in 360, to continue throughout 2020.

Lastly, we will be breaking out the Final Mile service business from DCS beginning in first quarter 2020 with supporting financial data for the prior year from both Final Mile and Dedicated.

2019 was a progressive year in many respects, and I see the setup for 2020 is productive.

I expect this year to both reveal and confirm our strategy in executing on our base businesses, while we expand our presence within our growth channels.

I'll now ask Dave Mee to make his comments.

Thanks, John.

I'll just going to focus a little bit more on the shorter-term results, basically around the fourth quarter of 2019.

We experienced a fairly strong but a very compressed peak season during the quarter, and it allowed no room for operational hiccups.

In addition, we saw customer expectations for operational accuracy at one of the highest levels we've ever experienced.

This was not a surprise to us going into the quarter, and we knew that if conditions change from our planning assumptions, we were going to err on the side of customer satisfaction.

In Intermodal, we realized some volume growth off the West Coast, as expected, but we also continue to feel the effects of the volume contraction as we finally get to lap the lane closure comps, but continue to see headwinds from truck competition in the Eastern network.

And the Western growth was not seen across all of our customers.

That put additional pressure on revenue per load results.

In addition, we lost some volume due to some rail service interruptions and we incurred some additional costs recovering from those events, trying to meet customer expectations.

In Dedicated, we benefited from our customers' fluid freight patterns during the condensed peak season as the year-over-year asset productivity improvement and steady and predictable new contract start-ups kept sequential margins from experiencing their normal seasonal decline from third quarter to fourth quarter.

In ICS, we realized both volume and revenue growth versus last year, but this was almost entirely due to freight mix changes away from LTL business and toward truckload freight.

This mix change resulted from both customer directives and a more concerted effort on our product to penetrate further into truckload brokered freight and then drive it through our Marketplace 360 platform.

Most of this freight was contractual business, where we experienced very competitive pricing during the bid season over the prior several quarters.

However, we did not experience similar competitive pricing in the third-party carrier markets, nor did we capture a materially larger portion of spot activity during the fourth quarter, hence, our margins were squeezed.

Our operating income declined as we continue to disproportionately invest in a disruptive technology of Marketplace 360.

And as John alluded to, we will continue to do so, most likely for the next 4 to 6 quarters, as we complete and improve our digital platforms to generate revenue growth and operating income longer term.

In truck, we were down in both revenue and operating income, primarily from a smaller volume of spot activity and general customer rate pressure compared to a year ago.

However, the mixture of company-owned equipment with independent contract carriers buffered the operating income and return on capital impacts we have historically experienced during these volume and rate declines when we were operating with 100% owned fleet.

Brad, that pretty much covers my prepared remarks.

I think we're now ready for questions.

All right.

We're ready for questions.

You can open up the lines.

(Operator Instructions)

It's Chris Wetherbee from Citi.

I guess I want to talk a little bit about what we expect the Intermodal load growth to look like as we move at least into the first half of the year.

You mentioned we're lapping some of the PSR initiatives for lane rationalization.

I think there's been some share gains.

Do we see an acceleration from what we saw on the fourth quarter?

Do we need to see sort of improvement from rail utilization to kind of see that?

Okay.

Fair question, one that we certainly would have expected.

We hit a negative volume run rate in the back half of '18.

As we entered early '19, the lane closures produced sort of a steeper hill to climb to dig out of the volume position we were in.

And so we're happy that in the back half of '19, we were able to dig out of that and actually represent positive volume growth in the fourth quarter.

Certainly, turning the corner on the comparison from last year when we lost an annualized run rate of 60,000 to 70,000 loads during the first quarter due to lane closures, certainly, this year, not having that comparison is going to drive some help for us.

So I would expect continued volume growth.

We're not guiding on just what that would be, but we're certainly -- have the expectation based on what we know today that we will continue growing in 2020.

Okay.

That's helpful.

I appreciate that.

And then just a follow-up on the 360 spend, I know incrementally another 4 to 6 quarters of spend.

Do you start to see that the potential losses go down or at least the rate of spending decelerates from here?

Or maybe the net impact of that spending decelerates because maybe there's some profit coming from the initiative?

I just want to get a sense of maybe how to think about the cost and maybe the returns starting to pile up here as we go through the next several quarters.

