J B Hunt Transport Services Inc (JBHT) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Mr. Brad Delco. Thank you, sir. Please go ahead.

Good morning. Before I introduce the speakers, 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 that 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 the 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.

Now I'd like to introduce you to the speakers on today's call. This morning, I'm joined by our CEO, John Roberts; our CFO, John Kuhlow; Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources; Nick Hobbs, Chief Operating Officer and President of Contract Services; Brad Hicks, President of Highway Services; and Darren Field, President of Intermodal. At this time, I'd like to turn the call to our CEO, Mr. John Roberts, for some opening comments. John?

Thank you, Brad. Good morning, and thank you for joining us today. The third quarter continued to present the momentum we spoke of during our last earnings call. We also see persistent irregularities in demand patterns substantially resulting from port, labor and inventory challenges with our customers. The congestion at key inbound port locations has further challenged the desired smoothing of supply chains in preparation for the upcoming holiday season. We find that the dialogue with our key customers reveals both a challenged labor market and a pent-up need to increase the in-stock levels across the system. Planned additions to our container and trailing fleets and the expansion in contract services, both final mile and dedicated, should all contribute positively as these headwinds abate.

The company is not insulated from the labor dynamics mentioned above for our customers. This year, we have reached all-time highs in the need for company drivers in all segments as well as openings we have on our office and field teams. We have done comprehensive and exhaustive research on our current compensation and benefits programs along with our incentive plans to help better position our jobs going forward. Progress in closing the gaps for both driver and non-driver positions has been made during the quarter, and we are optimistic these gaps will continue to shrink for us.

As our executives will discuss today, we're generally pleased with the performance of all segments. However, we do have ample room for improvement with the inventory flows and contractor model in our Final Mile business as well as in the utilization of equipment in Intermodal. Even with these opportunities, we see our supply chain-focused service is well positioned and healthy for the long-term needs of our customers.

We are also encouraged by the continued progress we see in the utilization of our 360 platforms and the productivity gains resulting from expanded usage across the company with our carriers and with our shippers. The past few weeks have returned us to the annual tradition of honoring our multimillion mile drivers, who over many years, accomplished the pinnacle of our profession. In Lowell, we have hosted 2 sessions for a total of over 100 drivers reaching between 2 million and 5 million safe miles along with their families for a 2-day celebration with our entire corporate team. We have been extremely careful to host these sessions following CDC guidelines.

Nevertheless, it has done all of us a world of good to see our very best in person again. The energy has been contagious, and I assure that it will carry us forward nicely. Please check out our website to see how we recognized these incredible men and women. I will now turn the call over to John Kuhlow for his comments. John?

Thank you, John. Good morning, everyone. Staying consistent with recent quarters, I'll start by providing a couple of comments on our third quarter of 2021 from a consolidated perspective. Overall, we are pleased with our revenue growth over the prior year, which was up 27% from the result of improvements in all segments. Our operating income increased 56% with mixed results from some segments that are the result of cost pressures from labor issues, but also due to the significant growth in implementing new contractual businesses that will be addressed in the segment discussions.

Interest expense was consistent with prior year, and we had a slight increase in our tax rate, resulting in earnings per share of $1.88 for the quarter, which is an increase of nearly 60% over the prior year. The impacts of labor shortages, network congestion and just general supply chain challenges are well known, and they persisted in the quarter, again, straining our ability to service the demand and effectively utilize our assets, similar to what we experienced in the second quarter.

Additional cost pressures in the quarter were primarily related to higher purchase transportation costs and other employee costs of incentive compensation and medical benefits. We ended the quarter with approximately $530 million in cash. At the beginning of the year, we had announced a heavy investment in equipment for 2021. While all orders remain in place, the constraints noted have limited our ability to in-service this equipment. Through unconventional means, including leasing our own private vessels, we are able to add just shy of 3,000 JBI containers and over 900 JBT trailers during the quarter as well as having success in sourcing our tractor needs as a result of solid relationships with our equipment manufacturers. Considering these constraints, we are adjusting our expected CapEx spend for the remainder of 2021 and now expect our CapEx to approximate a little over $1 billion for the full year.

We remain committed to obtaining capacity to serve our customers and continue our focus on obtaining the equipment ordered. While we haven't finalized plans for 2022 yet, our initial expectations are for CapEx to exceed 2021 levels but will depend largely on the ability and timing to obtaining the equipment. We purchased $50 million of our shares in the third quarter, bringing us to $135 million for the year and anticipate continuing buybacks on a more regular basis. We will continue to balance our cash outlay on equipment, dividends and buybacks for the remainder of the year as opportunities unfold, trending towards our targeted 1x EBITDA leverage metric on a net basis.

In recent quarters, we have updated you on costs directly related to COVID, which have principally been in the form of special bonuses for frontline employees and PTO for employees who need to quarantine. While we still incur these costs, we have now lapped quarters of providing this, and as such, there are no meaningful reconciliations to the prior year quarter. We continue to monitor the impacts of COVID, focusing on the health and safety of our people while staying informed of state and federal mandates around vaccinations and other protocols. This concludes my remarks, and I'll now turn it over to Shelley.

