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 and 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 Shelly Simpson, the Chief Commercial Officer and President of Highway Services John Kullo, our Chief Accounting Officer and the worst kept secret in Investor Relations community Brad Galco, our Vice President of Investor Relations. As far as call goes, same ground rules as before. Let me start with a 2 to 3 minute synopsis of our view of the quarter, and then 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. But 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. And private fleet outsourcing interest has not subsided because Dedicated's pipeline remains very, very strong. Specifically in intermodal, we were disappointed with the load counts for the quarter, but we saw visible signs that the seasonality of freight flows has not completely disappeared as our loads per workday improved throughout the quarter. Our Eastern network loads were down 11%, but we knew we could start off in the whole 9% due to the lane closures alone. Customer award compliance remained around 7%, which is about 10 to 15 percentage points below historical levels.
However, our load count increased sequentially from Q1, and that additional throughput did allow us to see a modest improvement in our profitability. ETFs 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 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, but we're able to offset some of the effect with growth in broadband sector. And we continue to see conversion to an adoption of the use of the marketplace for JV Hunt 360. The new technology, though, does not come without some hiccups. There's a year over year $4,800,000 increase in spending, and that's to further develop and harden the platform. And 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. And that put even further pressure on gross margins late in the quarter specifically. We believe we've added or 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 freight environment. While revenue was down from prior year in spite of higher customer rates per mile, the flexibility of the total fleet size and the planned efforts to control overhead allowed truck to improve its margins both sequentially and year over year.
That pretty much concludes our prepared remarks. Biju, you can go ahead and open up the lines, and we'll start taking and answering questions to the best of
our ability.
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.
Yes. Since you're the differentiation, I would just say that in our business in Dedicated, 68% to 70% of our revenue has some type of index or built in rate increases in the contract and it just happens automatically. And so we're not in the quasi dedicated business. And so ours are kind of separate. And so we're anywhere from 2% to 4%, but it's consistent year in and year out.
If you follow us historically, you'll understand how those indexes work. The other is the other 30% is typically at the anniversary date. We're working on rates, and it's just varied based on the demand and what driver pay and so forth is doing. But like I say, 70% of ours is already contractually scheduled in the contract.
And truckload business started off the year much higher as we did discuss earlier that it was in the mid to out of sema digits and as we progressed to this season that did lower to, I would say, flat to
up. And 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 triple asset parts of the business, we're lapping on top of historically higher prices on published business. So we don't expect rates to accelerate much from here. We think those will be for the full year and second half of the year in the flat to up 2% to 3%.
And moving to our question. Caller, your line is being unmuted.
It's Chris Watervy from Citi. I guess I wanted to talk a little bit about the comment on seasonality and freight return. And 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, and 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. So monthly, in April, we were down 9%. In May, we were down 8%. And in June, we were down 5%.
Now on a workday basis, so in April, we saw 7,300 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. And does that progression, does that type of progress carry over into 3Q, early 3Q?
Well, I mean, it was 4th July week or whatever. Yes, I don't have an update to make that assessment yet. I would say that customers have not run away. So they have to run into the shipment anyway.
Okay. Fair enough. I appreciate that. And then just on the dedicated side, some significant improvement in profitability, excluding the charge that you have 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 an operating leverage to continue on as you move forward through the year?
Yes. We're coming out of a big truck ad last year, and so you're seeing what we call the wave of they're up and profitable and running and stable. And so you're starting to see the results of that. We had good truck adds in Q2, and we continue to think we'll have the same level of truck adds in Q3. And so when we look at our pipeline all the way from beginning stages, we have 6 or 7 different stages, It's just as robust as it has ever been.
The only thing that is a little tepid, I would say, is just the last couple of months, same amount of deals, but the close rate has taken just a little bit longer. It seems like everybody is trying to figure out what's going on with the economy. But 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.
And moving to our next caller. Colin, the bottom line is being unmuted.
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. So any thoughts on second half intermodal margin? Thanks.
