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

Q2 2019 J B Hunt Transport Services Inc Earnings Call

LOWELL Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of J B Hunt Transport Services Inc earnings conference call or presentation Monday, July 15, 2019 at 9:00:00pm 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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* Allison M. Landry

Crédit Suisse AG, Research Division - Director

* Amit Singh Mehrotra

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

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Benjamin John Hartford

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

* Brian Patrick Ossenbeck

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

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* David Griffith Ross

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

* David Scott Vernon

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

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jordan Robert Alliger

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Kenneth Scott Hoexter

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

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* 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, welcome and thank you for joining today's teleconference, the 2019 Q2 earnings call. (Operator Instructions) With that, I'll turn the call over to David Mee, Chief Financial Officer. David, please go ahead.

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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. Good afternoon, everyone and thank you for joining us. I have with me this afternoon John Roberts, our CEO; Terry Matthews, the President of Intermodal; Nick Hobbs, the President of DCS; Shelley Simpson, the Chief Commercial Officer and President of Highway Services; John Kuhlow, our Chief Accounting Officer, and the worst kept secret in Investor Relations community; [Brad Delco], our Vice President of Investor Relations.

As far as the call goes, same ground rules as before. Let me start with a 2, 3-minute synopsis of our view of the quarter, and then we'll open up the lines for questions. (Operator Instructions). Overall, we felt like there was some positives in an otherwise weak freight environment. We saw our cost inflation becoming more normalized and the bid season pricing is performing largely as we expected, though the range of pricing from beginning to end is wider than what we had originally anticipated. We expect asset-based pricing in trucking and Intermodal to be positive though the year-over-year increases are ending the season in the low single digits. And private fleet outsourcing interest has not subsided because dedicated pipeline remains very, very strong.

Specifically in Intermodal, we were disappointed with the load counts for the quarter, but we saw visible signs that the seasonality of freight flows has not completely disappeared, as our loads per workday improved throughout the quarter.

Our Eastern network roads were down 11%, but we knew we could start off in the hole 9% due to lane closures alone. Customer award compliance remained around 70%, which is about 10 to 15 percentage points below historical levels. However, our load count increased sequentially from Q1, and that additional throughput did allow us to see a modest improvement in our profitability.

DCS had a strong quarter, plain and simple. The base business, which we define as anything but non-final Mile operated as expected, both from a revenue and profitability perspective. The final mile business continues to improve its profitability, excluding the charge for the action and settlement, and it continues to meet its EBITDA targets and did for the quarter.

In ICS, while the print for the quarter was disappointing, we were encouraged with the top line results. We lost or eliminated some LTL business compared to a year ago, but we're able to offset some of the effect with growth in dry van sector, and we continue to see conversion to and adoption of the use of the marketplace for J.B. Hunt 360. The new technology though does not come without some hiccups. There is a year-over-year $4.8 million increase in spending and that's to further develop and harden the platform, and that (inaudible) strong operating margins, but we expected that.

However, with the new technology, we found some bugs in the new applications and missed some internal processes to manage those new features, and that put even further pressure on the gross margins late in the quarter, specifically.

We believe we've added -- we've addressed these issues with both technology fixes and human interaction to be better prepared, as we continue to increase the scope and functionality of the platform over time.

Lastly, in truck, the mix fleet of company trucks and independent contractors yielded the expected results in a sluggish freight environment. While revenue was down from prior year in spite of higher customer rates per mile. The flexibility of the total fleet size and the planned efforts to control overhead allowed truck to improve its margins both sequentially and year-over-year. That pretty much concludes our prepared remarks. DJ, you can go ahead and open up the lines and we'll start taking and answering questions to the best of our ability.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First caller your line is being unmuted.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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It's Jason Seidl from Cowen. I wanted to talk a little bit about the pricing that you've mentioned, you said asset-based trucking. Can you differentiate between your over-the-road fleet and your dedicated fleet in terms of what you're getting on contract?

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

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Go ahead, Nick, since that -- since you are the differentiation.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [4]

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I would just say that in our business in dedicated, 7 -- 68% to 70% of our revenue has some type of index or built in rate increases in the contract and it just happens automatically. And so we're not in the quasi-dedicated business, and so ours are kind of separate and so we're anywhere from 2% to 4%, but it's consistent year in and year out, if you follow us historically you'll understand how those indexes work. The other is -- the other 30% is typically at the anniversary date, we're working on rates, and it's just varied, based on the demand and what driver pay and so forth is doing. But like I said, 70% of ours is already contractually scheduled in the contract.