Thank you, John, and good morning.

My commercial update will focus on general market conditions, our updated thoughts around peak season and our preliminary planning for 2022. I will also give some updated thoughts on the progress we are making inside our J.B. Hunt 360 multimodal digital freight platform. We continue to see plenty of opportunities in the market to provide valuable services for customers needing comprehensive supply chain solutions. While fluidity across the supply chain remains challenging, we are working closely with our customers to develop and execute plans that get their freight delivered. We believe our ability to source capacity on the J.B. Hunt 360 platform continues to differentiate us and our go-to-market strategy and ensure customers find the most efficient way to move their freight.

Capacity remains tight across all channels as evidenced by elevated spot and contract rates across all modes of transportation. Further adding to fluidity challenges is the backlog of freight off the West Coast waiting to get unloaded at the ports. We share in these frustrations and are not immune to these impacts, as some of our containers are also sitting out in the Pacific waiting to be unloaded. While peak season is upon us, we believe the bottlenecks in the West Coast are going to compact and even intensify further peak season capacity needs into November and December and are preparing ourselves accordingly.

As we think about planning for 2022, we will turn our attention to leveraging our people, technology and equipment to not only optimize our customers' freight, but even more important, optimize their freight spend. Freight is moving inefficiently today at elevated truck and spot rates, which will be ripe for conversion to Intermodal when we also have the full onboarding of our 12,000 new intermodal containers. While we remain focused on executing our peak season plans, we are also focused on positioning our customers to deliver on their budget for 2022 with the most efficient and cost-effective solution available. And again, we stand ready to meet the needs of our customers as we enter the new year.

We continue to be extremely encouraged by the trends we are seeing in our J.B. Hunt 360 multimodal digital freight platform. Carrier and shipper user activity and engagement metrics continue to accelerate, providing further evidence in the value of being able to optimize and transact in real time in a more frictionless process. With regards to automation, we have completed the pilot of some of our automated tools for matching freight between shippers and carriers and have begun a thoughtfully paced rollout of the system to our personnel in the field. We expect to see additional productivity and service quality benefits over the next year as the system is fully rolled out and utilized.

As we move forward, we remain focused on improving access, visibility and transparency on our platform, which we believe sets us up to achieve our mission statement to create the most efficient transportation network in North America.

Closing out my comments and similar to the message I shared with you last quarter, I remain extremely encouraged about our position to leverage our people, assets and technology to help our customers through their supply chain challenges. Those attributes, combined with our experience, tenured workforce and broad and expanding scroll of services is what I believe differentiates us in the market and why I believe customers continue to lean into us during these challenging times.

That concludes my comments, and I'd now like to turn it over to Nick.

Thank you, Shelley, and good morning. I will focus my comments on the performance of both our Dedicated Contract Service business or DCS and the Final Mile Service businesses, FMS. I'll also provide you an update from a general operational perspective on both the driver market as well as our ability to source equipment.

In our Dedicated business, we continue to see tremendous demand for our professionally outsourced fleet solutions. Propelled by the current market dynamics around driver and equipment availability, our backlog and pipeline remains strong. I am extremely proud of the team's ability to execute this quarter, highlighted by the addition of 744 trucks in the quarter. This is the largest number of truck adds in any single quarter. As historically is the case, start-up costs did put pressure on margins in the quarter as we incur costs before we begin to recognize revenue. But let me be clear, we are extremely pleased with these results as it sets the stage for solid growth and momentum as we roll forward. The new business we have been onboarding represents a broad and diverse mix of customer accounts across both industry verticals and geographies. While we in the industry are facing driver recruitment challenges, customers in most instances have been willing to support our out-of-cycle adjustments to support higher wages for our professional driving workforce.

As I alluded to earlier, we continue to see strong demand for our service. And as an update, we have sold 1,899 trucks year-to-date as of September 30, with an incremental 734 trucks from my last update on our second quarter call.

Now transitioning to our Final Mile Services update. We see solid growth opportunities in this market that is and will be supported by our ability to differentiate our service product. As a result, we continue to make investments in our people and processes to support our growth outlook. Relative to some of our recent quarters, profitability was pressured as a result of several factors.

Similar to Dedicated, we experienced start-up costs in the quarter, given the smaller base of business that had a disproportionate impact on our results. Additionally, our contract carriers are also facing labor challenges particularly for the second seat in the delivery trucks in addition to those at our customer warehouses.

Finally, and as we discussed last quarter, supply chain issues are impacting product availability and, in turn, our ability to leverage our network to deliver goods, potentially in the appliance and furniture categories. We believe these challenges are mostly transitory. Going forward, we are encouraged by the new business we are onboarding, and we are on pace for a record new year of sales. We continue to see a solid pipeline of both growth opportunities that we plan to capitalize on in the future. Our success will be largely dependent on our ability to differentiate the service experience for our customers' customers, and we remain committed to making the needed investments to achieve that differentiation.

