Good afternoon, and welcome to J.B. Hunt's third quarter 2019 earnings conference call. All participants are and will be in listen-only mode until the Q&A portion of the call. After today's brief presentation, there will be an opportunity to ask questions. To ask a question, you may press pound, then two. Again, that's pound on your touchtone phone. To withdraw your questions, please press pound, then two a second time to remove yourself from queue. Today's webcast is being recorded and will be available for replay after the call on the company's website at jbhunt.com. I would now like to turn the conference over to Brad Delco, Vice President of Investor Relations. Mr. Delco, please go ahead with your presentation.
Good afternoon. Thanks for joining us. Hopefully, everyone has had an opportunity to review our earnings release that was issued earlier today. If not, you should be able to access the release on the investor section of our website at jbhunt.com. Before I introduce the speakers on today's call, I would like to take some time to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt's current plans and expectations and involve risk and uncertainty that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B.
Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. With that out of the way, I would like to introduce the speakers on today's call. This afternoon, I'm joined by our CEO, John Roberts, our CFO, Dave Mee, Terry Matthews, President of Intermodal, Nick Hobbs, President of Dedicated, Shelley Simpson, Chief Commercial Officer and President of Highway Services, John Kuhlow, our Chief Accounting Officer, Darren Field, EVP of Intermodal, Brad Hicks, EVP of Dedicated, and Eric McGee, EVP of Highway Services. At this time, I'd like to turn the call over to our CEO, Mr. John Roberts, for some opening comments. John?
Thanks, Brad. Today, we're introducing a new element to our calls, which will focus on our strategic longer-term point of view to help better shape the information you are getting from us each quarter. We hope this will enhance and align your understanding more closely to ours and the extended perspectives we use to make decisions. Let's reflect on some of the key steps in our more recent strategic efforts that will help outline the building blocks that are in place today. There are key events that have occurred in each of the last five years that are very consistent with the cultural approach we have always taken as an evolving, growth-oriented transportation service provider. From 2015 through 2017, we implemented new processes to help identify and remove waste from all aspects of the company using employee input, known as ELEVATION.
We also completely restructured our information technology teams from the top down and publicly committed to important incremental growth channels in the commercialization of our freight management tools known as J.B. Hunt 360, and also to growing our Final Mile services business. In 2018, we launched 360 Marketplace and continued growing and digitizing our brokerage business, running nearly $600 million on the platform that year. We also closed on the first acquisition the company has made in 26 years with Special Logistics to expand our presence in fulfillment and forward deployment, supporting Final Mile. This acquisition, now two years old, is performing above our expectations compared to the data we used in the purchase decision. During 2019, we have focused on and invested in growing the programming and infrastructure needed to support our newer technology initiatives. Carriers have expanded to more than 600,000 trucks with a sign-on to the J.B.
Hunt 360 platform. Transactions executed through the J.B. Hunt 360 Marketplace are currently on a billion-dollar run rate. We've also closed on a second acquisition in Final Mile, expanding our furniture delivery and agent presence with Cory. Overall, through acquisition and organic growth, we have expanded the Final Mile network by over 40% so far year to date. We will be breaking out this channel in 2020. With regard to our legacy businesses so far in 2019, Intermodal has continued to move towards accommodated service levels with help from our rail providers and the substantive completion of lane and service changes in what is commonly known as PSR. Our fleets continue to have elasticity in potential box turns. We expect to return to historically sound utilization metrics per month before prudently initiating new purchase orders to further expand the container fleets.
DCS accelerated its organic growth through the past 2 years, reaching unprecedented contracted expansion in unit counts and revenues. As expected, the implementation expenses related to strong growth have mitigated over time, and we expect the core business and private fleet services to return to targeted margin performance. We also expect continued organic growth in this channel of private fleet creation and conversion. Highway Services, including our truckload business and all brokerage services, continues to migrate to a more digital and lighter asset model, moving towards independent contractors and contract carriers, with our capital focusing on the trailer fleets. We're exploring new and different ways to approach the trailer needs of our customers and carriers with the 360box programs and hope to find the right equation to expand this opportunity. Overall, I'm generally pleased with our progress on this part of our journey and continue to believe in our direction.
I reiterate my confidence in this leadership team and our employee base across the country. I will now ask Dave Mee for his comments on the quarter. Dave?
Thank you, boss. For the most part, we thought the quarter played out pretty much as anticipated. General freight volumes are still below 2018 levels, but we have seen seasonal uptick remain and continue its pace, and most of it was evidenced in each of our segments. In Intermodal, overall volumes were flat with a year ago, as we've announced. During the quarter, we saw absolute year-over-year changes. In other words, calendar month to calendar month. We saw July down 2%, August down 1%, and September up 3%. As we pointed out in our second quarter call, we've been paying particular attention to the daily load counts each month, both in recognition of the lower 2019 freight volumes and looking for some assurance that a traditional seasonal pattern would remain even at the lower freight levels.