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [5]

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In truckload business, started off the year much higher, as we did discuss earlier that it was in the mid to upper single digits and as we progressed to this season, that did lower to I would say flat to up.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [6]

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And I guess as a follow up, are you expecting up bid going forward for the remainder of the year based on what you are seeing, so far with demand?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [7]

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I would say specifically, truckload assets parts of the business we're lapping on top of historically higher prices on the published business, so we don't expect rates to accelerate much from here, we think those will be for the full year and second half of the year in the flat to up 2% to 3%.

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Operator [8]

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And moving to our next question.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [9]

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It's Chris Wetherbee from Citi. I guess I want to talk a little about the comment on seasonality and freight returning? If you could talk maybe a bit about Intermodal load growth progression through the quarter? And maybe what you've been seeing so far in July that would be helpful.

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

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Sure, Chris. Historically, what I've given everybody was just a change by month, and I'll start with that and then tell you about workdays because that really where we dig into the details, and where our comment came from. So monthly in April, we were down 9%. In May, we were down 8%, and in June we were down 5%. Now on a workday basis. So in April, we saw 7,300 up -- 7,300 loads per workday. In May, we saw 7,450 loads per workday and in June, we saw 7,800 loads per workday.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [11]

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Okay. That's helpful. And does that progression -- does that type of -- your progress carry over into 3Q, early 3Q?

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

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Well, I mean, it was Fourth of July week or there -- I don't have enough data to make that assessment yet. I would say that customers have not gone away so (inaudible) anyway.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [13]

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Okay. Fair enough. I appreciate that. And then just on the dedicated side some significant improvement in profitability, excluding the charge that you had there. Can you talk a little about sort of what the pipeline looks for the back half of the year in terms of potential fleet growth? And then if you expect that type of productivity and operating leverage to continue on as you move forward through the year?

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

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Yes. We're coming out of the big truck add last year and so you're seeing what we call the wave of -- they're up and profitable and running and stable, and so you're starting to see the results of that. We got good truck adds in Q2, and we continue to think we'll have the same level of truck adds in Q3, and so when we look at our top line all the way from beginning stages, we have 6 or 7 different stages. It's just as robust as it has ever been. The only thing that is a little tepid, I would say, is just the last couple of months same amount of deals, but the close rate is taking just a little bit longer, seems like everybody is trying to figure out what's going on with the economy. But we're still on our target planned for this year. We feel very good about that and the demand is still very high for pure dedicated business.

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Operator [15]

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And moving to our next caller.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [16]

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It's Tom Wadewitz from UBS. I wanted to see if you could give a bit of perspective on the -- I guess just the Intermodal margin outlook? And how you think about second half, whether it's kind of, I guess, similar level of year-over-year pressure or if there is a reason why things might ease, it seems like maybe volume gets a little bit favorable, but not clear whether the pricing helps you or hurts you in second half. So any thoughts on second half Intermodal margin? And...

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [17]

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Yes, I think, the Intermodal margins for the second half because we think our volumes will pick up going into the third and fourth quarter should improve from where they are today, and of course, our long-term outlook is between 11% and 13% margin, we're just north of that I believe for the quarter. And I think if you take the 5-year history and add a year, it will roughly going to stay in that 13% to 11% margin and it should get a little better here in the second half.

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Thomas Richard Wadewitz, UBS Investment Bank, Research Division - MD and Senior Analyst [18]

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So you're saying sequential improvement in the OR, or you're saying improved -- I mean you are not saying year-over-year improvement, you are saying sequentially some improvement. Is that the right way to understand it?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [19]

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Yes, that's correct.

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Operator [20]

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In case the caller was not able to hear that response, he said, "that is correct." Moving to our next caller.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [21]

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Yes. It's Jordan Alliger of Goldman Sachs. Just a question for you, you mentioned that you are looking for second half volumes to pick up on the Intermodal front. I'm just curious what the basis for that is primarily rooted in, is it rail service getting better? Is it an expectation on inventories coming down and pent-up demand for shipping as we move into the third and fourth quarter? Any color would be great.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [22]

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Well, as we went through the bid cycle, and we looked and saw what the awards were in our bids in the last 2 or 3 months, we believe that our volumes will increase via those bids, and as we look at the third quarter, there is probably a month or 2 that should get us into the positive comp territory, and by the fourth quarter that quarter should be positive as a whole with regards to quarter -- fourth quarter last year versus fourth quarter this year.