Finally, to close on some general operational updates, we have been extremely focused on our hiring efforts in the field to support our growth. As we have discussed in past quarters, we believe J.B. Hunt offers one of the most attractive driving opportunities given the concentration of work in both local and regional applications, combined with top pay and career advancement opportunities. This is also true for our field managers and operations personnel. We have continued to make adjustments to wages and benefits to make our company even more attractive for those seeking a rewarding employment opportunity. Additionally, we have been working closely with our equipment providers in order to support our growth. We have had to hold trades of some of our equipment to support our pipeline, but continue to stay attentive to both maintenance cost and fuel economy as a result. That concludes my remarks, so I'll turn it over to Brad.

Thank you, Nick, and good morning. I will focus my comments on the performance of Integrated Capacity Solutions and trucks. I'd like to start off by recognizing all members of our ICS and JBT segments for how they continue to respond in the current environment to elevated demand trends. Our customers continue to present us with opportunities to deliver both truck and trailing capacity solutions, and the team continues to respond very well in these demanding times. The experience of our people, leveraging our technology platform and our physical assets, continue to provide us opportunities to source and provide capacity for customers in what continues to be an extremely capacity-constrained environment. The ability to source that capacity is enabled by our technology investments into our J.B. Hunt 360 platform and is complemented by our drop trailer pools with 360box. We continue to invest in these areas as well as in our people to provide more solutions for our customers.

I'll start with my comments on truck for JBT. Revenue grew 87% year-over-year to $204 million. This is the first quarter that JBT segment has generated over $200 million of revenue since 2007, and we were able to accomplish this with approximately 60% fewer trucks versus that period. This is yet another example of our organization's focus on providing value-added solutions for customers while maintaining our focus on scaling into large addressable markets with our desire for adequate returns on our capital. We believe our drop trailer capacity or 360box is the power-only capacity source through our platform provides us an opportunity for sustainable growth. Our trailing capacity increased 20% versus the prior year and 11% from the end of the second quarter, and the segment generated $14.7 million of operating income, the highest of any third quarter since 2006.

Going forward, we will continue to stay disciplined on our desire to grow while also focusing on driving greater network efficiencies, particularly in our drop trailer network.

Shifting gears to Integrated Capacity Solutions or our ICS segment. ICS delivered $666 million of revenue, breaking our prior quarterly record achieved just last quarter. Revenue grew 55% versus the prior year period. Segment volumes grew 4% in the quarter, while specifically truckload volume growth was 14% year-over-year. The cost of sourcing third-party capacity remains elevated, which is a continuation of the same trends we have seen through the latter parts of 2020 and all of 2021. That said, gross margins did expand 150 basis points sequentially as a result of further scaling of our platform, implementation of higher contractual rates and robust spot opportunities. We believe that market dynamics could tighten even further in the fourth quarter as congestion across the supply chain is likely to compress the timing of peak season and intensify customer needs for capacity solutions right up to the holidays.

Going forward, we will continue to invest to expand the capabilities and functions of our multimodal digital freight platform for our carriers and customers as well as for our people to drive greater productivity and efficiencies in sourcing cost-effective solutions for our customers while giving carriers great visibility to the freight on our platform.

In closing, we continue to see solid momentum across our JBT and ICS segments as evidenced by both segments delivering the strongest top line growth across our scroll of services for the fourth consecutive quarter in a row. While much work has been done, there is still much to accomplish. But along the way, we will remain committed to our investments in our people and our technology platform that will drive waste out of the system and help us deliver on our mission to create the most efficient transportation network in North America. This concludes my comments. I'll pass it over to Darren.

Thank you, Brad, and good morning. I'm going to focus my comments on 3 items related to our Intermodal business. First, I'm going to review performance in the quarter. I will also discuss network fluidity and our continuous effort to improve velocity and capacity for our customers. And finally, I will discuss continued investment in both people and the onboarding of our trailing capacity that we think is going to put us in a solid position to meet the tremendous demand we are seeing for our services and to further support and accelerate the truck-to-rail conversion opportunities.

While demand for our Intermodal services remains very strong, our volume performance in the quarter doesn't reflect that as fluidity challenges across our network continue to temper available capacity to serve that demand. As we discussed last quarter, we believe the core challenges around network fluidity for both our rail providers and customers center around availability of labor and has continued to provide challenges across the entire supply chain. Volumes for the quarter were down 6% and by month, volumes were down 7% in July, down 6% in August and down 5% in September. Improvements in rail network fluidity, particularly at the terminals and quicker turns of our equipment at customer locations, combined with the onboarding of the new containers, would and will help us provide additional capacity.

As we discussed last quarter, we implemented programs with our customers to encourage better utilization of our equipment while protecting our need to generate appropriate returns on our significant investment in both people and equipment to support additional capacity. Importantly, these programs are designed to provide the benefit of additional capacity that results from gained efficiencies. I would say that the results from this program thus far have been mixed. We have seen some customer locations improve, while other locations have deteriorated even in instances within the same customer's footprint. I would also say, from our perspective, the results of the program have been mixed based simply on the fact that we would absolutely prefer to move more volume and provide more capacity for customers, which was not the case in the quarter.

