Good afternoon. My name is Jesse, and I'll be your operator today. At this time, I would like to welcome everyone to the 2018 Q4 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question and answer session.
Thank you. David Mee, CFO, you may begin your conference.
Thank you, Jesse. Good afternoon, everyone. Welcome to our second earnings call. We hope we've learned a little bit from the last one. So hopefully this will be a little bit more informative and not quite as robotic as the last one was, but we'll continue on with these things as long as everybody thinks they're productive.
I've got the team with me this afternoon: John Roberts, CEO Terry Matthews, President of Intermodal Nick Hobbs, President of DCS and Shelly Simpson, President of Highway Services, which to remind you all is both ICS and truck. Jesse gave you housekeeping, but again, if you'll make sure that you state your name clearly, so when you ask a question, we know who's asking and how we can respond. And again, limit your question, one question and one follow-up, and we'll try to get through as many people as we can in this hour. We do have a hard stop at 5 Central, 6 Eastern. As far as the general comments, overall, we felt it was a good quarter.
I wouldn't go so far as to say it was a great quarter, but a good one nonetheless. We obviously still have some cost and efficiency opportunities we need to address. But the results of the 2018 bid cycle and pricing efforts and our targeted growth areas were evident in our Q4 results, excluding our pre announced charges. In Intermole, we saw rail service interruptions and congestion that continue to hamper our ability to react to unplanned customer demand spikes. But overall, demand for the quarter was relatively consistent with a strong Q4 2017, even though we were a little disappointed and frankly a little surprised that demand did not accelerate throughout the quarter.
That said, and I'm sure Terry will end up commenting on this during the Q and A session, we have seen positive results on both load growth and price increases early in this current bid cycle. In DCS, we started an additional 4 58 trucks in the quarter and that's coming off of a 600 truck add in Q3 as a reminder. And we still improved our margins around 200 basis points sequentially. So the startups that we have begun are rolling into price profitability on time and as expected. And our private fleet pipeline continues to remain strong going into 2019 in our agreement to acquire Cory First Choice home delivery should allow DCS to continue its growth trajectory into 2019 and do it in a less asset intensive way.
In ICS, our gross margins in the quarter reflect the state of the market where contractual pricing has remained healthy and consistent, while obviously the spot market has softened. We'll watch customer reaction to this market mix and are prepared to help both customers and carriers weather through the swing using Marketplace. And speaking of Marketplace, we were very pleased with another sequential increase in activity conducted through the platform and will therefore actually accelerate our spending and our investment to develop the upgraded and expanded features to be released in 2019 to allow even faster adoption and execution for both customers and carriers. And last but certainly not least, truck was able to capitalize on the 2018 pricing environment. But more importantly, they successfully added to their fleet for the first time in several quarters.
These power adds are independent contractors, which give us flexibilities to satisfy customer demand while providing excellent service for customer needs. We'll continue to pursue 3rd party power as a growth strategy throughout 20 19. That's the end of my prepared remarks, giving you a glimpse of how we looked at the quarter and kind of a view of how we expect to go into 2019. So with that, Jesse, we're ready to answer questions.
Your first question comes from Baskin Majors. Your line is open.
Yes, thanks for taking my question here. I realize the BN arbitration situation is still very much contingent, But I mean, it does appear that at least they'll be able to or preliminarily able to extract some more value out of that relationship from you going forward. Does this change in any way assuming that they do prevail in the way that you guys have seen so far that you approach the intermodal business long term from a growth versus pricing perspective? I'm just kind of curious strategically if we'll see anything different from Hunt and Intermodal over the next 3 years versus the last 3.
Yes, this is Terry. I don't think it will change our strategy. Our strategy has always been able to grow and grow where we're capable of growing. As the Western network allows us to grow, we'll grow. As the Eastern network allows us to grow, we'll grow.
Obviously, if we have costs coming at us, we will try to price that into our product and recoup those costs from our customers.
And any expectations for bid season outcomes early on in Intermodal for this year?
Well, we've had about 20% of the first rounds of bids have been priced and most of them have been implemented. And we're pleased with what the outcome has been. It's been a very orderly market. It continues to be a very orderly market. And I believe in the future, that will persist going through this year.
And the first 20% of the bids we've seen high single digit rate increases and we've been able to grow some volume and we need to be able to grow some volume because we have some headwinds in the East with some of the rail rationalization that's going on with precision railroading. An annual, we will probably cost us 50 70,000 loads depending on the timing on lanes that basically the railroads in the East for the most part have decided to get out of because it doesn't meet their expectations or whatever the rationale for that is. But I can say through the first 20% of the bids, we've been able to replace half of the business that we think that we will lose during the calendar year 2019.
Your next question comes from Tom Wadewitz. Your line is open.