Yes.

So if we think about our investment in 360, we really think about it in 3 key areas.

We are making an investment in scaling the business as we believe it's critical to reach mass scale for us to create a more efficient transportation network.

So that's the first component that we're very focused on.

That will be very dependent on what's happening in the market from a brokerage perspective in both bid season and in the carrier PTE side.

The second piece of our investment is around our people.

And so we do have people for both our shippers and our carriers, making sure that our experience is one that our customers would rave about and want to repeat and continue doing business with a very high retention rate on both customers and carriers.

And then the third piece is in our technology spend.

And so from a tech spend, we will continue to invest the rest of this year, really, our people and tech costs is fairly well-known for 2020, too early for 2021.

It's -- the variability is more on our investment in scale and what that will look like here through the rest of this year.

This question comes from Justin Long from Stephens Inc.

This is Justin Long from Stephens.

Wanted to start with a question on Intermodal margins.

I know your initial expectation was for sequential improvement in the fourth quarter, we ended up seeing margins decline by about 40 basis points sequentially.

Is there any way to break out how much of that shortfall was related to repositioning costs?

And how much was related to the derailment you mentioned?

I just wanted to get a better understanding of how much of this margin shortfall was specific to the fourth quarter versus something we'll continue to see in 2020.

Okay.

Again, another fair question, Justin.

This is Darren.

I think our margin challenge in the fourth quarter is simply costs are higher today than what we have experienced.

In 2018, we were successful in increasing prices, but a lot of those dollars found their way to support our labor costs.

Our rail purchase transportation costs are up and Intermodal participates in the technology improvements we're making at J.B. Hunt as well.

So all of those present, to some degree, some challenge.

As we go into 2020, it's certainly our expectation to be working towards improvements in our cost structure, but it's probably pretty early to call anything specific about that.

I would just say the fourth quarter was hurt in a meaningful way by empty repositioning.

But at the same time, empty repositioning is something we've done during my entire career at J.B. Hunt, and I would expect we will continue to do some degree of that in 2020, obviously.

But that's an opportunity for us through mix and sales and our efforts with our customer base to help fill some of those empties, and that's an ongoing effort.

And as we go through 2020, we'll be working towards solving that.

Okay.

That's helpful.

And secondly, I wanted to get your updated thoughts on Intermodal pricing.

I know it's still a little bit early, but curious if you had an initial take on what you think 2020 bid season could look like.

And based on that outlook, do you feel like getting back to the Intermodal margin target of 11% to 13% is possible in 2020?

Or do we need to see a better pricing environment to get there?

Well, you're never going to hear me say it's not possible.

Clearly, it's possible.

I think it's -- I think we have a lot of headwinds in front of us.

The pricing, well, like you are saying, it is very early to say, we have very limited results and the results that we do have, have been a mixed bag.

We have results that are beneficial.

We have some pressure on price, certainly, and we have a lot of efforts going on in order to help solve for some of our mix challenges.

And when you add -- layer that on to just a difficult capacity market, I think it's really early to try to predict what will happen with price, but I would highlight there's pressure out there.

Our next question comes from Jordan Alliger from Goldman Sachs.

Just a question on the Dedicated business.

Can you give an update on your fleet expectations for 2020 and then sort of longer term?

And you mentioned productivity improving.

I'm just sort of wondering if you could comment a little bit more on that and how you expect that to move through next year, this year as well?

Certainly.

This is Brad.

Good morning.

We would expect 2020 to be very similar to what we experienced in 2019 in terms of new sales, targeting 800 to 1,000 trucks inside of 2020, and really continue to have confidence in our ability to operate in the 11% to 13% range, as we've stated historically, for the long term for our traditional Dedicated business model.

So pipelines remain very favorable to us based on historical standards, and we believe that -- it gives us optimism to believe that we'll be successful in our 800 to 1,000 trucks.

And just a quick follow-up and you maybe addressed this, I don't remember, on the ICS business.

I know you sort of talked about the -- obviously, the increased spending.

And then, obviously, there's the market weakness that's pretty well documented in brokerage right now.

Any sense for like the order of magnitude between the 2 in terms of whether it be the decline in profits versus last year or sequentially?