For the third quarter 2019, loads per workday for July were 7,851, August was 7,987, and September was 8,342. As a starting point for reference and a reminder, June loads per workday was 7,817. While we are encouraged about the increased throughput, we are still experiencing cost pressures, primarily in rail purchase transportation rates and localized driver inflation, not across the country, but definitely in local markets, as well as the additional costs associated with growing our network, which is now more out of balance than it has been in the past. In Dedicated, new truck additions were lower than recent quarters, but they actually were in line with first and second quarter 2018. The pipeline, as it stands today, remains very robust, and we're confident that we'll add the 800-1,000 trucks in 2019 that we expected.
Final Mile continues to see good throughput in both the historical and newly acquired business. The two acquisitions have positioned us to generate higher than expected organic growth in Final Mile in this current year, in 2019. ICS results for the quarter reflect what we believe is the current state of the market. Competitive and even aggressive contractual pricing to retain business and/or grow market share resulted in gross margin pressure with little or no opportunity in the spot market to mitigate the gross margin decline. We compounded ICS's operating margin decline by increasing our technology spend on the marketplace for J.B. Hunt 360 by over 60% year-over-year, and 10% sequentially from second quarter, with the expectation that we will compete and will have to compete for share in this environment to gain scale in the platform for the rest of 2019 and most likely through 2020.
Truck saw same-store sales contract rates hold positive in the third quarter year-over-year. However, customer spot activity was less than half of what it was a year ago, which affected both its load counts and overall rate per loaded mile. While we have seen some seasonality in the market and customers are meeting their truckload contractual commitments, customer spot activities is not expected to rebound substantially in the fourth quarter of 2019. Brad, that concludes what I have prepared.
All right, Michelle, we're ready for questions, so let's open up the queue.
Sure. Once again, ladies and gentlemen, if you wish to ask a question, please press pound two on your telephone keypad to enter the question queue. To remove yourself from the question queue, please press pound two on your telephone keypad. Our first question comes from Todd Fowler. Please repeat your name and company affiliation. Your line is now open.
Hi. Great. Good evening. It's Todd Fowler with KeyBanc Capital Markets. I feel a little bit guilty. John did a nice job of laying out some longer-term things. I'm going to start with some near-term questions. Dave or Terry, can you share some thoughts on just how you see the fourth quarter peak shaping up? You've got volumes that are comping positive in September. One of the other truckload carriers, I'd say, talking about a little bit of a less robust peak. I know some of your earlier guidance talked about fourth quarter volumes turning positive based on bid compliance. If you could just share some comments on what you're expecting for fourth quarter, both on the volume and the margin side for Intermodal, I'd appreciate it. Thank you.
Yeah. This is Terry. In regards to the fourth quarter, I think in the second quarter, we talked about we would be in positive territory for volume in the fourth quarter, and we haven't changed that direction with regards to positive volumes in the fourth quarter. As far as peak is concerned, September from the West Coast was stronger than the September we saw in 2018. It's been rather robust, and we see that starting to continue into October.
With regards to margin, we believe our margin in the fourth quarter from an OR basis should improve from what we saw in the third quarter.
Okay, just for a follow-up to your comment on the September strength, do you have a sense if any of that has to do with potential pull-forward related to tariffs, or do you think that that's maybe more of a reflection of just true demand in the marketplace? Thanks.
I haven't heard anything from our customers. Shelley might have heard something, but I haven't heard anything from our customers that they're pulling forward product and shipping it early. I see there's head shaking no. I think it's more of just basically what's going on in the marketplace.
Okay, thanks for the time.
Our next question comes from the line of David Ross. David, please repeat your name, your company affiliation. Your line is now open.
Thank you. David Ross from Stifel. Good afternoon. Just a question on Final Mile, which seems to be growing quite nicely. I think you said expanded the network 40% year to date. How big do you think that could get in two years' time?
We're on a run rate of about $500 million to $550 million. We're very comfortable to continue to grow at a very fast clip. I don't know if we're giving guidance, Dave, on some targets or where we want to be.
Two years.
Yeah.
Two years. I don't know, 10% a year, five% a year.
10%, 10% plus.
On the dedicated side, is that going to grow at a similar clip, or is that expected to be a little bit more GDP plus? Have you seen any difference in the private fleet conversion recently versus the last couple of years?
Yeah, the only thing that's really changed in the private fleet is just we were really hot in 2018, and I think it's back to a normal decision timeframe of 18-24 months that we've seen very consistently, other than when it sped up a little bit in 2018 because of the market. I think you will see us be very consistent with the truck adds we have this year, probably the truck adds we'll have again next year. Our pipeline, as Dave said, very good. We're very confident in the private fleet conversions and our retention rate is still very high, 98%. We feel very good about where that's going next year.
Great. Thank you.
We have the next question. Caller, please state your name, company affiliation. Your line is now open. Caller?