Yes. I think the intermodal margins for the second half because we think our volumes will pick up going into the 3rd Q4, should improve from where they are today. And of course, our long term outlook is between 11% 13% margin. We're just north of that, I believe, for the quarter. And I think if you take the 5 year history, add a year for our feeder, it will stay in that 13% to 11% margin, and it should get a little better here in the second half.
So you're saying sequential improvement in the OR? Or you're saying I mean, 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.
Yes. Hi, it's Jordan Alger at Goldman Sachs. Just a question for you. The 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 3rd Q4? 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 2 or 3 months, We believe that our volumes will increase via those bids. And as we look at the Q3, there's probably a magnitude that should get us into the positive comp territory. And then by the Q4, the quarter should be positive as a whole with regards to quarter Q4 last year versus Q4 this year.
And then 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 if that's the case. I mean 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?
Yes. I'll answer that a little bit, and then I'll show you a 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 2 where they're going to try to bleed off inventory.
So it's kind of a mixed message from my perspective.
And I would say from a scenario 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 that they are starting to work to get inventory and feel better about the back half of the year.
And moving to our next caller. Your line is being unmuted.
Thanks. Vasquez 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 Q1 into July.
Do you have more visibility now or things tracking normal? Just anything you could share
that would be helpful.
Yes. The normal bridge compliance is usually 80% to 85% of the state of the world. I think we mentioned that we were around 68%, 70% in the Q1, and that did not change as we went through the 2nd quarter. But I think we'll have a little bit of an uptick going into July, August September with regards to our compliance.
Does the trend stabilization even at a below normal level? I mean does that give you the ability to manage the cost side of the intermodal business and the capacity side higher in the second half? Or you still need to keep that extra capacity in case the volume starts to tick up? Thanks.
Well, we anticipate the volumes to increase because we're going to hit positive territory in the months ahead. So 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 Q3?
And then maybe help us understand how much of the cost was unusual related to JV Hunt 360 versus the lost LTL business?
Yes. So, Tidy, further accelerated our investment in Marketplace in Q2, and we'll continue that acceleration moving into Q3. We do have a good list of projects that we want to try to place here this year, but we do anticipate continuing our accelerated investment as we've been talking to our customers and what they are asking for in nearly our long range to eliminate the inefficient market and to get to a better way to use goods. That's really our focus of where we're at. And when we're making all of the investments that we have inside our technology and our people, there's still room for any error inside that space.
So part of what happened inside Q2 happened mostly in the month of June as traffic did tighten in the month of June, but also our acceleration, we've had a very successful bid season. Our acceleration of bid 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 and some of that goes out as we ended the month of June. We do feel like those are repairs here in July.
However, we are experiencing more growth from the published side of the business or the business customers. We're continuing to onboard that business as we lean in this year in Q3, and we are operating off of smaller margins and really plan to operate that way. And then our LTL volume, we are very committed to making sure we can exceed our customer expectations. So we're as we are transitioning into Optum Inframe and into a cloud based system. And also on the marketplace, there were a few key pieces in the LTL space that no longer could be supported.
And so we intentionally exited that business, wanting to make promises to our customers that we could keep. We worked with our customers' self base, made sure that really with a good timing for our customers and really finishing that out here by the end of the year with some of those gaps that were inside on the IT space.
Okay. Sorry, all that's helpful. But 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 even in ICS of kind of all those moving parts for the second half?
Yes. We would expect from the Q2, is that your question? I think it is. From the Q2, we would expect the second half of the year to improve. Certainly, we want to operate in a profit based scenario, and that's what we're marching towards.
But our expectation I'm going to add on to this, Shelley. The expectation was that ICS would still be below its historical operating income margins simply because of the tax spend that we knew we're going to have on this. So while we did expect we would expect a recovery in the back half of the year, we would not expect it to be in that normal 4% to 6% range or get to the 4% to 6%.
Moving to our next question.
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 from 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?