Just to try to get a sense for order of magnitude between the market and your spending.

So I would say, as we progress through the fourth quarter, we saw more margin compression as the quarter moves forward.

So as we moved into December, really, right before Thanksgiving, all the way through December, we saw a pretty big squeeze from a margin perspective, primarily driven from the supply side.

That has continued here in January.

And I would say that's historically off from what we've experienced in the past several years in total.

So I think for us, we're just watching what's happening in the market and trying to make sure that we make the best estimates with our customers on how we should best handle what's happening and being close to the market.

Our next question comes from Brandon Oglenski, Barclays.

I guess, Shelley, coming off the last question there, can you discuss the strategy, I guess, as you build out and make the investments this year?

I think you guys have said that you have those losses probably continue through the year.

But is this a game where you're increasing your efficiency to have much greater scale, you want to see a lot of growth and we just need to wait for the market to come back?

Or is this more internally specific to what you guys are doing?

Good question.

So I believe we've said the losses could continue between 4 and 6 quarters from our last call.

And I believe Dave also reiterated that in our opening remarks.

I will tell you, we are focused on gaining scale in the platform from a shipment perspective, and that's really from the data we see in the platform from the carrier community.

So we do have a large adoption from the carriers.

We see the abandon rate inside our platform, how often they're abandoning, and really how we need to, if you will, get the shelves full.

That's a huge focus for us.

But in addition to that, the market is under pressure on both our customer side and recently on the carrier supply side.

So I would say that has a more material impact in ICS over the last 6 weeks.

But our strategy is to continue to work very closely with our customers through the rest of this year and next year to build scale, and we will see the efficiency with our people moving into 2021 back half in total, and that should drive towards our bottom line.

Sorry, just as a point of clarification.

When we say supply, is that constraint on supply?

There are constraints on supply.

There have -- there's been constraints on supply since about the week before Thanksgiving.

We have seen slight easing over the last day or 2, but it has been very tight on the supply side.

Okay.

And then if I don't -- if you don't mind answering, but there's a lot of competitors, I think, pushing bigger into similar products and business models.

So can you just tell us what is really differentiated about the 360 platform versus maybe some of the new entrants?

Yes.

So for us, we are the largest multimodal digital freight platform.

So we don't really look at it from a brokerage-only perspective.

We really think about the $700 billion market and how do we take waste out of the $700 billion market.

So 1/3 of every driver that is available in the market today, 3.5 million drivers, 1/3 of their hours is completely wasted every single day.

And that's the heart of what we're trying to accomplish in 360, removing the waste in the system.

So for us, our multimodal approach in bringing really the best Intermodal product, best Dedicated product to market inside that and certainly the large highway side really allows us to solve for our customers in a more efficient way.

Our next question comes from David Ross with Stifel.

A question on the Intermodal side of things.

You mentioned that you expect volumes to be up an undisclosed amount in 2020.

Is that true for both the Eastern and the Western loads?

Or is there a difference among those 2?

So we didn't differentiate the 2 there.

I would say that's on macro for our system.

I think it's too early to know the answer to that.

Clearly, Eastern Network is where the bulk of the highway capacity challenges is really hurting Intermodal's ability.

Both Eastern railroads have improved their service in the back half of 2019, and we're encouraged by that.

I don't have either railroad come and suggesting that they'd like to cut our costs so that we can become more competitive in the market.

So we will offer Intermodal products to our customers across the board in the East and the West.

I think, in today's environment, there is a challenge to grow in the East because the customers are able to secure truckload capacity at rates equal to or better than Intermodal.

And until we can offer economics and service, combined, that outperform truck, we're going to be challenged there.

So we're not highlighting that we think any one segment will be stronger.

That would certainly be -- or would be growing, certainly, that would be -- our system, our network will grow in 2020.

And then just a follow-on.

You mentioned the lane imbalances that popped up more than normal because there's always certain lane imbalances.

Was that concentrated in either the east or the west?

And what drove, I guess, the higher-than-usual lane imbalances in the network?

I think what drove it is, for the first time in the history of our company, we were negative in volumes.

And when trying to turn the corner, the load volume that is available to grow with comes on when it's available.

And so growth, in essence, it's almost like a start-up expense.

