Ladies and gentlemen, welcome, and thank you for joining today's teleconference, the 2019 Q2 earnings call. Please note that all lines will be muted until the Q&A portion of the call. We will provide you with instructions on how you can ask a question at that time. With that, I'll turn the call over to David Mee, Chief Financial Officer. David, please go ahead.
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 two to three-minute synopsis of our view of the quarter. We'll open up the lines for questions. If you don't mind, please limit yourself to one question and one follow-up so we can get through this with everybody getting an opportunity to ask a question if they'd like. Appreciate it. 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. The range of pricing from beginning to end is wider than what we had originally anticipated. We expect asset-based pricing in trucking intermodal to be positive, though the year-over-year increases are ending the season in the low single digits. In private fleet outsourcing interest has not subsided because dedicated pipeline remains very strong. Specifically in intermodal, we were disappointed with the load counts for the quarter. 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 loads were down 11%. We knew we could start off in the hole 9% due to the lane closures alone.
Customer award compliance remained around 7%, which is about 10- 15 percentage points below historical levels. 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 that's non-Final Mile, operated as expected, both from a revenue and a profitability perspective. The Final Mile business continues to improve its profitability, excluding the charge for the accident 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. We were able to offset some of the effect with growth in the dry van sector.
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's a year-over-year $4.8 million increase in spending, and that's to further develop and harden the platform. That puts pressure on 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. That put even further pressure on gross margins late in the quarter specifically. We believe 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 mixed fleet of company trucks and independent contractors yielded the expected result in a sluggish rate 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. Bijou, you can go ahead and open up the lines, and we'll start taking and answering questions to the best of our ability.
Absolutely. Ladies and gentlemen, as we move to Q&A, press pound two on your telephone keypad to enter the question queue. You will hear a notification when your line is unmuted. At that time, please state your name, location, and question. Once again, pressing pound two will indicate that you wish to ask a question. We have a few questions popping in. First caller, your line is being unmuted.
Hey, guys, it's Jason Seidl from Cowen. Wanted to talk a little bit about the pricing that you 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?
Go ahead, Nick. Yeah, since you're the differentiation.
I would just say that in our business in Dedicated, 68%-70% of our revenue has some type of index or built-in rate increases in the contract, and it just happens automatically. We're not in the quasi-dedicated business. Ours are kind of separate. We're anywhere from 2%-4%, but it's consistent year in and year out. If you follow us historically, you'll understand how those indexes work. The other 30% is typically if it's an 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. Like I say, 70% of ours is already contractually scheduled in the contract.
Truckload business started off the year much higher as we did discuss earlier that it was in the mid to upper single digits. As we progressed through this season, that did lower to, I would say flat to up.
I guess as a follow-up, are you expecting up bid going forward for the remainder of the year based on what you're seeing so far with demand?
I would say specifically in truckload asset parts of business, we're lapping on top of historically higher prices on published business. 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%- 3%.
Moving to our next question. Caller, your line is being unmuted.
Hey, it's Chris Wetherbee from Citi. Thanks for taking the question. I guess I wanted to talk a little bit 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'd be helpful.
Sure, Chris. Historically, what I've given everybody was just a change by month. I'll start with that and then tell you about workdays because that's really where we dig into the details and where our comment came from. 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, in April, we saw 7,300 loads per workday. In May, we saw 7,450 loads per workday, and in June, we saw 7,800 loads per workday.
Okay, that's helpful. Does that progression, does that type of progress carry over into early 3 Q?
Well, it was 4th of July week or whatever. I don't have enough data to make that assessment yet. I would say that customers have not run away, so they haven't gone anywhere.
Okay. Fair enough. I appreciate that. Then just from a Dedicated side, some significant improvement in profitability excluding the charge that you had there. Can you talk a little bit 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?
We're coming out of a big truck add last year, you're seeing what we call the wave of they're up and profitable and running and stable. You're starting to see the results of that. We had good truck adds in Q2, we continue to think we'll have the same level of truck adds in Q3. When we look at our pipeline all the way from beginning stages, we have six or seven 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 has taken just a little bit longer. Seems like everybody's trying to figure out what's going on with the economy.