So I would say as the quarter progressed in Q2, we did see a tightening in June. Part of that was road check, which was to be expected as that came right on the hill of really a religious holiday. And the combination of those two things really put pressure, more pressure than expected on margins, but it tightens more quickly than we expected in this environment. As we move 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 clinical in supply than it was in the month of June.
And then if I could just talk about the truckload side of it, I think you're talking about drivers in general on the truckload side. And I would say drivers are slightly easier to come by on the truckload space, but significantly more expensive to onboard. So we really have increased the level of pay for our professional drivers and we've seen that happen here 2 years in a row. So our cost for hire is up and our W-two is up as drivers. So although we're seeing a little bit of anything inside that space, I think our W2 increases that I've heard in FERC-two have helped attract new people into our business.
Okay. And 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. Or where do you think the supply growth is coming from? There's 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 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 mean, I would say 2nd quarter is normally the tightest environment, particularly in June inside the supply side. So we'd say we return to a more normalized equity. 2018 was an anomaly. If you look at really many of our trends that have happened, we've had a couple of years here in the last 6 years that have been unusual on the supply side that we would expect a softening and has seen and softening happen here in Dior.
And moving to our next caller. Caller, your line is unmuted.
Thanks. Good afternoon. So I want to go back to your intermodal volume outlook comments. I know there's been quite a few questions on this. But if I'm hearing it right, it sounds like you had maybe a couple of significant contract wins during the bid season.
So I guess, 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 rate. But just curious, I'm curious to understand 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.
Allison, is that you?
This is me. I'm sorry for asking 7 questions in one.
It's fine. You just didn't announce first. That's why I was just double checking that it was you.
I'm sorry. Allison Williams 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 out of 1 individual customer or 2 customers. It was not a price play, and I think you will see that play out in the next few quarters when 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. And as I stated earlier, if you look at the Q3, we believe there's a month or 2 in there that will have positive comps versus the Q3 last year, and we should get positive comps in the 4th quarter in
Moving to our next caller. Caller, your line is being unmuted. 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.
It's Tim Exter from Bank of America Merrill Lynch. Maybe just to step back and bigger picture, is there anything that shifted recently during the conference season? It sounded like you were maybe a bit more pessimistic on the outlook. And here, it sounds like the outlook into Q3, both intermodal, even ICS maybe turning more positive. Is there something underlying shifting that we should kind of be taking away from this from your point of view?
Well, I think that it's just
a matter of the volume starting to appear to show up. Now I'm still cautious. And my point of view and obviously, I'm probably the biggest skeptic in the group, which is one of the reasons I don't like to talk to customers. But I was happy to see the trends throughout the quarter. While they are below expectations, they're at least direction correct.
I think that if we can get through July because I think July is not a good month to gauge anything off. I mean, from our perspective, the only month worse than July is typically February. So I'd like to see a little bit more in August. But based on sentiment of what I know are the awards and as the volumes are starting to come on, yes, I'm a little more optimistic than I was when we did in that. Sure.
And 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. And 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, yes, let's clarify. The question that I got asked, I believe, is your confidence I interpreted that as for the year. And so my response is no. And we would not get inside the 11% to 13% for the year of 2019. I stand by that statement today.
I think that the Q1 is just something that would be extremely difficult to overcome. Now I understand and I've seen what Terry is looking at and his projections. So yes, there's a possibility we get back into 11 per particular quarter. But I stand by my statement that we would not show an 11% to 13% in for the full year of 2019.
Moving to our next caller.
Matt Brooklier, Buckingham Research. So I wanted to circle back to intermodal pricing questions for you. If you could talk to of your contract volume, what to date has been priced at the end of Q2 and maybe your expectations for what remains and where potentially contract rates could fall out for that portion the contract side of your business?
Okay. So I think I've mentioned before that first 3rd of the bids were higher single digits. The middle third was middle single digits, and the last third were lower single digits. And we're basically through all of our major bids for the most part. Some we don't haven't implemented yet, but we know what we're going to be basically looking at.