I believe this highlights the severity of the labor challenges across the supply chain. Box turns in the quarter fell sequentially to 1.62 versus 1.65 in the prior quarter, further supporting that view. We continue to be optimistic about the opportunities for long-term sustainable growth in our Intermodal business. Customer demand continues to grow, and our rail providers continue to view us as a solution to the current congestion challenges that are even more severe in the international intermodal market. Owning our own equipment, including power, trailing and chassis and our highly skilled driver and operations personnel are differentiated in the market, particularly around fluidity and service.

This is further supported by our J.B. Hunt 360 platform that allows us to source capacity when rail congestion or restrictions hamper our ability to serve. In closing, Intermodal's value proposition remains strong as driver and labor challenges continue to plague the supply chain combined with higher energy prices and the fact that an intermodal shipment on average is 60% less carbon intensive than the all-truck alternative. We will continue to make investments to support the meaningful growth opportunities in the market. We expect to take delivery of our entire 12,000 container order by early 2022, setting us up to provide meaningful savings for our customers as we begin the next bid cycle. That concludes my prepared comments.

(Operator Instructions) Your first question comes from the line of Jon Chappell with Evercore ISI.

Darren, if I can just start with you on the fluidity question and what that means for volumes going forward. If we layer that on top of the high-profile announcement made this week from the administration and the port shifting to 24/7 operations conceivably, how do you think that, that plays into your volumes? And quite frankly, the fluidity of the system in the year end? And do you think you and your partners have the capacity if the gates are open longer to handle more volumes? And finally, can you do that profitably? I don't know if that translates into overtime costs. Like how does that figure into the profitability of the business if you're kind of running 24/7?

Well, Jon, great question. We are -- continue to be confident that as our customers have growing demand in Southern California, that we have capacity to continue growing with those customers, but we are asking the customers to help us in that area to help us unload faster and create a more fluid capacity solution for us. We're also onboarding additional equipment during the fourth quarter, which will certainly help. But we would anticipate that we will continue to offer additional capacity for our customers as the customers participate in that solution. So that's the key element of this, while getting equipment out of the port is going to drive new demand. But at the same time, the customers have to be able to receive it. And we're working with them. We're supporting them in that area, and that's really, really important for us.

Your next question comes from the line of Chris Wetherbee with Citigroup.

Darren, maybe another one for you. Just wanted to think about that revenue per load in the intermodal side, obviously, a very, very strong performance. Is there any way you can kind of break down what is kind of core base rate relative to what might be certain accessorial fees that have the potential to go over the [full] if fluidity comes back to the network and we start to see volume and utilization pick up? I just want to get a sense of maybe what's sort of the sustainable underlying rate environment that you're building now off of going forward the next several quarters?

Yes. We anticipated this. And unfortunately, we're not going to be able to break that down in any way. I just want to probably remind the entire group listening, we're not going to break out any sort of accessorial commentary. I think that core pricing was strong going into the third quarter and while costs were also up, we will always anticipate that our core pricing is maintaining coverage for the cost exposure that we have. We're paying drivers more today. We're hiring outsourced carriers at higher rates today. Our equipment utilization is down. That's driving some of the pricing out there. And certainly, our rail providers also participate in our cost base. So those are all factors that drive core pricing, and we really probably don't have any other commentary on that at this point.

Your next question comes from the line of Scott Group with Wolfe Research.

Just before I get to my question, Darren, just a follow-up there. Like is it fair though that core pricing would have accelerated from whatever we saw in the second quarter?

Yes. It's fair to assume that.

Okay. So I guess, how are you thinking about contractual pricing for next year in light of trucking companies talking about at least mid-single-digit pricing? And then just given the environment, can you maybe talk about your plans to grow the container count beyond just the 12,000 that you're taking this year, early next year?

Okay. I think that as we go into next year on the pricing environment, we're probably way early to offer any kind of commentary compared to some of the other. We're surprised that anybody would come out and say anything about that at this point. There's just too much unknown today. I mean we've never been in an environment like this and the cost environment is going to drive pricing for us. That's always going to drive our pricing decisions as we're focused on the returns of the investments we put into place.

Certainly, the container order for 12,000 that we announced earlier this year, we continue to onboard that equipment as fast as we can get it here. Decisions about advancing the equipment next year will continue as we finalize plans for next year. And frankly, as we continue to work with customers and see what's happening in the market relative to demand velocity improvements that are really available to our customer base to achieve savings not only in what their intermodal experience today, but converting more business off the highway at better pricing compared to truckload can really produce an awful lot of capacity if we can just improve the velocity of the current fleet. All that being said, if we see an opportunity to expand our equipment and the customers are supporting that with pricing, then I have no doubt our organization will set a path to do that, but we have a long way to go before a decision is made on that.

Your next question comes from the line of Justin Long with Stephens.

I'll stick with the Intermodal theme. Darren, last quarter, you gave some helpful commentary on the cadence of the Intermodal container deliveries. Any update on that front you could share in terms of the number of containers you're expecting to receive in the fourth quarter and then in the first? And then also, would love to get your thoughts on the sequential progression of box turns the next couple of quarters. Does taking these additional containers make it tougher to see some improvement there?

