U.S. Markets closed

Edited Transcript of JBHT earnings conference call or presentation 15-Apr-19 9:00pm GMT

Q1 2019 J B Hunt Transport Services Inc Earnings Call

LOWELL Apr 18, 2019 (Thomson StreetEvents) -- Edited Transcript of J B Hunt Transport Services Inc earnings conference call or presentation Monday, April 15, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David G. Mee

J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO

* Nicholas Hobbs

J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services

* Shelley Simpson

J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services

* Terrence D. Matthews

J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal

================================================================================

Conference Call Participants

================================================================================

* Adam Kramer

Cowen and Company, LLC, Research Division - Associate

* Albert Brad Delco

Stephens Inc., Research Division - MD

* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

Deutsche Bank AG, Research Division - Director and Senior Research Analyst

* Barry George Haimes

Sage Asset Management, LLC - Managing Partner and Portfolio Manager

* Benjamin John Hartford

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* David Scott Vernon

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Rick Paterson

Loop Capital Markets LLC, Research Division - SVP

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

* Thomas Richard Wadewitz

UBS Investment Bank, Research Division - MD and Senior Analyst

* Todd Clark Fowler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. My name is Akesia, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2019 Q1 earnings conference call. (Operator Instructions) Thank you.

Mr. David Mee, you may begin your conference.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [2]

--------------------------------------------------------------------------------

Thank you, Akesia. Good afternoon, and thank you for joining our call. With me are John Roberts, our CEO; Terry Matthews, President of Intermodal; Nick Hobbs, President of DCS; and Shelley Simpson, our Chief Commercial Officer and President of Highway Services, and for those of you that don't know, covers both our ICS and Truck business units. (Operator Instructions) Thank you.

As for opening remarks, on a consolidated basis, the published results obviously revealed headwinds in parts of our business and masked improvements and forward progress in others. In Intermodal, volume, or lack thereof, is obviously the main story. We expected to be down from a reasonably strong first quarter 2018 due to the expected and planned ramp closings and train reroutings, and from our sequential volume trends coming off a very strong pricing season in 2018. But the service disruptions from weather issues, starting in late January and progressing through late February, actually caused some freight to revert back to the highway in addition to loads being outright canceled.

When the service began to improve, we did not see a snapback in customer demand in March, which was our biggest surprise, and frankly, our miss to our expectations. While it is way too early to make a trend call for even the second quarter of 2019 or for the rest of the year, we are still waiting for customer demand to accelerate. DCS did have a progressive quarter as they successfully onboarded an additional 400-plus trucks into new customer contracts and began the integration of the Cory acquisition, which closed in February. Overall, margins held as expected as non-Final Mile business that has been operating for more than 12 months performed at a seasonally expected 11%. But this success was masked by the start-up costs in the quarter and a growing lower margin, high return on capital Final Mile business and the Cory integration cost.

ICS results demonstrated the aggressive customer pricing becoming apparent in the brokerage market, the adequate supply of capacity to meet that customer demand and our commitment to devote resources to further develop the technology expected to capture additional revenue opportunities, assist driving out waste in the transportation industry and lower our enterprise operating costs. For the quarter, in addition to their reported revenue, ICS sold approximately $80 million in revenue recognized by our other business units, primarily inside Intermodal, which is about equal to the first quarter of last year. But more specifically, the Marketplace for J.B. Hunt 360, volume through the platform was up over 100% year-over-year that yielded a 92% increase in revenue executed. We also began the migration of Intermodal's third-party dray business during the quarter. As with the ICS business, as this dray network capacity matures inside the platform, we expect to provide these carriers with opportunities to eliminate waste, provide them with additional revenue opportunities as well as provide JBI and ICS with additional revenue opportunities that are not exposed through our traditional customer sales and bid processes.

Lastly, but certainly not least, truck had a successful quarter as it capitalized on moving committed loads at committed pricing and growing its capacity to meet that customer demand. Truck continued to focus on its return on invested capital profile as was evident by the change in its capacity composition from a roughly 65% owned equipment in the first quarter of 2018 to roughly 50% owned equipment in first quarter 2019, and the continued rationalization of its trailing fleet to fit actual customer demand.

Balance sheet analysis, we had -- balance sheet analysis shows we had an out-of-character amount of cash at March 31. We issued $700 million in securities at the end of February to refinance our March 15, 2019, maturity, term out our current balance on the revolver and raise cash from -- for some expected first quarter working capital needs. The working capital needs were delayed until subsequent periods but that determination could not be made until after our trading window closed. I specifically mention this to caution investors that they should not view this anomaly as a change to our historical balance sheet or cash-management philosophy. That concludes our prepared remarks.

Akesia, if you wouldn't mind, you may open the lines for questions. Akesia?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Tom Wadewitz.

--------------------------------------------------------------------------------

Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [2]

--------------------------------------------------------------------------------

Wanted to ask you a bit more about the -- your thoughts on the volume in Intermodal in first quarter. If you would care to offer the volume growth year-over-year by month? I know sometimes that's noisy with Chinese New Year timing but if you want to offer that and just, I guess, maybe more on what happened in the weakness in March, whether that's a demand issue or if you think there's something else going on?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [3]

--------------------------------------------------------------------------------

I'll jump in with the numbers first, and then I'll let Terry offer up his observations. In January, the volumes, and these are based on calendar days, we were down 7% in January. We are down 6% in February, and we were down 7% in March.