Hi, it's Thomas Wadewitz from UBS. I wanted to ask a question on how we might think about intermodal margin. It seems like you're executing on the transition in volumes and certainly seeing volume growth in the transcontinental side. It seems like price is a lever that you're pushing to some extent to get that growth. How would we think about intermodal margin perhaps the next couple of quarters, or if you look into 2020? Is it reasonable to think that margins improve if you have volume growth but less price? How do we think about the levers of volume and price moving different ways and what that might mean for margin?
Yeah, in the third quarter, we thought it was going to improve versus the second quarter. Because of some of the network imbalances that we have, we had to reposition more empties, and our empty costs exceeded what we anticipated it would be in the third quarter. As I mentioned earlier, we believe our margins should improve in the fourth quarter as we compare it to the third quarter. As far as next year, we're still in the budget process. We don't foresee anything that should change our margin profile. If we can continue to grow and to continue to watch our costs and not have anything from a macro standpoint on the economy, we would anticipate that our margins should improve.
I guess one additional question or one follow-up? How do we think about the numbers that you're providing in ICS of more volume going through that system and what that means? Obviously, I guess it means you're utilizing the system. Is there a point where as more goes through, the margin performance should be better, or do we think about more going through being an acceleration in volume performance? What does it mean when you put more through 360 in terms of the impacts on results?
Yeah. Dave talked about scaling the business, and I think that's a key piece in building the platform. We focused this year on really being able to move any shipment through the platform, and we're about, by the end of this year, should be 85% of our volume should be able to execute inside the platform if we were fully utilized inside that. For us, it really is about scaling our revenue and allowing us to really get after what we believe is the bigger idea, which is creating a more efficient transportation network in North America. It's about reducing costs for our shippers and increasing time for carriers, saving them money and giving them a better experience overall. We believe there is a better way to move goods, just like intermodal was a better way to move goods from truckload.
We believe using a digital freight platform is actually a better way to transact and for customers and carriers alike.
Do you have a sense of the time lag of when we would see that, or is that tough to identify?
We definitely are talking about that here internally. As Dave spoke earlier, we did further accelerate our investment into the platform. The more that we see the transactions that are occurring in the platform, the more we see the opportunity to further eliminate the waste in the system. I think we'll be going into 2020 with more work, particularly on the data science side, with what we can do with the data that we see in the platform. One of the things that we're really focusing on, we've seen a 400% increase in the level of data that we see interacting in the platform. About 5 billion sets of data points that we are really trying to discern in different categories, how we apply more machine learning and AI into that information. It's one of the ways that we will create a more efficient transportation network.
That work is really just beginning. I would say we're at the infancy stage. As we've been building the platform, we've been collecting data. Our ability to really create a different way to move goods, whether that's with a different carrier or a different mode. We've talked for a long time about how there are somewhere between seven and 11 million shipments that are on the nation's highways that we believe can move into intermodal. That's one big idea we have through the platform. The more data we see, the more information we have, the more we know how goods should move over a longer period.
Great. Thank you for the time.
Our next question comes from the line of Brian Ossenbeck. Brian, repeat your name and company affiliation. Your line is now open.
All right. Thank you, Brian. Brian Ossenbeck from J.P. Morgan. Thanks for taking my question. Maybe, Shelley, if we can continue on that last thought about the shipments converting off the highway to intermodal over time, then maybe it's a bigger, longer-term picture for John as well. What do you think really gets the intermodal business back to sort of secular growth that we've seen over the last couple of decades? When do you think the truck conversion really becomes a material contribution to that? I still think service has a ways to go on the rail side before you get there. If you could just size up the maybe secondary opportunities when you look at reefers as the rails start to offload more trailers and move more to containers, and then anything material on the transload opportunity.
Can I just talk about our platform just for a second as it relates to intermodal? Because I think one of the things the platform allows is access to shipments and access to capacity. If you look at what's happening in the market, we see about $80 billion-$85 billion of freight every year, and that's continued to grow for us as we've penetrated, really, I would say, mid to large customers. We've really not moved into that small, midsize market as much overall. Customers that are currently shipping in truckload, so this is more of a macro view, customers that currently ship truckload just don't know another way to do that. I would even say those are in the midsize lanes.
They believe that they have the assurance of how their shipments can move at a predicted price and predicted service by using what they've historically done. If you really give access to small, midsize shippers to really what can transact on a real-time basis, making movements more dynamic, it changes the way a shipper can move and can open up what the market can look like. Just talk about that from a market perspective.
Yeah. This is Terry. From a growth perspective, I think I've identified before four or five key things. What is the price of fuel relative to truck? Price of fuel, what is the truck rate? What is the truck capacity? What is the rail service, which is a real key in terms of being able to convert highway freight to rail. What are the general macroeconomics? When you put those five things together, we keep on looking at a bucket of freight of eight to 10 million loads that we see that fit the intermodal network in North America, but yet not have converted. As those factors turn positive and the more of those factors that turn positive, you'll see the acceleration of intermodal. The second thing I would mention is that the railroads want to grow intermodal.