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Jordan Robert Alliger, Goldman Sachs Group Inc., Research Division - Research Analyst [23]

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And just as a quick follow up, I think last quarter, you did mention that warehouses were pretty slow, and we continue to hear anecdotally at least that that's the case. I mean are you starting to see or hear about work down of any of that or is it trade issues still sort of impacting the port situation or warehouse situation?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [24]

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Yes, I'll answer that a little bit then Shelley is going to follow up on that. From what I've heard from our customers, it's a little mixed. Some customers say some of their inventory has bled off, other customers say they still have a month or 2 where they're going to be a try to bleed off inventory. So it's kind of a mixed message from my perspective.

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [25]

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And I would say from a demand perspective, our customers are optimistic. They did recognize the level of inventory that they brought in incremental to avoid what was happening around tariffs, but they're starting to work through that inventory and feel better about the back half of the year.

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Operator [26]

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We are moving to our next caller.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [27]

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Bascome Majors from Susquehanna here. In April, you said that the bid compliance from your Intermodal awards was tracking below normal. Can you guys size up what's "normal compliance" based on or maybe blended across the book there? And how that progressed sequentially during 2Q from first quarter into July. Do you have more visibility now or are things tracking normal? Anything you can share on that front will be helpful.

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [28]

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Yes. The normal bid compliance is usually 80% to 85% of the state of the award. I think we mentioned that we are around 68%, 70% in the first quarter and that did not change as we went through the second quarter. But I think it will have a little bit of an uptick going into July, August and September with regards to our compliance.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [29]

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Does the trend stabilization even at a below normal level -- does that give you the ability to manage the cost side of Intermodal business and the capacity side tighter in the second half or you still need to keep that extra capacity in case the volume starts to pick up?

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Nicholas Hobbs, J.B. Hunt Transport Services, Inc. - Executive VP & President of Dedicated Contract Services [30]

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Well, we anticipate the volumes to increase because they are going to hit positive territory in the months ahead. So that will help better utilize the assets from a container standpoint as well as a dray standpoint moving forward.

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Operator [31]

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Moving to our next caller.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [32]

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It's Todd Fowler with KeyBanc. I guess maybe you can help us out a little bit with ICS. It sounds like there were a quite a few puts and takes in the quarter and I guess what I'm just trying to understand with the slight loss here, the expectation that you can return to profitability in the third quarter? And then maybe help us understand how much of the cost was unusual related to J.B. Hunt 360 versus the lost LTL business?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [33]

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Yes, so Todd, we further accelerated our investment in marketplace in Q2, and we'll continue that acceleration moving into Q3. We do have a good list of projects that we want to try to place here this year, but we do anticipate -- continuing our accelerated investment as we've been talking to our customers and what they are asking for and really a long range to eliminate the inefficient process and to get to a better way to move there. That's really our focus of where we're at. And when -- we're making a little bit of investment that we have cyber technology and our people, and there is thin room for any error inside that space. So part of what happened inside Q2, happened mostly in the month of June as traffic did tighten in the month of June. But also our acceleration, we've had a very successful bid season, our acceleration of bids improved. The quarter yielded lower margins in total, as we were onboarding new business. We were using from our data in the platform and really trying to come through our start up along with spot volumes really falling significantly in the month of June. With that on top of some of the new systems that we put in place, we had a few issues with and some bad closeout as we ended the month of June, we do feel like those are repaired here in July.

However, we are experiencing more growth from the public side of the business, so the bid season customers who are continuing to onboard that business as we lean into here in Q3 and we are operating off a smaller margin, and we would plan to operate that way. And then our LTL volume, we are very committed to making sure we can exceed our customer expectations, so we're -- as we are transitioning into off the mainframe and into a cloud-based system, and also on the marketplace, there were a few (inaudible) in the LTL space that no longer could be supported. And so we intentionally exited that business, wanting to make promises to our customers that we could keep. We worked with our customers closely to make sure that we really had a good plan for our customers. And really finishing that out here by the end of the year with some of those gaps that were inside on the IT space.

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Todd Clark Fowler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [34]

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Okay. All that's helpful. But just to kind of follow up on profitability piece of that. You talked about Intermodal improving in the back half of the year. Can we expect improvement in profitability then in ICS with kind of all those moving parts for the second half?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [35]

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Yes. We would expect from the second quarter, is that your question? I think it is. From the second quarter, we would expect the second half of the year to improve. Certainly, we want to operate in a profit-based scenario and that's what we're marching towards.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [36]

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But our expectations, I am going to add on to this Shelley, the expectation was that ICS would still be below its historical operating income margins, simply because the tech spend that we knew we're going to have on this. So while we did expect -- we would expect a recovery in the back half of the year, we would not expect it to be in that normal 4% to 6% range or get to the 4% to 6%.

