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Edited Transcript of JBHT earnings conference call or presentation 15-Oct-18 9:30pm GMT

Q3 2018 J B Hunt Transport Services Inc Earnings Call

LOWELL Nov 11, 2018 (Thomson StreetEvents) -- Edited Transcript of J B Hunt Transport Services Inc earnings conference call or presentation Monday, October 15, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Mee

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

* John N. Roberts

J.B. Hunt Transport Services, Inc. - President, CEO & Director

* 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

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Conference Call Participants

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* Adam Joseph Wieschhaus

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

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

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

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity 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

* Don Thoren

American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach

* Kenneth Scott Hoexter

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

* Matthew Edward Reustle

Goldman Sachs Group Inc., Research Division - Senior Equity Analyst

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* 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

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Presentation

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Operator [1]

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Ladies and gentlemen, please welcome your speaker for today, Mr. David Mee. Sir, you may begin.

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

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Thank you, Donna. Good afternoon, everyone, and thank you for joining us. We have here, John Roberts, President and CEO; Terry Matthews, President of Intermodal; Nick Hobbs, President of DCS; Shelley Simpson, Chief Commercial Officer and President of Highway Services; and myself, David Mee.

Given that this is our first earnings call, let me kind of go over what we'd like the format to be. I'll make a brief opening statement and then we'll open up the lines for Q&A. The participants will have an opportunity to ask a question and then one follow up, before they have to return to the end of the queue to give everybody a shot at asking the questions that they want. We do have a call scheduled for 90 minutes. So we hope to get through as many questions as we can during that time. And we do appreciate your patience, given that this is the first time we've attempted this. As we go forward, I'm sure, it will be a lot more efficient into the future.

As far as the opening remarks, I have 2 areas that I want to address. The first is the quarterly tax rate and the difference between the preannounced after-tax charge and the actual after-tax charge reported in the earnings release. The primary culprits in the reduced rates are our annual computation of what is referred to as our FIN 48 exposure, and a tax rate adjustment for equity-based compensation.

At the time of the arbitration update announcement last week, we had not performed these reconciliations and had not determined the discrete item amounts. So we used our previous estimated quarterly tax rate of 26% instead of the 20.4% that Q3 ultimately generated. With this third quarter adjustment and our current estimate of what our discrete items will be in the fourth quarter, we anticipate that our full year 2018 tax rate will be 24%.

The second area is, obviously, the elephant in the room, the arbitration update. And as we announced, we received the interim award on October 5, 2018. The interim award is subject to a protective order, addressing among other things, confidentiality of the award and the underlying contract. However, in that interim award, we were able to identify a quantifiable claim for a specific issue that accrued over a multiple-year period, that was the $18 million pretax charge we announced. We also stated that the arbitration panel has requested additional submissions from the parties over the next several months. These submissions are needed to determine, a, an appropriate interim award or awards; and b, a final award. We cannot determine any further financial implications of the interim award beyond the announced $18 million pretax charge, until after the arbitrators review the additional information required to be submitted and issue an additional interim award or final award. Once we can determine any additional financial impact of any interim award or final awards, we will provide additional disclosure at that time.

Until then, we will follow what has been our standard practice during this entire process, which is, what we said in the press release is all we're going to say. So any questions on the arbitration process or on this interim award will most likely be answered with no comment, it is confidential, well we have said all we're going to say or something similar.

Now as we do when the investor community visits our headquarters, we've assembled the entire management team to answer your questions and talk about their businesses.

With that, Donna, we're now ready to take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mr. Amit Mehrotra.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [2]

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First one is just if you can talk about the deceleration in Intermodal volume growth, basically every quarter this year I fully understand that we have the derailment in the quarter, which likely impacted the number. But does the deceleration, I would imagine impact some price over volume focus from the management team, could you just talk about that? When do you guys expect to pull the volume lever or volumes to reaccelerate, just given the tight truckload market?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [3]

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Yes, this is Terry Matthews. We, obviously, this year, we've been focused a lot on price, and I think you're seeing the results of that in the marketplace. It's been a marketplace that I believe has been the most orderly marketplace I've seen in the 28 years I've been involved in Intermodal and I think that will continue into next year. With regards to volume, as you look in 2019, I think, you'll see a better balance between price and volume as we go forward and we'll have a more balanced approach as we hit 2019.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [4]

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Could you talk about what the -- what you estimate the volume impact to be from the 5 major derailments in the quarter?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [5]

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I believe it was around 4,000, 5,000 loads.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [6]

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Got it. That's helpful. And just as a follow-up, I guess, it was nice to see that step up in incremental margins in the third quarter over 20% kind of an underlying basis. Is that the right level to expect kind of over the next 3, 4 quarters, just given, as some of the pricing actions continue to cycle through the numbers. Is that sort of the right incremental margins you guys are targeting for the Intermodal business over the next several quarters?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [7]

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I think that's going -- I mean, this is David Mee. I think that's going to be the result, given that the fact is that we will begin a new pricing calendar here in the fourth quarter, but the effects of those new pricings won't show up until later into 2019. So yes, I would say that the pricing is set. So operationally, if we can squeeze a little bit more margin out of it, out of operations, then we will. But I wouldn't expect much difference in what you've seen here in Q3.

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Operator [8]

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Your next question comes from the line of Mr. Jason Seidl.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [9]

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This is Adam on for Jason. I guess, first of all, do you expect more startup costs for Dedicated Contract Services heading into 4Q and then 2019?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [10]

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I would just -- this is Nick, Adam. I would say, our pipeline is very strong and we would continue to see startup cost in Q4. And we already have some trucks booked for Q1. So yes, I would say that would continue through the next couple of quarters tailing off in Q1.

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

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Got it. And then a quick follow-up as well. I think that the latest data came out just this morning about spot truck rates continuing to fall. Do you guys think that this is maybe because of a pull-forward of freight, which created kind of an artificial high, which we're now seeing the tail of? Or maybe do you think there's something else at work that's causing these spot trucking rates to continue to fall?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [12]

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Great question. This is Shelley. We have similar questions. We have been talking with our customers. We do know that some customers have done a pull-forward strategy, but I can't say that we've got a great answer to what that question is. We have confirmed with customers, they are expecting a good peak retail season that they are still considering to be good and so we would expect to have a pretty good peak as we come into Intermodal, finishing the first leg and then truckload coming after that.