We're still on our target plan for this year, feel very good about that, and the demand is still very high for pure dedicated business.
Moving to our next caller. Caller, your line is being unmuted.
Good afternoon, it's Tom Wadewitz from UBS. Wanted to see if you could give a bit of perspective on the, I guess just the internal margin outlook and how you would think about second half, whether it's kind of, I guess, similar level of year-over-year pressure, or if there's a reason why things might ease. It seems like maybe volume gets a little bit favorable, but not clear whether pricing helps you or hurts you in second half. Any thoughts on second half's intermodal margin and Thanks.
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. Of course, our long-term outlook is between an 11% and a 13% margin. We're just north of that, I believe, for the quarter. I think if you take the five-year history, add a year of rough season, it'll stay in that 13%-11% margin, and it should get a little better here in the second half.
You're saying sequential improvement in the OR, or you're saying You're not saying year-over-year improvement, you're saying sequentially some improvement. Is that the right way to understand it?
Yes. That's correct.
I think the caller was unable to hear that response. He said that is correct. Moving to our next caller, your line is being unmuted.
Yeah. Hi, it's Jordan Alliger at Goldman Sachs. Just a question for you. You mentioned that you're 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.
Well, as we went through the bid cycle and we looked and saw what the awards were in our bids in the last two or three months, we believe that our volumes will increase via those bids. As we look at the third quarter, there's probably a month or two that should get us into the positive comp territory, and then by the fourth quarter, the quarter should be positive as a whole with regards to fourth quarter last year versus fourth quarter this year.
Just as a quick follow-up, I think last quarter you did mention that the warehouses were pretty full, and we continue to hear anecdotally at least that that's the case. Are you starting to see or hear about work down of any of that, or is the trade issues still sort of impacting the port situation or warehouse situation?
I'll answer that a little bit, and then I'll have Shelley follow up on that. From what I've heard from our customers, it's a little mixed. Some customers say some of the inventory has bled off. Other customers say they still have a month or two where there's going to try to bleed off inventory. It's kind of a mixed message from my perspective.
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 really what was happening around tariffs. They are starting to work through that inventory and feel better about the back half of the year.
Okay, moving to our next caller. Your line is being unmuted.
Thanks. Bascome Majors from Susquehanna here. In April, you said that the big compliance on 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? Just anything you could share on that front would be helpful. Thanks.
Yeah. The normal bid compliance is usually 80%-85% of the state of the award. I think we mentioned that we were around 68%-70% in the first quarter, and that did not change as we went through the second quarter. I think we'll have a little bit of an uptick going into July, August, and September with regards to our compliance.
Does the trend stabilization even at a below normal level, does that give you the ability to manage the cost side of the intermodal business and the capacity side tighter in the second half? You still need to keep that extra capacity in case the volume starts to pick up? Thanks.
We anticipate the volumes to increase because we're going to hit positive territory in the months ahead. That will help better utilize the assets from the container standpoint as well as a dray standpoint moving forward.
Moving to our next caller. Caller, your line is being unmuted.
Great. Thanks. Good evening. It's Todd Fowler with KeyBanc. I guess maybe you can help us out a little bit with ICS. It sounds like there were quite a few puts and takes in the quarter, and I guess what I'm just trying to understand, it's a slight loss here. Is the expectation that you can return to profitability in the third quarter? Then maybe help us understand how much of the cost was unusual related to J.B. Hunt 360 versus the lost LTL business.
Yeah. 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 complete 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 our long range to eliminate the inefficient market, and to get to a better way to move goods. That's really our focus of where we're at, and when we're making the level of investment that we have inside our technology and our people, there's thin room for any error inside that space. Part of what happened inside Q2 happened mostly in the month of June as capacity did tighten in the month of June. Also our acceleration of bids had a very successful bid season.
Our acceleration of bids coming through the quarter yielded lower margins in total as we were onboarding new business that we were using from our data in the platform and really trying to come to our start up along with spot volumes really falling significantly in the month of June. Put that on top of some of the new systems that we put in place. We had a few issues with, we backed those out 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 published side of the business or the bid season customers. We are continuing to onboard that business as we lean in this year in Q3, we are operating off of smaller margins and really plan to operate that way.