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Operator [37]

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Moving to our next question.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [38]

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Ben Hartford with Baird. Shelley, maybe interested in your perspective on supply capacity, made a comment I think in June, perhaps a comment about tightening up. Just curious about how supply trended through the quarter? And what the outlook is from the back half of the year from an ICS perspective or even from a JBP point of view as it relates to recruiting? Where do you think we are in the industry supply correction cycle?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [39]

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So I would say, as the quarter progressed in Q2, we did see a tightening in June. Part of that was road check, which was to be expected that, that come right on the heel (inaudible) holiday and the combination of those 2 things really put pressure -- more pressure than expected on margins and tightened more quickly than we expected in this environment. As we moved into July, we're seeing a seasonal softening just like has happened every other year, and we would expect the second half of the year to be a more balanced market, maybe even on the supply side, more clinical in supply than it was in the month of June. And then if could just talk about the truckload side of it, I think you're talking about drivers in general on the truckload side, and I would say drivers are slightly easier to come by on the truckload stage, but significantly more expensive to onboard, so we really have increased the level of pay for our professional drivers, and we have seen that happen for 2 years in a row. So our cost for hire is up and our W-2 is up with drivers. So although we're seeing a little bit of easing inside that space (inaudible) increases that have occurred (inaudible) have helped attract new people into our business.

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Benjamin John Hartford, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [40]

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Okay. And if I could just follow up on that comment, I think you said you expect supply to be a little more plentiful in the back half of the year than June? What do you think the supply growth is coming from? There is obviously -- been some discussion about small carriers that have failed, and I think, owner operator recruitment has improved generally among the larger carriers. Where do you think that net supply growth is going to come from and how long is it going to take or what it is going to take for that to return to a more balanced or even tight market?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [41]

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Well, I mean, I would say, second quarter is normally the tightest environment particularly in June inside the supply side, so it's a return to a more normalized second quarter. 2018 was an anomaly, if you look at -- really at any of our trends that have happened, we've had a couple of years in the last 6 years that have been unusual on the supply side that we would expect a softening and have seen softening happen here in July.

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Operator [42]

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And we will move on to our next caller.

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

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So I wanted to go back to your intermodal volume outlook comments. I know there's been quite a few questions on that side. But if I'm hearing it right, it sounds like you had maybe a couple of significant contract wins during the bid season. So I guess how would you clarify whether you would expect loads to show better than normal seasonality in Q3? And then do you have to trade price for volume more than you originally anticipated in order to get some of these wins? I know that earlier that you had talked about leaning more towards volume versus rate, but just curious and want to understand how that tracked relative to your expectations and what that means for the pricing and revenue per load trends in the back half of the year?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [44]

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Allison, is that you?

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [45]

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This is me. I'm sorry for asking 7 questions in 1.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [46]

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That's fine. You just didn't announce first. That's why I was just double checking that it was you.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [47]

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Oh, I'm sorry. Allison Landry from Crédit Suisse.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [48]

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No problem.

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Allison M. Landry, Crédit Suisse AG, Research Division - Director [49]

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Sorry about that.

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

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The volume increases we should see in the second half of the year are from a group of customers not from individual customer or 2 customers. It was not a price play, and I think you will see that play out in the next few quarters when we start looking at the revenue per loads. It was more a service play in terms of the quality of service and the differentiation that we've been able to work with our customers on through a difficult time last year I think we separated ourselves from that. And as I stated earlier -- and if you look at the third quarter, we believe there is a month or 2 in there that will have positive comps versus the third quarter last year and we should have positive comps in the fourth quarter in June.

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Operator [51]

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Moving to our next caller.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [52]

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David Vernon of Bernstein. Dave, could you talk a little about how much OpEx...

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Operator [53]

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We're sorry, caller, your connection seems very unstable. If you wouldn't mind please hanging up and dial back in. Moving to our next caller for the time being.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [54]

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It's Ken Hoexter from Bank of America Merrill Lynch. Dave, maybe just a step back and bigger picture. Is there anything that shifted recently during the conference season? It sounded like you were maybe a bit more pessimistic on the outlook and here it sounds like the outlook into third quarter both Intermodal even ICS maybe turning more positive. Is there something underlying the shifting that we should kind of be taking away from this from your point of view?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [55]