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [4]

--------------------------------------------------------------------------------

Yes, I would say a couple of things that went on in March. First off, I believe the west coast was down versus what we anticipated. I think the data that we've seen is that China, in February, not only between -- because of Chinese New Year but because of the potential tariffs that were supposed to go in March 1, had a good shift, I think, it's down 20-plus percent, and I can see that landed into a much slower west coast -- volume off the west coast. The other thing that we're hearing from customers is that the warehouses are full. We've had a very late spring, and typically, the restocking of spring merchandise did not show up in March as it has in past years. So those are probably the 2 major factors along with the things that we had with the PSR lane closures that we've seen. And then the service disruption that we saw in February, some of the freight that we used to handle, we think maybe drifted -- some of the fringe freight drifted from -- away from the rails and we think with the service pickup that we've seen recently, some of that should come back to us here in the second quarter.

--------------------------------------------------------------------------------

Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [5]

--------------------------------------------------------------------------------

Okay. Just, I guess, to follow up on that a little bit more. Is your best read on this that these effects are temporary in terms of, I guess, be working down inventory or obviously this meaningful weather effect and causing noise. So do you think they are temporary? And would you be optimistic that you returned to volume growth in the quarter -- in second quarter in Intermodal? Or is that -- what are your thoughts about the look forward?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [6]

--------------------------------------------------------------------------------

Well, based on the comps, I think that the volume growth will show up sometime in the third and fourth quarter. I think there is -- the sales to inventory ratio has crept up a little bit, and I think that you need to bleed off some inventory here early in the second quarter. Easter doesn't help being this week, which typically is not a good freight week in past years.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from the line of Brandon Oglenski.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

This is [David Azula] on for Brandon. It seems like more and more traditionally asset-based transport companies are looking at logistics, namely Intermodal, as an opportunity for future growth? In addition to commentary from rail management teams, which focused on the product for volume expansion. How do you see the domestic Intermodal market changing over the next few years and what impact do you think this will have on J.B. Hunt's position today and over the next year or so?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [9]

--------------------------------------------------------------------------------

Yes, I think the biggest impact on Intermodal is what the railroads are doing with precision schedule railroading. And what's affected us a little bit here this year is the lane closures that we've seen in the East. With that, we believe that the service levels should go up, that's what the railroads have been preaching, and we're starting to see that here in the last 2 or 3 weeks. So as service levels go up, that should attract more freight to Intermodal. And that would be positive part of scheduled railroading. So I believe that as the levels go up, the opportunity, especially in the East, will continue to enable us to grow Intermodal.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question comes from the line of Jason Seidl.

--------------------------------------------------------------------------------

Adam Kramer, Cowen and Company, LLC, Research Division - Associate [11]

--------------------------------------------------------------------------------

This is Adam on for Jason. I just -- first, I wanted to ask you guys about increased competition in your last mile business, obviously with the Cory transaction, but are you guys seeing more competition there? And what's that kind of been like?

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [12]

--------------------------------------------------------------------------------

Yes, this is Nick. I would say, we've had a great response to our Cory acquisition, particularly in the furniture segment. We run up against a bunch of small competitors, we do run up against a couple of the bigger ones that have done some acquisitions recently. But it's no more than what we normally see. There's no one out there that's been really overaggressive in the marketplace, I would say. And -- so I love where we're here at, I love our position with the Cory. And they've got us in with a lot of key customers in the furniture segment.

--------------------------------------------------------------------------------

Adam Kramer, Cowen and Company, LLC, Research Division - Associate [13]

--------------------------------------------------------------------------------

Got it. And then a quick follow-up, if I may. Just -- you guys cited higher driver and non-driver salaries as a negative in the quarter. I was wondering even with trucking rates coming down, are you guys still seeing driver pay go up? And do you anticipate that this is going to continue to be a challenge for you guys going over the next few quarters and through the rest of the year?

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [14]

--------------------------------------------------------------------------------

This is Nick again. I'll talk specific about dedicated. There is still some tight markets out there, Northern Cal, the PNW, Chicago, Ohio, through to the Northeast, where we still have some extra incentives on to hire drivers. But in the rest of the areas, it has softened up. We're not taking wage reductions with drivers, but it's eased up some. So it still tight in some markets but we feel pretty good about where we're at from a driver positioning as of today.

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [15]

--------------------------------------------------------------------------------

Yes. Intermodal, I would say, there's a leveling off. There are pockets that Nick had mentioned. But there is a leveling-off effect, and it's not the same environment as what we saw last year.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

And your next question comes from the line of Brad Delco.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [17]

--------------------------------------------------------------------------------

Question for Shelley. Shelley, as we look at the broader logistics' landscape, could you give your thoughts on kind of what's going on from a competitive market? And maybe to use Nick's comment on competition, is anybody being Uber-competitive, no pun intended?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [18]

--------------------------------------------------------------------------------

I think you set me up on that. So I would say, just in general, the brokerage market is competitive, the bid season has been very aggressive. We purchase PTE on the spot market, if you will, although we might have regular carrier relationships, a lot of those changed with the dynamics of what's happening in the market. And so the price can change more quickly back to customers, certainly on spot, but then also in the published business. We've seen a very aggressive bid season this season. I think part of that, Brad, is just having more data and understanding you do see new competitors in the space, specifically on the digital freight-matching side. So just having the data and knowing which carriers are interested and what lanes fit those carriers, this year, we know that better, and I think the competitors know that as well. But I would say it's a very aggressive and competitive bid landscape from a brokerage perspective.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [19]