Publicly stated, the two eastern railroads have said they'd like to grow 10% in 2020 in the East Coast, and these four or five factors will be key as to how we'll be able to try to accomplish that goal. You have railroads willing and able, and then you have some market conditions, but we also see the freight. The timing of how all that melds together is really the big question, and I think you'll see, as I mentioned, as those five things turn positive for intermodal, you'll see an acceleration. Let me obviously add a little bit on top to the question of transloading or refrigerated. All markets that we're studying, there's some big numbers in those channels that we want to pay attention to. I think the key point is that the railroads are interested
We definitely hear them talking with us about what we need to do to continue to be able to organically convert incremental volumes into their networks. PSR being substantially done is a little bit of a cleansing activity. I think the conversations are positive, and with the highway conversion, refrigerated, transload, and other, we're certainly looking at the future potential of intermodal as being growth oriented. Lastly, with regards to refrigerated, we're up to 1,000 refrigerated containers, and we plan on adding containers in 2020 to continue to be able to grow that business double-digit.
Okay, great. Thank you.
Thank you, everybody.
Our next question comes from the line of Jordan Alliger. Jordan, please repeat your name, company affiliation, and ask your question. Your line is now open.
Yeah. Hi, Jordan Alliger at Goldman Sachs. One question is, can you talk a little bit about the impact of the IT spend versus the impact of the fundamentals on the ICS business? Some sort of order of magnitude. I know you're going to keep spending on IT as we go into next year, is this sort of like the peak quarter impact, or is there a way to frame that? Thanks.
We aren't just spending money on the technology side. We're actually investing on the people side as well, because to build the marketplace, we really believe that creating an experience which has raving fans on both shippers and carriers is the most critical component of the platform. In areas where carriers aren't interacting in the platform or shippers don't have enough density, we're having to insert our people in the process. We also have quite a few people inside that space that are focused on what the experience actually is. They think of it more from the sales perspective on both carriers and customers. Quite a bit. I don't think we've given guidance as to what that looks like. I think leaning into next year, we will continue to make investments on technology.
We are working, as I stated earlier, around what we can do with the data, and we still have to firm up what our budget looks like. I would expect further spending at least at the same level, if not possibly more. On the people side, continuing to grow people. One of the reasons we're going to pull from an earlier discussion or an earlier question is, what do we get for that? We do think that technology will create speed at which we can move transactions, that it will really fuel our growth from a highway perspective and even the opportunity to talk to customers about different ways to move goods.
I would see next year continuing to have pressure on our operating income results, but our longer-term focus, really for us, our three to five-year vision on creating that more efficient transportation network creates a very large marketplace, and that really is our North Star.
Okay. I guess sort of just as a follow-up, and I know the fundamentals are separate, I know there'll be pressure on EBIT in 2020. Is there a way to get a sense, will profits go back in the black at some point, or do you expect it to stay sort of in the negative range just in some way?
We're still working on our budget for next year.
Okay.
I would say, I think we're going to have pressure on our bottom line performance. We will be watching all the key metrics in the platform. That's going to be our biggest driver overall. We know there will be inefficiency. Today, we have inefficiency that's happening in the platform from a carrier purchasing perspective and also from new freight that we're onboarding into the platform. That will work itself out over time. As we get through startup, that's probably more impactful right now. As we continue to accelerate our growth, which is a key theme for us, we'll continue to onboard new carriers, new lanes for both customers and for carriers, and that's going to put pressure on our margins as well.
Yeah. Jordan, taking a little bit longer view, the answer is no, we don't expect this exercise to be a loss leader just to get into the market. We expect this business unit to take this technology and turn it into a profitable business using the technology, the people, and all the investments that are occurring here in 2019 and most likely throughout 2020. Does that mean it actually turns black in 2021 yet? We don't know. Five years ago, it was pretty easy to put some numbers on a chalkboard and say absolutely yes. The market's changed, as we've seen in the meantime. Yes, I would say that from our perspective and from a strategic standpoint, this is not a loss leader.
This is to be designed to be a profit center, just as it was before we started spending the money to transform it into a more digital platform.
Got it. That's very helpful. Just one other quick question, perhaps. Can you give a sense for what, on the intermodal front, your thoughts on bid season and bid season timing? You're able to do 5% ex-fuel surcharge, 2% all in this quarter. I know you've talked sort of low single-digit of late, so I'm just curious, any follow-up thoughts on that front?
Well, bid season's just starting. We haven't really gotten any results back. The last two years, it's been a very orderly market, and I would anticipate next year to be an orderly market, knowing the pressures that other providers have with regards to rail PTC that's out in the marketplace. If our costs are up, our expectation is that we will have positive price to cover those costs.
Thank you.
Our next question comes from the line of Benjamin Hartford. Benjamin, please state your name, company affiliation. Your line is now open.