Okay. We had said that we expected to get 3,000 to 4,000 in Q3, and I think we highlighted in prepared comments that we were just under 3,000 while we had equipment anchored waiting to unload literally just weeks ago that would have certainly hit on that mark. At this point, I'd say we would end the year somewhere between 8,000 and 9,000 of the box turns onboarded. So we feel like there is an improved cadence in the fourth quarter coming with new boxes onboarding. But we're not immune to the challenges. The port of Los Angeles and onboarding that equipment, that certainly has influenced our ability to get that equipment here, and we'll continue to work through it. We feel really good about how we approach that this year, and we'll continue to work to that end. But 8,000 to 9,000 by the end of the year, so I'll let you do the math on the fourth quarter.

As far as box turn sequential cadence, that's a great question and that we're focusing with our customers every single day on how to improve that number related to their actions that are influencing it. Now they're not the only influencer. Certainly, our rail providers are moving somewhat slower than we would have anticipated. So at this point, I would have said at the end of Q2 that I can't imagine it getting worse. And you know what, it did. So I'm going to be cautious to give you any kind of thoughts on that moving forward. I just want to highlight that we're working every single day to improve that number. And that won't end any time. We're chasing 2 turns a month and really anticipate a lot of conversation with our customers on this over the coming months.

Your next question comes from the line of Amit Mehrotra with Deutsche Bank.

Darren, I had a question, I guess, on Intermodal volume growth just beyond the cycle and beyond what we're seeing in trucking rates and fuel prices. And this really has to do with kind of a higher level of transloading. I'm not sure if this is a real opportunity for J.B. Hub, but it just seems like the international liner companies are probably, I would imagine, less willing to move their international boxes inland from the ports. I'm wondering if you're seeing any of that and if there's a real opportunity for pent-up demand release on the transloading side next year that could drive maybe some bigger volume improvement.

Sure. All of your thoughts, I think Shelley and I will both comment on this question. For a long time, our target for growth in Intermodal has been highway conversion first. But certainly, we have felt that domestic Intermodal in a 53-foot container was a benefit to shippers importing through Southern California, and the flows of the international equipment and the massive amounts of empties that flow to various ports in order to get back to Asia certainly does represent an opportunity. I think that as the international congestion at various rail terminals throughout the interior of the country have driven a lot of conversations with customers that are looking for that solution. We have grown with transload for many, many years now and would anticipate that, that is a primary focus for our growth in the coming years and absolutely plan to capitalize on that. I don't know, Shelley, you may have a comment.

Yes. So we look at our ability to grow intermodal in 2 areas. So transloading for sure would be an opportunity. If you think about the advantages we can give both the railroads and our customers, really it's around our operations because we control really the 3 critical components: the chassis, the driver and the container. Our ability to create a very fluid network at the destination is very different than what happens today from an international perspective.

And when railroads are constrained, that allows us to think about and process differently there. The second one is in over-the-road conversions, which I did talk about that in my opening remarks. But we do see a high percentage of shipments that are moving on the rail today. Part of that are our intentional strategy to own any lane that moves Intermodal in our highway space. And so we're gaining access and information through our J.B. Hunt 360 multimodal digital freight platform to be able to know what we can and should talk to our customers about converting. So that's going to be a big focus for us as we come through the rest of this fourth quarter, very focused on peak and helping our customers be successful.

We also are working closely with them to determine the freight that's moving on the highway today that we know to move into Intermodal. So I would tell you, those 12,000 boxes, I have high confidence in being able to load those at good quality of revenue. And I think, to the earlier question around what we would add, would really be dependent on what our customers can do from a fluidity perspective on turning our equipment.

Your next question comes from the line of Allison Poliniak with Wells Fargo.

Just want to turn to Dedicated and FMS has the same issue. Is there a way to quantify the negative impact from the new business adds versus the cost inflation? And then I guess as we're looking at Q4 and your backlog comments, should we assume that stays elevated? Or does it intensify here? Just any color that would be helpful.

Yes. I would just say that when we look at what we call our core business, we see the operating margin being very acceptable within our range. Clearly, with our -- in our range of guidance. So we break that out internally and look at that. So we just -- it is operating very well. And then our start-ups are looking very good. We measure those as they're coming out of startup, getting to certain hurdle rates. So we're very pleased with the pricing and how that's performing. And then from the backlog, I would just say yes, the backlog is probably a little more than it has been historically. So the demand is still there. There's still a lot of demand for our services and our pipeline is very, very full on the Dedicated and on the Final Mile side.

And then on the Final Mile side, it's got a smaller base. And so the start-ups are really dramatically impacting that because contractor rates are up. And we're just seeing a lot of warehouse labor rates up as well, so we're getting a lot of costs in there. So we've got some supply chain issues, some labor costs that we're addressing. But the demand is still there for our services as well. But the #1 impact on Final Mile, I would say, is our startups.

Your next question comes from the line of Ravi Shanker with Morgan Stanley.