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Operator [13]

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Your next question comes from the line of Mr. Tom Wadewitz.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [14]

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I wanted to ask a little bit more on kind of the freight trends, and I guess, it's a little bit similar to the prior question. But can you give us a read on what the volume growth look like in Intermodal by month? And then, what the start for October is, in terms of just, I think, load growth year-over-year?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [15]

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Tom, I'll take historical stuff, and then I'll let Terry tell you about what's -- how he feels so far in October, since it's too early. And you know I don't tell you what the numbers are for the current [quarter] anyway. July was up 4% year-over-year, not calendar affected. August was down 1% year-over-year, again, not calendar affected and September was down 2% year-over-year, again not calendar affected, that's how we get to our 1% up.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [16]

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As far as really how peak season has started off it -- we've seen the West Coast pick up the last week or so in September, and basically the peak is hitting our expectation similar to what we've seen in the past here so far in October. We think the next 4 to 6 weeks up through Thanksgiving should be very normal -- it'd be a very normal peak, and we're also thinking that December with possible tariff implications should be extremely strong in December as well.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [17]

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So how do you think about the relationship between spot market and what you're seeing and then what that might imply for next year. So I guess, we have seen that softness in the truckload spot market, but it sounds like you're expecting a good seasonal pickup. So does that imply that the spot data should be stronger as we get into kind of later October, November? But then I guess, if that doesn't play out that you see continued weakness in the spot metric. Does that give you concern that you're going to lose some leverage as you go into the contract negotiations and bid season for 2019?

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

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I would say customers have finished their bid seasons here through the third quarter with implementation. I know a lot of our customers were working towards getting more in the contract business. So they paid higher rate and in fact got taken somewhat by surprise, understood that the asset players needed more contract rate. They were willing to give that up, and I think you've seen part of it happen from a bid cycle being fully implemented in total.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [19]

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The other thing I would mention -- this is Terry, that the -- as much as we try to keep up with the truck rates, we did a pretty good job there, but the fuel surcharge has gone up substantially over the last year. And when you look at the differential between all-in fuel and the truck rate versus what the Intermodal rate is there's still a pretty good gap there. So I think that bodes well for Intermodal.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [20]

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Okay. So it sounds like you're not overly concerned about the spot market weakness in truck in terms of impact to Intermodal rate?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [21]

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No.

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Operator [22]

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Your next question comes from the line of Mr. Matt Reustle.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [23]

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Just a bit more on pricing and contract repricing you mentioned as you're starting up the season again in the fourth quarter. What type of rate increases are you guiding your customers towards in 2019, and how have those conversations been going?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [24]

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So I think that depends customer by customer. We have started talking with them about the costs creep that is occurring and that depends by lane, by customer and what that really looks like. It also depends on when they really came into the bid cycle with us. So we saw cost continue to creep after we started the bid cycle last year, and so some of those customers we're having different conversations with versus customers that have just completed their bids.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [25]

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Okay. Is it reasonable to still expect above average rate increases next year, I guess, it's a different way of asking that versus historical norm?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [26]

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We think that our -- we still have cost challenges. We are talking to our customers about those and recouping those during bid season. Historical norm, I'm not sure what that number is for you, but I would expect customers to be able to manage the budgets better coming into next year not being as surprised being in the spot market as much. But they will still be paying more than really what any of us want to pay based on cost changes that are still happening.

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Matthew Edward Reustle, Goldman Sachs Group Inc., Research Division - Senior Equity Analyst [27]

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And then just one quick follow-up for me on the tax rate. As we look into '19, is 26% still the right number to use for '19? Or is there a step change down associated?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [28]

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Yes, at this point in time, I'm going to tell you 26% is going to be the number. Again, we'll have discrete items with both the stock compensation and the FIN 48. Stock compensation is affected by stock price, so if the stock price goes up or down that will change that baseline amount up or down accordingly with stock price. And then FIN 48 is going to be based on income levels in the states that we have uncertain tax positions in. So it's very difficult to predict on the front-end basis. So my budget, we'll use 26% until we figure out what the exact discrete items look like.

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Operator [29]

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(Operator Instructions) Your next question comes from the line of Mr. Brad Delco

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Albert Brad Delco, Stephens Inc., Research Division - MD [30]

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A question for Nick. Nick, could you -- I know you talked about the dedicated startup costs, but when we make the adjustments that were sort of outlined in the release and add back $4 million of quantified startup cost, you get to like 91.3% OR, and I don't think that's necessarily your steady state going forward. So can you talk about the kind of cadence of what you think the operating ratio should do, assuming you don't have anything other than the start-up costs you've quantified for Q4 and Q1?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [31]

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Yes. Well, I think, first thing is the startup cost is a lot of stuff around driver pay, hiring charges, training charges, so there's a lot of those in there. But the other thing to keep in mind, Brad, is you're right, that's not a normal cadence. Our cadence would be more in the 11% to 13% margin range and that's what our base business is running. And I think the other thing, when you're looking at the global dedicated, you have to take into account Final Mile is starting to grow some, and so there is little bit of dilution that goes on with that as well from an OR standpoint. Not a great amount, but it does drag it down a little bit. But it's just the timing of when all of them come home and when they go out and trying to estimate that. If you look at just our base business that's out of startup, it is performing in our accepted margins. And so we just got a bunch of trucks. We had 600 trucks that we added from the end of Q2 to the end of Q3, which is a lot. So that $4 million that we put in there, that's some very big items. There is lot of little items associated with that. So each one of them is different, but I would think you'd see the OR start heading back where it needed to be in Q1, and then Q2 of next year and as we get some more big awards.

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Albert Brad Delco, Stephens Inc., Research Division - MD [32]

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And then, Dave, for you just 2 small nitpicky follow-ups. The bankruptcy that you guys commented on, I'm assuming that's related to one from last year. Can you quantify if there is any exposure to one that's been very recently announced, if any? And then number two to the follow-up. Can you tell us when that 4,000 load impact hit which month in Intermodal?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [33]

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Yes, the Intermodal impact was the end of mainly August, but the first week in September, when the Cajon Pass had the major derailments and the 3 major lines went out. It's August 21, but it's taken them 3 or 4 weeks, so that bled into September, but it was primarily August and the first 10 days of September.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [34]

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And then, as far as your bankruptcy, that one particular one did occur this year. It was with a store that was competed with the Dollar stores. We've had them as a customer for quite a while, but they decided to expand into the Northeast and we grew with them. And it turned out that it wasn't the most advantageous business decision for either one of us at this point in time. As far as the one that happened, was it today, by any chance? We have virtually no exposure to that one.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [35]

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Brad, and a follow-up, we had the Hurricane Florence in September. So we had derailments bleed in from August to September and then the hurricane that affected the Carolinas.

