Good afternoon. My name is Jesse, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Q4 earnings call. All lines please on mute to prevent any background noise.
After the speakers' remarks, we will have a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. 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 learned a little bit from the last one, hopefully this will be a little bit more informative, and not quite as robotic as the last one was.
We will continue on with these things as long as everybody thinks they are productive. I have got the team with me this afternoon, John Roberts, CEO, Terry Matthews, President of Intermodal, Nick Hobbs, President of DCS, and Shelley Simpson, President of Highway Services, which to remind you all is both ICS and truck. Jesse gave you housekeeping, again, if you will make sure that you state your name clearly, so when you ask a question, we know who is asking and how we can respond.
Again, limit your question, one question and one follow-up, and we will try to get through as many people as we can in this hour. We do have a hard stop at five o'clock Central, six o'clock Eastern. As far as just general comments, overall, we felt it was a good quarter. I would not go so far as to say it was a great quarter, 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 fourth quarter results, excluding our pre-announced charges. In intermodal, we saw rail service interruptions and congestion that continued to hamper our ability to react to unplanned customer demand spikes.
Overall, demand for the quarter was relatively consistent with a strong fourth quarter 2017, even though we were a little disappointed and frankly, a little surprised that demand did not accelerate throughout the quarter. That said, I am sure Terry will end up commenting on this during the Q&A session, we have seen positive results upon both load growth and price increases early in this current bid cycle.
In DCS, we started an additional 458 trucks in the quarter, that is coming off of a 600 truck add in Q3 as a reminder. We still improved our margins around 200 basis points sequentially. The startups that we have begun are rolling into price profitability on time and as expected.
Our private fleet pipeline continues to remain strong going into 2019, and our agreement to acquire Cory's First Choice Home Delivery should allow DCS to continue its growth trajectory into 2019, and do it in a less asset-intensive way. Excuse me. In ICS, our gross margins in the quarter reflect the state of the market, where our 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. Speaking of Marketplace, we were very pleased with another sequential increase in activity conducted through the platform, and we 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.
Last, but certainly not least, Truck was able to capitalize on the 2018 pricing environment. 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 third-party power as a growth strategy throughout 2019. That's the end of my prepared remarks, giving you a glimpse of how we looked at the quarter, and a view of how we expect it going to 2019. With that, Jesse, we're ready to answer questions.
Again, if you'd like to ask the question, please press star one on your telephone keypad. We'll pause just a moment to compile the Q&A roster. Your first question comes from Bascome Majors. Your line is open.
Yeah. Thanks for taking my question here. I realize the BN arbitration situation is still very much contingent, but it does appear that at least they'll be 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 curious strategically if we'll see anything different from Hunt and intermodal over the next three years versus the last three.
Yeah, this is Terry. I don't think it'll change our strategy. Our strategy's 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.
Any expectations for bid season outcomes early on in intermodal for this year? Thank you.
Well, we've had about 20% of the first rounds of bids have been priced, and most of them have been implemented. 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. In the first 20% of the bids, we've seen high single-digit rate increases, and we've been able to grow some volume. We'll 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 will probably cost us 50,000 to 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 their rationale for that is. 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.
Yeah. Good afternoon. I wanted to ask you just within fourth quarter, and then I have a follow-up. Within fourth quarter, how much should we allocate from the charge, the $134 million charge related to BN?
Can you identify how much of that would have applied to the fourth quarter? 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, I don't know if you can ballpark that for me in terms of the impact in fourth quarter.
As far as the charge, in our pre-announcement, we disclosed that $89.4 million was for 2016 and 2017, and that $44.6 million was for 2018. That would have been a full year picture. The best you could assume is that 25% of the $44.6 should be applied to fourth quarter. As fuel, I'm really not sure where you're going with that, Tom, but we don't break down fuel by business unit. Never have.
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. If we were chasing it would have been a headwind, and if we were ahead of the curve, it would have been a tailwind for the short period of time.
Yeah. Okay. 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. Just to make sure I heard you right, high single digit rate increases, and I think that would be with respect to intermodal.