We're layering on new business, and the opportunities that were presented to us in the middle to back half of last year were concentrated in a few markets, and that drove empty repositioning requirements in order to produce the capacity to bring on that business.

We didn't highlight empty repositioning in the East or the West, and so we reposition empties in both markets.

And so I'm just going to leave it at the macro, we certainly had a little higher run rate than what is normal.

However, it's very normal to move empties in both markets all the time.

The next question comes from Scott Group with Wolfe Research.

So, Darren, I get 11% to 13% is tough for the year.

So 2 questions.

One, do you think you see any margin improvement in Intermodal this year?

And then as you take over this role, do you think the 11% to 13% target is still the right long-term target?

Or do you think it's appropriate to sort of reset those lower?

I'm certainly not going to change our long-term margin target.

That's been our target for the long time and will continue to be our target.

We're working every day to find ways to drive efficiency into our system, which would help expand our margin.

Walk me through the first part of your question again.

I just -- you hit me with am I ready to change the long-term target.

Absolutely not.

The first part was just, do you think you see any Intermodal margin improvement or not this year?

Well, certainly, finding a better margin is part of our plan.

There are just -- there's still a lot of unknowns out there.

So I'm not going to tell you that we're not planning to improve the margin.

Certainly, we are.

Okay.

And then, Shelley, on the ICS.

So I think we get 4 to 6 more quarters of losses.

Any directional color on the magnitude of those losses, meaning, we get 103 OR in the fourth quarter?

Does that seem like the right sort of place?

And then if we're losing money, at least for the next period of time, and you should be thinking maybe judging on maybe revenue growth, what's sort of the revenue growth that you'd be happy with at that segment this year?

Is it 10%, 20%, 50%?

I don't know how to think about it.

So we think about revenue growth really outpacing our historical norm and outpacing what the market looks like.

So if we are doing that, it will really trend with whatever is happening in the market, and that would be good for us.

From a loss perspective, it's going to be very dependent on what happened here this bid season and also what's happening on the -- in the carrier market.

If we haven't experienced such a tightening on the supply side the last 6 weeks, probably we would have more certainty as to when the losses occur this year and by quarter.

But because of that, I'm a little fuzzy on what that's going to look like for the rest of the year.

Okay.

Our next question comes from Bascome Majors with the Susquehanna Financial Group.

If you look back over the last 6 years, the Intermodal business has compounded profit growth of about 2% per year.

If you look at the 6 years before that, it was closer to 11%, and that period actually includes the Great Recession right in the middle of it.

From a real high-level and long-term view, is -- does management and the Board of J.B. Hunt still view Intermodal as a secularly growing business?

Or is it just becoming more cyclical in nature as you've gotten bigger, supply chains are getting shorter and the Class 1 railroads continue to work to extract value from their partners?

Sure.

I think it's a very fair question.

Certainly, we continue to see opportunities from our customers in the millions of loads.

I think we've shared -- I even think Terry highlighted on the last call, 8 million to 10 million loads of opportunity to convert off the highway to Intermodal.

Now that's in raw data.

The reality is we have to produce the combination of economics and service that convince that customer base that Intermodal is the right solution for them.

I would be wrong if I didn't highlight that it's more difficult today than it was during the 6-year period you've referenced.

There was a lot of expansion in the Intermodal system.

We had railroads opening services during those 6 years.

So you have -- you can go after some lower-hanging fruit that the business that is warehouse transfer and it's inventory replenishment, and it's items that Intermodal is perfect for.

In today's environment, our customers are expecting a more truck-like service environment with a benefit in the economics.

Obviously, they're not going to give us Intermodal business at rates that are higher than they can get the business truck for.

They do expect some version of a discount, and it's up to us with our rail providers to develop service solutions that will continue to drive Intermodal growth as we move into the next several years.

I expect us to be successful in doing that.

So, yes, I expect it to be a growth market, but we need the railroads to participate with us on the service front and economics front.

I think it is in their -- they are delivering a strategy that, that's what they want to do.

I guess, over the next 4 or 5 years, we'll see if we're able to work together to accomplish that.

If I could just clarify the last point.

In partnering with the railroads, has the bigger challenge in your perspective been the service design changes?

Or is it the lack of flexibility in your cost of capacity?

Wow, great question.