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Albert Brad Delco, Stephens Inc., Research Division - MD [36]

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Is that -- and that was included in the 4,000?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [37]

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Yes.

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Albert Brad Delco, Stephens Inc., Research Division - MD [38]

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And then last September you had Irma and Harvey, and you think, you quantified 5,500, is that fair?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [39]

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Correct.

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Operator [40]

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Your next question comes from the line of Mr. Allison Landry.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [41]

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I wanted to ask about what your thoughts initially are on the potential short and long-term impacts from precision railroading potentially being rolled out in across the U.S. rail?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [42]

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Yes, this is Terry again. The precision railroading, obviously, the CSX is the -- Hunter Harrison is the pioneer of that. And I think, what you're seeing is each railroad is taking bits and pieces and trying to implement things that they think that fit within their railroads without going overboard with regards to maybe what the CSX did in going all out into precision railroading. Some of the effects that could happen are some of the rationalization that goes on. They like big long trains and some of the shorter markets, they have announced, I think in January, there is a few things that will be discontinued, and I think that's probably the key thing that we're focused on, trying to figure out what does that exactly mean? Can we use a different ramp? Can we use a different railroad? Can we have a longer dray? But I believe that'll -- there will probably be less options than more, and hopefully this -- the service will get back to where we all expect it to be and where they want it be in some form or fashion.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [43]

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Okay. And then following up, how does 360 play a role in this, if at all? And then could you give us a sense for your initial expectations for rail purchase trends in '19? And maybe some color on the -- your initial thoughts on margins for JBI?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [44]

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So we'll be integrating the dray piece on JBI into the platform in 2019. And so any carriers that we do dray with, which will be about 15%-or-so of our shipments, will be contracting through our 360 platform that's scheduled to come online mid-year next year.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [45]

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Yes, the JBI, traditionally, we've been trying to have 11% to 13% margin. I think we're somewhere in that range now and we hope we can be able to continue that and hopefully, improve upon that. As far as next year, we're in the budgeting process, and we really don't have any hard numbers yet to be able to tell you what's going on with box orders or equipment for 2019.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [46]

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Okay. And does that -- yes, do you have any -- sorry, for the background noise. Any thoughts on the rail cost next year versus 2018?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [47]

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No. I mean, each year there's rail cost increases. And at this point, it doesn't look any different than what it has in the years past.

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Operator [48]

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Your next question comes from the line of Chris Wetherbee.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [49]

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Wanted to ask about the DCS segment. So I guess, I'm thinking about 2019 and the environment that we're in would seem that there's likely to be a continued push for shippers to sort of get capacity. So in that context, if you think about a good amount of potential fleet conversion or growth of the segment, do you think you can sort of stabilize and move margins higher. I guess, really the question is, can you get margins moving upward if you're still experiencing strong revenue growth. I'm just trying to get a sense maybe how that relationship looks in 2019.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [50]

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Yes, I think our plan -- our focus is try not to get as much -- we really don't focus on capacity fleets. We try to focus on private fleet convergence. We will get a little bit of that capacity with some of our historical legacy customers. But I think, we will plan on probably not adding as many trucks next year as we added this year. I think a good number of trucks for us to add is between 1,000 and 1,200, and that's probably what our plan is going to be for next year. This year, we're going to add a whole lot more than that, and so I think it will slow down and we call it the wave from '18 will help carry some of the better margins in the middle part to the end of next year. So I think, we -- you will see some margin improvement. But if we happen to get another big deal signed up, where we've signed up little over 500 truck deal this year and some other large deals in our pipeline that we've signed that's in the middle of implementing, if those come along, it could be a little bit of a drag. But right now our plan is for 1,000 to 1,200 trucks next year.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [51]

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Okay. Okay, that's helpful. And then on Intermodal, I guess, really since the middle of last year, it would seem that volume growth has been lower than what your traditional run rates have gotten and I appreciate the law of large numbers, so I know there are some mathematical forces at play here and clearly, there's rail service issues, all of those factors. But when you think out, I guess, to the drivers behind that sort of lower volume growth. Do you think these are more sustainable in that as we move into '19 and potentially beyond, we should expect sort of a structurally lower pace of volume growth in the network? Or are these sort of transitory like we saw with some of the derailments you have this quarter and other factors that have played out over the course of '18 that they might go away and you could see that run rate kind of move back up. I'm thinking more conceptually about your ability to grow in that segment really than the specifics, so that would be helpful.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [52]

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Yes, the bucket of freight that we see in our bid and data warehouse is in the millions of loads and the east being a bigger portion of that bucket than maybe the west, even though both buckets are in millions of loads. So it's just a question of when the customers feel comfortable of moving that freight from Intermodal -- excuse me, from truck over to Intermodal, and some years, it's a quicker transition than others. So I hesitate thinking that the story is over, because as soon as you say that the ability -- the rate comes [out]. So a little increase in rail service and I think the cost of trucks will continue to increase. I think our ability to be able to grow in the Intermodal segment maybe not at the percentage law of large numbers that you talked about is still is good for the upcoming years.

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Operator [53]

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Your next question comes from the line of Ravi Shanker.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [54]

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Couple of questions here. Just going back to the current freight environment. Since we aren't really seeing the kind of uptake and kind of spot rates and market tightness that you'd expect going into peak season. It does seem like shippers are more comfortable than we'd expect it to be, given the start of the year. Is that how you're seeing it? And kind of what impact does that have on the brokerage environment, given that a relatively balanced market kind of tends to be a headwind to shippers using brokers?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [55]

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So I think that customers, this time last year, were really trying to figure out how to budget and we had sent out a customer letter in August, really trying to articulate our cost position and trying to guide them on budgets. And I think customers took several months to try to figure that out. And if you think back to the hurricanes happening this time last year, the network was in such a chaos that not only was it difficult to find a truck to move the shipment or capacity, but also the price. And as customers came through bid season, I think customers started to understand and were very receptive to talking about capacity and what prices look like. I think customers are more comfortable today because they've made it through bid season. They feel like that they've had a good plan. I think they probably picked really good providers to really reset themselves for a successful 2019. And so at the beginning of this year, customers still weren't sure how high pricing would go. And if service would be acceptable or not. In the conversations we're having now, customers are still concerned about service, less concerned about cost, although I've never met a customer that wants an increased cost, they understand what's happening in the market and they really understand what's happening specifically with drivers. So I think they're more comfortable than what they were back in the day. And customers have really done a good job coming out of the spot market and being in contract relationships.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [56]