Yes. Good afternoon. I wanted to ask you just kind of within Q4 and then I have a follow-up. So within Q4, how much should we allocate from the charge, the $134,000,000 charge related to BN, can you identify how much of that would have applied to the Q4? And then just in terms of fuel, if you could offer a thought of how big might the fuel timing or fuel basis benefit, how large and if you can ballpark that for me in terms of the impact in
Q4? As far as the charge in our pre announcement, we disclosed that $89,400,000 was for 2016 2017 and that $44,600,000 dollars was for 2018. That would have been a full year picture. So the best you could assume is that 25% of the 44.6% should be applied to 4th quarter. And as fuel, I'm really not sure where you're going with that, Tom, but we don't break down fuel by business unit.
Was it a meaningful tailwind to earnings or not so much?
Frankly, I don't even know what the direction is because we always consider it a wash when it all comes out. So if we were chasing it, it would have been a headwind and if we're ahead of the curve, it would have been a tailwind for the short period of time.
Yes. Okay. And then I guess the second question would just be in terms of I think Terry you gave some thoughts on rates and it sounded pretty constructive on early part of the bid season.
So just to make sure
I heard you right, high single digit rate increases and I think that would be with respect to intermodal. So how would you think the overall bid season plays out? I mean do you think truck and intermodal rates end up mid to high? I guess that seems like that's pretty would be a pretty bullish outcome given that spot rates are down a bit at the beginning the year admittedly versus tough comps. But I wonder if you could add some more color on how that is developing and what you might think on that kind of overall bid season?
Yes. I think as I mentioned in 2018, I thought Intermodal was yoked very closely to truck in terms of the elevation of rate increases as a percent. I think this year might be a little bit different. There's a little bit of a dichotomy going on because of what's going on in the spot market in truck. I'll let Shelly speak to the asset and non asset rate structures there.
But with regards to intermodal, everything that we've seen in the orderly market that I talked about is that everybody is facing similar challenges with regards to rail PTE, higher grade cost. And one of the things that we're starting to see is that there's a bigger need for transload in the West Coast. We've heard from the ocean carriers, the railroads and seen it early in the bids that there seems to be more transloading which will support pricing power off the West Coast. So I think you could see a scenario where intermodal rates could be higher at the end of the year in terms of overall rate increases than truck, which is different than what we saw in 2018.
Yes. And if I could just talk about the truckload market in general. We see our customers really trying to create stabilization in their capacity and being able to predict what their costs will look like. We have had good conversations through the bid season. Early indicators for us is in the mid single digits on price, but I think that depends customer by customer.
I think as the year plays on, we'll be able to have those conversations. It's too early to tell for the full bid season. But I do think that what Terry said on intermodal could be a change from what the truckload market will see overall. And I also think there's an opportunity this year for intermodal conversions to occur as the railroads do speed up and have more capacity and they're more predictable, I think our customers could be moving into that at maybe a higher price for automotive, but it would lower their overall transportation costs.
Your next question comes from Chris Wetherbee. Your line is open.
Hey, thanks. I wanted to come back to intermodal loads for a minute and maybe talk a little bit about some of the potential outlook. I know you're not giving guidance, but with maybe it looks like potentially a 3% headwind from some of the PSR actions from the Eastern Railroads. Just give a sense of maybe how you're thinking about the outlook for 2019. Is still a growth assumption or maybe the last couple of quarters are indicative of what the demand environment is?
Well, I think I mentioned that we're going to grow in 20 19 even with the headwinds that we have with the rationalization and the precision railroading that the Eastern folks are doing. I believe I mentioned that we will equate to 50,000 to 70,000 loads. And as I mentioned through the first twenty percent of the bids, we have been able to replace half of that volume that we're going to lose this year.
Okay. Okay. That's helpful. I guess when you think about the dedicated side and when you're looking at the growth into 2019, if you can maybe strip out
of the Cory aside for a
minute when you think about the private fleet conversion opportunity, how should we be thinking about fleet as we move into next year, so tractor count as we move through 2019?
First of all, we come off of 2018, which was a record breaking year. So we were excited about that. And moving forward, we think we're going to have another good year. It's too early to tell what it's going to look like. We measure our pipelines and they're very consistent, but it's really too early.
People are just getting back from holidays and trying to figure things out. So we'll be able to have a little better feeling later on. No real reason though to suggest that
it would be that the demand environment feels any different in terms of the conversion opportunities that it has been for the last couple of quarters?
No. There's nothing out there really driving that at this point we
see. Your next question comes from Allison Landry. Your line is open.
Hi, good afternoon. Thanks for taking my question. In terms of just going back to the $134,000,000 charge and Dave, I know you mentioned about $45,000,000 was relating to the full year 2018. Is there a way to sort of think about how much of that was attributable to the 4th quarter, trying to really just get a sense of what the core operating ratio is?
Well, I mean, you mean as far as
in the Q4, Allison? Yes. Yes. We don't do non GAAP publications or discussions, but the audit committee, our audit committee asked that same question. So I'll tell you what I told them.