I'm not sure there's a correct answer to that.

It's both.

The lack of flexibility -- reality is the railroads would say, "In order to be more competitive on the economics, I have to find a way to be efficient." And one of the ways they can be more efficient is they're removing some of the flexibility from the customers trying to drive benefits in their networks, which ultimately produce a lower cost that we can pass along to the customer.

So is it a chicken or egg thing?

Are they trying to develop efficiencies so that we can, together with the railroads and the Intermodal market, produce a lower cost to pass along to the customer?

I think that's very real.

And every railroad would say, "I would love to offer a discount, a stronger discount to the market to grow Intermodal.

But in order to do that, I have to cut my costs." And I think that's a fair perspective on their part to try to drive efficiency in their system so that we can, together, pass some portion of that on to the customer.

This question comes from Todd Fowler with KeyBanc.

Great.

I just wanted to ask on Final Mile.

I know that we're going to get some more detail next quarter and have that broken out separately.

But if we strip that out from Dedicated, can you help us think about how you're thinking about the growth for Final Mile, maybe both in 2020 and then on a longer-term basis?

And then also speak to what sort of investment is required to support the growth there?

And do you see that being organic or are there other inorganic opportunities?

Great question.

And I think that we're gearing up, and it's part of the reason why we're separating it out as its own business unit.

And so you're going to get and see a lot more information and details.

As John alluded to, we do intend to show you what 2019 looks like in that separation in a look back.

And so I think you'll have a much better perspective when we get to the end of the first quarter here in 2020.

In terms of investment, Shelley spoke about the tech investments.

There are similar technology investments in Final Mile, not nearly to the magnitude that we see in the 360 platform, but we do have incremental investment.

But again, I think you're going to see in the guidance we've given before is -- the Final Mile, is going -- and our target operating range is at 2% to 4%.

And we believe we'll see that when we split it out, and we're very confident that we're going to be able to operate in and around that range for the foreseeable future.

Similar to the second part of your question on revenue growth, it's a lot like what Shelley said.

We do believe that we will outpace the market in growth in our Final Mile segment.

We're not prepared yet to disclose what those percent targets look like.

But our full intentions are, as part of separating it out, are it will be a $1 billion business for us.

You won't see that today.

I think last reported numbers we heard were in the $500 million to $550 million for 2019 were the targets.

But we're moving quickly towards that.

John mentioned, we just had our third acquisition that was announced a few weeks back, and that's going to help us with some of that revenue growth.

But we're also seeing organic revenue growth through our sales channels that we're excited about.

Great.

That's very helpful.

And then just a follow-up, David, I'm not sure if you spoke to kind of a CapEx expectation for 2020.

If you have a number you'd like to share?

And maybe you could break it down maybe a little bit and kind of give us some help on what you're thinking for the Intermodal container fleet and where the rest of the spend would be?

Yes.

The -- I think the number in our models range from $675 million to $700 million on a net basis.

As far as container growth, dry van containers inside of Intermodal are going to be virtually flat.

We obviously have replacements we're going to place orders for.

There may be some back-end growth.

We do have optionality in our contracts to allow for that.

But we'll have to have some more conviction that we're going to actually need additional equipment.

As I think you realize, our turns are not where they've historically been, and we're going to focus on that.

We will add refrigerated containers.

The plan right now is around 1,500 throughout the year.

They'll be sprinkled in throughout the year.

We don't expect them to come in at any one quarter, but that's kind of our goal at this point in time is just to add refrigerated containers.

Brad talked about adding 800 to 1,000 trucks in Dedicated, so growth CapEx would be there.

We have some technology that will be capitalized somewhere between $80 million and $100 million, I think, ends up being capitalized within the year.

Again, that will be based on project completion, so we'll have to wait and see what that number actually turns out to be.

And then the rest of it is just maintenance and replacement CapEx.

So growth is somewhere around -- out of that $675 million to $700 million, somewhere around $200 million, $250 million, and the balance would be maintenance.

All right.

Our next question comes from David Vernon from Bernstein.

Dave or Shelley, could you help us kind of ring-fence kind of what the operating loss could be in DCS for 2020?

I know the sequential rate has ticked up a little bit.

Obviously, there's volatility on the gross margin side.