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Got it. And just sticking with ICS. Can you just talk about JB 360 costs, and kind of how they're -- they've been trending through the quarter and kind of where do you see them in the next couple of quarters?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [57]

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Well, they're increasing. I haven't really put together the 2019 plan yet that we have, started with what we want from that, so we'll be working on our budgeting here in the next month or so, so we can start planning for those resources.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [58]

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Got it. And just one last follow-up, Dave, I think you said that you didn't want to comment on IM trends in October, but just to clarify, from what you're seeing so far, are IM year-over-year load growth numbers in October up or down year-over-year?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [59]

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Well, we don't comment on the quarter, but I would tell you that yes, Terry has said, and what he did say is, that we're about where we expected to be, maybe slightly a little bit ahead, but nothing to scream that we're seeing things just run off the chart.

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Operator [60]

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(Operator Instructions) Your next question comes from the line of Mr. Todd Fowler.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [61]

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Terry, I wanted to come back to the comment you made about 2019 and kind of having more balance between volume and price on the Intermodal side. If I think about the revenue per load trends that you're seeing in the back half of our 2018, and maybe where some of the contract pricing resetting thinking about that carrying forward into '19 and the comments about it still being a decent pricing environment, to me that implies that you could see mid- to high single-digit revenue per load in '19 on the Intermodal side, is the comment that you'd expect to see similar sort of volume growth with that into next year as well?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [62]

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As I mentioned, I haven't given any numbers out on that. I think, as Dave mentioned, you can somewhat extrapolate what the bid cycle is going to do for the first half of next year with regards to price. But again, we haven't put together our plan for 2019. But as I mentioned, I believe that there will be more balanced approach going into '19 than maybe what was -- we had this year.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [63]

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Okay. And -- but it is fair to think about the fact that the rates that are resetting in the second half of this year, you get the carryforward of that into next year, and if it's still positive pricing environment, at least directionally that's a decent way to think about revenue per load into 2019 at this point?

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

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Yes, you're correct.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [65]

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Okay, good. And then maybe just kind of a short-term question as we think about the fourth quarter. If we go back, and David maybe this is for you, kind of a high level. But if we adjust for the charges here this quarter. At this point -- in the third quarter, is there anything that we should think about as to why we wouldn't see maybe kind of what you normally seasonally see from third quarter into fourth quarter, either some additional cost coming through on the rail service side? Or as you sit here today and we think about kind of how to think about the fourth quarter for the rest of the year, is it fair to think about normal fourth quarter trends versus third quarter and kind of typical seasonality or is there something else we should be factoring into our assumptions?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [66]

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Well, yes, I think the general trend for Intermodal should be fairly consistent. I think that our expectation, like we said, the customers are telling us there is going to be a normalized peak. You're not going to get the -- obviously, the last year's hurricane wave come in, in spite of Michael that we just don't expect it yet, it could show up, but we're not counting on it as an item. In Dedicated, I think, they'll see their seasonal operations and so they would expect a seasonal rise, probably a little more so than normal, because frankly, ICS lost some of their seasonal activity to DCS. The big -- one of the big or the big contract inside DCS was a direct result of cross-selling, and there is a little bit of robbing Peter to pay Paul, so ICS is going to have to backfill to get to its normal seasonal uptick in Q4 considering they gave a bunch of their freight to DCS this year. And then truckload is actually starting to perform very well inside the seasonal market, relatively speaking. So I think the trend is going to be okay. I couldn't tell you that I see any abnormal cost on the horizon, so I'm hoping the trend is again as predicted, but we're hoping that the pricing covers that trend as it did 3Q.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [67]

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Okay, that make sense. Yes, and I think that the biggest piece really is just typically when you see that improved OR in the fourth quarter on the Intermodal side that, that really drives some of the seasonality, it sounds like that that's on track and that's helpful on kind of the interplay between ICS and DCS, as we think about the fourth quarter.

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Operator [68]

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Your next question comes from the line of Matt Brooklier.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [69]

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So another DCS question for you. Could you talk to how many trucks you expect to add in fourth quarter?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [70]

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Yes, we should see our total number go up in the range of 98, 100 to 99, 100 is where we'll end the year with trucks on the books.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [71]

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Okay, that's helpful. And then kind of a higher level DCS question. If we think about this, the incremental growth that you're seeing this year. How much of it would you attribute to a tighter overall truckload market versus the continuation of converting private fleets and also maybe taking some share from your competitors, trying to get a feel for how much of it is just blocking and tackling on the competitive side versus a function of a tighter overall truck market?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [72]

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Yes, I would say probably 70% of it is more private fleet blocking and tackling basic stuff. The other 30% is probably because of tightening capacity with, like, some of the stuff we got from ICS that's going into a long-term contract with us, but also just our base fleets are growing. We're expanding our service radius from 200 to 250 out because the one-way market is going up, so we're signing up trucks for longer periods of time because of that. So that's where I get that longer -- extending out for longer miles and that's growing to some of our base fleet. So that's a ballpark.

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Operator [73]

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Your next question comes from the line of Ben Hartford.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [74]

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Want to circle back on the DCS margin question. I know that I think on this call you had mentioned the long-term 11% to 13% margin. How should we think about that over the next 5 years or so to the extent that Final Mile does grow, you had acknowledged that, that is a lower-margin business? So maybe twofold, is that 11% to 13% still the target, as you assume scaling up the nonasset-based network, one? And then two, it's a nonasset-based network, is it fair to assume that it is a higher return on invested capital business than the core legacy DCS business?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [75]

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Yes, so the way we do our pricing and all of it is based on ROIC guidelines. And so I'll start reverse of that, talk about the Final Mile, the nonasset portion of that does have a much higher ROIC. So as we grow that, it's going to be growing it from a smaller base but a higher percent. So we'll have some dilution, could be anywhere from 20 to 50 basis points depends on how fast we grow of the overall DCS margin. But I think we can still within DCS, we can still maintain that 11% to 13%, even with that starting to dilute and pull a little bit more as we go forward. But our ROIC on our Dedicated, we price each one of the deals based on how much capital we got to put in it and hitting our ROIC targets. And so we feel very good about that. But it'll have -- Final Mile will have some drag on it, but we still should be able to hit within those guardrails, if you will, of 11% to 13%.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [76]

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Okay, that's helpful. And then, if I could circle back real quick on the tariffs. And you had mentioned that December could be quite strong given the looming tariff on January 1. But what are customers saying as it relates to inventory across the channel, to the extent that there was any pull forward in 2Q ahead of the 10% and the now, if there is some -- in front of the 25%, where do inventory levels sit and have they -- have customers experienced any issue at all, as it relates to passing on higher costs to customers? Has there been any impact to aggregate demand outlook to '19 based on these tariffs?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [77]

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I'm not sure that I could specifically talk about tariffs, because our customers are also trying to think about their own strategy. So what is their sourcing strategy, will it make an impact on them and that's been off my most recent visits in total.