Ben Hartford with Baird. Thanks. Maybe Shelley, back to ICS here. When you measure success as you build out this platform, how do you singularly define success? I guess I'm looking at this $200 million in revenue executed through Marketplace and ICS this quarter, up $50 million year-over-year. Has the profile of the customer that you engage with through Marketplace, has it changed? Is it meaningfully different from the profile of the customer that you typically interact with across the business lines? It's a bit of a leading question, but I'm curious if you're able to engage with small or medium-sized customers more effectively in that $200 million bucket this quarter year-over-year. If not yet, will you? Maybe talk a little bit about the profile of that customer, how it's changed, and how it could change over time.
Sure. We have largely spent time with customers that know us and know us very well. The interactions that you see currently in Marketplace are customers that we have deep relationships with and that really buy across our nine services that we offer inside our four business segments. We do plan to go into the small and midsize market. We really don't participate as an organization there much. That's something that'll be coming out in 2020. That's definitely part of our plan in our scaling out of the platform.
Okay, just if we're looking at the gross margins this quarter, understanding some of the competitive dynamics, as this project matures and as you do supplement the growth with some of the small or medium-sized customers as that development continues, how do you anticipate that gross margin percentage trending over time if we smooth the average, if we look at this quarter as a baseline? Should it benefit from mix offset by the natural competitive pressures, or is there something else going on as we think about that gross margin trend over time?
Great question. I think that the gross margin % could stay similar to what you see inside our earnings results in Q3, ±100 or 200 basis points in total. I think the bottom line performance can get back into the range that we've really talked about, 4%-6% in total. If you look at what's happening inside ICS, just in the base part of our business, we're up as expenses to % of revenue really across everywhere that we're investing. Certainly in our employee expense where we expect to get leverage, in our direct expense, our EMP, and all of our new system dev all have significant expense sitting inside that. We do watch each one of those metrics so that we can understand what our productivity and our footprint looks like.
As we lean into the back end of next year, so maybe fourth quarter of next year, maybe into 2021, we do expect productivity improvements to start to occur inside our people. We're just getting started on the points of automation that we need to really happen from an employee-based perspective. That, we think, will enable us to start getting back to profitability.
Helpful. Thank you.
Next caller, please state your name, company affiliation, and your line is now open.
Hi, this is Justin Long with Stephens. Thanks for taking the questions. Maybe to start with intermodal, I know you were successful winning some intermodal business late in the bid season. If you were to strip out the tailwind from some of those market share gains, how would you say the underlying volume environment trended in the third quarter relative to what you would view as normal seasonality?
Yeah, I think there's two stories. We had four or five bid events that happened towards the latter part of the second quarter, plus we had bid events prior to that should have allowed us to grow even more than what we were anticipating. It really came down to the compliance that we've talked about. I think what you're seeing in the latter part of the third quarter and into now is that the compliance is better than what we saw in the second quarter, and that's lifting all boats, if you will. We have four or five big customers that have helped us, but then the compliance with the rest of the base has also given us a lift.
Okay. Going back to the intermodal OR questions and thinking about the progression going forward, Terry, do you feel like we need to see price increases in next year's bid season in order for the intermodal OR to improve in 2020? Or do you think there's enough levers with volume growth, better rail service, et cetera, to drive improvement in margins next year, even if pricing is flat-ish?
Well, pricing moves the lever quicker than volume. Obviously, price would help us to get there. The momentum that we have with volume moving into the first half of next year, we should have some good volume comps, given the economy staying where it's at and nothing new showing up in regards to the macroeconomy. To answer your question, the price would move the needle quicker. The question will be is how much of that can we get, and what are our costs that we have to try to cover to add margin?
Okay. Just to clarify something you said earlier, you said if your costs are up in intermodal, you expect pricing to be up as well. Do you feel like intermodal pricing can be up even if truckload pricing is down contractually in 2020?
That's what happened so far in 2019. I think there's a probability that yes, you could see that.
Okay, great. I'll leave it at that. Thanks for the time.
Our next question comes from the line of Ken Hoexter. Ken, please repeat your name and company affiliation. Your line is now open.
Hey, it's Ken Hoexter from Bank of America Merrill Lynch. Thanks for the time. Good afternoon. Maybe just to follow on that maybe more near term, if you're looking on pricing, you're looking for positive volumes for the fourth quarter. I guess you're saying that revenue per load can also be positive, and maybe you could just talk about the rate environment, not only in intermodal but perhaps for each segment.
Yeah, I think on the second quarter conference call, I mentioned that we should have a positive rate for load in the fourth quarter, and we haven't changed that thought process.
I would say brokerage does I think Dave spoke to the competitive environment inside brokerage, and I would say that we're just starting the big season. We do see competitive pressure to retain our current business inside brokerage, and on the asset part of the business, really too early to tell. Having different conversations with different customers.