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Well, I think it’s just a matter of the buy-in starting to appear and show up. Now I'm still cautious and my point of view, and obviously, I'm probably the biggest skeptic in the group, which is one of the reasons they don't let me talk to customers, but I was happy to see the trends throughout the quarter, while they are below expectations, they're at least directionally correct. I think that if we can get through July because I think July is not good month to gauge anything off, I mean, from our perspective the only month worse than July is typically February. So I'd like to see a little bit more in August, but based on sentiment of what I know are the awards and as the volumes are starting to come on, yes, I'm a little more optimistic than I was when we visited and met. Sure.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [56]

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And just to clarify I guess on that particularly Intermodal thought, you kind of thought Intermodal margins are not likely to hit our target range. And Terry maybe mentioned earlier that we expect to get right back on that -- is that -- am I reading that commentary right in terms of your margin outlook for Intermodal?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [57]

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Yes. Let's clarify, the question that I got asked I believe at your conference. I interpreted that as for the year. And so my response is no. And we would not get inside the 11 to 13 for the year of 2019. I stand by that statement today. I think that the first quarter is just something that would be extremely difficult to overcome. Now I understand and I've seen that Terry is looking at, not his feel, his projections. So yes, there is a possibility we get back and do 11 for a particular quarter, but I stand by my statement that we would not show an 11 -- the 11 to 13 in the -- for the full year of 2019.

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Operator [58]

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Moving to our next caller.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [59]

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Matt Brooklier, Buckingham Research. So I wanted to circle back to Intermodal pricing questions for you. If you could talk to -- of your contract volume, what to date has been priced at the end of second quarter? And maybe your expectations for what remains and where potentially contract rates could fall out for that portion of the contract side of your business?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [60]

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Yes. So I think I've mentioned before that the first third of the bids, we were in higher single digits, the middle third was middle single digits and the last third were lower single digits and the basically through all of our major bids for the most part, some we haven't implemented yet, but we know what we're going to be basically looking at. So I think that will land us somewhere in the middle single digit when it's all said and done for this bid cycle.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [61]

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Okay. So it sounds like the contract pricing is pretty much in line, I think, with your expectations kind of a little bit of a fade into the second half of the year, but I think that's what you guys have been conveying through that. And then the more positive outlook at Intermodal in terms of volume, I think you guys mentioned that some of it had to do with your ability to execute the relative service levels that you're providing. Is this partially driven by UNP's PSR efforts or am I not reading this correctly?

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

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Well, the service levels that we received, especially from the eastern railroads are up significantly from last year at this time, not to where their goals are or where our goals would be. But being assessed, started off extremely well, then we had a weather issue in February and then March started to rebound and then we had flooding issues here in the last couple of weeks in June. They're starting to rebound here and we're starting to see an uptick on that. So service obviously has helped there. And some of the technology investments that we've made, we've been able to -- to be able to better set appointments, better analyzing rail schedules, and predictability of what will happen has allowed us to be able to communicate to our customers a better level of service, even though it might be a couple of hours slower here and there, but we've been able to use those tools to what we think is differentiate our product from others.

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Operator [63]

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Moving to our next question.

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Justin Trennon Long, Stephens Inc., Research Division - MD [64]

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This is Justin Long with Stephens. So Dave, I think you gave a number earlier on the intermodal volume headwind from lane closures in the second quarter. Could you clarify what that percentage was. And then on the loads per workday that you saw monthly in the second quarter. You noted the pickup. But I'm curious how that acceleration compares to the normal seasonality in that metric you've seen historically in the second quarter.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [65]

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Yes. The 9% volume decline, if you will, due to the lane closures is simply the snapshot of the number of loads that we saw disappear that could no longer be serviced. And like I said, that was expected, we understood that going into the quarter but it -- obviously our goal is, we said this earlier, that we're going to try to overcome that and we just didn't see the demand to allow that to occur. As far as the trajectory of the loads per workday, I would say that -- Terry, you jump in on this -- that looked pretty normal to me as far as the trajectory from month to month to month, even though it's at a lower base. The trajectory was good obviously from April to May and into June and it should continue into the months and quarters ahead. The other comment I would make is that the floods in May and June cost us about 2,500 loads that we weren't able to handle, that, that had to run truck because of the various floods that we were not able to handle.

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Justin Trennon Long, Stephens Inc., Research Division - MD [66]

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Okay. That's helpful. And then circling back on the 11% to 13% margin target in intermodal. Dave, you said it sounds like that won't happen in 2019. But is this something you think is achievable next year if we continue to see low single-digit pricing environment where we're exiting -- like we're exiting this bid season? Or do we need to see an acceleration in the pricing environment from here to get to that target?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [67]

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That would be, I guess, giving guidance for one, and I'm not ready to do that yet. And the second thing is, I have to wait and see what their plan for next year looks like and I haven't seen that yet either, Justin, so I don't know the answer to that.