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Operator [78]

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Your next question comes from the line of David Ross.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [79]

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Dave, you mentioned that JBT, the truckload segment is actually performing well for a change. Could you elaborate?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [80]

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Well, I meant for -- from an opportunity standpoint, they've got room to improve, and I -- they've not been let off the hook. But I think that yes, that they're -- I'm getting a dirty look from Shelley because I'm answering her question. I really should let her describe that the trend is actually moving in the right direction. So go ahead, Shelley.

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [81]

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So first, I'll take the acknowledgment from our CFO that Truckload is doing okay. That doesn't happen very often. But Truckload, I think, is performing. Our prices really came through here in the third quarter. We feel really comfortable with our power mix and our direction moving forward in Truckload segment. And we also feel comfortable how they can interact and operate inside of our 360 platform. So that's something that we plan to integrate as well coming into 2019.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [82]

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And can you talk a little bit on the driver side, how much wages are up this year across Dedicated, Truckload, drayage? And then do you expect a similar increase next year? Or what's been communicated so far about driver wages into '19?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [83]

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Yes. This is Nick. I'll talk about Dedicated. Probably in the last 12 to 18 months, our driver wages are up about 10% or a little bit more than that. As far as going forward, we price each deal depends on where it is and what the demand is and how tight it is in that particular market. So we price each one of our individual deals based on what we think it would take to recruit the drivers. We've been recruiting drivers very well in this difficult market because of the pay that we've been able to price into our deals for our drivers. So I can't really speculate what it's going to do next year on driver pay. We're just pricing deal by deal.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [84]

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Yes. Our driver wages are...

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [85]

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Wages different on the trucker, drayage side in terms of 10% wage inflation?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [86]

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So in Truckload, we are seeing double-digit increases in driver wages. I would say it is the more difficult job to attract new entrants in the market. We've done a nice job in turnover in that segment overall but we are experiencing double-digit increase.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [87]

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In the Intermodal, we've had to increase wages as we will increase wages next year. We already have increases on the books around the plans for early next year. So we anticipate next year will be similar to what this year was.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [88]

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And then my question, Shelley mentioned earlier about customers getting out of the spot market where they got abused this year and into the contract business. Are any of those contracts coming with volume commitments in terms of -- if you're going to put them under contract and readjust the truck network for them, is it fair that they also commit to give J.B. Hunt a certain number of loads?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [89]

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Well, first, I don't know that they got abused. In the spot market, the network was completely out of balance. And so their lack of planning, our lack of planning, and more importantly, what the driver market was doing in total really created such a demand that people were deadheading and doing things they needed to do to be able to service customers. I don't think any of our customers intend to not live up to their commitment. They don't do as good of a job at forecasting and neither do we, and so the crystal ball is very foggy for our customers, so it's foggy for us as well. Customers are trying to do their very best in estimating how much volume they need to move, and they're trying to commit to their carriers based on that. We never have a conversation with the customer. It doesn't come with what's the commitment, and that's really a two-way street.

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Operator [90]

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Your next question comes from the line of Ken Hoexter.

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

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Just I want to turn back to Intermodal. Your comments on the growth turning negative, particularly in the Transcon side. Is that -- I want to understand, is that because you're being more aggressive on the rail -- because of the rail costs going up and you're being more aggressive on rates? Or is it something in the market specifically?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [92]

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Well, there's probably 3 or 4 things I would point you to. One, we've talked about the weather events and the derailments that we previously mentioned. Last year, we were almost up 8% on the Transcon, so the comp was a little bit difficult. And as we mentioned, the West Coast was not quite as robust in August and in the first half of September. And then lastly, some of the freight that we lost due to the pricing and the customers did not by our price with regards to long drays, happened to be some of the Transcon freight.

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

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Okay. And did you mention if you -- if that's what you saw turning when you mentioned the October outlook? Or is that, I just want to understand where you are in that process?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [94]

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Well, I think the West Coast is certainly strong now, so that should help us. It's only 15 days into the quarter. So that's what I was alluding to is that the West Coast has been strong as a normal peak should be.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [95]

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Great. And then, Shelley, for the follow-up, on your thoughts on negative rates at brokerage, you talked a bit about LTL growth ramping up, and I guess, the ramp-up of J.B. 360, is there a shift in focus at brokerage in terms of driving more LTL growth? Or is that the shift that you mentioned between the brokerage and DCS?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [96]

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No, I would say that's more a contractual relationship that we have that grew more on the LTL side, but we're continuing to expand services and cross-sell into our customers. And certainly, on the 360 side, that's been a big growth for us. We're pleased with where we're at. Our statistics somewhat, the carrier and the customer side and that gives us good promise moving into 2019.

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Operator [97]

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(Operator Instructions) Your next question comes from the line of Bascome Majors.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [98]

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Dave or Terry, the long-term range of margins expectation you talked about in Intermodal of 11% to 13%, that dates back to, I think, last March. Clearly, a lot has happened since then, both good and bad inflation, an interim award from your largest supplier in Intermodal business and in some shifts in customer preferences, mix, both regional, et cetera. And I believe earlier, you pretty much said that's the right range to be at going forward based on what we know today. Can you say that -- or maybe talk about that a little more explicitly? And if we need to think about referring to the higher or lower end of that range with some of the changes that have happened, just maybe expand on that a little.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [99]

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Well, I think we are a little out of that range in the latter part of last year, and I think we've gotten back into that range in the last quarter. So -- and we anticipate to be within that range going forward. And whether it's higher or lower or in the middle, I can't give you any direction on that, but I think we'll be in that range moving forward.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [100]

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All right. And Shelley, just one on the brokerage business. The gross margin sequentially seemed to improve on a fairly seasonal basis based on the history that you guys have experienced. Can you talk a little bit about the profit margins you're earning on the transactional versus the contractual side today coming out of bid season? How wide is that gap, which one's in favor? And what does that mean for the overall gross margin of business as we move forward?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [101]

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Well, on our contractual business, we've been going through repairing that business and recouping costs that we paid out to carriers on a more real-time basis. So certainly, those margins have improved as the year has progressed. Our spot margin in total, the revenue per load in spot is generally higher because that's more out-of-pattern shipments. A longer length of haul, our margins tend to be slightly better and definitely less volatile. We typically stay in the 14% to 16% range on spot margin in total, and then published pricing continued to repair as the quarter moved forward.