Our LTL volume, we are very committed to making sure we can exceed our customer expectations. As we are transitioning off the mainframe and into a cloud-based system and also on the Marketplace, there were a few CPAs in the LTL space that no longer could be supported. 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 really we have 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 ICS space.
Okay, Shelley. All that's helpful, just to kind of follow up on the profitability piece of that, you talked about intermodal improving in the back half of the year. Can we expect improvement in profitability, given the ICS of kind of all those moving parts for the second half?
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, that's what we're marching toward.
Our expectation, I'm going to add onto this, Shelley. If the expectation was that ICS would still be below its historical operating income margins, simply because of the tech spend that we knew we were going to have on this. While we would expect a recovery in the back half of the year, we would not expect it to be in that normal 4%-6% range or get to a 4%-6%.
Moving to our next question. Caller, your line is unmuted.
Ben Hartford with Baird. Shelley, maybe interested in your perspective on supply capacity. You 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 for the back half of the year from an ICS perspective, or even from a JBT point of view as it relates to recruiting. Where do you think we are in the industry supply correction cycle?
I would say as the quarter progressed in Q2, we did see a tightening in June. Part of that was Roadcheck, which was to be expected, but that came right on the heel of a religious holiday. The combination of those two things really put more pressure than expected on margins. It has tightened more quickly than we expected in this environment. As we've moved into July, we've seen a seasonal softening, just like has happened every other year. We would expect the second half of the year to be a more balanced market, maybe even on the supply side, more plentiful in supply than it was in the month of June.
If I could just talk about the truckload side of it, I think you are talking about drivers in general on the truckload side. I would say drivers are slightly easier to come by on the truckload space, but significantly more expensive to onboard. We really have increased the level of pay for our professional drivers, and we have seen that happen here two years in a row. Our cost for hire is up and our W2 is up as drivers. Although we are seeing a little bit of easing inside that space, I think our W2 increases that I have heard inside JBT have really helped attract new people into our business.
Okay. If I could just follow up on that comment, I think you said you expect supply to be a little bit more plentiful in the back half of the year than June. Where 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 is it going to take for that to return to a more balanced or even tight market?
Well, I would say second quarter is normally the tightest environment particularly in June inside the supply side. I would say we are returning to a more normalized. The year 2018 was an anomaly. If you look at really any of our trends that have happened, we have had a couple of years here in the last six years that have been unusual on the supply side, but we would expect a softening, and that seasonal softening happened here in July.
Moving to our next caller. Caller, your line is unmuted.
Thanks. Good afternoon. I wanted to go back to your intermodal volume outlook comments. I know there's been quite a few questions on this, if I'm hearing it right, it sounds like you had maybe a couple of significant contract wins during the bid season. I guess, first, could you clarify whether you would expect loads to show better than normal seasonality in Q3? And then did you have to trade price for volume more than you originally anticipated in order to get some of these wins? I know that earlier this year you had talked about leaning more towards volume versus weight. Just sequentials on sequentials and how that tracks relative to your expectations and what that means for the pricing and revenue per load trends in the back half of the year. Thank you.
Allison, is that you?
This is me. I'm sorry for asking seven questions in one.
That's fine. You just didn't announce first. That's what I was just double-checking that it was you.
Oh, I'm sorry. Allison Landry from Credit Suisse.
No problem.
Sorry about that.
The volume increases we should see in the second half of the year are from a group of customers, not one individual customer or two customers. It was not a price play. I think you will see that play out through the next few quarters when you start looking at the revenue per loads. It was more of 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. As I stated earlier, if you look at the third quarter, we believe there's a month or two in there that will hit positive comps versus the third quarter last year, and we should hit positive comps in the fourth quarter.
Okay, I follow. Thank you, guys.
Moving to our next caller. Caller, your line is being unmuted.
Hi, David Vernon with Bernstein . Dave, could you talk a little bit about [audio distortion].
We're sorry, caller. Your connection seems very unstable. If you wouldn't mind, please hang up and dial back in. Moving to our next caller for the time being.