--------------------------------------------------------------------------------

And so as we think about sort of this, moving forward, competitive landscape, clearly freight has been a little bit more challenged this year, but your loads are growing 15%. So you think you're taking share and you're able to take share just because of what marketplace has provided to you, is that how I should interpret that?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [20]

--------------------------------------------------------------------------------

You know I can't speak for what others are doing. I do see our competitors aggressive on price in the bid season. We have, obviously, our own strategy and we've got a lot of data that helps us back that up for us. We still wouldn't generate a profit at the bottom line. So understanding the relationship on how price is changing, what's happening in supply, demand by lane, we can see that more clearly now through the marketplace. And we are using that data to help us be more surgical and understand better how we should win with customers. And for that, I would expect us to take market share.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Amit Mehrotra.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [22]

--------------------------------------------------------------------------------

Deutsche Bank. Terry, I just wanted to ask about the Intermodal business. I guess, more from a structural perspective first. Length of haul is down for 6 straight quarters in a row, Transcon versus eastern mix continues to be challenging. And of course, there is, I guess, infrastructure projects that are facilitating that shift, whether it's port infrastructure projects or the expansion of the Panama Canal. So I guess, the question is, is that what happened to the Intermodal business? Or the returns of the Intermodal business structurally when the market continues to move towards lower length of haul, which is inherently more truck competitive?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [23]

--------------------------------------------------------------------------------

Yes, the margins that we have east or west are similar. So that really shouldn't affect us too much. I think the East still has great opportunity to be able to grow. Yes, there will be a little noise with the truck, but I think as service continues to get better and that's going to be the key, if service can get back to the levels that the railroads have told us they expect to get to in the East, I think we'll be able to attract enough loads to be able to grow that particular product and region of the country.

--------------------------------------------------------------------------------

Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [24]

--------------------------------------------------------------------------------

So you don't think that there is inherently a structural change in the returns of the business as the Intermodal business as a whole becomes, on the margin, more truck competitive? You're still thinking that 11% to 13% framework that you have for Intermodal is a reasonable view, both on given what's happening with rail pricing and this mix shift that's happening towards lower length of haul type of freight?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [25]

--------------------------------------------------------------------------------

Yes, I haven't really seen anything that would make me think different. I can't predict the future, but I haven't seen anything that would make me think different today.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And our next question comes from the line of David Ross.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [27]

--------------------------------------------------------------------------------

On the last mile side, how much of that $26 million growth was from Cory? And what was the base in 1Q '18?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [28]

--------------------------------------------------------------------------------

You want to take that?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [29]

--------------------------------------------------------------------------------

Well, there is no base in 1Q '18. Because we acquired it in February, February 15. February 15 of '19 is when we closed on the deal. And Cory, revenue for 6 weeks was about $20 million.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [30]

--------------------------------------------------------------------------------

Okay. And then the base off of which you grew $26 million, was that $80 million a year ago in the last mile segment?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [31]

--------------------------------------------------------------------------------

For the first quarter, I don't have it. The first quarter, I don't have it right in front of me.

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [32]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [33]

--------------------------------------------------------------------------------

Do you have the approximate annual run rate then of the business?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [34]

--------------------------------------------------------------------------------

Yes. The -- annualized, it's going to be roughly in the $500 million to $550 million annualized this year.

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [35]

--------------------------------------------------------------------------------

This year. Last year was about $350 million.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [36]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [37]

--------------------------------------------------------------------------------

Okay. And then, okay, just real quick, why were G&A expenses up about 40% from $32 million last year to $45 million here in the first quarter?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [38]

--------------------------------------------------------------------------------

I don't know, I'm trying to figure out my sheet.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [39]

--------------------------------------------------------------------------------

Part of it is in -- part of it is where we run the -- that's the line item, where we run our IT spend in, that's the biggest move.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [40]

--------------------------------------------------------------------------------

So that should probably level out from here with consistent IT spend going forward?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [41]

--------------------------------------------------------------------------------

Yes. Hopefully, that -- it's also where we have a bunch of lawyer fees, so hopefully that eventually goes down.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

And our next question comes from the line of Brian Ossenbeck.

--------------------------------------------------------------------------------

Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [43]

--------------------------------------------------------------------------------

So Terry, maybe you could give us an update on how much of the closures, I think it was 50,000 to 70,000 loads you're looking to replace last quarter, about 1/5 of the way through. Where does that stand right now? I imagine it might have gotten disrupted by the weather. And when have the rails communicated that they expect to get back to what would you deem as satisfactory service?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [44]

--------------------------------------------------------------------------------

Well, I'll handle the rails first. The rails for the last 2 or 3 weeks are -- their services that they have provided are better than what they did in '17 and '18, but not to the targets they have set, there's still a pretty good gap there, so that's been helpful. As far as the closures, I think we mentioned 50,000 to 70,000 loads, and most of those started January 1. There were -- I think there was 1 lane that closed in March. And then with regards to the bids, we've been able to make up roughly half of those. And maybe a little bit more than that, but what we're seeing is some of the compliance on the old bid awards and the new bid awards are a little less than normal.