And then you guys can all determine what you want to acknowledge or use or whatever. What I told them was in the Q4 and they were looking at the entire company, not just Intermodal. They said, how do I compare Q4 2017 to Q4 2018? And so I said Q4 2017 you got to add back the 38.9 charge that we had in that $38,900,000 And in the Q4 2018, we have to add back to $89,400,000 75 percent of the $44,600,000 Okay.
Okay. That would give you
the operating income between the two quarters on a one more
Okay. That's definitely helpful. Thank you. And then as far as the TransCon volume in the 4th quarter, how much of that do you think was related to the deterioration in BN service? And is there how do you frame how would you frame the risk to 2019 loads and TransCon
if this persists for some time? Yes. The service that we received from all railroads in the 4th quarter was not what we had hoped and the velocity was obviously down which consumed boxes. As we've gone around and talked to the various railroads, they believe the velocity and service will be up with all railroads. So we're anticipating better box turns, better velocity, better service as Sheryl alluded to that should help conversion with regards to 2019.
So the rail service that we've seen so far in the 1st 15 days, it's early, but it's refreshing. We've seen some of the best service we've seen in the last year and a half, much better than last January. And hopefully that will continue. We'll just have to see.
Your next question comes from Matt Russell. Your line is open.
Thanks for taking my question. A bit of a follow-up to that. You've mentioned some of the cost pressures and bottlenecks that you're seeing in the business. Curious if you're seeing improvement in those areas and easing in cost pressure? And is it reasonable to expect that operating income can outgrow revenue again in 2019?
Or do you see headwinds on the cost side which might offset that?
Are you talking only about intermodal?
Are you Intermodal and broadly for the business, if you could talk on each?
Broadly for the business, I think that where you'll see is you'll see for us an acceleration in our IT spend that will be buried in each of our business units as they consume that development of upgrading of their platforms as well as the enterprise platform that hosts all of the business units. That's probably going to be an extra $50,000,000 in our expectation this year. We'll expect to get some benefit out of that, but it's probably going to be more in the back half of the year than the front half. So I would expect those cost increase that cost increase to be there. I expect rail purchase transportation.
I'll let Terry speak a little bit more to that. I think the rails will continue to try to recover their costs associated with their operations. We will continue to have driver and frankly all salaries and wages with mechanics and frontline people and managers and things of that nature. Maybe not to the pace we saw a year ago, but we certainly don't expect to see cost reductions in the labor pool by any means. We know that the insurance capacity out there is still tight.
We've renewed some policies recently and tried to keep down our rate increases. Even at our safety record, we're having to take rate increases to get insurance capacity. Like those are the big ones that I can think of. Terry, in intermodal, is there anything I missed? Well, as velocity picks up and the service gets better, you're going to see better box turns, which means you get more loads with fewer boxes as well as I'm hoping that it should show up in the dray efficiency because the more on time the railroads are, the more efficient our dray fleet would be.
So that could be a potential upside for us.
Okay, great. That's really helpful. And then one follow-up on CapEx. It looks like you came in above that $800,000,000 target that we got on the last conference call. Is that pulling forward dedicated business?
Anything that you would mention there? And then how should we think about CapEx in 2019?
Yes. It definitely is a reflection of the amount of dedicated business we added on the back half of the year. We certainly tried to get the equipment in place, so it would generate the revenue. We were fairly successful with that. We still have a very heavy trade cycle beginning 2019, but we would expect our CapEx to be somewhere around $200,000,000 less than what we had a year ago in 2019.
Your next question comes from Amit Malhotra. Your line is open.
Thanks. Hi, everybody. Can you just offer the monthly cadence of inter intermodal volume costs in the quarter? And more broadly, just comment on the overall volume environment? There's obviously a lot of uncertainty out there in terms of trade wars just overall slowing growth.
If you could just help us kind of contextualize those concerns in terms of
what you're seeing on the
ground today, that'd be helpful. Thanks.
Amit, I thought we just heard that Trump canceled the trade war.
Okay. So everything's great, right?
Anyway, to answer your question on volume on the calendar month, in October, we were plus 5 year over year. In November, we were minus 3 year over year. And in December, we were minus 6 year over year. And then as far as general demand Yes, the volume trend, I think some of the tariff activity that was supposed to go in December 1 helped some pre shipping. So we were a little disappointed as Dave mentioned in his opening comment in December.
But now that we'll see what happens after today's announcement. But January, everything we've heard from the international steamship companies that their boats are 90% plus loaded here in January, which should make January equal to or from an intermodal standpoint as well as last year. Now there could be a lull of Chinese New Year, I think is in the 1st week of February, which basically plays out into the 3rd or 4th week of February. So are they pre shipping now because of what could possibly happen in March? Or is that going to kind of wash itself out?