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Operator [68]

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And moving to our next question.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [69]

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It's Brian Ossenbeck from JPMorgan. So I wanted to ask another question on ICS and the marketplace. Shelley, maybe if you can give us a sense what type of benefits you're seeing excluding the extra spending on IT and maybe on head count by getting more of the transactions pushed through the marketplace, maybe up to about 2/3, was continuing to climb. But I'm a little surprised to see that the loads per employee are down significantly and headcount's up. And maybe that's a function of adding more IT folks but maybe just give us a sense as to what benefits you're seeing and when you think they'll start to flow through that second line item?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [70]

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So the mix inside LTL and truckloads does change our volume per employee. But we also did add employees as part of our further investment in marketplace because we're trying to build the marketplace as new systems are coming on board, taking more time, spending more time with those customers and carriers, making sure that their experience is topnotch. So as we move into 2020 and start thinking about our automation, that's everything that we're really trying to invest in this year, really reviewing each piece that is not automated and things that we need to do to move us into automation. And then lastly is probably the thing that impacts us, the -- very much is the level of data and the granularity that we get of the data through the platform. So earlier I spoke of the supply side coming back, and we're seeing that immediately inside the platform all from a digital space, what offers you're doing, how many tiers are on board, what percent are on board, what lanes are becoming softer or harder, all of these pieces are allowing us to get better at our pricing, better at serving our customers and we think that we'll see that really push us here towards the end of the year as we come -- and come to a better comp against LTL. We think fourth quarter moving into next year, we'll have market share gains as a result.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [71]

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And Dave, a quick follow-up for you. Can you just remind us of the buyback program. It looks like you were pretty active this last quarter. You still got some left on the authorizations so maybe you can just give us a sense as to why you were so active this last quarter and what you expect to be doing from a capital allocation standpoint throughout the rest of the year?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [72]

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Well, I mean, one reason we were active in the quarter, I mean we definitely had cash, if you will. We typically use our revolver as cash so -- or our debt-to-EBITDA ratio as a cash indicator. So we had availability. And frankly, we thought the price was attractive. So we've always said, we would be an opportunistic buyer. I think that we will continue that approach on a go-forward basis. And so if we see something happening in the future where we either have additional room on our debt-to-EBITDA ratio or we end up seeing another attractive price and we have the ability, we'll probably participate again in the future.

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Operator [73]

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Moving to our next question.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [74]

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Ravi Shanker from Morgan Stanley. Just a couple of questions on DCS. Can you just clarify what drove that big decline in DCS salaries and wages? And kind of was that related to the charge, and if you can give us kind of any more details kind of on that charge? Was that an in-sourcing position by a customer?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [75]

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No. It was not an in-sourcing position by a customer. It was -- a lot of it was a workers' compensation and insurance policy accrual adjustment that came back in that, frankly, everybody participated to a certain level but it showed up more materially inside DCS simply because they got more people. It's the way the policy works, so they got a benefit, it went back to the business units, and DCS was just a more material effect.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [76]

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Got it. And just a follow-up. I know you probably won't comment on the BNSF arbitration but do your results include any charge or reserve for a potential verdict or result in the future? I mean you had $44 million, I think, each of the last 3 quarters, so are you taking out, like, $11 million a quarter for that in the current results?

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [77]

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We haven't commented on that. People have asked that in the past, Ravi. Should they do that inside their models -- and frankly, my response has been, since I don't have any other additional information to give to them, if they were to do that, there's nothing I could do to argue, to say that is an inappropriate conclusion.

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Operator [78]

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Moving to our next caller.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [79]

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Amit Mehrotra here from Deutsche Bank. And Brad, congrats on the appointment. Terry, on the commentary around intermodal volumes, any update on how PSR may impact the outlook for the second half? Union Pacific is taking significant action in Chicago this month, I believe, and Berkshire has talked publicly about PSR quite openly over the last few months. So maybe any update or thoughts on how you're thinking about PSR as being a headwind or not on the volumes in the second half.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [80]

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Well, one, we obviously don't use the Union Pacific. But I believe that the benefit of PSR is that we should get better service, which should give us better turn times and should give us the ability to be able to move more freight from the highway over. We always talked about sometimes with PSR that if they get into a fix or a derailment, sometimes they're not quite as resilient. They don't have extra crews waiting around to play catch up. So that's the one to watch out with regard to PSR. With regard to BNSF, I -- we see some of the things that they're doing, they -- I don't think they're public maybe, but the -- it appears with regards to what they're doing that I don't see anything out of the ordinary that should come about in the second half of this year that we need to pause in terms of what we're seeing and what we've been doing in the past and how we should react going forward.