--------------------------------------------------------------------------------

Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [45]

--------------------------------------------------------------------------------

Okay. And then just a follow-up on the general market conditions. Could you give us a sense of where pricing is coming in for the current bids, both in trucking and the Intermodal. And if you have an updated view on where you think those are going to hit for the full year? Last time we were talking about high single digits for Intermodal and more mid-single-digit for trucking?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [46]

--------------------------------------------------------------------------------

Yes. What -- on the Intermodal side, I think I mentioned we had 30% -- 25% to 30% of the bids we're in and we're in high single-digits, we're now at 45% in implemented and that has held true. The next 25% to 30% that is out there is less than high single-digits, and I don't know what the last 30% will be, as that unfolds, we haven't even priced that yet.

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [47]

--------------------------------------------------------------------------------

And on the Truckload side, truck -- speaking of Truckload from an asset perspective, because I think I've already spoken about what's happening in the brokerage space, but about 30% of our business is implemented inside JBT, and that's going to be a mid-single-digit price increase. And I would say, Q2, we should implement another 38% of our business. So around 70% of our business complete by Q2, and that business will be low single digits in the second half of the year, still too early to tell.

--------------------------------------------------------------------------------

Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [48]

--------------------------------------------------------------------------------

Okay. And to -- just to sum that up, it sounds like things are progressing pretty well, but maybe towards the lower end of the previous ranges in both segments, is that fair?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [49]

--------------------------------------------------------------------------------

I think I said mid last time and I think I said -- it's tracking about what we expected, maybe slightly lower, but about what we expected.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

And the next question comes from the line of Matt Brooklier.

--------------------------------------------------------------------------------

Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [51]

--------------------------------------------------------------------------------

Where April is trending, I think you did mention that you haven't really seen a rebound at this point in time. But if you could give, I guess, more details there, I think that would be helpful.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [52]

--------------------------------------------------------------------------------

I would love to give more detail, but we don't have any more detail. It's too early.

--------------------------------------------------------------------------------

Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [53]

--------------------------------------------------------------------------------

Okay. And then just kind of as a follow-on, you talked about severe winter weather being a hindrance on the Intermodal business. Was there any impact from flooding in the Midwest? And has flooding impacted the business thus far in 2Q?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [54]

--------------------------------------------------------------------------------

It has somewhat, but not near as much as what we saw in February with regards to the winter and what happened in Chicago. It's not near as much, at least for the rivers that we run on as versus -- maybe versus another railroad. But I believe the February weather was by far much greater than the flooding.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of [Arish Aman].

--------------------------------------------------------------------------------

Unidentified Analyst, [56]

--------------------------------------------------------------------------------

It's just a quick question. You mentioned that one of the biggest surprise in the Intermodal was the volume, and I was wondering if anything else surprised you in the quarter or in the trend so far in terms of the Intermodal. Is the rail pricing coming in as you expected? And the cost on the wages side and everything else, is that coming in as expected as well?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [57]

--------------------------------------------------------------------------------

Yes, I think I mentioned the driver wages were leveling off, and it's a little different moving forward than maybe what we saw this time last year. With regards to the volume, I think Dave mentioned that March was different than we thought it was going to be. And I mentioned that the west coast was somewhat of a -- different than what we thought it would be in March. So those are 2 of the things that are different.

--------------------------------------------------------------------------------

Unidentified Analyst, [58]

--------------------------------------------------------------------------------

And on the rail pricing side, is that as you kind of expected?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [59]

--------------------------------------------------------------------------------

Yes. As I mentioned, I went through that, it's basically where we thought it would be.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

And our next question comes from the line of David Vernon.

--------------------------------------------------------------------------------

David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [61]

--------------------------------------------------------------------------------

So Dave, I just want to ask you the question that I think is on a lot of investors' mind, right? Rail rates -- rail seems to be pushing rate in one direction and truck rates are going the other direction. How should we be, sort of, expecting or bracing performance in the Intermodal segment? Is -- should this be an outlook where we're expecting you guys to take it on the chin on margin? Or maybe just have less volume as you're being a little bit more selective and just getting the stuff that can afford the price increases you're getting from the rails? I'm just trying to get a sense for how this particular market set up, how you're thinking about the outlook?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [62]

--------------------------------------------------------------------------------

The east coast railroads know that they need to be market relevant. And I think that they will understand what's going on in the truck market, and they will make sure that their providers are market relevant and in accordance with that. And from -- general strategy, we haven't changed our general strategy. We said early on that we would try to take a more balanced approach to volume and price. But irrespective of what's happened in Q1, we haven't changed that from a bid perspective. And Terry said, we're about 40%, 45% through, and that means that, that freight will start moving here in Q3 -- Q2, if we get it. Compliance bid -- award compliance is down, but that doesn't mean that we have changed our approach, if you will, to price versus volume in this cycle, at this point in time anyway.

--------------------------------------------------------------------------------

David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [63]

--------------------------------------------------------------------------------

So -- I mean, I guess, is -- I'm still struggling here a little bit with this not being a change in approach, right? Because it does seem like for years you guys were outgrowing the market at below market rates and now you're maybe going a little bit the other direction. I mean I guess, as you carry forward the success you've had in bid season so far, do you still feel comfortable that we will be staying ahead of rail rate inflation for the year, do you think there might be still a little bit of margin pressure?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [64]

--------------------------------------------------------------------------------

A lot of that comes with the bid compliance. If our volume can increase the way we anticipate it to increase, I think we'll have -- that would take the pressure off the margin.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

And our next question comes from the line of Todd Fowler.