Overall, I think when trucks get a little bit looser and intermodal service goes up and there's an opportunity to move some freight back over to intermodal even though there's some rationalization going on. I think some of that has happened in the marketplace. So with regards to volumes, even with the rationalization, it's difficult in January, February, March, but it's pretty well in line so far with what we've what we anticipated for the first half of January.
Okay. That's very helpful. Thanks. Just a follow-up on, I guess, incremental margins. What's the right way to think about incremental margins for both the intermodal and dedicated business in 2019?
I'd assume for intermodal, it's a tale of 2 halves. If you can just kind of give us some color of how to think really about the dynamics of that and really the second half of twenty nineteen? And then the dedicated incremental spiked up pretty significantly. The startup costs have weighed down that for several quarters now. What's the right way to think about that in 2019?
That's it for me. Thanks.
Yes. Well, I mean, just generally, I would tell you well, I mean, Nick, talk about your base business on Dedicated. We'll start there and then we'll go to intermodal. Yes. We're very pleased with how 2018 turned out for our base business.
We operated our base business in Dedicated within the guidelines that we say we want to operate, which is the 11% to 13% operating margin. So we're pleased with that. And that's with startups loaded in there and everything. So we're just very pleased with the base business. We're facing some headwinds with growth in Final mile and that provides some challenges to us.
But the base dedicated business is performing within our guidelines. So all said, I mean if Nick shut down growth completely, he'd be running in that 11% to 13% margin range. That is really how we look at it and that's how it's priced and that's how it's always been. And in a model, as far as just general aspect, again, we haven't moved our margin targets just yet. We think that 11% to 13% is the right long term margins.
We have some room to get up there. So the incremental margin in the short term, I don't know how to answer that because we have to get back to the base case before we can talk about what an extra load is to get to our to cover our overall cost nut inside of intermodal. But at this point in time, we have to inch back into that 11% to 13% margin range. And we do have some cost headwinds we'll have to overcome in order to get there.
Your next question comes from Jason Fidle. Your line is open.
Hey, guys. This is Adam on for Jason. Good afternoon and thank you for taking my question. I guess I just wanted to ask you guys about your thoughts on last mile delivery, particularly in light of the Cory's First Choice purchase. Is this an area where you guys feel pretty good where you are now with this purchase?
Do you feel like you maybe want to kind of grow a little bit more in Last Mile, maybe look for other acquisitions? Maybe just a little bit about your thoughts and strategy here surrounding last mile delivery? Thanks.
Okay. Yes, this is Nick. We're very pleased with our acquisition. It gets us into the furniture side of Final Mile in a big way. We're pretty heavy on the appliance side and so this gets us into the furniture side.
And if you look at the Final Mile, big and bulky delivery, we think it's $12,000,000,000 to $14,000,000,000 spend. Dollars 5,000,000,000 is the largest and that's in the furniture area. So we're excited about what that can do. And then $3,000,000,000 of that is in the appliance and then you get smaller on medical and exercise equipment. But we will focus is on the big ones right now and we're excited about that.
We're not planning on any more acquisitions. We think we'll take this one on. It will really launch us into the big segments and we're excited about that. We think we're one of the largest players in the big and bulky delivery and give great service and Cory was a great match. They've got a great reputation on the service side and their culture matches ours very well.
So I've been on the call with all of their customers and it's been a great transition, Setting up for a great transition, we'll close on that next month. But we're going to be able to do a lot of integration, I think, with Shelly's team and even Terry's on some intermodal inbound. So I think there's going to be some extra revenue picked up from that from our relationship.
And I know you guys have spoke a bunch about intermodal already and a little bit about precision scheduled railroading as well. But I was just wondering if there's anything else that you guys might be able to share regarding PSR and specifically with the rollouts at NSC and UP. Just any other details maybe that you can share about the rollouts there and maybe how it's affected you guys or your
customers? Thanks. Well, I would say that obviously the CSX is all in on precision railroading and I think the others have taken pieces of it and implemented it in various stages. It looks like the UP is going to accelerate what they were doing and some of the things that they do. I don't know if they've all been done yet.
So there may be some new things that develop on the Union Pacific side of things with regards to some of their rationale as they precision their railroading by definition should be better on time service and better on time service means that intermodal should grow. And then the quality of the revenue should also follow that as well. So I think one of the things that I think you're seeing why pricing is holding and going up is that if all these railroads are trying to get to a 55 OR as quickly as they can, it's difficult to do that if you're slashing rates. So that's one of the reasons why I think it's an orderly market because everybody has some of those PTE opportunities in front of them along with the delay as I've mentioned and it's going to create an environment similar to last year and we'll just see what kind of level it settles out in the next months ahead.
Your next question comes from Brad Delco. Your line is open.
Thanks. Good afternoon, everybody. Can you hear me?
Yes. Yes. John, I got a
question for you about the broader portfolio, another acquisition that Nick just spoke about. But when you look across the portfolio, where do you want or what do you want each of these businesses to represent of the total pie? And to the extent there is more inorganic growth opportunities out there, what would you be looking at?