But is there like a tens of millions-of-dollar range you can put around what the operating loss should be for 2020?

Are you asking for guidance?

No, I'm asking for a directional range on what the loss should be around ICS for 2020.

0 to $400 million.

I don't know.

David, that's what Shelley was talking about.

It's a little early to try to quantify that.

A lot of it is going to be dependent upon the market and we're seeing some mixed signals in the market as it is right now.

We have a pretty good idea of what we're going to spend on tech and what we're going to spend on people.

But how all that shakes out at this point, it's too early to give any kind of range.

All right.

Well, maybe as you think about the volume growth in ICS coming in at 3%, I understand the LTL is falling off and TL is growing in there.

If we kind of -- when should we expect us to lap that sort of LTL decline and see a pickup in the volume growth?

Obviously putting a bunch of capital to the business, you'd expect to see some more volume running through it.

Like when -- is that a 2020 thing?

Or is that a 2021 thing?

So we watch both revenue and volume.

Our LTL volume will have a much lower revenue per load or revenue per shipment in total.

I would say, throughout this year, you should see an accelerated change in what's happening with our total revenue, and that's going to be the number that we'll watch most closely.

I would think you'll start to see that in Q1.

Shipments, I'm not totally sure how much faster we're going to grow TL and what's going to happen inside LTL, so I can't really say when we may or may not lap that.

Is there a time when the LTL headwind is sort of lapped?

Or is that just -- you're not going to give us any sort of additional insight into that?

Yes.

No more insight.

.

All right.

We'll move on to our next question, from Allison Landry with Crédit Suisse.

So I just wanted to ask one on last mile.

You've obviously done a number of acquisitions, some more sizable than others.

But just trying to gauge how aggressive you might be on this front, if, let's say, maybe a potentially very large opportunity came on the market and if you could answer that strategically.

And from a capital allocation standpoint, how willing you might be able to take up leverage for M&A?

You never say never, and so I would say that, from a strategic standpoint, I think that we've been fairly open to growth in both modes, especially when it comes to Final Mile, both organic and through acquisitions.

Obviously, there might be opportunities to make an acquisition at much larger size than what we've done so far.

And like I said, you never say never.

But frankly, I hadn't thought about it up until 2 days ago, to be candid.

As far as a strategic, whether we would be willing to lever up to make an acquisition, we've always had that approach.

Yes, we'd be willing to use our balance sheet if we think that the return profile is sufficient to add it to the portfolio.

But it would have to meet that criteria before we'd be willing to extend our balance sheet in it.

And that's, frankly, a rule regardless of the size.

I think that we've been fairly disciplined in our acquisitions and our performance of those.

And it is all being based on return metrics, and I wouldn't think size would have anything or wouldn't change that directive.

All right.

Our next question comes from Tom Wadewitz with UBS.

It's Tom Wadewitz.

So I wanted to ask you, I think this is for Shelley.

I think we've seen in the spot market data, the truck stop data or whatever spot data you want to look at, you've commented on it as well, that there was some tightening in the spot market in, let's say, December, I think you said like the last 6 weeks.

Do you think that, that's more a function of seasonality?

Or do you think this is really the beginning of the kind of anticipated big capacity reduction that I think people are hoping takes place and tightens up the trucking market.

How do you think -- what do you think is happening?

I guess you get into seasonally weaker freight here.

And so it's -- just trying to figure out whether things are off to the races on capacity coming out or if it's seasonal kind of noise that has tightened things recently.

Well, so I think I talked about this a little bit earlier, but it is the first time that we've had such a short period between Thanksgiving and Christmas in a very long time.

And so we haven't gone through the seasonality of that in so long that it's hard to draw any specific parallel to that.

So I think that could have had some impact in total.

But as I said earlier, we are watching very closely what's happening.

I will say the available carriers went down considerably in both December and in the first couple of weeks here in January.

That was a surprise even from normal seasonality.

So, for us, it's too early to call on what that means in the market.

Certainly, it feels, from a supply side, like a tighter environment than really what people are talking about.

We'll see if something starts to shake loose here in the next couple of weeks and then return more to norm.

Maybe the shortened window between Thanksgiving and Christmas had an impact that we just can't forecast.