--------------------------------------------------------------------------------

Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [66]

--------------------------------------------------------------------------------

KeyBanc Capital Markets. So it was very helpful to get some of the thoughts around the impact on the volumes during the quarter on the Intermodal side from the weather and the lane closures. Can you help us think about the cost, if you can kind of split some of the cost impact out on the OR? And then I think the commentary was that you're expecting to get back to positive volume growth in the second half of the year, just given the comps, I understand that, that's dependent on bid compliance, but would you also get back into the 11% to 13% margin range, either in the second quarter or the second half of the year?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [67]

--------------------------------------------------------------------------------

Probably not in the second quarter. There could be a quarter in the second half that we could get in that range from a margin standpoint.

--------------------------------------------------------------------------------

Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [68]

--------------------------------------------------------------------------------

And Terry, is it the volume issue that prevents you from getting there in the second quarter or is it the continued issues on the rail service side, just if you can help us think about what's keeping you kind of below the targeted range?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [69]

--------------------------------------------------------------------------------

Yes, the volume consideration is -- we're basically living with the bid cycle that we had in 2018. And as Dave and I both mentioned, we're taking a more balanced approach, and with that, we believe that volume should turn positive in the second half, and when that turns positive, the dray assets, the box assets, everything basically starts falling to the bottom.

--------------------------------------------------------------------------------

Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [70]

--------------------------------------------------------------------------------

Okay. And then just any thoughts on quantifying weather and rail service in the first quarter?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [71]

--------------------------------------------------------------------------------

We haven't. I mean internally, we tried to take a stab in the dark at what those costs (inaudible), but we haven't -- but I'm not comfortable saying they're solid enough to talk about what the real dollars were.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

And your next question comes from the line of Ben Hartford.

--------------------------------------------------------------------------------

Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [73]

--------------------------------------------------------------------------------

Just a quick question. Is there any update on the BN arbitration? Is it finalized yet or is it still ongoing?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [74]

--------------------------------------------------------------------------------

There is no further update.

--------------------------------------------------------------------------------

Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [75]

--------------------------------------------------------------------------------

Okay. The contractual pricing environment on the Truckload side -- specific to the truck segment, could you provide the -- what the rate growth was in the first quarter for committed contractual business in truck? And then any expectations for the balance of the year?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [76]

--------------------------------------------------------------------------------

You're asking about price or volume, Ben?

--------------------------------------------------------------------------------

Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [77]

--------------------------------------------------------------------------------

Price. I'm sorry, typically you've got a line in JBT, the segment there about what committed contractual business was repriced on a year-over-year basis in the first quarter. Just curious what it was and then what your expectations are for the balance of the year?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [78]

--------------------------------------------------------------------------------

Yes. So our price change on our contractual business was up 12%. And I think I talked about that earlier that we would see price renewals here in the first quarter, mid-single digits moving into Q2, in the lower single digits, and then it's too early to tell for the second half.

--------------------------------------------------------------------------------

Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [79]

--------------------------------------------------------------------------------

And how far along are you in those bids?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [80]

--------------------------------------------------------------------------------

So 30% in Q1, a net of 38% in Q2. So we'll be about 70% complete first half of the year.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

And your next question comes from the line of Ravi Shanker.

--------------------------------------------------------------------------------

Ravi Shanker, Morgan Stanley, Research Division - Executive Director [82]

--------------------------------------------------------------------------------

Can we just take a step back here and kind of try to peel the onion a little bit and you -- obviously, you had a noisy first quarter with lots going on with weather and service changes and everything else. But we're just trying to get a sense of the overall economic kind of macroenvironment? Where would you rate that? I mean are you concerned about where we are and you know just getting past tariffs and such? Do you -- are you concerned that we're heading into recession or kind of are you feeling better about the second half of the year just on an overall macro perspective?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [83]

--------------------------------------------------------------------------------

Yes, I'm feeling okay about the rest of the year the purchasing manager index that we follow I think hit 55 which was up from the previous month and which is strong. So that tells me that people are going to be buying things in the future. That with the late spring and then they hopefully can get the tariff noise out of the way, those 3 things should have a -- make a reasonable year for 2019.

--------------------------------------------------------------------------------

Ravi Shanker, Morgan Stanley, Research Division - Executive Director [84]

--------------------------------------------------------------------------------

Got it. And as a follow-up, Shelley, I think in the last few quarters, you've had in ICS, the impact of one or more of your customers kind of shifting to the DCS business. Can you just kind of help dimension, how much of the pressures in ICS this quarter came from that versus just the market being soft in general?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [85]

--------------------------------------------------------------------------------

I would say the market being soft in general. We were able to extract our gross margin percentage from the market as carrier prices were falling through the quarter and we were still holding onto our customers contractual rates. In general, I think that we also did a decent job in adding incremental customers to our portfolio in the first quarter, really going after that small midsized market, adding new names and going after the spot market to help balance what was happening on the published side of the business.

--------------------------------------------------------------------------------

Operator [86]

--------------------------------------------------------------------------------

And your next question comes from the line of Ken Hoexter.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [87]

--------------------------------------------------------------------------------

Can you just talk a little bit about your -- you talked about lower network utilization as one of the expenses, I presume that, as volumes came down, also increased equipment and maintenance cost. Can you talk about the dichotomy in that? Why you're seeing the increased equipment cost as utilization comes down?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [88]

--------------------------------------------------------------------------------

Yes, you're talking about increased maintenance cost.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [89]

--------------------------------------------------------------------------------

Just in the release, you mentioned the reason for some of the increased expenses. I don't know, is one related to Intermodal, the other truck, or is there a difference between what you're talking about in the release?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [90]

--------------------------------------------------------------------------------

No, it's just a matter of -- it's just part of the winter operation. I mean -- they try to avoid truck freeze ups, didn't, especially around Chicago. There is a -- and then you end up with the same thing on the chassis fleet that's sitting around instead of rolling. Just general lack of utilization and the general cold-weather maintenance type cost.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [91]

--------------------------------------------------------------------------------

Okay. So that's -- you're just talking seasonal, not something specific in terms of operations?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [92]

--------------------------------------------------------------------------------

Yes. Well, you mean as type of -- the type of equipment or anything? No.