How would you think the overall bid season plays out? Do you think truck and intermodal rates end up mid to high? I guess that seems like that would be a pretty bullish outcome given that spot rates are down a bit at the beginning of the year, admittedly versus tough comps. I wonder if you could add some more color on how that is developing and what you might think on that 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 %. 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 and truck. I'll let Shelley speak to the asset and non-asset rate structures there.
With regards to intermodal, everything that we've seen in the orderly market that I talked about is that everybody's facing similar challenges with regards to rail PTC, higher dray cost. 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. 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.
Yeah, to 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. I do think that what Terry said on intermodal could be a change from what the truckload market will see overall.
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 intermodal, but it would lower their overall transportation costs.
Your next question goes to Chris Wetherbee. Your line is open.
Hey, thanks. 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 looks like potentially a 3% headwind from some of the PSR actions from the eastern railroads.
Just get a sense of maybe how you're thinking about the outlook for 2019. Is it still a growth assumption or maybe the last couple quarters are indicative of what the demand environment is?
Well, I think I mentioned that we're going to grow in 2019 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 will equate to 50,000- 70,000 loads. As I mentioned, through the first 20% of the bids, we have been able to replace half of that volume that we're going to lose this year.
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 could maybe strip out the Cory side 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 as to tractor count as we move through 2019?
First of all, we come off of 2018, which was a record-breaking year. We were excited about that. 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, they're very consistent. It's really too early. People are just getting back from holidays and trying to figure things out. 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 than 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 million charge, Dave, I know you mentioned about $45 million was relating to the full year 2018. Is there a way to sort of think about how much of that was attributable to the fourth quarter? Trying to really just get a sense of what the core operating ratio was.
Well, you mean as far as in the fourth quarter, Allison?
Yes.
Yeah. We don't do non-GAAP publications or discussions, but our audit committee asked that same question. I'll tell you what I told them, then you guys can all determine what you want to acknowledge or use or whatever. What I told them was in the fourth quarter, and they were looking at the entire company, not just intermodal.
They said, "How do I compare fourth quarter 2017 to fourth quarter 2018?" I said, "Fourth quarter 2017, you got to add back the $38.9 charge that we had in that, $38,900,000. In the fourth quarter 2018, you have to add back the $89.4 and 75% of the $44.6." Okay?
Okay. Yep.
That would give you the operating income between the two quarters on a normalized basis.
Okay. That's definitely helpful. Thank you. As far as the transcon volume in the fourth quarter, how much of that do you think was related to the deterioration in BN service? How would you frame the risk to 2019 loads in transcon if this persists for some time?
Yeah, the service that we received from all railroads in the fourth quarter was not what we had hoped. The velocity was obviously down, which consumed boxes. As we have gone around and talked with the various railroads, they believe the velocity and service will be up with all railroads.
We're anticipating better box turns, better velocity, better service, as Shelley alluded to, that should help conversion with regards to 2019. The rail service that we've seen so far the first 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. Hopefully that will continue. We'll just have to see.
Your next question goes 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 any easing in cost pressure. Is it reasonable to expect that operating income can outgrow revenue again in 2019? Do you see headwinds on the cost side which might offset that?
Are you talking only about intermodal?
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 million 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. I would expect 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 records, we're having to take rate increases to get insurance capacity. I think those are the big ones that I can think of. Terry, in intermodal, is there anything that I missed?
As velocity picks up and as 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. That could be a potential upside for us.
Okay, great. That's really helpful. One follow-up on CapEx. Looks like you came in above that $800 million target that we got on the last conference call. Is that pulling forward dedicated business? Anything that you would mention there? How should we think about CapEx in 2019?
It definitely is a reflection of the amount of dedicated business we added on in 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 million less than what we had a year ago in 2019.
Your next question comes from Amit Mehrotra. Your line is open.
Thanks. Hi, everybody. Can you just offer the monthly cadence of intermodal volume costs in the quarter? More broadly, just comment on the overall volume environment. There's obviously a lot of uncertainty out there in terms of trade wars and just overall slowing growth. If you could just help us kind of conceptualize those concerns in terms of what you're seeing on the ground today, that'd be helpful. Thanks.