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Operator [102]

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Your next question comes from the line of Brian Ossenbeck.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [103]

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So Terry, just one more for you on the Intermodal volume side. You made some comments about the Transcon freight and the West Coast being stronger -- or it should be stronger into the normal peak. But we've seen the rails running more trailer on flat car especially with e-commerce demand and the parcels taking up some capacity there. Has there been any sort of limitation for the space that you're able to get on, on the network as well?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [104]

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I think it's maybe caused a -- in a few ramps, a little congestion here and there. But in terms of being able to service our customers and get their loads on the trains, I believe we'll be able to be successful in doing that this year.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [105]

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Okay. And the other one for Nick. As you look at the private fleet conversions, which has been a majority -- a big chunk of what you're getting now. How is it right now retaining drivers when you make those conversions? Does it -- is it easier because you're getting the same people running the same sort of freight? Or are you finding it difficult to hang on to those folks when you do the conversion?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [106]

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No. With those private fleets, it makes the conversion a lot easier, because we have ability to go in and talk to them. We know ahead of time. We can do our comparisons on pay and benefits. And we have strategic conversations with the decision-makers on how we want to align that to make sure we're aligned. So we're much -- we like doing those because we get a lot of the drivers, come over in the transition. There will be some that don't pass some of our tests or something, but the vast majority do. And so that makes the startups go quicker, and we get to profitability a little bit quicker.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [107]

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Okay. Just to confirm the $4 million charge from this quarter, is that expected to basically continue in 4Q and then sort of tail off into the first quarter and second, depending on, I guess, the lumpiness of any new big contracts that are signed on?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [108]

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Yes, I think that's probably a good way to look at it. Again, that $4 million were just the big bucket items, there's a lot of other smaller things in there that we didn't roll up in there. But I think that's a good way to look at it.

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Operator [109]

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Your next question comes from the line of Scott Group.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [110]

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A couple of quick things here. So on the Dedicated side, it sounds like you're talking about fourth quarter being better than third. Can you just clarify if you're including or excluding some of the charges you talked about in third quarter with that comment? And then maybe for you, Nick, on Dedicated -- on the new business that you're winning, are you pricing that at 11% to 13% margins? Or do you see opportunities to be pricing that better given the environment?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [111]

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I mean given the environment, I would say we're pricing it a touch better. Our margins, if I look at our price business in '18 versus '17, it is better than what we were pricing in '17. And then go back on the first part, was that for me or for Terry?

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [112]

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I guess it was for Dave who made a comment about fourth quarter being better than third quarter in Dedicated.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [113]

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Okay. I would just say that I think we're going to have some of those same startup cost, but it might be a touch lighter in the fourth quarter. But I think the $4 million is going to carry forward, it might be a touch lighter, then it's going to tail off in the first quarter.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [114]

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Okay. Terry, just going back to that 11% to 13% Intermodal margin comment, I just want to make sure, that captures or reflects anything you know at this point, as it relates to the arbitration, is that right?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [115]

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We don't have any comments about arbitration because we don't know. Nice try, Scott.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [116]

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But you know more than we do, right? And you're -- I guess I just want to make sure, Terry's still saying 11% to 13%, I just want to make sure if he's...

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [117]

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11% to 13% is what our target is. 11% to 13% is still our target.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [118]

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Okay. And then last one on the brokerage side. So gross margins improving, gross revenue per load falling, when you add all that up, Shelley, is net revenue better or worse than you thought in the quarter? And do you have a view on the direction of net revenue growth accelerating, decelerating going forward?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [119]

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I would say net revenue growth was better than expected. And moving into fourth quarter, I think we'll have a good net revenue growth year-over-year. And spot is somewhat muted. We come through bid season, but I would still expect to have a good fourth quarter in net revenue.

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Operator [120]

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Your next question comes from the line of David Vernon.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [121]

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Question for you on the Intermodal growth. It feels like the rail network as well as some of the drayage network in the yards are really constraining your ability to kind of grow in that market. Can you comment at all about kind of how rail service is progressing and what kind of the industry or shippers need to do to help kind of increase the fluidity of Intermodal traffic, so that it can actually accommodate more growth?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [122]

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Yes. That's kind of a two-part question. The rail service isn't where the railroads want it. It's not where we want it, and it's certainly not where the customers want it. But if you look at history, when they kind of -- when their service has degraded. You normally don't see it more than 18 to 24 months, so I think, hopefully, next year they'll start coming up out of that. I know there's a lot of things going on with the railroads with a variety of commodities and that they've always been able to recover. The velocity is key to them as -- especially as they start looking at precision railroading. And they make more money with better velocity typically than they do with slow velocity. So -- then to answer your question about the terminals and what the customers can do, the flexibility that the customers can have with regards -- to be able to deliver freight 24/7 will allow us and the railroads to be able to clear those terminals quicker, better, and the more open windows they have to be able to deliver that freight, the quicker we will be able to pull it and deliver it to them and that will allow more fluidity in the rail system.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [123]

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So you're not worried about capacity on railroads kind of constraining growth into '19 then?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [124]

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Not at this point, no. I think they're going to make the appropriate plans, and we will work with them to get those terminals and work with customers to get their freight picked up and delivered accordingly.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [125]

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All right. And then Dave, maybe just as a follow-up, as you think about CapEx for the year, where do you think you're going to end up? And it feels like we're spending a little bit more, maybe that's associated with the start-ups. If you can give us some added color as to how much of the spend that's gone out this year is backstopped on contract versus assets that shareholders may be on the hook for in a downturn, that would be helpful.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [126]

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Now I think where we will probably end up is probably just shy of $800 million. At this point in time, Nick is spending a boatload of money. Those are all under contract. So we're less concerned about downturn risk in those particular environments. But that's I think that's where we're going to end up at this point in time.