Hi, it's Ken Hoexter from Bank of America Merrill Lynch. Dave, maybe just to step back, 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. Here it sounds like the outlook into third quarter, both intermodal, even ICS, maybe turning more positive. Is there something underlying shifting that we should be taking away from this from your point of view?
I think that it's just a matter of the volume starting to appear to show up. Now, I'm still cautious. 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. I was happy to see the trends throughout the quarter, while they are below expectations or at least direction correct. I think that if we can get through July, I think July is not a good month to gauge anything off. From our perspective, the leading month of the year from July is typically February.
I'd like to see a little bit more in August. Based on sentiment of what I know are the awards and as the volumes are starting to come on, yeah, I'm a little more optimistic than I was when we visited in May.
Sure. Just to clarify, I guess, on that particular intermodal thought, you kind of thought, hey, intermodal margins are not likely to hit our target range. Terry maybe mentioned earlier that we expect to get right back on that. Am I reading that commentary right in terms of your margin outlook for intermodal?
Well, yeah. Let's clarify. The question that I got asked, I believe at your conference, I interpreted that as for the year. My response is no. 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 what Terry is looking at, and his gut, his feel, his projections. Yeah, there's a possibility we get back into 11 for a particular quarter, but I stand by my statement that we would not show an 11- 13 for the full year of 2019.
Moving to our next caller. Sir, your line is unmuted.
Hey, thanks. Matthew Brooklier, Buckingham Research. 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 off for that portion of the contract side of your business.
Okay. I think I've mentioned before that the first third of the bids were in higher single digits, the middle third was middle single digits, and the last third were lower single digits. We're basically through all of our major bids for the most part. Some we don't have implemented yet, but we know what we're going to be basically looking at. I think that'll end us somewhere in the middle single digits when it's all said and done for this bid cycle.
Okay. It sounds like the contract pricing pretty much in line, I think with your expectations, a little bit of a fade into the second half of the year. I think that's what you guys have been conveying through that. The more positive outlook at Intermodal in terms of volume, I think, you 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?
The service levels we received, especially from the eastern railroads, are up significantly from last year at this time, not to where their goals are or what our goals would be. The BNSF started off extremely well. We had a weather issue in February into March. Starting to rebound, we had flooding issues here in the last couple weeks in June. They're starting to rebound here in this week. We're starting to see it come up to par. Service obviously is helped there. Some of the technology investments that we've made 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 hours slower here and there.
We've been able to use those tools to, what we think, is differentiate our product from others.
Moving to our next question. Caller, your line is unmuted.
Hi, this is Justin Long with Stephens. Good afternoon. Dave.
Finally, the AT. Finally, you got the AT.
I don't know about that. It only took me about a decade to get coverage of the stock, but the day is finally here. 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? 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 that you've seen historically in the second quarter.
Yeah. 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. Like I said, that was expected. We understood that going into the quarter. Obviously our goal was, we said this earlier, that we were going to try to overcome that, 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. Right. Yeah, the trajectories was good, obviously from April through May and into June, 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 had to run truck because of the various floods that we were not able to handle.
That's helpful. Circling back on the 11%-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 this bid season? Do we need to see an acceleration in the pricing environment from here to get to that target?
That would be, I guess, giving guidance, for one, and I'm not ready to do that yet. The second thing is I have to wait and see what their plan for next year looks like. I haven't seen that yet either, Justin Long, I don't know the answer to that.
Moving to our next question. Caller, your line is unmuted.
Hey, guys. It's Brian Ossenbeck from JPMorgan. I wanted to ask another question on ICS in the Marketplace. Shelley Simpson, maybe if you can give us a sense what type of benefits you're seeing, excluding the extra spending on IT and maybe even on headcount, getting more of the transactions pushed through the Marketplace. Maybe you're up to about two-thirds, which continue to climb. I'm a little surprised to see that the loads per employee are down significantly, the headcount's up. Maybe that's a function of adding more IT folks, but maybe can you just give us a sense as to what benefits you're seeing and when you think they'll start to flow through that segment line item?
The mix of side LTL and truckload does change our volume per employee. 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 top-notch. 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 the things that we need to do to move us into that automation. Lastly, probably the thing that impacts us the very most is the level of data and the granularity that we get of the data through the platform. Earlier I spoke of the supply side coming back.