--------------------------------------------------------------------------------

Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [93]

--------------------------------------------------------------------------------

Well, I'm just trying to figure what -- in your release, you kind of listed why expenses were high during the quarter and one of them you listed was lower network utilization, the other was -- but yes, you had increased equipment and maintenance cost. I'm just trying to understand if you used the equipment last yet you had higher expenses or just higher relative to last year's cost?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [94]

--------------------------------------------------------------------------------

No. Now don't necessarily equate network utilization with purely less activity. There was a lot of inefficient activity.

--------------------------------------------------------------------------------

Operator [95]

--------------------------------------------------------------------------------

And your next question comes from the line of Allison Landry.

--------------------------------------------------------------------------------

Allison M. Landry, Crédit Suisse AG, Research Division - Director [96]

--------------------------------------------------------------------------------

So Nick, you mentioned earlier that you expected second quarter JBI loads to be negative year-over-year. And I know you didn't provide guidance but is that what you initially expected because of the more difficult comps or should we read this as marginally worse? And I guess, yes, the broader question is, if your volume outlook for the year is roughly the same in light of the somewhat transitory events in the first quarter?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [97]

--------------------------------------------------------------------------------

Yes, this is Terry. It's the comps, and it's the recovery from PSR, and it's going to take us to get through the bid cycle to be able to recover from that, and we haven't changed what we were thinking in the second quarter in terms of -- excuse me, the second half with regards to positive growth.

--------------------------------------------------------------------------------

Allison M. Landry, Crédit Suisse AG, Research Division - Director [98]

--------------------------------------------------------------------------------

Okay. And then as it relates to brokerage, Shelley, I think you mentioned earlier that you're seeing a little bit of price aggression from some of your competitors. But could you maybe comment on what you're seeing as far as contract rate negotiations so far in the bid season? Are they lower than Truckload? Are they flat or negative?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [99]

--------------------------------------------------------------------------------

Yes. I would say prices are negative in the bid season, and I would expect them to be negative for the full year. I don't see them going significantly worse than we are today in change, but they are negative, and there is a definite difference between the asset part of our business in price and the brokerage part of our business.

--------------------------------------------------------------------------------

Operator [100]

--------------------------------------------------------------------------------

And our next question comes from the line of Barry Haimes.

--------------------------------------------------------------------------------

Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [101]

--------------------------------------------------------------------------------

I also had a question back on ICS. And wondering if there's any way to parse out or give us a little bit of color on -- if we look at the down 22% operating income, how much of that was the base business, if you will, or the legacy business? Versus how much of that was a function of the incremental investment that you're making in marketplace? And then I wonder also if it's possible to give us a little bit of color in the quarter of what your -- what percent your cell rate was up year-over-year versus what percent your buy rate or capacity was up or down year-over-year?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [102]

--------------------------------------------------------------------------------

Okay, I'm sorry those were several questions. So the first question was -- sorry, I was thinking about the last question.

--------------------------------------------------------------------------------

Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [103]

--------------------------------------------------------------------------------

Yes, first question was...

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [104]

--------------------------------------------------------------------------------

Oh, yes, yes, I'm sorry, the base business. So the base business was very healthy in the first quarter, performed at or beat our models in total, and that's our 10-plus-year model that we have been at and running at -- inside that. But I would say we had really good results inside our base business. The majority of what you're seeing in the change in OR or change in operating margin is a result of marketplace and kind of our new ideas around growth and understanding what's happening inside that space. So that's primarily the drag that's inside that. And then your question around price versus what happened on -- our margin stayed relatively the same each month in Q1. So margin January, February and March stayed about the same. That's because prices typically tightened or the PTE tightens typically in March. We did not see that occur. We were able to react to the market on a price change to customers overall. Our price for customers did move down in both spot and in published spot obviously moved significantly year-over-year within public space. Does that answer the question?

--------------------------------------------------------------------------------

Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [105]

--------------------------------------------------------------------------------

It does.

--------------------------------------------------------------------------------

Operator [106]

--------------------------------------------------------------------------------

And our next question comes from the line of Chris Wetherbee.

--------------------------------------------------------------------------------

Christian F. Wetherbee, Citigroup Inc, Research Division - VP [107]

--------------------------------------------------------------------------------

Just want to make sure I understood sort of the mechanics of pricing coming back to you guys. Has all of that sort of step up, for 2019, the expected step up, been realized in the first quarter or do you think does that play out sort of gradually as the year progresses? Just want to get a sense of maybe how that influences the cadence of Intermodal margins this year?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [108]

--------------------------------------------------------------------------------

Yes, I don't know if I understand your question.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [109]

--------------------------------------------------------------------------------

Rail pricing changes?

--------------------------------------------------------------------------------

Christian F. Wetherbee, Citigroup Inc, Research Division - VP [110]

--------------------------------------------------------------------------------

Yes, I guess is the price that you're paying in the first quarter the price you'll pay for all 2019 or would we expect to see further rate increases from here?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [111]

--------------------------------------------------------------------------------

The price we pay?