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Operator [127]

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Your next question comes from the line of Brandon Oglenski.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [128]

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I jumped on a little bit late, so I apologize if we already discussed this. But I -- following the question about CapEx, I think maybe more strategically it seems like you might be putting more capital behind Dedicated and the technology effort, the 360 platform. How should long-term investors view that? Is that a strategic shift within the company? A little bit less focus on Intermodal and more on some of the other segments? Or how do -- how should we interpret that shift?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [129]

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Hey, this is John. I wouldn't say it's any less focus on Intermodal as much as an increased focused on building the platforms and connection that we need to reach more people and to better automate what we're doing and how quickly we're doing it and how efficiently we're doing it. I think we're really seeing all of the businesses connect through the investments that we're making, probably find us some things that -- places where we can connect better than we're doing today. But it's not a deemphasis on any part of the business. We've always held ourselves to a pretty high standard of return, and I think so far we've been pretty true to that.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [130]

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The other thing I would mention is that as 360 grows, it just adds more loads to Intermodal.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [131]

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What -- should we be thinking in any way that this is going to be a more capital-intensive company looking forward, or is that the wrong way to characterize it as well? Because when I think Dedicated, I think very asset-intensive.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [132]

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I think that -- this is Dave. It might be somewhat asset intensive. And no, I don't think we have any delusions that the returns that Dedicated can generate even with their contracts can approach, say, Intermodal with an asset light or ICS with the nonasset model. However, I would say that the way Dedicated is priced and at what standard they're held from a return on invested capital standpoint, that it is not going to look like a traditional Truckload model or at least the ones that we can see out there. And granted, we can only see it on a consolidated basis. But what we break down and where we hold Dedicated's ROIC thresholds to be -- is not going to look like what a traditional Truckload model -- or at least one that we've operated in the past or what we see out there from public information is going to be. Or asset, but a better return than normal.

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Operator [133]

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Your next question comes from the line of Donald Thoren.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [134]

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Real quick. I just -- listen, if you can just play a little history lesson for all of us to make sure I've got my history right, and also to be better equipped, so that we can think about how you look at the business strategically in coming years, months, quarters and years. Your agreement with the BN is an ongoing relationship that actually began what, how many decades ago? With the Santa Fe, correct?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [135]

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1990.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [136]

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Yes. And it's a revenue-sharing agreement. The net resulting price, sets the absolute minimum to be in. SF can charge anybody else in the system, correct?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [137]

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Well, I think I said earlier that contract is under a confidentiality agreement. I think it is fairly well known that it is a revenue-sharing agreement.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [138]

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Well, yes. When it wasn't under a confidentiality agreement, that's certainly what was out there. And you -- on an ongoing basis, you the -- you both renegotiated percentage revenue split. You've been involved in minor litigation with each other before, but it's in the both of your best interest to continue the relationship. There's no rational reason for anybody to inject fear into this, to expect anything other than you and the BN are going to continue to be prosperous business partners for years and decades to come. Am I overstating that? Or is that just the reality of the business for both parties?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [139]

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I guess I'm not sure what you want us to say on that.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [140]

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Well...

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [141]

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If I comment, then it sounds like I'm speaking for BN, then -- you would have to ask us both that question at the same time. And I'm not about to answer that question without them.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [142]

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You can't speak for them, but strategically, it's something that -- it's not unreasonable for us to expect that from your vantage point, you should be continuing to do prosperous business with them for years and decades to come?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [143]

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I would think that any contract that we sign with any type of provider or supplier, yes, we would expect to create prosperous business out of that contract, yes.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [144]

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Yes, right. All right. Well, that -- not fully where I was headed, but the point being this is an ongoing thing that happens now and then between the 2 of you. This isn't new news by any means, is it?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [145]

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It isn't new news. I think that we have been in arbitration once before this particular time and we are in arbitration again.

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Don Thoren, American Fuel & Petrochemical Manufacturers - VP of State and Local Outreach [146]

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Fantastic. All right. Thank you, gentlemen. And everyone else has already expressed and appreciate you being willing to host the conference call and being willing to take live questions, that shows a level of transparency and accountability that, quite frankly, is needed by more of those in the industry. So thanks for that and greatly appreciate it.

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Operator [147]

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(Operator Instructions) Your next question comes from the line of Barry Haimes.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [148]

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Can you hear me okay?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [149]

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We're here.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [150]

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Great, great. I had a question having to do with shipper behavior and it's, maybe, a Truckload question or probably also Intermodal question. And the question is, as rates have moved up over the last year or so, one of the issues, of course, has been drivers waiting around. And as the power has shifted, if you will, from shipper to provider, one would expect that, you guys and others, have less tolerance for that. And I'm wondering, are you seeing a lot of shipper behavior change? How many of them, just gut feel, were not doing a good job? And when those -- how many of those are now doing a better job? How much productivity benefit do you get? So any just -- color around changes in shipper behavior that you guys have seen across your businesses.

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [151]

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I think as customers have become more knowledgeable about where we at -- are as an industry with drivers and specifically for J.B. Hunt, they want to know what they can do to help. They have probably the greatest awareness of what their facilities look like. Shippers are wanting to be a shipper of choice and so I would say, a large part of our shippers are trying new things and thinking about driver amenities and the way that they treat drivers on dock. And so we've seen a movement of that. Could I say what percentage in the past? I think as transportation cost has -- have reached other companies' press releases, it has gotten the attention, all the way up to the C-suite of our customers. And so those that are over our customers' locations also are trying to figure out, so you don't just have transportation trying to manage cost. In the past, it was primarily transportation trying to manage cost and the locations were managed completely separate. So I would say not as great of a percentage. Did anything in the past out of the ordinary where today because of the heightened cost in earnings releases, they are very interested in making their locations very driver friendly.

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Operator [152]

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Next question comes from the line of Todd Fowler.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [153]

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I know that you quantified the weather impact of the Intermodal loads in the press release. I think that last year, you had given some color around the cost side for weather in the third quarter of '17. Do you have a similar number this year for what you think weather was on the expense side this year?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [154]

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No.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [155]

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Right. Right. There you go. There you go.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [156]

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I take back everything I said about it. I'm happy to do these calls. Come on.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [157]

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Yes. I -- and I have to admit, I don't have last year's. I'm not sure we talked about costs. I know we talked about loads lost. If we did quantify it, I apologize, I don't remember that. And yes, the weather was only one component because we also had the derailments, which are probably more of an effect on the load count than the hurricane event was this year. Last year, it was just hurricane events, but I know they have tried to quantify some cost for me, but I don't have that. That's why Terry said no.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [158]

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Okay.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [159]

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That's why Terry said no.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [160]

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I won't take it personally. Okay. I think that we had a number in our notes, so maybe it wasn't something that was specific and then released at some point.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [161]

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It could have been.