If I can just follow up on that last comment, kind of how do we think about that going into 4Q? I mean you had this high-quality problem of the launch costs in Dedicated for a while now. And we do recognize that this is a high-quality problem. But kind of how do we think about that going into 4Q? And also maybe for Shelley, on the ICS side, what's the update on the Google partnership that you guys had? I think there was a product or a launch supposed to drop at the end of the year. Is that still on track? And how do we think about that scaling into next year?

That's a good way to get 2 questions in there in one breath, I guess. On the dedicated side, I would just say that with our demand still pent up, we're going to continue to feel pressure with the startups just before our supply gets its own start-ups, and we're going to continue to see that moving forward for a while.

And I would say on our Google strategic alliance, we are on track and feel confident about the 2 big projects that we've been working on, our first one is further along. And then the second one, but that's really still timing-wise, in good shape. We do have a bigger idea that we have brought to the discussion, and that is a huge focus of what the team is looking into. We're not ready to say whether that would be a 2022 release yet on top of the first 2 projects, but we do have a more aspirational idea that we're working on in that co-innovation segment.

Our next question comes from the line of Jordan Alliger with Goldman Sachs.

Just you had a nice step-up in the Intermodal margin in the quarter. I heard your comments around bottlenecks maybe intensifying in the fourth quarter. And I'm not sure how you're looking about 2022 in terms of timing of supply chain and congestion leaving. But putting all that together, is the 11.7% kind of a number we can benchmark off of? Or is it difficult to assess given the supply channel situation?

Well, I think we've talked about our long-term margin targets of 10% to 12% back at the first quarter call in April. And beyond that commentary, I don't think we can really highlight anything else.

Our mission right now is to achieve growth and achieve return on the investment of our equipment, and those are the factors that drive our decisions in Intermodal.

Just following. What about on any high -- the high-level costs around the supply chain situation going into next year? I mean are you expecting alleviation then?

I think that we are all common sense people and realize that there will come a time when the congestion eases. We are going to stop very short of predicting when that will happen because like you, we have no idea. But if somebody told me in the second half of '22, things will loosen up a bit, I'm not going to be surprised. But at the same time, we're going to have to wait and see.

Your next question comes from the line of Bascome Majors with Susquehanna.

18 months into this surge in supply chain disruption, when you sit down with your customers, what is your sense for how things are changing in a permanent or a semipermanent nature from how they procure freight and want to manage their supply chain? And what decisions are you making at the senior management and Board level to capitalize on that not just next year but 2, 3, 4 years down the road?

I'll try to take that and see if anybody has something to add. I think our customers are hopeful that this is not a permanent or a long-term position from how the supply chain is operating today. There is too much uncertainty, which is driving too much cost in unplanned events whether that is unplanned on the shipping side, where it should be shipping from or even where it's going to. So I think there is a good hope that we can create more efficiency. That's something that we're working on with our customers. The last thing we want to do is be inflationary in total without looking first to say what can we do to help our customers meet their budgets overall.

I would tell you customers, in general, the theme accelerate is something we rolled out in our sales summit February 2020. It could not have been a better theme as we moved into COVID, and we have continued to see our customers accelerate on solutions, idea sets. I think they are leaning more into providers that can do a multitude of different deliveries for them across the supply chain. Certainly, we are seeing that with the market share gains across all 5 of our segments. And our customers are asking us to consider and do things we've not done before. And so we are being open to solving for best answers for them. We are agnostic as to how we move a shipment, so that helps create a differentiation in the market for us, but they need a lot of help. They are constrained on labor, not just at their DC locations but also just in their office personnel. And so we are leaning into our technology, our engineering teams, I would say, across the board. Have a lot of confidence that we're going to be able to continue to take more market share and help our customers be right when it comes to having an efficient supply chain.

I would just add that what we're seeing really is the customers trying to take control of everything they can, which leans into us, as Shelley said. So they're getting ships. They're leasing their own ships. They're wanting us to go into the ports for them to help them control their experience in there. And they want us on the Intermodal side with transload. And then they're helping us with -- on the dedicated side with more fleet. So it's really about customers gaining control of their supply chain, and that fits very well with us.

The last thing I would say, this is Brad Hicks, is that recognizing the stress and the strain and disruption that puts a lot of pressure on our customers' supply chain teams and it finds its way into our group. And we remain remarkably proud of how our talented employees have helped navigate those choppy waters. And so there's a lot of just pressure and stress, and our team has found a way to thrive in that environment on behalf of our customers.

Let me just -- this is John. I'll just finish the thought with that question on the Board. If we just -- we are a return on invested capital business. And all of the needs and demands would hit the filter of if we do this, do we achieve the kind of returns that we're used to and expect and that our owners and our customers frankly expect because we reinvest. But that visibility, we have some performance P&Ls, returns on those investments is vital to that last step of getting the approval to make the investments to continue to grow the business as we have.

Our next question comes from the line of Tom Wadewitz with UBS.

So I wanted to see if you could offer some thoughts on labor markets. I mean, it seems like you talked about labor, labor, labor being the constraint. I'm thinking about Intermodal, in particular. I just wonder if you could comment about some of the particular labor element, whether it's warehouse, rail, intermodal terminals, your own drayage. Are you optimistic that if you look out a couple of quarters that labor availability will increase? And if so, what -- is that just a function of paying people more?