I don't have anything specifically in mind right now other than something that would be very logically adjacent to services that we're providing today that presents us with something we can't do organically. And I think the 2 acquisitions that we have made, we saw in both of those companies something that we could use quickly and would take us a long time to build. We don't really have it. We've got a lot of things in the works right now that are very complementary And we haven't really had conversations here that say, here's a big gap, we really need to be looking to fill that gap. I think we did feel that way on the delivery side, particularly on the contractor delivery and the furniture side.
So Cory was a real good add on for us. But nothing is a burning platform that we don't have internal activity cooking around and we do have a lot of projects going right now. So I would want us to be careful getting deal fever.
I'd like
to see us finish off some of the bigger projects that were pretty late stage on and see what they present. Dave's opening comments, he remarked about increasing our investments on our technology platforms. We're pleased with what we're seeing there. You can't get too many plates up on too many sticks you want. I think we want to be thoughtful about that and be very careful.
Now that's not to say that one of these folks comes in with a deal they really like. When we do this now having done it a few times, said no to several, we have a little bit more of a program internally that seems to work for us. So if one of these division heads comes in with an idea they really like and they have some passion for it and they have a good story to tell around it, then we'd be listening. But I wouldn't say that we have anything that's current at the moment.
Okay, great. And then maybe if I can follow-up to that for you, Dave. You gave us the capital budget plans for 2019, dollars 2 100,000,000 less than 2018. How should we think about that capital being deployed amongst the segments?
I think the biggest yes, I think obviously the biggest user is still going to be dedicated. But even Intermold has got a heavy trade here. So I would say that they're going to be obviously a large consumer of that as well. And then part of that part of our overall CapEx spend is an additional $50,000,000 in technology spend that we're going to end up as we develop our enterprise software and the hardware associated with being able to run these platforms, these digital platforms, that requires capitalization. We're looking at intermodal, we're looking at yard expansions, things of that nature, which are our high cost one time items.
But as far as breaking out how much goes where, It's in our plan, but that would have been guidance had we decided to issue guidance.
Your next question comes from Brian Ossenbeck. Your line is open.
Hey, everyone. Thanks for taking my questions. So I just want to elaborate on ICS a little bit specifically marketplace. It's generating looks like about 50% of revenue. Can you just walk us through the next rollout for the Control Tower and Optimizer?
It sounds like those are increasing. And the margins were pretty healthy, but the revenue per load was down. Do you think that is that a function of just a lower cost to serve with 360?
That's a great question. Lower cost to serve with 360. So we definitely see a lower cost to serve with loads that are executing in the platform. There is a delta between traditional brokerage and executing in the platform. So that has happened in general.
But I would say the softness in the spot market impacted us is specifically in ICS, ICS, in particular in December, but just all of Q4 as well and continuing into January. We think about what's coming out in the platform. We do have, I think Dave has mentioned acceleration that's happening. We have quite a few features that we are working on inside the 360 platform, really to drive more efficiency inside the network, but also to be very predictive. So we did just roll out our very first piece of machine learning.
So using the data points that we have from carriers coming and searching and so what we do with that information in turn and how we create better matches for carriers and also for shippers, that's something that was implemented in the platform and we will continue our work on the data science piece. So a large investment happening inside that space. We're also working on the small and mid sized market in 360 for them to have access to the platform. So that's another key component inside the 2019 budget in total. And then really just expanding the services.
So really that our entire organization can gain benefit from the platform. So you will start to see the rest of the segments coming onto the platform here in 2019.
Okay, great. Thanks for all the detail there. Just to go back for a follow-up, just a bigger, bigger question for you, Shelly and Terry. Why do you think we could see rate increases that are higher for Intermodal this year than truck when there's a pretty tighter correlation than we've seen in the past last year. You know how strong the market was.
So is that a base effect? Is that a mix shift? Maybe you can just walk through a little bit more of the logic behind that. Thank you.
I think it's the cost headwinds that all the automotive providers are up against. And I mentioned the rail PT, the higher grade cost. And then we think the tightness in the West Coast will continue with more transloading as the international players don't want their boxes in certain points in them. And I think they're going to be pricing in such a way that they're going to the option may be better to transload. So you've got a supply and demand situation on the West Coast, which is positive for price, and you have higher grade costs and higher LPT ease, so and improving service.
So with that, we might have a fuss fight here and there and some backhaul lanes in the East. But generally speaking, there's many lanes in the East that are now 2 day lanes that were priced maybe for a day, day and a half that I think that intermodal will be able to hold its ground with. And as I said, it's a dichotomy. Normally, it doesn't do this, but I think this year might be different and for those reasons.
And I might add to that. I feel like in the truckload sector that from a customer perspective, there is more stabilization happening from good awards. And so if you look at what happened in 2018 and in 2017, the freight market was very volatile. Customers were churning lanes that fit and that in turn made the truckload series have to churn what freight they can accept or what really works for their network. I think there is a more stable network today, so less churn in the bid business.