--------------------------------------------------------------------------------

Christian F. Wetherbee, Citigroup Inc, Research Division - VP [112]

--------------------------------------------------------------------------------

Yes. What you paid for the rails. Have all your rail rate changes occurred for the full year.

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [113]

--------------------------------------------------------------------------------

Yes. We don't divulge when we take rail increases.

So mostly in the first quarter, we do.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [114]

--------------------------------------------------------------------------------

For the most part. For the most part, Chris, yes. But that does not mean they can't change throughout the year.

--------------------------------------------------------------------------------

Christian F. Wetherbee, Citigroup Inc, Research Division - VP [115]

--------------------------------------------------------------------------------

Okay. But -- okay, that's helpful. And then just on the DCS side, can you talk a little bit about fleet growth expectations in 2Q? And then maybe how the back half looks? Just trying to get a sense of relative startup cost to what we saw in the first quarter?

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [116]

--------------------------------------------------------------------------------

Yes. I would -- the first quarter was probably the second best quarter we've had in our history as far as number of startups, but 400-plus Q3 of '18 was a big quarter for us. The top line is still full. We think we're going to hit our sales marks this year. So I would say, it's still good. Last year was a record year. Don't think we'll quite hit those numbers, but it's going to be a good solid year for us with the way our top line looks at this point.

--------------------------------------------------------------------------------

Christian F. Wetherbee, Citigroup Inc, Research Division - VP [117]

--------------------------------------------------------------------------------

But just to be clear, probably a little less in 2Q than what you saw in 1Q in terms of startups?

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [118]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Rick Paterson.

--------------------------------------------------------------------------------

Rick Paterson, Loop Capital Markets LLC, Research Division - SVP [120]

--------------------------------------------------------------------------------

Have you had any indications from BNSF that they plan to adopt precision scheduled railroading or even certain aspects of it? And in your conversations with BN, have you encouraged them to do so?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [121]

--------------------------------------------------------------------------------

I don't think we've encouraged them to do so, but I think all railroads have taken bits and pieces of precision railroading and implemented certain parts of it. More -- some railroads more than others. And I think the BN has done their fair share in certain aspects of that.

--------------------------------------------------------------------------------

Rick Paterson, Loop Capital Markets LLC, Research Division - SVP [122]

--------------------------------------------------------------------------------

Do we get into a situation where you could be running over non-PSR, begin competing with tough -- with competitors running over a better running PSR UP, is that a concern at the end of the day?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [123]

--------------------------------------------------------------------------------

It's not a concern today. I think the BN runs a pretty good railroad, and I -- they're heavily into Intermodal. So I think when you look at PSR and the BNSF versus maybe a railroad that has a different type of mix, it's kind of apples and oranges. But some of the concepts that PSR has, I believe the BN will implement some of those concepts.

--------------------------------------------------------------------------------

Operator [124]

--------------------------------------------------------------------------------

And our next question comes from the line of Scott Group.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [125]

--------------------------------------------------------------------------------

Shelley, can you give us some perspective? Have we ever seen this big divergence between asset-based and non-asset pricing before? And do you think it's sustainable?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [126]

--------------------------------------------------------------------------------

Well, we did see it anytime the spot was a significant part of brokerage the year before. So we saw the same thing happen -- I don't know if at the same magnitude, but 2014 to 2015, we definitely saw a change happen from asset based to non-asset based. And then in my past, I don't know, 11, 12 years' experience in brokerage, I've seen it, but these were 2 of the biggest years that spot has been in the market from a brokerage perspective. So I didn't expect -- I expected for prices to fall inside the brokerage part of business. We budgeted for that. It has been more aggressive than what we expected, but it's also been slightly softer than what we expected as well. So I would say those 2 things add up to me.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [127]

--------------------------------------------------------------------------------

But didn't asset-based pricing fall in '16? I guess that's what I'm trying to understand. Like you're saying that non-asset is down and asset is up but that's what I'm trying to understand, if that divergence can last?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [128]

--------------------------------------------------------------------------------

I mean, I think it might be a little bit more pronounced because our price went up so significantly as an industry and certainly for us, inside 2018. So there's probably a bigger change from those 2 periods. But I will say, it is different as far as the change in how much prices have moved in brokerage.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [129]

--------------------------------------------------------------------------------

Got you, okay. And then either for Nick or Dave, dedicated margins, do we need to rethink the 11% to 13% margin target there? And then maybe some margin expectations for this year or if we can be 11% to 13% in the quarters going forward? Any color there?

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [130]

--------------------------------------------------------------------------------

Can I take that?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [131]

--------------------------------------------------------------------------------

Yes, go ahead that.

--------------------------------------------------------------------------------

Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [132]

--------------------------------------------------------------------------------

I would just say that as Dave called out in the earnings report, our base business operated in the 11% margin range in Q1, which we're very pleased with. And very -- that's good for us in Q1, so we're excited about that. As we do bring on more acquisitions and as Final Mile continues to grow with lower margins and higher ROIC, it will have some dilution on the overall dedicated. But it'll be incrementally in small amounts, I think, going forward.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [133]

--------------------------------------------------------------------------------

Got you, okay. And then, Dave, just real quick. Tax rate and CapEx for the year, if you can?

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [134]

--------------------------------------------------------------------------------

Well, we said our tax rate was going to be 24% in the press release. And CapEx hasn't changed.

--------------------------------------------------------------------------------

Operator [135]

--------------------------------------------------------------------------------

And our next question comes from the line of Brian Ossenbeck.