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Amit Singh Mehrotra, Deutsche Bank AG, Research Division - Director and Senior Research Analyst [81]

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Okay. And just as a follow up, just sticking with intermodal if I could, and on the cadence for pricing, you talked about earlier, I think the top of this call, kind of up low single-digits pricing. And truck spot rates have obviously been pretty negative for a while and the expectations of contract -- truck contract rates have been coming down pretty consistently over the last year. So just on that context, Terry, what are the risks that you might have positive volume in the back half of the year but the yields turn negative in the back of the year? If you can talk about the comfort you have around kind of positive yields in the back half of the year either based on the negotiations you have done to date or the volume outlook just in the context of the trucking environment getting a lot weaker at least from the contract expectation side.

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Terrence D. Matthews, J.B. Hunt Transport Services, Inc. - Executive VP & President of Intermodal [82]

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Yes. I think I had mentioned the -- in the previous conference calls that we thought that intermodal pricing would stay higher than truck pricing throughout the year, and I think that's going to unfold and be true. As I mentioned, the bid cycle is over with. The results are in, and we know what those results are and we know what our path is moving forward for the next couple of quarters with regards to pricing, and I don't see that going negative or something.

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Operator [83]

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Moving to our -- the final question from now.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [84]

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Hopefully, the line's a little bit better, David Vernon from Bernstein. Dave, could you talk a little bit about how much development OpEx for J.B. Hunt 360 is going through the P&L today, and when over the course of the next several years you might be able to expect some falloff in that investment into the software?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [85]

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What we said was we got an extra $4.8 million -- or we got $4.8 million in the quarter of OpEx spend inside of ICS. I'm looking at Shelley.

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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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Incremental.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [87]

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It's incremental.

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [88]

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Correct.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [89]

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Base is off of a $2 million base? So it's up to $6.8 million?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [90]

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It was up to $11 million.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [91]

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It was up to $11 million. So it was off of. Okay, so you were up $5 million off of $6 million prior. So we're spending $11 million a quarter in ICS primarily for the development of Marketplace 360. Now if there's other pieces inside that because you also have to harden the systems to handle the capacity, expanding the available capacity, they're also doing further development through the intelligence pieces and stuffs, so it's not all just for the Marketplace 360 but it is part of the 360 platform. When do we realize that -- when do we realize the revenue side? I mean we're starting to see a little bit trickle in now. Do we see capitalizing on our further development? I think that, that probably plays out over the next 2 to 3 years. How much more do I have to spend to get it to the point where we're seeing what we would expect to be maximum revenue generation out of this? I don't know the answer to that yet, David.

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David Scott Vernon, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [92]

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All right. One separate follow-up question on the DCS business. I was just wondering if you could give us some qualitative commentary on the impact of Final Mile from a margin perspective in that segment. The results were just a lot stronger than we thought. Now obviously, that seasoning of some of the prior contracts, I'm just wondering are you also getting some margin gain on that Final Mile business you acquired last year?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [93]

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Yes. So I would just say, as Dave talked about earlier on, the DCS business, minus Final Mile, is hitting right in the middle of our target range of where we want to go. So that portion of DCS is doing well. Final Mile, if you take out the onetime adjustment, it's making incremental improvement. The acquisitions are coming along and hitting their EBITDA targets. And we're continuing our sales pipeline there is very strong, we're going to hit our expectations on sales there. So it is going well. The integrations are all going very well. So we're very pleased with how that's moving and progressing in the right way. But the margins on Final Mile are not at the level of the margins of the -- so it's actually dilutive, David.

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

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Exactly. Because of non-asset. A lot of the new stuff coming on is non-asset.

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Operator [95]

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And we did have a couple of more questions come in as well.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [96]

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David Ross here from Stifel. I wanted to dig into the truck segment. Better-than-expected given soft 2Q in the overall truckload market, and it looks like you improved the margins due to some internal initiatives. Could you expand on this comment as to what specifically helped the profitability in the quarter in the truck segment?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [97]

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Well inside truckload, we are continuing our transition to move to a more of an asset-light model. In total, we did change the number of company-owned trucks, continued some of those trucks into our Dedicated Contract Services group and continued moving forward, and we plan for the rest of this year to increase the percentage of independent contractors inside that space. That mix of business is more of a variable compensation model and so that just benefits us in total. And then, I think we've just talked about some of the cost cutting measures that we have inside that segment. We did a better job in wealth management. Just with the trucks that we had and what we -- the freights that we moved with our customers, the type of freight that we move with our customers, we moved those trucks into more committed relationships and that helped our book as well.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [98]