And then I guess a related component, how do you think about vaccine mandates? And if you think that goes into effect, what does that do to kind of a broader impact on the labor side?

Okay. Let me take that first, and then we'll have Nick comment on some thoughts around driver availability and vaccine mandates as well and other labor thoughts. So I think our rail providers and the transportation system that we're running, we're recruiting truck drivers at -- in Intermodal in addition to the rest of the organization at an extremely rapid pace and it's difficult. I don't want that to come across -- it's never been more difficult than it is today to find and attract and retain qualified drivers. It's very, very challenging. And certainly, the costs are -- we're facing that.

I believe our rail providers are not immune to it and that contract workers inside the terminals continues to be a challenge for the rail providers, but I think they have actions in place to counter that. And certainly, at the end of the day, that simply means we all have to compete for that labor. The thing that has been the most difficult for us to get eyes on is customer warehouse labor, and that's where there is a significant bottleneck is our customers' ability to unload the demand that they have.

And so when you ask the question about what's -- do we see a future in which that changes, I don't know that we have a line of sight to any kind of real dramatic improvements in it. But what we have line of sight to is our customers have to process supply chains more efficiently to achieve their goals. And that seems logical to us that they will attack this labor situation. Nick, you may add some more.

Yes. I would just say on the labor situation, it's across the board. It's maintenance, taxes, drivers. There's going to be tremendous pressure on wages. I see that continuing on for quite some time, all throughout the supply chain. On the Biden or the vaccine mandate or testing, we will be compliant with that. And we're working with the third parties so that we -- if it becomes an order and gets through OSHA, then we'll be compliant with it. It will be a lot of bureaucracy. I don't see it really helping the situation much other than causing confusion in the supply chain even more. But we will be compliant with that and follow that process. So it will have some impact on the industry, but we will make it through it.

Our next question comes from the line of Ken Hoexter with Bank of America.

John and team, congrats on great results in a tough operating quarter. But just to clarify on the last statement there, so if you're not seeing any shift or benefit as we move past peak and the supply chain, right, it's not like the increased wages so far have increased. But then I guess to give Darren a quick break, Shelley, Brad or Nick, from your perspective across the supply chain, is there any thoughts on underlying demand or shift from what you see aside from peak outside of congestion? Obviously, we saw some of the volumes down on Intermodal. Any thoughts just on underlying demand would be great.

Ken, thank you for those nice comments. I think all of us know if you go to the shelf today at a store, many of those are empty. And we're hearing that directly from our customers as they are somewhat surprised as to what's happening in peak and we are as well. It's pushing peak longer into November and December, and that will make for more replenishment in the first quarter and even into the second quarter of next year. So we do believe that the first quarter will be unusually stronger than it has been in maybe a more typical environment really trying to get their shelves and inventory in the right places in the right time. So demand from that perspective is still there in total. I don't have great comments about the second half of the year because people are asking us and customers are really trying to do that through their budget process right now. But I would say strong demand, optimistic, feel really good.

And then last comment, I've been asking retailers if they feel like because this Christmas season, the right products won't be on the shelves, will gift cards be more here in this Christmas season. And I think that we're leaning to a yes, which means there would be more shopping and more retail sales in January and, obviously, more need for us to replenish any of those goods as well.

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

Great. So Brad, I wanted to ask on the step-up in profitability in ICS. I know that the second half of this year, there's kind of been a marker out that, that was when we could hit the inflection point. But I also know there's been a lot of cross currents kind of in the brokerage market. So can you talk a little bit about the improvement in profitability? And also, as we look to 2022, is that a year where ICS can be in the targeted margin range of 4% to 6%?

Yes. Thanks, Todd. We continue to progress on our strategy and the investments that we've made in our people and our technology that will allow us to scale. And I think as you look back over really the last several quarters, we've continued on that trend, and we remain supportive and optimistic as we continue to move forward into Q4. Obviously, there are a tremendous amount of unknowns that have been discussed at length this morning in all segments of our company as well as with our customers. But the solutions that we're able to provide for our customers in the time of need, they're leaning in and we're being very successful by being able to put them in the most efficient answer, whether that's our highway product on J.B. Hunt 360box, whether that's Intermodal or even in ICS. And so I guess said a different way, we remain very pleased with the progress and really see no reason that we won't continue to take steps forward to create leverage as we scale the platform.

I might add to that. Scale is so important in the platform. We did start on the Carrier 360 side first and then further launched with Shipper 360. We do believe that we have a good percentage of carriers that are coming into our platform, looking at our shelves, if you will, and looking for product. And we have a lot of empty shelves also because we don't have enough freight. And so we are very focused on making sure that our platform is the destination location for carriers to be able to come in, search for what they want and get the product that they need at the right time. We have high confidence in the amount of time we've actually been with carriers and the different measurements that we're seeing continuing to break records even in this very constrained environment. We are in a new mode with carriers. So that's allowing us to go back into the demand side, talk to customers in a different way, but scaling is the most important component for us in getting not only revenue growth for our business but primarily for our bottom line profitability as well.