So I think that will end us somewhere in the middle single digits when it's all said and done for this mid cycle.
Okay. So it sounds like the contract pricing pretty much in line, I think, with your expectations, kind of a little bit of a fade into the second half of the year, but I think that's what you guys have been conveying through that. And then the more positive outlook at intermodal in terms of volume, I think you guys mentioned that some of it had to do with your ability to execute the relative service levels that you're providing. Is this partially driven by UMP's PSR efforts? Or am I not reading this correctly?
Well, the service levels we received, especially from the Eastern railroads, are up significantly from last year at this time, not where their goals are or what our goals would be. The BNSF started off extremely well, then we had a weather issue in February into March starting to rebound. And then we had flooding issues here in the last couple of weeks in June. But they're starting to rebound here. And this group.
We're starting to see an uptick on access service, obviously, has helped there. In some of the technology investments that we've made, we've to be able to better set appointments, better analyze and 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. But we've been able to use those tools to what we think is differentiated our product from others.
Moving to our next question. Caller, your line is unmuted.
Hi. This is Justin Long with Stephens. Good afternoon. So Dave, I think
Finally, the AD. Finally, you got the AD.
I don't know about that. It only took me about a decade to get coverage of the stock, but today is finally here. So Dave, I think you gave a number earlier on the intermodal volume headwind from lane closures in the Q2. Could you clarify what that percentage was? And then on the loads per work day that you saw monthly in the Q2, 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 Q2.
Yes. The 9% volume decline, if you will, due to the lane closures is simply the snapshot of the number of loads that we saw disappear that could no longer be serviced. And like I said, that was expected. We understood that going into the quarter. But obviously, our goal is we said this earlier that we're going to try to overcome that, and we just didn't see the demand to allow that to occur.
As far as the trajectory of the loads per workday, I would say that, Terry, you jump in on this. That looked pretty normal to me as far as the trajectory from month to month to month even though it's at a lower base. Right. Yes, the trajectory was good, obviously, from April through May into June, and it it should continue into the months and quarters ahead. The other comment I would make is that the floods in May 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.
Okay. That's helpful. And then circling back on the 11% to 13% margin target in intermodal, Dave, you said it sounds like that won't happen in 2019, but is this something you think is achievable next year if we continue to see low single digit pricing environment where we're exiting like we're exiting this bid season? Or do we need to see an acceleration in the pricing environment from here to get to that target?
That would be, I guess, giving guidance, for 1, and I'm not ready to do that yet. And the second thing is I have to wait and see what their plan for next year looks like. And I haven't seen that yet either, Justin. So I don't know the answer to that.
We are moving to our next question.
Hey, afternoon. It's Brian Ossenbeck from JPMorgan. So I wanted to ask another question on ICS in the marketplace. Joe, 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 up to about 2 thirds, which continue to climb. But I'm a little surprised to see that the loads per employee are down significantly.
The count's up. And maybe that's a function of adding more IT folks. But maybe you can 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?
So the mix aside LTL and truckload does change our volume for our employees, but we also did add employees as part of our further investment in marketplace because we're trying to build the marketplace as new systems are coming on board, taking more time, spending more time with those customers and carriers, making sure that their experience is top notch. So as we move into 2020 and start thinking about our automation, that's everything that we're really trying to invest in this year, really reviewing each piece that is not automated and the things that we need to do to move this into that automation. And then lastly, probably the thing that impacts us very much is the level of data and granularity that we get of the data through the platform. So 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 doing, how many years are on board, what percent 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. And we think that we'll see that really push up towards the end of the year as we come to a better comp against LTL within full quarter, maybe into next year, we'll have market share gains as a result.
Okay. Thanks for all the details, Shelley. And Dave, a quick follow-up for you. Can you just remind us of the buyback program? Looks like it was pretty active this last quarter.
You still got some left on the authorization. So maybe you can just give us a sense as to why you were so active this last quarter and what you expect to be doing from a capital allocation standpoint throughout the rest of the year?