I'll just say on the dedicated side, 70% of our business has ETI, TTI built in, so that portion will get whatever those indexes dictate. We got 30% that does not have that in there, but two-thirds of that's not up for renewal in the next year, so that will not feel any pressure. That leaves about 10% of our business that would face some pressure, that could face potential pressure in the one-way market. We feel good about that. Overall, our rates will be up in dedicated as our season goes.
Great. Appreciate that run through on it. A quick follow-up. Maybe you talked about the acceleration from the West Coast volumes and obviously a decline still on the East Coast. Can you talk about were there any service issues still cleaning out lanes, or is it just demand picked up on the transcon versus the decline in the regional volumes? Maybe just talk a little bit about on the volume side for intermodal.
Yeah, service has picked up from where it was last year. It's not where the railroads had targeted to be, but they have definitely improved, and it's helped our velocity and their on-time service to the customer. The East Coast continues to see pressure with truck on the fringes, and that hasn't really subsided at all with regards to what we're seeing in the marketplace today.
Just to clarify, it's more a truck competition than it is a lane closure or change in PSR strategy from your main provider out east.
Yeah. We still have the hangover for another 4 or 5 months with regards to the PSR, where we lost 60,000 or 70,000 loads starting in early January. That we should comp that in January through March, I think is when those were implemented. That's about 70% of what's going on in the East in terms of our negative volume. The other's kind of the fringe trade, as I call it, the 1%, 2%, 3%, with regards to the competition with the truck and then slash the poor service that we saw last year. Those combination is where we've lost a couple % to truck. As service picks up and if the market starts to tighten, that usually jerks back our way.
Great. Appreciate the time. Thanks.
The next caller, your line is now open. Please state your name, company affiliation, and ask your question.
Hey, guys. It's Jason Seidl from Cowen. Two quick ones here. One, you guys did a good job sort of breaking down how you see the market going forward. Obviously, you're not going to be predicting the economy or fuel. I guess, where do you see truck capacity going in 2020? Are you confident in what you've seen thus far from the PSR implementers that rail service will be improved next year?
Well, from a rail service perspective, yes, I think the railroads will continue to get better, especially as other commodities are a little bit slow. I anticipate that the rail service will get better. They have not met their targets that they have set out to meet, and I think they will improve versus what we've seen this year.
Jason, are you talking about intermodal when you say the truck market, or are you talking about truck service?
Overall truck capacity.
You're talking about capacity, not necessarily. Okay. I'm going to let someone else. I thought you meant I didn't know if you meant the price of used trucks or not. That's why I was asking. I'll let Shelley talk about that.
I would say that a macro view from a capacity perspective obviously would change our view. We think that it's sluggish in the market. Mostly from the supply side, demand is not as strong as anyone would like. I don't know how confident we are in that, being that we've done budgets now for 20 years, and we never hit our budgets up or down from a capacity perspective. I would say first half of next year could be more sluggish, similar to right now. Second half, I think macro will be more of an indicator.
Okay. No, that's a good callout. I guess my follow-up here is your main Western partner is the only one to not implement PSR or at least a form thereof. Is that something that you envision them doing at some point?
You'd really have to ask them. The conversations that we have had with them, they've said that they've had some form of PSR going on in the railroad for over a decade. I would think that they're doing certain things, but they aren't calling it PSR.
Okay. Fair enough. Everyone, thank you for the time, as always.
Our next question comes from the line of Allison Landry. Allison, please repeat your name, company affiliation. Your line is now open.
Thanks. Allison Landry from Credit Suisse. Dave, you commented earlier about some aggressive behavior in terms of brokerage contractual rates. I just was curious if you think that's normal from a cyclical standpoint, or are you seeing increased competition from either tech-based entrants or some of your more traditional peers that might be also going after the digital freight marketplace?
I'll let Shelley answer that question.
I would say it's more competitive than it has been. Certainly, I think technology in general has changed the way our customers view the level of predictability. If you look at what's happening in the brokerage space today, cost and capacity and service is more predictable right now than it was a year ago. Our customers leaned into more asset mix in bid season last year. I think this season, based on early discussions with customers, they are more comfortable leaning into brokerage based on the pricing that they're seeing from early bid season. I would say there could be likely a shift to more brokerage here this bid season at a macro view, and I would say it is more competitive.
Okay. Just as a follow-up in terms of the extra repositioning and network and balance costs that you saw in JBI, could you help to maybe give us a sense or quantify what that was in the quarter and give us a little bit of color on what drove that? It maybe seems like it was a little bit worse than you guys had anticipated. Thank you.
Yeah. Some of that came from the bid cycle, the last third of the bids that came out. Part of it is customer compliance, where we thought we had balance and the customer didn't give us the freight that they thought that they were going to give us. That's what created that. I think what I mentioned that if we hadn't had that extra cost, that we would have improved our OR versus the second quarter, and I think I'll leave it with that.
Thank you.
Our next question comes from the line of Chris Wetherbee. Chris, please repeat your name, company affiliation. Your line is now open.