Our next question comes from the line of Brian Ossenbeck with JPMorgan.

Shelley and Brad, maybe a follow up on that last train of thought. When you look at the last 3 quarters, ICS has had more spot than contract volume but that sort of shifted back this quarter. So can you elaborate on how you're thinking about balancing that mix when things are so volatile against maybe the opportunity to continue taking more share? And then can you just touch on the expectations for productivity in 360? You mentioned there's 2 new efforts in automation. Is this more of a productivity play? Or do you think this will help really grow the top line, which at least in 360, looked like it was a bit flat quarter-over-quarter in this period?

Brian, I'll start. If I take you back momentarily, we have a strategy going into Q1 that we were maintaining the cost level that we saw at the end of 2020. And really, we didn't win. And we talked about that in our Q1 release. And then we started to see customers come back to us. And we started to grow into the bid season through Q2 and Q3. And so we would anticipate wanting to continue to move forward and be successful from a published standpoint and get maybe a little bit more balanced from a historical perspective. Obviously, bid season just kicked off for this next year about 1.5 weeks ago. And so we'll see where that sits, but it's certainly our expectation to continue to grow in published freight to create balance against the spot opportunity. Some of that really goes back to the disruption that Shelley spoke of earlier in the call, where freight patterns are different and freight demands are different. And some of that is contributing to elongated spot needs. But I do believe as we think about moving forward, you'll look to see more published balance.

And I would just add to that, Brian, that for our customers, in the contact and spot market, we have been very disciplined in growing our platform and scaling the platform. We do not believe it's prudent for our customers or ourselves to accept every order that a customer is asking us to accept that's outside of our committed capacity. And there have been thousands of shipments per day that we are turning down that we are talking to our customers about creating a better answer and a better solution in total.

And that's part of the reason that you see more spot than you see contract as well on top of what Brad talked about. So I think that's really important. If I go to your question around automation, we think of J.B. Hunt 360 as a full ecosystem that helps connect our shippers, our carriers and our people to that. So automation is intended to be across those 3 groups that are interconnected in the platform. The current automation is intended for our people, and so that's really connecting our Shipper 360 and Carrier 360 internally for our people and our new system. And we also have other automation ideas for both carriers and for shippers that will help them be more productive over the long term as well.

Your last question comes from the line of Brandon Oglenski with Barclays.

So I guess I'll try to encapsulate it here. I mean we're seeing so much inflation on the revenue side and the cost side. And I think a lot of the questions were getting at this. Like how much of that is going to be transitory? Or how much will your customers be thinking this is just the new cost of doing business? And then on the flip side, if we do get cost efficiencies and the supply chain opens up next year, I mean, is it possible we could see negative rates, but maybe even accretive to margins?

I think that's a really great question. I certainly hope that the costs that our customers are experiencing today in their budget will not be the long-term cost for their budget. There are so many unplanned costs happening in the supply chain today that we can get to a more static and a better, more efficient way to move goods. We see that across all of our segments in total. But having said that, the underlying cost of drivers, equipment, that is going to stay. I don't see, in this environment, taking driver wages down or customers taking their own wages down. Our equipment is not getting any cheaper, so I would segment the question into those 2 areas. Our base costs will continue, and that is going to be our new norm. But the way shipments are moving are completely inefficient. We can help our customers become so much more efficient, really take them out of that high cost to serve into more predictable cost servicing capacity over the long term.

Okay. And then John, I think -- yes, thank you, Catherine. I think John wanted to close out with some comments.

Yes. I'll just close this up and say I think that you guys did a good job at [ladies] to get around the table. We sometimes have too much information to cover, but I thought we did get to touch on the great work happening in JBI and the opportunities that are present in that business with the Dedicated growth. It is a good setup for us going forward. We -- I think you'll continue to see us in that industry-leading business. Our highway services, across the board, I think are creating a lot of value in this disruptive time. And then just last but not least, we didn't talk much about Final Mile.

But we definitely have to spot some of the short-term dynamics there. I think the point I want to make is you can see if it's a comprehensive supply chain management approach with an agnostic view of how we help. We will help the best value that we can present for our customers. And so I feel like that the company is well positioned. And I think we're starting to see how the parts connect and how the team is able to pivot and adjust much more quickly today than we have in the past. Of course, we're talking about '22, and there's a lot of work to be done there.

I want to just say too that I'm super proud of this team. We've got -- we kept ourselves up sometimes in the hard work we do. And this morning, it dawned on me that sometimes, we need to just take a deep breath and say to ourselves, hey, nice job. And I think this team deserves that. Nice job, team.

And I'll just close with this. We're working hard on the people side. We've heard a lot about labor. We're deeply invested right now at the executive level in our human resources teams, our people teams, as I mentioned, compensation and benefits and the things that are going to help us stabilize that ability to serve our customers is well underway. And we're thankful for every single member of J.B. Hunt teams. They keep us moving, and they keep businesses. So we're appreciative. Thank you for being on the call today and back to you.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.