Well, I mean, one of the reasons we were active in the quarter, I mean, we definitely had cash, if you will. We typically use our revolver as cash or our debt to EBITDA ratio as a cash indicator. So we had availability. And frankly, we thought the price was attractive. So we've always said we would be an opportunistic buyer.
I think that we will continue that approach on a go forward basis. And so if we see something happening in the future where we either have additional room on our debt to EBITDA ratio or we end up seeing another attractive price, and we have the ability to probably participate again in the future.
Moving to our next question. Colin, your line is unmuted.
Give us any more details on that charge, was that an
in sourcing decision by a customer?
No. It was not an in sourcing decision by customer. It was a lot of it was a workers' compensation and insurance policy accrual adjustment that came back in that, frankly, everybody participated to a certain level. But it showed up more materially inside of DCS simply because they got more people. Just the way the policy works.
So as they got a benefit, it went back to the business units, and DCS was just a more material effect.
Got it. And just a follow-up. I know you probably won't comment on the BNSF arbitration, but do your results include any charge or reserve for a potential verdict or result in the future? I mean, you had $44,000,000 I think, each of the last three quarters. So are you taking out like $11,000,000 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. And frankly, my response has been, since I don't have any other additional information to give to them, if they were to do that, there's nothing I could do to argue to say that was an inappropriate conclusion.
Moving to our next caller.
Amit Mehrotra here from Deutsche Bank. Terry, on the commentary around intermodal volumes, any update on how PSR may impact the outlook for the second half? Union Pacific is taking significant action in Chicago this month, I believe, and Berkshire has talked publicly about PSR last few months. So maybe any updated thoughts on how you're thinking about PSR as being a headwind or not on the volumes in the second half?
Well, one, obviously, we don't use the Union Pacific, but I believe that the benefit of DSO 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've always talked about sometimes your PSR that if they get into a fix or derailment, sometimes they're not quite as resilient because they don't have extra crews waiting around to play catch up. So that brings a watch out with regards to PSR. With regards to the BNSF, I see some of the things that they're doing. I don't think they're as public as maybe what the key is with regards to what they're doing.
But I don't see anything out of the ordinary that should come about in the second half of this year. It would be a 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. And 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 kind of up low single digits pricing and 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. So 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 kind of positive yield in the back half of the year, either based on the negotiation you're done to date or the volume outlook, just in the context of the trucking environment getting a lot weaker, at least in
the contract expectation side? Yes. I think I'd mentioned in previous conference calls that we thought that M and M pricing would stay higher than truck pricing throughout the year, and I think that's going to unfold and be true. As I mentioned, the bid cycle is over with. The results are in, and we know what those results are, and we know what our path is moving forward for the next couple of quarters with regards to pricing.
And I don't see that being negative at all.
Moving towards the final question for now. Caller, your line is unmuted. Hopefully, the line is a little bit better. David Vernon from Bernstein. Dave, could you talk a little bit about how much development OpEx for JB Hunt 360 is going through the P and L today?
And 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 4,800,000 dollars Well, we got $4,800,000 in the quarter of OpEx spend for the inside of ICS. I'm looking at Shelly. It's incremental. It's incremental.
Correct.
Base is off of a $2,000,000 base. So it's up to 6.8 percent. It's up to 11 percent. So it was off of okay, so we're up 5% off of $6,000,000 prior. So we're spending $11,000,000 a quarter in ICS primarily for the development of Marketplace 360.
Now 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. So it's not all just for the Marketplace 360, but it is part of the 360 platform. When do we realize that? When do we realize the revenue side?
I mean,
we're starting to see
a little bit trickle in now. Do we see capitalizing on our further development? I think that, that probably plays out over the next 2 to 3 years. How much more do I have to spend to get it to the point where we're seeing what we would expect to be maximum revenue generation out of this thing? I don't know the answer right,
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 still a lot stronger than we thought.
And obviously, that's seasoning in some of the prior contracts. So I'm just wondering, are you also getting some margin gain on that Final Mile business you acquired last year?