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Operator [162]

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Your last question comes from the line of Amit Mehrotra.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [163]

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Okay. The first one and the last one, great. So just a few quick ones here. One is, when I was out there earlier this year, truck orders -- new truck orders weren't at the level they had been over the last several months. Obviously, the outlook for Intermodal volume and pricing was quite strong. But if you could just talk about how the record truck orders had changed your view at all about next year volume and pricing trajectory for Intermodal. I guess more appropriately probably for the second half of next year. And I know it's a little bit of a crystal ball question, but I would imagine that it would have had some effect in terms of how you think the cycle plays out.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [164]

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Yes, I think it's a little early to tell on that. As I mentioned earlier in the call that the differential between the truck price and the Intermodal price when you include fuel has widened. I think the line-haul price made it -- we may have kept up with that in most cases, but the fuel cost has widened. So the gap between truck and Intermodal versus this time last year has widened. So the question will be, does the truck rate come down? But then you have all the pressures that are on truck. I don't perceive seeing that come down. So I don't believe early on in '19, it should have really any effect, and we'll just have to wait and see with regards to what happens with truck pricing. Even if truck pricing comes down a little bit, which I don't think is going to happen, you -- and there's still a large gap between truck and Intermodal.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [165]

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Okay. Let me just ask one follow-up for David. I don't know if I heard this correctly, but the September Intermodal volume comp, I thought you said was negative. If I'm not mistaken, I think the overall comp in September was actually pretty easy. It was -- I could be wrong on this, but plus 1% September last year. Can you just talk about why that comp turned negative in September despite the comp being so easy?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [166]

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Yes, there were 2 or 3 things that I had mentioned earlier. The West Coast was not as robust as what it was last year. The -- of course, the weather events happened in September, and the major derailments on the Cajon Pass affected what happened in early September plus some of the final bids that were implemented that had long drays that we weren't able to retain, started showing up in August and September.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [167]

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Got it. Okay. And then one last one for me on the Dedicated business. Would there be -- I mean, obviously, the growth initiatives have been organic so far. Would there be any appetite to, I guess, bulk up in that business via acquisitions?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [168]

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I think on the Dedicated side, we've got a roster of 35-plus salespeople out there. And our pipelines are full. And so I see no reason to pay a premium to go grow when we can do it organically.

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Operator [169]

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We have another question. It comes from Bascome Majors.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [170]

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Dave, the $800 million or close to $800 million in CapEx that you talked about spending this year with the boost from all the Dedicated growth you've been able to achieve here, I think historically you've talked about closer to $500 million in a "normal year." How far down closer to that did we look next year based on what we know today?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [171]

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Well, I think if you look at where our fleet size is -- and when I say "fleet," I'm referring to the consolidated fleet. Yes, my guess is that $500 million as a norm is probably inching its way up that you're going to talk about replacement CapEx and normal growth CapEx combined is probably going to look closer to the $650 million from the old $500 million. We've been inching up the last couple of years on that anyway, Bascome. But yes, I have to wait and see what my trade cycle looks like for the next 2 or 3 years and then add to that what I would consider normal growth inside of Intermodal and Dedicated to give you what a normal CapEx number would be. But I think we've moved off the $500 million just given our general size.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [172]

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Understood. And has the return profile you're targeting strayed from the kind of, call it 20% returns on capital you've generated historically?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [173]

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No, it hasn't. It has not. As a matter of fact, that even though we're seeing solid record-type growth numbers inside of Dedicated, the return profile that those growth numbers are throwing off is not diluting what Intermodal return profile and ICS return profiles should be. So I -- at this point in time, I would say that we're not willing to move off the dart throw of 20% ROIC for the consolidated group.

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Operator [174]

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We have your last question. It comes from Mr. Ken Hoexter.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [175]

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Bascome just kind of had to ask the question I was going to on CapEx, so let me just round it out on Intermodal. Dave, did you -- were you specific on the Intermodal portion of that, changing at all given the growth deceleration from -- or is there an outlook on your target CapEx just for the Intermodal side?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [176]

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The -- in the current period, Ken, no, we've not deviated from many of our plans. The trucks that we wanted to bring on for the dray group, we are bringing on and trading, frankly, during this quarter as well as planned. The box count that we expected to bring on, we're sticking with and not deviating from that. Frankly, we kind of need them because our turns have not been the greatest. So we certainly don't want to give up opportunity for growth just because we don't have an extra box or we shorted ourselves boxes accordingly. I think if we make modifications, that will go into the '19 budget process, and we haven't made those determinations yet.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [177]

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Well, just to clarify, when you say modifications, you mean you might -- if the service improves, you might not need to spend as much because you've got extra boxes? Or you're going to need more?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [178]

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Both, it could go either way. If we have a growth target and we think the growth target can be satisfied from the elasticity that we already have in our equipment, then we may make that decision. On the other hand, if we see that this is going to be a steady growth target more than a 1-year period of time, and we're not heading into an actual downturn from an economic standpoint, yes, I wouldn't anticipate us not showing growth boxes in '19 as well.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [179]

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And then just lastly for me, your thoughts on leverage and the pace of the buyback?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [180]

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Leverage, I think our attitude has remained the same. As a unwritten rule, we've always kind of targeted 1x EBITDA as relative, safe, prudent debt levels. I wouldn't expect us to deviate that from any -- in any material way. Naturally, we could be little bit higher in one period and a little bit lower in another period, but I think we always come back towards the 1x EBITDA as a target. And if we get substantially lower than the 1x EBITDA, we certainly consider that excess cash. And we've been active in our share repurchase, but I don't see us -- I don't see any real reason to accelerate that and lever up or pause on that, if we start seeing additional EBITDA over our debt levels.

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Operator [181]

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There are no questions at this time. Please continue.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [182]

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Well, Donna, if we've answered everybody's questions, we can certainly terminate this and let everybody get off to writing their reports, if they want to. And I can send all these people back to work around here. Okay, Donna, I think that -- if that's the case, then I think we'll call it early and call it quits early. Thank you all for joining us, and have a good evening.

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Operator [183]

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This concludes today's conference call. You may now disconnect.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [184]

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Thank you.