We can see that immediately inside the platform, all from a digital space, what offers are due, and how many peers are on board, what percents are on board, what lanes are becoming softer or hotter. All of those pieces are allowing us to get better at our pricing, better at serving our customers. We think that we'll see that really push us towards the end of the year as we come to a better comp against LTL within this full quarter. Moving into next year, we'll have market share gains as a result.
Okay. Thanks for all the details, Shelley. David , a quick follow-up for you. Can you just remind us if the buyback program looks like it was pretty active this last quarter? You still got some left on the authorization. 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.
Well, one of the reasons we were active in the quarter, we definitely had cash, if you will. We typically use our revolver as cash or our debt to EBITDA ratio as a cash indicator. We had availability, and frankly, we thought the price was attractive. We've always said we would be an opportunistic buyer. I think that we will continue that approach on a go-forward basis. 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.
Moving to our next question. Caller, your line is unmuted.
Thanks, everyone. 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? Was that related to the charge? If you can give us any more details on that charge. Was that an insourcing decision by a customer?
No, it was not an insourcing decision by a customer. 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. It showed up more materially inside of DCS simply because they got more people. It's the way the policy works. As they got a benefit, it went back to the business units, and DCS was just a more material effect.
Got it. 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? You had $44 million, I think, each of the last three quarters. Are you taking out $11 million a quarter for that in the current results?
We haven't commented on that. People have asked that in the past, Ravi, should they do that inside their models? 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 was an inappropriate conclusion.
Moving to our next caller. Caller, your line is unmuted.
Thanks. Amit Mehrotra from Deutsche Bank. Thanks for taking the question. 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, Berkshire has talked publicly about PSR quite openly over the last few months. Maybe any updated thoughts on how you're thinking about PSR as being a headwind or not on the volumes in the second half? Thank you.
One, obviously we don't use the Union Pacific, but I believe that the benefit of PSR is we should get better service, which should give us better turn times. It should give us the ability to be able to move more freight from the highway over.
We always talk about sometimes your PSR, that if they get into a fix or a derailment, sometimes they're not quite as resilient, because they don't have extra crews waiting around to play catch up. That's the ones to watch out with regards to PSR. With regards to the BNSF, we see some of the things that they're doing. I don't think they're as public as maybe what the UP is with regards to what they're doing. I don't see anything out of the ordinary that should come about in the second half of this year. It would be 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.
Okay. Thank you for that. Just as a follow-up, just sticking with intermodal, if I could, and on the cadence for pricing. You talked about early at the top of this call, up low single digits pricing. Truck spot rates have always been pretty negative for a while, and the expectations for contract rates have been coming down pretty consistently over the last year. Just in 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 half of the year?
If you can talk about the comfort you have around positive yield in the back half of the year, either based on the negotiation you've 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.
Yeah. I think I mentioned 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's 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. I don't see that being going negative at all.
Moving toward the final question for now. Caller, your line is unmuted.
Hi. 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 to the P&L today? When over the course of the next several years you might be able to expect some fall off in that investment into the software?
What we said was, we got an extra $4.8 million, or we got $4.8 million in the quarter OpEx spend for inside of ICS. I'm looking at Shelley. Incremental. It's incremental. Correct. Base is off of a two million base, so it's up to $6.8 million. It's up to $11 million. Okay, we're up five off of six prior. We're spending $11 million a quarter in ICS, primarily for the development of Marketplace 360. There's other pieces inside that, because you also have to harden the systems to handle the capacity, expand the available capacity. They're also doing further development through the intelligence pieces and stuff. It's not all just for the Marketplace 360, but it is part of the J.B. Hunt 360 platform.
Is it?
When do we realize that? When do we realize the revenue side? 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 two to three 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 thing? I don't know the answer to that yet, David.
All right. Thanks for that color. 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 a lot stronger than we thought, and 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?
Yes. I would just say, as Dave talked about early on, the DCS business minus Final Mile is hitting right in the middle of our target range of where we want to go. That portion of DCS is doing well. Final Mile, if you take out the one-time adjustments, it's making incremental improvement. The acquisitions are coming along and hitting their EBITDA targets. We're continuing our sales pipeline there is very strong. We're going to hit our expectations on sales there. It is going well. The integrations are all going very well. We're very pleased with how that's moving and progressing in the right way.