That is favorable, I would say that prices don't have to move at the same clip. And then you look at the disruption happening in Intermodal. Kelly talked about the lane closures and the rail rationalization that alone will create those cost pressures that are happening. And so I think the disruption happening in Intermodal is different than what's happening inside the truckload space.
Your next question comes from Scott Group. Your line is open.
Hey, thanks. Afternoon, guys. So, why don't you just follow-up on the arbitration. Dave, is there a better number to use for the forward looking impact than the 44,000,000 dollars from 'eighteen? Is there anything more specific you want to tell us?
And then I guess I just wasn't clear on your answers earlier, if you think intermodal margins can still improve in 2019 even with the impact of arbitration? And then just adding to that, you had a comment, we haven't changed our 11% to 13% margin targets yet. And I wasn't sure if what you really meant by it. Is there does something change because of arbitration with the 11% to 13% or am I misreading and you still feel good incredibly clever, Scott.
Well, that's 3 questions in one. So that's incredibly clever, Scott. And now I've forgotten exactly where all three of them. But let's start with the margin. So at this point in time, 11% to 13% is still our margin target for a long term basis.
However, we'll have to wait and see and we're not pinning this down on arbitration. The other rail cost pressures are also out there. Let's not forget that we ride all but one of the big railroads. And so we have to look at as rails pass their costs on to us and then as our customers accept price increases where those margin targets will end up being. But as it stands today, we still think 11.13 is the right long term range.
As far as the arbitration itself, I don't have any other information that's not what we've already issued public as far as cost.
And then the other part was just given that, do you think you can improve margins this
year in intermodal? In the short term, again, in that, but don't hang it on just one railroad. We have to look at our entire mix and see what our rail PTE will look like from all the railroads. And we are expecting some cost increases. And whether we can capture all that back in a one period bid cycle.
We'll have to wait and see.
Your next question comes from Todd Fowler. Your line is open.
Great, thanks. Good evening. Just a follow-up on the Dedicated comments. I think a comment was made that the expectation is that dedicated is going to continue to grow at the recent run rate, which has been around 25%. Is that a thought that that's really what the revenue for dedicated should grow throughout all of 2019?
And if you could also follow it up with kind of the expectations for the cadence of the margin improvement, understanding the business isn't coming through right now with where the targets are for that business? At what point do you see that in the second half of twenty nineteen? Or is that more pushed into 2020 with some of the growth?
Todd, that would be asking for guidance. However, before I allow Nick to answer, I just wanted to make that point
very clear. He will not give you guidance. I think if we say directionally and how to think about it, which we always try and do, that's not really guidance. We're just helping us think about stuff.
Well, I mean, Nick's looking at me. I will tell you that when we do dedicated is probably the most volatile because frankly their growth is all dependent on when a damn customer signs a contract. Right. Right. So for lack of a better scheduling, when they do their budgets and hand them into me, it's pretty ratable throughout the year, okay?
The growth is ratable.
The growth
is ratable. That's right. It's throughout the year. But that's here we are, January 17th. We don't have any data that says anything otherwise.
But the good part about it is we've seen him when he flaring on this revenue, we're overcoming the startup costs because the startups are coming out as scheduled and priced. So I wouldn't expect a huge lag in their margins improvement as they go on. I think the biggest headwind and I'm going to let Nick speak to this because he can talk about growth in this area is as they mix in, they're getting started they're starting to get to a size in the non asset piece that as that mixes with the asset side, double put pressure on their OR. Those great phenomenal things for their ROIC, which is what we want, but we'll have to discuss that as we start to see that happening. Yes, I would just say particularly once we get the acquisition on, it's 90 something percent non asset.
So it's going to come on. And then just the growth in general that we already have on the non asset side and Final Mile, it's going to be a bigger percent of our portfolio when it's climbing. And so that's going to put pressure on our overall margin in dedicated that has both Final Mile and Dedicated in it. And so that's what I was trying to allude to. We're very pleased.
We break it out internally. We're very pleased and it is hitting the margin targets that we have shared numerous times. So we
feel very good about it.
Okay. Yes. And obviously, I mean, the questions are, I mean, I think that we all want to get our expectations directionally correct. We don't want to have the volatility. And so that's, I think, at least where I'm coming from in the questions.
And I guess for my follow-up, and I think that Brad Delco asked something directionally about this earlier. But John, when you think about, again, the portfolio of businesses, the investments that you're making, should we read into that there just is more growth outside of the intermodal business going forward?
Is that by design? Is that a reflection of the
opportunistic recently?