Hey, Amit, I thought we just heard that Trump canceled the trade war.
Okay. Everything's great, right?
Anyway, to answer your question on volume on a calendar month, in October, we were plus five year-over-year. In November, we were minus three year-over-year. In December, we were minus six year-over-year. As far as general demand.
Yeah, the volume trend, I think some of the tariff activity that was supposed to go in December 1st helped some pre-shipping. We were a little disappointed, as Dave mentioned in his opening comment in December. Now we'll see what happens after today's announcement.
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.
There could be a lull. Chinese New Year, I think, is in the 1st week of February, which basically plays out into the 3rd or 4th week of February. 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. With regards to volumes or even with the rationalization, it's difficult in January, February, March, but it's pretty well in line so far with what we anticipated for the 1st 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 two halves.
If you can just kind of give us some color of how to think really about the dynamics of that and really the 2nd half of 2019. 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.
Yeah. Well, just generally, I would tell you Well, Nick, talk about your base business on dedicated. We'll start there and then we'll go to intermodal.
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%-13% operating margin. We're pleased with that.
That's with startups loaded in there and everything. 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. The base dedicated business is performing within our guidelines.
All said, if Nick shut down growth completely, he'd be running in that 11%-13% margin range, is really how we look at it, and that's how it's priced, and that's how it's always been. Intermodal, as far as just general aspect, again, we haven't moved our margin targets just yet. We think that 11%-13% is the right long-term margin, so we have some room to get up there.
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 cover our overall cost nut inside of intermodal. At this point in time, we have to inch back into that 11%-13% margin range. We do have some cost headwinds we'll have to overcome in order to get there.
Your next question comes from Jason Seidl. Your line is open.
Hey, guys. This is Adam on for Jason. Good afternoon, 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 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. 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, this gets us into the furniture side. If you look at the final mile big and bulky delivery, we think it's a $12 billion-$14 billion spend.
$5 billion is the largest, that's in the furniture area. We're excited about what that can do. $3 billion of that is in appliance, you get smaller on medical and exercise equipment. Where we're focused is on the big ones right now, we're excited about that. We're not planning on any more acquisitions. We think we'll take this one on, it'll really launch us into the big segments, we're excited about that.
We think we're one of the largest players in the big and bulky delivery and give great service, Cory was a great match. They've got a great reputation on the service side, their culture matches ours very well. I've been on the call with all of their customers, it's been a great transition, setting up for a great transition.
We'll close on that next month. We're going to be able to do a lot of integration, I think, with Shelley's team and even Terry's on some intermodal inbound. I think there's going to be some extra revenue picked up from that, from our relationship. I think it's going to be beneficial to a lot of different divisions.
Great, thanks. Maybe just a quick follow-up. I know you guys have spoke a bunch about intermodal already and a little bit about Precision Scheduled Railroading as well, I was just wondering if there's anything else that you guys might be able to share regarding PSR, specifically with the rollouts at Norfolk Southern and Union Pacific. Any other details maybe that you can share about the rollouts there and maybe how it's affected you guys or your customers. Thanks.
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. Some of the things that they do, I don't know if they've all been done yet.
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 railroad. Precision Railroading, by definition, should be better on-time service. Better on-time service means that intermodal should grow. The quality of the revenue should also follow that as well.
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.
That's one of the reasons why I think it's an early market because everybody has some of those PTC opportunities in front of them, along with the drought, as I mentioned, and it's going to create an environment similar to last year, and we'll just see what 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.
John, I got a question for you about the broader portfolio. Another acquisition that Nick just spoke about. 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? 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.
I think the two 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'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. Cory was a real good add-on for us, but nothing is a burning platform that we don't have internal activity cooking around.
We do have a lot of projects going right now, I would want us to be careful getting deal fever. I'd like to see us finish off some of the bigger projects that we're 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 flags up on too many sticks at once. I think we want to be thoughtful about that and careful. Now, that's not to say that if one of these folks comes in with a deal they really like. The way we do this now, having done it a few times, said no to several and yes to two is, we have a little bit more of a program internally that seems to work for us.