Yes. So 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. So 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.
And we're continuing our sales pipeline. Theirs is very strong. We're going to hit our expectations on sales there. So it is going well. The integrations are all going very well.
So we're very pleased with how that's moving and progressing in the right way. But the margins on Final Mile are not at the level of the margins of the so it's actually dilutive. Exactly. Because nonasset. A lot of new stuff coming on is nonasset.
And we did have a couple more questions come in as well. Colin, 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 and 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 move to a more of an asset light model. In total, we did change the number of company owned trucks, putting some of those trucks into our dedicated contract services group and continues moving forward. And we plan for the rest of this year to increase the percentage of independent contractors inside that space. That mix of business is more of a variable compensation model, and so that did benefit us in tail. And then I think we just talked about some of the cost cutting measures that we had in the segment.
We did a better job in road management Just with the trucks that we had and what 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 and that helped our footprint as well.
And 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 how many use the term stabilized. I can't remember the exact word 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 add at the dealers right now.
Obviously, it's well known that the new order bids or new order placements are down considerably, but the backlog is still working. It's way through the system. I believe that their conversation with lower courts about October is the next I'm looking at General Roberts talking to him. I think October was the next date that they were really trying to figure out. Then what do they do?
So if the orders stay at this level, do they add productivity or not? So I think if they're still in search mode, but the immediate beef truck pricing, they have not seen any kind of material change when they're ready.
Moving to our final caller for now. Your line is being un muted.
It's Scott Gruets from Wolfe. How are you?
We are just wondering where you are.
I think I was hitting the wrong numbers to get in the call.
So I do that all the time myself. That's the problem.
The monthly loads per day that you gave, Dave, do you have this from a year ago just
so we can understand if
this is a good or bad progression?
A year ago? Yes. Yes. So you're talking about April 'eighteen?
Yes. So that's $7,300 to $7,450,000
I don't I'm horrible with technology, so I have to send the stacks of paper here. I don't know if I've got that or not.
I'll keep going. I hear you, if
you want. Yes. Okay. I've got April was 8,000. In May, '18 was $8,100 and June was $8,200.
Okay. Perfect.
And the same transaction, how that said, is at a lower level.
Right. Okay. When we think about that 11% to 13% margin and maybe not getting there in 2020, what do you think are the bigger swing factors? Is it volume growth? Or is it the ability to keep pricing positive?
What's where is the bigger risk to 11% to 13% on volume or price?
I'm going to Terry answer that question. Yes. I think the biggest benefits to try to get through the prices pretty well locked in for 'nineteen and then cost control.
My apologies. Please go ahead.
Sorry, sir. I was thinking about 2020 and the ability to get to the 11% to 13% next year.
Well, obviously, if price falls apart, that would have the quickest impact of any of the above. But at this point in time, we don't see that happen. Haven't seen it happen yet.
And with that, there are no further questions on the line.
Well, then we'll leave this as one last call since there is a couple of minutes here. And going once, going twice. Thank you all. Appreciate it. I'm sure we will catch up, and I'm sure you know where to find Brad.
We
have one question come in from someone who's already asked a question. Would you like to take that?
That's fine. Go ahead and let it through.
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? Yes.
So I mentioned this earlier. Yes. So I mentioned this earlier. I'm not sure if you're able to
hear it, so
apologies if I'm repeating. But as we're moving our system off the mainframe and the cloud based system, some of the business that we had in LTL, we had not completed the development in the new system and we needed to work with our customers really to exit part of that business. So we set some time with our customers that was intentional on change. We do have on the road map this year to complete some of the work that is needed to really onboard those customers again in 2020. And Sherry, does that explain some of the big drop in gross margin percentages, 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. But the change overall with our mix that happened, the new published business that came on and accelerated as the quarter progressed. So that was more than the
And with that,
there are
no more questions.
All right, Tzu. Thank you very much. Appreciate it. Thanks, everyone.
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