Chris Wetherbee from Citi. Just to follow up on that question to make sure I understand repositioning costs. We should not expect that to continue into the fourth quarter? That was isolated to 3Q?
It's too early to tell. We're only 15 days in. If the West Coast continues to stay strong like we've seen it, we could have some extra reposition costs. Typically, that fades off in the last 45 days of the month. It's too early to really make that call.
Okay. All right. That's helpful. I appreciate it. Maybe coming back just to make sure we put some numbers around this. The tech spend, I think, Dave, you mentioned maybe up, I think you said 60% sequentially. I don't know if that puts us into the sort of $16 or so million. I don't know if my math is right there. Could you quantify sort of what that tech spend is? Shelley, you mentioned that maybe it goes up going forward. Can you try to frame this up a little bit? Is it possible that maybe we're talking about an $80 or $100 million annual spend in this? I just wanted to try to get a sense of how maybe that adds up as we go out into 2021.
Well, are you talking enterprise-wide or inside ICS?
Both.
Enterprise-wide, yeah, $100 million enterprise-wide is a piece of cake. That's easy. Through September, we're past that. That's just the OpEx side. Inside ICS itself in the quarter, I think that their tech side was a little bit shy of $14 million in the quarter.
Okay.
That's up 60% year-over-year. That's just on the development side.
No, that makes sense. I guess, could you help us sort of frame out how you think, and we talked a lot about this, I guess, on the call, but I just want to sort of make sure I understand sort of how we think about the growth through the marketplace as we think about 2020. What are some of the numbers we should be thinking about from a revenue perspective? I guess when can we start to see this turn towards each sort of incoming income start to generate a return? Maybe you can frame up what you think your sort of return hurdles are for this investment.
We continue to have more needs from the base part of the platform, and I talked earlier about what we do with the data. That's going to be the most significant driver of what we do from a tech perspective moving into 2020 and beyond. In total, we do expect our revenue to accelerate next year. We still are working on our budget and what our 5-year look really will be in total for all of ICS, but also across the enterprise. Our hurdles really are across every category that I talked about that we are working towards scaling. We have too high of employee costs currently based on as a percentage of revenue. We have too high of EMP costs. Pretty much across the board that touches the platform, we're investing heavily inside that space.
It'll take us, I don't know, maybe 18 months or so to really get through that and develop a scale that we believe we need to then start leveraging into our cost as a % of revenue.
Okay. We're thinking kind of 18 months from now is the right way to be thinking about that.
Sure.
Okay.
Okay.
Great. Thanks very much for the time. I appreciate it.
Our next question comes from the line of [David Vernon]. [David], please repeat your name, company affiliation. Your line is now open.
Hi. Hi, it's David Vernon from Bernstein. I just wanted to ask you, Dave, a question on the balance sheet and sort of the long-term sort of outlook for returns here. First on the balance sheet, you've got about $75 million worth of cash sitting on the balance sheet, and you guys used to kind of pretty religiously manage that balance down. Is there a reason why we're holding that much cash or any sort of change in the prioritization of available cash from sort of prior practice?
No, David, no change. There's a lot of times when we'll end up with cash inflows faster than outflows in a period of time where I can't do anything in public markets with it. I'm just basically putting it on my balance sheet because I either can't deploy it in the repurchase programs, I have a lull in equipment purchases, so it's more timing than it is any kind of change in strategy.
Is there a draw on that other than equity repurchase? Like is it being held aside for a reason or something?
No, not any particular purpose, no.
All right. One thing I'd love to get-
It's all my.
Sorry, there's a little bit of a lag. I apologize. One other question I'd love to get your help in terms of helping investors understand is a little bit of the change in business mix. Obviously, the DCS business, the ICS business is growing a little bit faster than the intermodal business historically. One of the things that's been great about J.B. Hunt is the high level of return. Can you help us understand kind of what the relative return profile of these businesses are, just to think about kind of how that shift is going to affect the business long term?
Well, we haven't broken out the internal ROICs, simply because don't want to get into a lot of debate with regard to allocation of shared services and allocation of footprint for asset profile, which you'd end up having to do, and then the comparison issues, we have that debate anyway. What we've said is that we definitely longer term think that the ICS should be the highest returning asset that we own or segment in the portfolio because it's the lowest capital intensive. Intermodal would at this point in time be next in line. Even today, that probably is going to have to run for its money as we convert to a more asset-light model in truck. Everything is based on the relative asset size.
Intermodal would be, let's say that truckload is less asset-intensive, so it would be next, then intermodal, and then dedicated. With that being said, how we measure each of those business unit is relative to the peer groups. In the peer groups, obviously ICS would be brokers. Truckload would be asset-light truckers, so think maybe possibly a Landstar-type model is what we would have to compare ourselves to. Intermodal is in a business of itself, so that should be pretty easy if we can compare it to those players. Dedicated is kind of a quasi-business because it is not truckload. It is not one-way truckload.