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. I wouldn't say that we have anything that's current at the moment.
Okay, great. Maybe if I can follow up to that for you, Dave. You gave us the capital budget plans for 2019, $200 million less than 2018. How should we think about that capital being deployed amongst the segments?
Yeah, I think obviously the biggest user is still going to be dedicated. Even Intermodal's got a heavy trade here. I would say that they're going to be obviously a large consumer of that as well. Part of our overall CapEx spend is an additional $50 million 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 digital platforms.
That requires capitalization. Intermodal is looking at yard expansions, things of that nature, which are our high-cost one-time items. 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. Shelley, 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. Is that a function of just a lower cost to serve with 360?
Oh, well, that's a great question. Lower cost to serve with 360. 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. That has happened in general. I would say the softness in the spot market impacted us, and specifically in ICS.
In particular in December, but just all of fourth quarter as well and continuing into January. If you think about what's coming out in the platform, we do have, I think Dave has mentioned the 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. We did just roll out our very first piece of machine learning.
Using the data points that we have from carriers coming and searching, 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.
A large investment happening inside that space. We're also working on the small and midsize market inside 360. For them to have access to the platform, that's another key component inside the 2019 budget in total. Really just expanding the services. Really the Our entire organization can gain benefit from the platform. 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 go back for a follow-up, just a bigger picture question for you, Shelley and now 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 year, given how strong the market was? 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 intermodal providers are up against. I mentioned the rail PTC, the higher dray cost, 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 inland, I think they're going to be pricing in such a way that the option may be better to transload.
You got a supply and demand situation on the West Coast, which is positive for price. You have higher dray costs and higher rail PTCs, and improving service. With that, we might have a fuss fight here and there in some backhaul lanes in the East.
Generally speaking, there's many lanes in the East that are now two-day lanes that were priced maybe for a day and a half, that I think that intermodal will be able to hold its ground with. As I said, it's a dichotomy. Normally, it doesn't do this, I think this year might be different for those reasons.
I might add to that. I feel like in the truckload sector, that from a customer perspective, there is more stabilization happening from bid awards. If you look at what happened in 2018 and in 2017, the freight market was very volatile.
Customers were churning lanes that sit, that in turn made the truckload carriers have to churn what freight they could accept or what really worked for their network. I think there is a more stable network today, less churn in the bid business.
That is favorable, I would say, that prices don't have to move at the same clip. You look at the disruption happening in intermodal. Terry talked about the lane closures and the rail rationalization. That alone will create those cost pressures that are happening. 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.
Great. Thanks. Afternoon, guys. Wanted to just follow up on the arbitration. Dave, is there a better number to use for the forward-looking impact than the $44 million from 2018? Is there anything more specific you want to tell us? 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?
Just adding to that, you had a comment, we haven't changed our 11%-13% margin targets yet, and I wasn't sure if what you really meant by that. Does something change because of arbitration with the 11%-13%, or am I misreading and you still feel good about 11%-13% longer term?
That's three questions in one, that's incredibly clever, Scott. Now I've forgotten exactly what all three of them are. Let's start with the margin. At this point in time, 11%-13% is still our margin target for a long-term basis. However, we'll have to wait and see. 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. We have to look at as rails pass their costs onto us, then as our customers accept price increases, where those margin targets will end up being. 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.
The other part was just given that, do you think you can improve margins this year in intermodal?
In the short term, again, don't hang it on just one railroad. We have to look at our entire mix and see what our rail PTC will look like from all the railroads. We are expecting some cost increases. 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 to follow up on the dedicated comments. I think a comment was made that the expectations that dedicated is going to continue to grow at the recent run rate, which has been around 25%. Is that a thought that's really what the revenue for dedicated should grow throughout all of 2019?
If you could also follow it up with 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 2019 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. Okay.
Well, 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, Nick's looking at me. I will tell you that dedicated is probably the most volatile because frankly their growth is all dependent on when a damn customer signs a contract.