The margins on Final Mile are not at the level of the margins of It's actually dilutive, David.
Exactly. Because non-asset. A lot of the new stuff coming on is non-asset.
We did have a couple more questions come in as well. Caller, your line is unmuted.
Yes. Good afternoon. Dave Ross here from Stifel. Wanted to dig into the truck segment. Better than expected given soft 2Q in the overall truckload market, looks like you improved the margin due to some internal initiatives. Could you expand on those comments as to what specifically helped the profitability in the quarter in the truck segment?
Well, inside truckload, we are continuing our transition to more of an asset-light model. In total, we did change the number of company-owned trucks, as we moved some of those trucks into our Dedicated Contract Services group, continued moving forward. 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, so that did benefit us in total. Then, I think we just talked about some of the cost-cutting measures that we have in subject segment. We did a better job in yield management just with the trucks that we had and the freight that we moved with our customers, the type of freight that we moved with our customers. We moved those trucks into more committed relationships, that helped our quarter as well.
Then any change in the used truck market? What are you seeing going on there right now?
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 stabilized. I can't remember the exact quote they said. They weren't seeing any increase in used truck prices, nor were they 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, the backlog is still working its way through the system. I believe that their conversation with their boards was really about October. I'm looking at John Roberts, talking to him.
Yep.
I think October was the next date that they were really trying to figure out what do they do. If the orders stay at this level, do they add productivity or not? I think they're still in search mode, the immediate used truck pricing, they have not seen any kind of material change one way or the other.
Excellent. Thank you.
Moving to our final caller for now. Your line is being unmuted.
Hey, thanks. It's Scott Group from Wolfe. How are you?
We were just wondering where you were. I was getting worried.
I think I was hitting the wrong nine numbers to get in the call.
I do that all the time myself. That's the problem.
The monthly loads per day that you gave, Dave, do you have those from a year ago just so we can understand if this is a good or bad progression?
A year ago?
Yeah.
Yeah, you're talking about April 2018?
Yeah, so about 7,300- 7,450.
Hang on one second. I'm horrible with technology. I have to flip through stacks of paper here. I don't know if I've got that or not.
I'll keep going.
Uh.
If you want. Yep. Oh, you got them. Okay.
No, I've got April was 8,000. May 2018 was 8,100. June was 8,200.
Okay. Perfect.
Same progression, like I said, but at a lower level.
Right.
Okay. When we think about that 11%-13% margin and the 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? Where's the bigger risk to 11%-13%, on volume or price?
I'm going to let Terry answer that question.
Yeah, I think the biggest benefit to try to get through volume. Our pricing's pretty well locked in through 2019. Cost control.
I was thinking
My apologies. Please go ahead.
Sorry, I was thinking about 2020 and the ability to get to the 11- 13 next year.
Well, obviously, if price falls apart, that would have the quickest impact of any of the above. At this point in time, we don't see that happening. Haven't seen it happen yet.
With that, there are no further questions on the line.
Well, we'll do this as one last call since there is a couple of minutes here. 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.
We have one question come in from someone who's already asked a question. Would we like to take that?
That's fine. Go ahead and let it through.
Caller, your line is unmuted.
Hey, 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?
Yeah. I mentioned this earlier, I'm not sure if you were able to hear this, I apologize if I'm repeating. As we're moving our system off the mainframe and to a 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 business. In terms of customers, that was intentional on change. We do have on the roadmap this year to complete some of the work that is needed to really onboard those customers again in 2020.
Shelley, does that explain some of the big drop in gross margin percent, the big drop in LTL?
Well, LTL has a greater percentage of gross margin, or gross margin percent certainly is higher because there's a lower gross margin dollar per load. The change overall was our mix that happened, the new published business that came on and accelerated as the quarter progressed. I would say that was more of the majority impact of LTL.
Thank you, guys.
With that, there are no more questions.
All right, GG, thank you very much. Appreciate it. Thanks, everyone.
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