So does that -- the recent tightening, does that give you some optimism that maybe rates don't need to be down so much in terms of the 2020 bid season, whether it's truckload or Intermodal contract rates?

Or I think earlier on the call, someone mentioned pressure, so is it still realistic to think contract rates are down?

We're working through each bid with each customer.

It's something -- we're trying to match what's happening in the market with every single customer as they're coming to bid.

It's like I said earlier, we're watching very closely, trying to keep our customers abreast as to what's happening in the market.

And we'll continue to do that throughout this season.

Okay.

And last, a fine point on something you said.

You're building scale or you're looking to kind of invest in scale in ICS.

What is scale to you?

Is it -- you had $1.5 billion in ICS revenue in 2019, that's a decent amount of scale.

$3 billion, $5 billion, how do you think about reaching scale in ICS?

Yes.

So the post market is actually around $86 billion or so, something like that.

And so, really, to have a platform where any shipment is available for any carrier, that would be our perfect platform that we've got to get to a place where our abandon rate and abandoned cart from a carrier perspective is now filled.

And so I think scale at $1.5 billion is good, but it's not good enough for our platform.

$1.5 billion is good for a traditional brokerage business.

It is not good for our platform to actually execute freight in an automated way to create a more efficient transportation.

All right.

Moving on, our next question comes from Brian Ossenbeck from JPMorgan.

Just another question, Shelley, on the 360 platform.

Maybe if you can give us some sense as to how the recent iteration of Shipper 360 went?

What sort of adoption and feedback you're getting?

And then also on the carrier side, it looks like you're kind of bumping up against that 700,000 carriers on the platform.

How many of those are returning, if you do 80% of this, 20% of them?

So if you can give us some sense as to the adoption and retention rate, both on the carrier and the shipper side in the platform.

So I think we did release the percentage of carriers that are actually active in the platform.

We were very pleased.

That's what we came out with first inside the platform because of the fragmentation of the carrier market, and we are very pleased with the activity level.

We continue to onboard new carriers, both into our entire company but also in the 360 as well.

So I would say we feel really great about where we're at there.

It really comes back to the shipment side.

So for us, it is about gaining more scale on shipments.

From a customer perspective, our Shipper 360 launch that we did there in November.

We have been talking to customers about what that looks like.

We are setting up our sales offices as we speak, accelerating growth inside those offices to really talk with those.

We expect that to progress as we come through this year that we continue to escalate the amount of shipments coming through Shipper 360, I would say really early in that space.

Okay.

Darren, a quick follow-up for you.

Just going back to the whole cyclical versus secular movement within truck-to-rail conversion.

How far -- how far off do you think we are from a tipping point of getting that secular conversion back?

And do you think there has to be some sort of catalyst or shock to the system.

Obviously, you felt some of those -- some of the opposite direction consolidation, but do you need something else to happen here to maybe put an existential threat in the mix?

And I guess what I'm referring to is, with the autonomous trucking sort of launch or traction, do you think that would actually help drive some more collaboration here between Intermodal?

Well, certainly, I think, as truck capacity goes and prices in that market change, Intermodal will either benefit or feel pressure from that.

If truck capacity tightens, we've got an opportunity.

Now for more sustainability of Intermodal, what I would -- what I've told the railroads is I'm appreciative and supportive and a believer that the efforts that are putting in place to improve their service this year are material, they're impactful, and they're going to help us.

But we as an industry have to sustain that for a much longer period of time than a few months in November, December and January.

We have to sustain it for multiple cycles.

We have to be very good at educating our customers on what's the best method to benefit from Intermodal.

I think we're the best at doing that.

I think we do offer the best service product already.

But at the same time, we've got to continue to drive confidence in our shippers that Intermodal won't put them at a risk of delivering their goods to their customer if the transportation move is actually a transaction between 2 businesses.

That's really the big bucket of business left to convert.

It's smaller shippers.

And to them, they view Intermodal as being a little bit risky, and we have to continue to work hard to educate and give them assurance and make sure that their experience is excellent with Intermodal, and I think we're positioned to do that.

I'm not sure I'm answering your question.

I don't know how to tell you the railroads need to cut their price by 5%, and that's going to give us a pickup.

I don't think it's that clear.