Right.
For lack of a better scheduling, when they do their budgets and hand them in to me, it's pretty ratable throughout the year. Okay?
The growth is ratable. The truck.
The growth is ratable, that's right, throughout the year. That's here we are, what, January 17th. We don't have any data that says anything otherwise. The good part about it is we've seen him when he's layering on this revenue, we're overcoming the startup cost because the startups are coming out as scheduled and priced.
I wouldn't expect a huge lag in their margin improvement as they go on. I think their biggest headwind to margins, 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 starting to get to a size in the non-asset piece that as that mixes with the asset side, that will put pressure on their OR. Does great-
Right
phenomenal things for their ROIC, which is what we want. We'll have to discuss that as we start to see that happening.
Yeah, I would just say, particularly once we get the acquisition owned, it's 90 something % non-asset, it's going to come on. Just the growth in general that we already have on the non-asset side and final mile, it's going to be a bigger % of our portfolio when it's climbing.
That's going to put pressure on our overall margin in dedicated that has both final mile and dedicated in it. That's what I was trying to allude to. We're very pleased. We break it out internally. We're very pleased, it is hitting the margin targets that we have shared numerous times. We feel very good about it.
Okay. Yeah, obviously when the questions are, I think that we all want to get our expectations directionally correct. We don't want to have the volatility. That's, I think, at least where I'm coming from in the questions. I guess for my follow-up, I think that Brad Delco asked something directionally about this earlier.
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 opportunities that you see? Is that just something that's been 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 final mile services, I really think we've been very open-minded and open-eared to what is it that we're hearing from that base of people we serve.
Even some new customers that we're reaching now with things like Marketplace, that historically we've been a big shipper provider, 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. One of the things that we discuss here is there a need?
Who else is providing that service? Are they good? Is there a return? For us, it's also can that service, can that offering grow to a meaningful enough size that's going to move our needle? 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 not going to be big enough to really matter.
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? 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, that's been real good for us. It's been a little disruptive, we hired a lot of people this year to support the growth that we brought on, I just find that's a self-fulfilling system in a lot of ways.
We don't have a preconceived notion. We know that the best return for us is going to be organic growth. We've always been keenly aware of that. We also are not allergic to 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. 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? Is it big enough to matter?
Your next question comes from Ken Hoexter. Your line is open.
Hey, great afternoon. Terry, you mentioned your thoughts on pre-shipping impact to volumes. I just want to understand as if we have this continue until the end of February, do you expect a kind of sizable lull as you move into March or April, May, just given the pre-shipping activity at the ports. Dave, just want to understand your comments 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 5,000 or 6,000 of our containers, and we're getting some of those back rather quickly.
With regards to the tariff March 1st, the potential tariff, I do think it could be similar to December. We're seeing some pre-shipping going on. You always see some pre-shipping before the Chinese New Year.
You might have not only the normal Chinese New Year lull, but you might have some less activity because of the tariffs. Where Easter stands, sometimes that kind of washes itself out. We'll just have to see what happens with regards to the tariffs.
It's not like you've already seen a significant oversupply or pre-shipping that is a significant hassle.
What I said is the steamship companies that we've been in contact with said that their boats are more full in January and the reservations they have versus what they had last January coming to the West Coast.
Okay. Dave.
Your next question comes from Matthew Miller. Your line is open.
Hey, thanks. Good afternoon. Not a guidance question, but could you give us some color in terms of how much revenue Cory's First Choice did over the trailing 12 months? 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 the relative margins to help us think about dedicated as a whole next year from a margin perspective, that'd be pretty helpful.
Okay. Yeah, the trailing 12 months would be between $155 million and $165 million in revenue that they did in the trailing 12 months. We've had conference calls with all those customers, and they're very pleased with the acquisition. They think we can help them grow a lot faster.
They have a lot of pent-up demand that Cory didn't quite have the capital to grow with. The customers are excited about that. The other question was our margins in there. It depends on the capital required. If it's all non-asset, we're going to be in the 5- 7% range is what our operating margin targets are going to be in that business.