I think as a whole, we're really listening to the customers and the systems that we work in. If it's intermodal, it's what's going on with our rail networks and how fluid are they, how responsive are they to that customer need, if it's in developing new technologies or creating services. I really think we've been very open minded and open ear to what is it that we're hearing from that base of people we serve and even some new customers that we're reaching now with things like marketplace that historically we've been kind of a big shipper provider and I think we're opening some doors that get us into smaller shippers, which we can now serve more efficiently with some of the platforms that have unique needs across their whole supply chain. And so one of the things that we discuss here is, is there a need? Who else is providing that service?
Are they good? Is there a return? And for us, it's also can that service, can that offering grow to a meaningful enough size that's going to move our needle. And because I think we've learned from some of our past that you can't let your management team get distracted with ideas that aren't going to present you meaningful growth along the way and take away that talent to things that are going to be big enough to really matter. So again, it just comes back to what do we need to be doing today based on what our customers are telling us, where do we have gaps.
And overall, I think we've always enjoyed organic growth here. We have the cash flow to support a good capital program if it means investing in equipment or properties or systems. I think we've brought on a lot of really good people in the last few years, some from the outside that have helped us think a little differently and that's been real good for us. It's been a little disruptive, but we hired a lot of people this year to support the growth that we brought on and I just find that's kind of a self fulfilling system in a lot of ways. So we don't have a preconceived notion.
We know that the best looking in other places, whether that's an acquisition or like our recent announcement with working with some outside people that can help us do things that we can't do on our own. We're just again, I'm pretty simple minded about this. What does the customer need? Can we make a good return and be great at what we're doing? And anything big enough to
matter. Your next question comes from Ken Hoexter. Your line is open.
Hey, great. Good afternoon. Gary, just your you mentioned your thoughts on pre shipping impact to volumes. I just want to understand if we have this continue until the end of February, do you expect a kind of sizable low as you move into March or April, May, just given the pre shipping activity at the ports? And then, Dave, just want to understand your comment on the container adds, you said accelerated due to the state of market demand or because congestion chewed up your boxes?
Well, the congestion when it's relieved and the velocity goes up, it leaves more boxes. I think we've talked about that the rail velocity or the slow rail velocity last year consumed 5000 or 6000 of our containers and we're getting some of those back rather quickly. With regards to the tariff March 1, the potential tariff, I do think it could be similar to December. We're seeing some pre shipping going on. You'll only see some pre shipping before the Chinese New Year.
So you might have not only the normal Chinese New Year low, but you might have some activity or less activity because of the tariffs. Where Easter stands sometimes that kind of washes itself out. So we'll just have to see what happens with regards to the tariffs.
So it's not like
you've already seen a significant oversupply or pre shipping that is
significant capital?
What I said is the steamship companies that we've been in contact with said that they are their boats are more full in January and the reservations they have versus what they had last January coming to the West Coast. Okay. And then, Dave
Your next question comes from Matt Brooklier. Your line is open.
Hey, thanks. Good afternoon. So not a guidance question, but could you give us some color in terms of how much revenue Cory First Choice did over the trailing 12 months? And you also talked to there's potentially a mix impact on the margins, it's a business that uses a lot more owner operators. If you could talk to kind of the relative margins to help us think about Dedicated as a whole next year from a margin perspective that would be pretty helpful?
Okay. Yes. The trailing 12 months would be between $155,000,000 $165,000,000 in revenue that they did in the trailing 12 months. And we've had conference calls with all those customers and things. We're very pleased with the acquisition.
I think we can help them grow a lot faster and they have a lot of pent up demand that Cory didn't quite have the capital to grow with. So they're excited the customers are excited about that. And then the other question was our margins in there. It depends on the capital required to fall non asset. We're going to be in the 5% to 7% range is what our operating margin targets are going to be in that business.
Okay. That's
helpful. And then you mentioned shifting over to intermodal, you're looking to grow volume in 2019. I'm curious if that volume growth potential factors in negative headwinds from PSR at Union Pacific? And if there are service level disruptions and they are meaningful, what's the potential for J. B.
Hunt to maybe take on additional volume in the West? Thanks.
We should have the boxes available if the BNSF continues the way they have started the year with their increased velocity. So as long as there's boxes, I think we can and if terminals can stay fluid, we will have the necessary power at origin destination to do the pickup and deliveries. So I would say it's good as long as the rail network stays stable. And to specifically answer your question, Matt, yes, the growth expectation in 2019 is in spite of the rail rationalization and loss of those loads.
Your next question comes from David Vernon. Your line is open.
Hey, good afternoon. Thanks for fitting me in. You gave us some good color on sort of how you're feeling about the rate environment. I wanted to ask sort of the same question in a different way. Are you seeing any sort of signs on the hiring side that it's getting easier to see drivers?
Is the labor market loosening in any material way? And then I just have a quick follow-up.
We'll let since Nick has to hire the most drivers, we'll let Nick take that one correctly. Yes. I would just say that it's still a challenge out there. There are some markets that are still really tight, but I would say it's eased slightly, but it's still difficult to find good quality drivers. And we're still needing quite a few of those.