I think we'll have to continue to drive high-quality service and capacity and design and communication with the customers, and that will help drive Intermodal growth.

Meanwhile, the railroads have to work with us, and together, a combination of our costs has to represent a value to the shipper, period.

And, Darren, I might add to that.

One of our long-term targets inside our platform is to be able to identify the shipments that are moving over the road that can convert into Intermodal.

We still do a lot of our business in Intermodal with a small group of customers.

And so we're just now entering the midsized market in small market with Shipper 360.

We already see good results in our platform of shipments that historically have moved truckloads in marketplace that we are talking to those customers now about what that would mean and what that would look like for them as they're getting introduced to Intermodal for the first time.

So the more scale we gain inside J.B. Hunt 360, the better it is for Intermodal and for the rest of our asset business.

All right.

I appreciate that, Shelley and Darren.

I guess the question is really if you have a mix dilutive venture for railroads that are all focused on operating ratio, it might be a little harder to get them to the table.

But I can appreciate the challenges and the opportunities you're trying to drive internally.

We'll take our next question.

It's Amit Mehrotra with Deutsche Bank.

David, I was just wondering if you could help us with respect to the headwinds to Intermodal buffets from the 360 investments in 2019 because I think it would just be helpful in understanding the real underlying profitability of the business.

And also, like whether that 360-related costs that are allocated to Intermodal increase or decrease in 2020.

I'll let Darren hit on that.

That's in his business.

Well, we certainly don't -- we're modernizing our technology platform, so that's our operating system.

It's the way that we book orders, the way we dispatch trucks, the way we communicate, pay railroads, that sort of thing.

All of those systems need to be modernized into today's technology and yes, it's an impact.

Do I have a specific number for you, Amit?

I guess we don't.

We don't break that out, so I'm not going to be able to do that.

But certainly, it's different than -- it was a cost headwind, and that's probably all I can say about it.

Is it higher in 2020 than it is in 2019 in terms of incremental costs?

I don't -- I honestly don't know the answer to that.

Okay.

I just had a couple of very quick follow-ups.

One is could you talk about yield?

The length of haul dynamics were more favorable in the quarter, I guess if you look at sequentially or year-over-year.

We would -- I would have just expected yield to be a little bit better than it was in the quarter.

If you could just talk about that.

And then, I guess, more relevant is, as growth returns to the Eastern network because, hopefully, tightening truckload capacity, is there a potential for yield to be down this year because of that maybe mix effect?

Or maybe I'm not thinking about it, if you could talk through that.

So we've -- through my years of meeting with the various folks, a lot of people would like to ask us, what's the difference in our margin in the West and the East, and we simply don't highlight that.

We make our -- we're out there marketing for...

I'm asking about yield, though.

I'm not asking about margin, sorry.

I'm asking about yields.

Okay.

Well, on -- I mean it's all going to -- the Eastern Network business, if we were to grow that faster than the Transcon business, is that going to lower our length of haul?

Potentially, I guess, it could.

In the past, we have had times where if it was going to grow in the East much faster than the West, it's going to influence your revenue per load, certainly it would.

That's a potential outcome of growing faster in the East.

Okay.

Okay.

One quick, very quick follow-up.

I know I'm over my allocation, but one very quick one.

You talked about 700 to 900 trucks being added in Dedicated, and that's -- you have this nice wave effect in 2019 because you added a lot more trucks in '18 and you have that -- you benefited from that in the OR.

I know you talked about 11% to 13% as a long-term target, but given that the additions this year are pretty consistent with '19, would the wave effect kind of be null and void and it'll -- kind of margins -- the way we should think about margins, are flat year-over-year at best given that dynamic?

First, I would say that the wave effect that you have seen and we've realized was overstated off of historical standards because of the 2018 tractor add year that we had that was abnormally high.

That 800 to 1,000 trucks, we'll still have a wave.

But historically, our business does not come on evenly throughout the year.

It doesn't come on 1/12 each month, it comes on in chunks at points in time, and we don't know yet when exactly it will all onboard.

There's also a gap in timing from when we sell the business to when it actually starts.

And so again, we feel very favorable on our ability to hit our goals.

But it's just a matter of you can't predict a win.

Will, if there are no other question, we'll be ending the call now.

All right.

That concludes our conference.

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