Okay. Helpful. You mentioned shifting over to intermodal. You're looking to grow volume in 2019. 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.
Well, we should have the boxes available if the BNSF continues the way they have started the year with their increased velocity. As long as there's boxes, I think we can. If terminals can stay fluid, we will have the necessary power at origin destination to do the pickup and deliveries. I would say it's good as long as the rail network stays stable.
To specifically answer your question, Matt, yes, the growth expectation in 2019 is in spite of the rail rationalization and the 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 how you're feeling about the rate environment. I wanted to ask the same question in a different way. Are you seeing any signs on the hiring side that it's getting easier to see drivers? Is the labor market loosening in any material way? Then I just have a quick follow-up.
Since Nick has to hire the most drivers, we'll let Nick take that one directly.
I would just say that it's still a challenge out there. There's 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. We're still needing quite a few of those.
There's still hire-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. I would say the market is still very tight, particularly in our Dedicated side.
Nick, I would just note that our costs to hire.
Absolutely
Are still at a high level. Nick talked about hiring bonuses, but just our cost in total W2, also paying for those hiring bonuses as those are maturing more now. Our cost to acquire new talent and new drivers is still at an elevated price.
Yep.
That's a good point.
All right. That's helpful. Thank you. Then Dave, I do want to ask you a question about guidance. I understand that there's uncertainty around the year, but I think 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 used to not hold earnings calls. So I think this is helpful. 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? Is there any point where you're going to be able to tell us at least timing-wise when this arbitration stuff may come off as an overhang?
Yes, I did fit two in as a follow-up.
Yeah. It is not likely that we will talk about guidance in 2019. Even when we tried to get more visibility, it's either been ignored or caveated, depending on who's reading it. Then it's never updated. We're always behind the curve. We never used to issue guidance.
When we thought people were getting out on a limb too far, we started doing it, but it worked for about two years, and then we're back out to where we were before even putting our numbers out there.
I doubt if you're going to see us issue guidance definitely in 2019. 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. I have a question for Shelley. 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? Kind of along those lines, if you can just comment on how you view margins and return profiles going forward.
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? 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 so we could fill the gaps in that.
I would expect ICS to continue to have strong growth, but also expect that organizationally, because we'll use that data to help customers know how to transition into intermodal better or create dedicated fleets or find backhaul for our own equipment. I would expect that to continue to prove beneficial to our bottom line here over the next several years, but also long term.
From a labor perspective, we do think that a large portion of the margins go to fund the expense of labor. People to do the 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.
We think we need both really to accelerate what the platform can do for our customers and carriers. 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's doing really a lot of the work that's not that fun to a broker.
Brokers will transition and use their more creative side and problem-solving skills where the computer can't do that, and we'll let the computer collect the bids and do things that are more automated.
Okay, thanks. Does that change the type of person that's going to take that job over time? 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, so we are looking for different skill sets for carrier sales versus carrier procurement. So I do think that that will change over time.
Those jobs can be shared at times, I do think we're going to be talking to carriers about the platform, the adoption, and the features and benefits of saving them money, giving them more time to drive, and giving them a better experience versus maturing at the moment when something needs to happen.
Presenters, do we have enough time for another question?
Yeah, we'll take one last question.
All right, your next question comes from the line of Ben Hartford. Your line is open.
Thanks. I'll finish it. Terry, just your perspective on inventory levels across the channel. You made the comment about transload activity in the first quarter. It sounds like warehouse capacity is tight, particularly in the L.A. basin. Overall, do you have a sense as to what customers are saying as it relates to inventory levels and planning for 2019?
Yeah, 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 two years ago. I'm really curious to see what the new data would say in December, January, I haven't seen any spike up with 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. That's why we pursued, like others, accessorials, not only for dwell but also for storage.
I don't think it's changed materially from anything that I've seen in the last two or three 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.
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 the circuits, and I know a bunch of you have got scheduled to come on, or are scheduled to come on down and see us. We're excited to talk to you about where we take this company in 2019 and beyond. Thank you.
This concludes today's conference call. You may now disconnect.