So there's still higher on bonuses that are out there. So that tells you that it's still tight. There's not as many, but there is some out there. So I would say the market is still very tight, particularly in our dedicated side.
And Nick, I would just note that our costs to hire are still at a high level. So we talked about hiring bonuses, but just our cost in total W2 also paying for this hiring bonuses as those are maturing more now. So our cost to acquire new talent and drivers is still an elevated price.
That's a good point.
All right. That's helpful. Thank you. And then Dave, I kind of do want to ask you a question about guidance. I understand there's uncertainty around the year, but I think one of the things that one of the pieces of pushback that we often get on J.
B. Hunt as a stock is we don't have a lot of visibility around the company. They don't they used to not hold earnings calls. So I think this is helpful. But is there a point in the year here where you're going to feel more comfortable in giving us some directional guideposts so that we can sort of make sure that we're not letting our wildest models run away from us with 15% pricing?
And is there any point where you're going to be
able to tell us at least kind
of timing wise when this arbitration stuff may come off as an overhang? And yes, I did fit 2
and there's a follow-up. Yes. It is not likely that we will talk about guidance in 2019. Even when we try to get more visibility, it's either been ignored or caveated depending on who's reading it. And then it's never updated.
So we're always behind the curve. So we never used to issue guidance. And then we thought people were getting out on a limb too far. We started doing it. It worked for about 2 years and then we're back out where we were before even putting our numbers out there.
So I doubt if you're going to see us issue guidance definitely in 2019. And as far as the arbitration, the information that we have issued to the public is all the information that we intend to issue to the public. When we get more information, we'll issue more information to the public.
Your next question comes from Casey Deak. Your line is open.
Thank you. A question for Shelly. It's more long term in nature. If you're looking at more revenue, more growth coming from marketplace over time, does that change how you look at the general ICS business and the brokerage model? Does that change your needs on the labor front of how many brokers you need or the footprint that you have in that business?
And then kind of along those lines, if you can just comment on how you view margins and return profiles going forward?
Sure. If I could take your questions a little differently, because I thought you were going to say, do I think differently about brokerage having marketplace? And I would say, I think that our ability to grow share should continue to accelerate now that we have better data, more real time visibility and really understanding where the inefficiencies are happening here. We could drill the gaps in that. So I would expect the IPS to continue to have stronger, but also expect that organizationally because we use that data to help customers know how to transition into intermodal better or create dedicated fleets or find backhaul for our own equipment.
So I would expect that to continue to prove beneficial to our bottom line here over the next several years and also long term. And then from a labor perspective, we do think that margins, a large portion of the margins go to fund the expense of labor. So people to do business, we aren't expecting in the near term to lower our total headcount. We've actually accelerated that headcount. We think the platform will be successful when we put our experienced people with great technology.
And so we think we need both really to accelerate what the platform can do for our customers and carriers. So we think our gross margin percentage will shrink over time, but our bottom line percentage should still be in the range of brokerage as we get efficiency and the computer is doing really a lot of the work that's not that fun to a broker. So brokers will transition and use their more creative product, problem solving skills where the computer can't do that and wants the computer collect the bids and do things that are more automated.
Okay. Thanks. And does that change the type of person that's going to take that job over time or kind of change your labor force of who you're looking at for hiring to come into that business?
We definitely have started to segment the work of our ICS sales team. And so we are looking for different skill sets for carrier sales versus carrier procurement. And so I do think that that will change over time. Those jobs can be shared at times, but I do think we're going to be talking carriers about the platform, the adoption and the features and benefits of saving their money, giving them more time to drive and giving them a better experience versus maturing at the moment when something needs to happen.
And presenters, do we have enough time for another question?
Yes, we'll take one last question.
All right. Your next question comes from the line
of Van Hartford. Your line is open.
Thanks. I'll finish it. Terry, just your perspective on inventory levels across the channel. I mean, you made the comment about transload activity in the first quarter. It sounds like warehouse capacity is tight, particularly in the LA Basin.
But overall, have a sense as to what customers are saying as it relates to inventory levels and planning for 2019?
Yes. I think inventory levels from the latest data that I've seen are down versus what we saw maybe a year and a half to 2 years ago. I'm really curious to see what the new data would say in December and January, but I haven't seen any spike up in regards to that. We know that there's various warehousing shortages throughout the country in certain markets, which is why some of our freight sits on our trailer. And that's why we pursued like others accessorials not only for dwell but also for storage.
So it's I don't think it's changed materially from anything that I've seen in the last 2 or 3 months, but we'll have to see the new data when it comes out here in the next couple of weeks.
Okay. That's helpful. Thank you.
And this is all the
time we have for questions. I'll turn the call back over to our presenters.
Thank you all for joining us. I'm sure we'll see you out on circuits and I know a bunch of you have got scheduled to come on or are scheduled to come on down and see us. And we're excited to talk to you about where we're going to take this company in 2019 and beyond. Thank you.