--------------------------------------------------------------------------------

Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [136]

--------------------------------------------------------------------------------

I just wanted to ask, at a high level, can you give us an overview of what 360 Marketplace is doing now versus what you might think it could be able to do sort of at the end of the year, maybe even next year? So I think you're making a lot of investment, it sounds like you've brought on different types of capacity, more third-party capacity? So what do you see the benefits from that? And what's sort of the path forward from here?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [137]

--------------------------------------------------------------------------------

Yes, so Brian, we think that digital freight matching is really in its maybe first inning from adoption from the carrier community, but also -- and what we can do with it but also from a customer perspective. We do have quite a few things on the roadmap for this year to deliver for our customers and for the carriers as well. We do expect the platform to continue to grow overall for our company. Our objective is to create the most efficient transportation network in North America, and that's really by seeing all shipments and all capacity to eliminate the waste in the system. So we do believe technology can drive significant advantages for both carriers and customers. And the things on the roadmap for this year should help us deliver some of those items and some of the opportunities. We do still believe, in 2020, we'll continue to have some of those on our roadmap. And the more we're in the platform, the more we start to understand how we can benefit on both sides, shippers, carriers and obviously, us in the middle helping arrange for transportation. So that's our objective, and that's across all of our segments, not just specifically inside ICS. For us, it's really about the most efficient way to move goods. And so we are putting quite a bit on the science piece and trying to understand data to be more predictive and to really be able to solve that on the front-end versus having someone try to do that in their own head or through a calculator.

--------------------------------------------------------------------------------

Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [138]

--------------------------------------------------------------------------------

Shelley, if you could just give us a sense of -- is there any ability to put more on the Intermodal side on the dray side. Looks like it was a fairly small number this quarter with $12 million, but you mentioned shippers and carriers, but is there a benefit for how J.B. Hunt's business as this evolves?

--------------------------------------------------------------------------------

Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [139]

--------------------------------------------------------------------------------

Yes, this is Terry. It's a small number because we started ramping up in March, and we have something over 70% that got signed on in late March. So that'll show a bigger number in the second quarter. And hopefully, we can be 90-plus percent by the end of the second quarter of having our outside dray carriers hooked up, which should help -- as Shelley mentioned, should help in dray matching and filling empty legs in dray, which will make them more efficient, that should make us more efficient. And the second thing I would say to that is that it also adds another carrier to Carrier 360. So if there's not a dray load to handle for JBI, they can go look in the marketplace and participate on a one-way Truckload. And so we'll be adding thousands of carriers via the Intermodal dray network into Carrier 360.

--------------------------------------------------------------------------------

Operator [140]

--------------------------------------------------------------------------------

And our next question comes from the line of Ben Hartford.

--------------------------------------------------------------------------------

Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [141]

--------------------------------------------------------------------------------

Thanks, everything has been answered. Appreciate the time.

--------------------------------------------------------------------------------

Operator [142]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Brad Delco.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [143]

--------------------------------------------------------------------------------

Shelley, another one for you. If we think about the first quarter, you -- now a little bit more pricing pressure being put on carriers. You had some weather, probably very poor utilization, rising fuel prices, I think, in February. Do you think that the carrier base in ICS, is that sensitive to those items as they were? Meaning, do you think you could see some carriers start folding or is that way too early in the process to be thinking about that?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [144]

--------------------------------------------------------------------------------

I don't know if I could answer for that. One of the efficiencies that we're driving through the platform is just helping the carrier find the right load, the right truck at the right time. So for them getting the right load in the system. So today, they're having to hunt and peck and try to find a load that would fit them. The elimination of empty, if I looked at, I think it was the [Stevens] Truckload report, we recorded the highest in the industry, the highest percentage empty in the year 2018 at 12% over a 15-year period. There just makes no sense when you have technologies that can create the match. So for us, the change that's happening on price is as a direct result of helping them find better loads. Certainly, the market's readjusting so the spot rates that were out there at one time, hopefully, those couriers haven't built a complete model on spot. I know we certainly don't. But the platform isn't just about -- it's not really about bidding the rates against each other, it's really about creating the most efficient way to move that good, and that's by finding the right carrier at the right time.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [145]

--------------------------------------------------------------------------------

Got you. And then -- but maybe more broadly, would you say that you would have visibility into how competitive non-asset brokers are being? Would you say that could be a threat to capacity in trucking, if this persists for a longer period of time?

--------------------------------------------------------------------------------

Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [146]

--------------------------------------------------------------------------------

I think it might be too early to tell. I mean certainly, we've seen cycles of that in our past and in our history, and I would assume it would follow the exact same cycle that -- or a similar cycle that it has in the past, but I'm not sure that we'd be able to say that. I will say, just the bids that we're looking at and the number of bids we are placing, responses to customers are up for us significantly inside ICS here in Q1. So not only are we implementing more of this -- those rates for our key customers, but also we're adding new names. And so customers are a lot more interested in talking to us in the brokerage part of the business.

--------------------------------------------------------------------------------

Operator [147]

--------------------------------------------------------------------------------

And there are no further questions at this time.

--------------------------------------------------------------------------------

David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [148]

--------------------------------------------------------------------------------

Okay. Well, if there's no further questions, thank you all. Appreciate it, and this concludes the call.

--------------------------------------------------------------------------------

Operator [149]

--------------------------------------------------------------------------------

And this concludes today's conference call, you may now disconnect.