While it does compare itself to Werner and Knight, which is phenomenal, and the rest of the traditional truckers, we kind of hold it to a higher standard because it doesn't have the price fluctuation that those typical truckload carriers have to go through. I would say that you would end up comparing it to the higher end
Truckload carriers, the Knight, the Heartland, the things of that nature, from an ROIC perspective. The way they are performing, ICS is obviously lagging today. Historically, it is not, but it is today. Intermodal is lagging on a 12-month basis given what the charges we've taken in the past year. Its NOPAT performance is low on a trailing 12 months. Truck is going through some transition, so it's kind of all over the board at this point in time, but improving. Dedicated is actually performing on a return basis better than our expectations.
All right. Thanks a lot for that, [that is all] .
The next question comes from the line of Bascome Majors. Bascome, please state your name, company affiliation. Your line is now open.
Yeah, Bascome Majors from Susquehanna. On Dedicated, heading into the last recession, that was about a 5,000 truck, $1 billion revenue business. You've got 2 times as many trucks, 3 times as much revenue in the growth you've generated over the last 10 plus years there. Can you walk us through how the larger Dedicated business, how you think that performs in a recession scenario? Where are you vulnerable to weaker pricing and volumes that's going to hit the overall one-way truckload market? Where do you get some cyclical protection from the contract structures you've got there? Thanks.
I would just say, typically our contracts are about four and a half years based on average, some longer, some seven, nine years. We get some protection there. If you talk about just a downturn in the economy, as we've gone through that and seen that through the years, what we typically see is you may see a bankruptcy of somebody that goes out because of financial conditions. We may take a hit of 100 trucks or something like that. As depends on the industry that's impacted the most in the down cycle, we may see some truck shrinkage at accounts, and we do that with our customers. That's the flexibility that we offer, and then we'll take those trucks and place them at new accounts.
When the economy turns south, that means that CFOs like Dave are really scrutinizing their capital and what they're going to do. We take that opportunity to really go talk to them about capital and deploying their capital, where they're going to deploy it, and let us do it in a more efficient way and save them money. We hit up the CFOs hard during that time, and we have a lot of success of selling that way. Will we have some exposure to the one-way market? It again depends on the timing of that. When that portion of our business that is 30% of our business that does not have indexes in it, what portion of that is up for renewal at that given time when the economy is strong, we'll face some pressure on that.
It's hard to say, but it could be 10% of our business or something like that, potentially. I would just tell you that I turn up the heat on our sales team when the economy goes south because there's a lot of people that want to get out of their private fleet. The CFOs are more valuable to us than ever before during that time. I would expect us to continue to sell.
Thanks. I appreciate the detailed answer there. Dave, just a follow-up for you. Looks like net CapEx was approaching $600 million year-to-date. Can you give us an updated look at what the full year spend could look like for this year and any preliminary thoughts on next year? Thanks.
Don't have preliminary thoughts on this year. The one number I know I missed on my forecast was the amount we're capitalizing on tech. Originally, I thought it was going to be somewhere in the $40 million range. It's probably going to be more like $80 million. My CapEx is probably going to be up somewhere around $680 million by the time the year is out. It's all due to the accelerated tech spend that's being capitalized.
Thank you.
Okay, Michelle, this is Brad. We have time for one more question.
Sure. Our next question comes from the line of Scott Group. Scott, please state your name, company affiliation. Your line is now unmuted.
Hey, it's Scott Group from Wolfe. Thanks for squeezing me in. Terry, is there any way you can help us think about transcon versus east margins, if there's much of a difference there? Then you had a comment earlier about rail PTC expense for some of your competitors. I wasn't sure, were you trying to say that you've got similar cost inflation next year as everybody else, better, worse? I wasn't really sure what your point was.
Yeah, my point on that is that as all providers of intermodal have rail PTC challenges, the likelihood of decreasing rates is less than the likelihood of having to increase rates. Our programs are obviously different than most, so I won't go into that. Your second part of your question was?
transcon versus east margins, if there's much of a difference there.
I think in previous calls we've talked, there isn't much of a difference in that. What you'll find is that the profile of the load is different in terms of there's more revenue associated to a transcon load. A margin of X on a transcon load is different for the total op income versus a smaller load with a similar margin. That load will take much less time to be able to execute.
Just back on PTC for a sec. Directionally, do you think you've got more or less PTC headwind in 2020 versus 2019?
Less.
Okay. Just last thing real quick. Any way you can help us, Terry, just think about fourth quarter volume. I know you said positive, but you think it's sort of similar to that 3% in September, better, worse? Anything you can just help us with the model?
Positive is better than flat. I don't have any real guidance on that. We haven't really given guidance on that. A couple % is what you'd probably be looking at.
Thank you for the time.
Nobody's expecting a spike, Scott.
Thank you, guys.
Okay, Michelle, that concludes our call.
Thank you for using AT&T Event Conference Enhanced. You may now disconnect.