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And then any change in the used truck market? What are you seeing is going on there right now?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [99]

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We actually had one of our OEMs in last week. Their view of the used truck market was that it's -- I'm going to use the term, stabilize. I can't remember the exact quote they said. They weren't seeing any increase in used truck prices, and ultimately, they're seeing an additional deceleration. They do expect, frankly, a change in the value depending on what does happen with the ultimate delivery of the inventory that they have at the dealers right now. Obviously, it's well known that the new order bids -- or new order placements are down considerably but the backlog, it's still working its way through the system. They -- I believe that their conversation was more towards they are worried about October is the next -- I'm looking at John Roberts, talking to him. I think October is the next date that they will really try to figure out then what do they do. So it's, in order to stay at this level, do they attack productivity or not? So I think that they're still in search mode but the immediate used truck pricing, they have not seen any kind of material change one way or the other.

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Operator [100]

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Moving to our final caller for now.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [101]

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It's Scott Group from Wolfe. The monthly loads per day that you gave. Dave, do you have those from a year ago just so we can understand that this is a good or bad progression?

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [102]

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A year ago?

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [103]

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Yes.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [104]

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Yes. You're talking about April '18?

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [105]

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Yes. So that 7,300 to 7,450...

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [106]

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I don't -- I'm horrible with technology so I have to come with stacks of paper here. I don't know if I've got that in here.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [107]

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I'll keep going maybe from -- if you want.

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [108]

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Right here. No, no, I've got April was 8,000 and 09/18 was 8,100. And June was 8,200.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [109]

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Okay. Perfect. And Dave...

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David G. Mee, J.B. Hunt Transport Services, Inc. - Executive VP of Finance & Administration and CFO [110]

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Going back to, like I said, it's on a lower level.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [111]

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Right. Okay. When we think about that 11% to 13% margin and maybe, maybe not getting there in 2020. What do you think are the bigger swing factors. Is it volume growth or is it the ability to keep pricing positive? What's -- where is the bigger risk to 11% to 13%, on volume or price?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [112]

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I'm going to let Terry answer that question.

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

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Yes. I think the biggest benefit strategy absolutely is volume. Pricing is pretty well locked into '19, and then cost control.

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

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I was thinking...

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Operator [115]

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My apologies, please go ahead.

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

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Sorry. I was thinking about 2020 and the ability to get to the 11% to 13% next year.

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [117]

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Well, obviously, if price falls apart, that would have the quickest impact of any of the above but at this point in time, we don't see that happening. We haven't seen that happen yet.

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Operator [118]

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And with that, there are no further questions on the line.

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [119]

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Well, then we'll give this just one last call. So there is a couple of minutes here and going once, going twice. Thank you all. Appreciate it. I'm sure we will catch up, and I'm sure you know where to find Brad.

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Operator [120]

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We have one question come in from someone who's already asked a question. Would you like to take that?

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [121]

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It's fine. Go ahead. Let it through.

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Operator [122]

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Caller, your line is unmuted.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [123]

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It's Scott again. Sorry, for this. My other question was on ICS. Can you just talk about what's causing the big drop in the LTL volumes? And what's the impact on gross margins from that?

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Shelley Simpson, J.B. Hunt Transport Services, Inc. - Corporate Executive VP, Chief Commercial Officer & President of Highway Services [124]

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Yes, so I've mentioned this earlier, I'm not sure if you were able to hear that so I apologize if I'm repeating. That as we're moving our system off the mainframe into the cloud-based system, some of the business that we had in LTL, we had not completed the development in the new system and we needed to work with our customers really to exit part of that system. So we set the time with our customers, that was intentional, unchanged. We are -- we do have on the roadmap this year, if you could see, some of the work that is needed to really onboard those customers again in 2020.

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

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And Shelley, does that explain some of the big drop in gross margin percentages, the big drop in LTL?

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

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Well, LTL has a greater percentage of gross margin or gross margin percent. Certainly, it's higher because there's a lower gross margin dollar per load. But the change overall with our mix that happened, the new published business that came on and accelerated as the quarter progressed, I think that was a -- more of a material impact on this year.

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Operator [127]

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And with that, there are no more questions.

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John N. Roberts, J.B. Hunt Transport Services, Inc. - President, CEO & Director [128]

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All right, [DJ], thank you very much. Appreciate it. Thanks, everyone.

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Operator [129]

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That concludes the conference. Thank you for using AT&T event conferencing, you may now disconnect.