Q2 2020 J B Hunt Transport Services Inc Earnings Call

We placed on pharma hold until the conference begins again your lines will be placed on sign on hold until the conference begins.

[noise], ladies and gentlemen, thank you for standing by and.

Welcome to the JB hunts second quarter Twentytwenty earnings call. All lines are currently in listen only mode. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question that anytime. Please press star and the number one on your telephone keypad sure meet your stuff from Q press the pound Keith.

A replay will be made available after today's call on the company's website at <unk> Dot Com as a reminder, this call is being recorded.

It is now my pleasure to hand, the call over to Brad Delco, Vice President Finance and Investor Relations. Please go ahead Sir.

Good afternoon, and thanks for joining us hopefully everyone has had an opportunity to review our earnings release.

Issued earlier this afternoon, if not you should be able to access to release on the Investor section of our web site at JP Hunt Dot com.

Before I introduce the speakers on todays call I'd like to take some time to provide some disclosures regarding forward looking statements.

This call may contain forward looking statements with the meeting.

The meaning of the private Securities Litigation Reform Act of 1995 words, such as expects anticipates intend estimate or similar expressions are intended to identify these forward looking statements. These statements are based on JV on its current plans and expectations and involve risks and uncertainties that could cause future activity.

Some results to be materially different pronounced those set forth in the forward looking statements for more information regarding risk factors. Please refer to JV Hans annual report on form 10-K, and other reports and filings with the Securities Exchange Commission.

Now I'd like to introduce the speakers on today's call.

Afternoon, I'm joined by our CEO John Roberts.

Our interim CFO, Chief Accounting Officer controller, and senior Vice President Finance junk Hello, Charlie Anderson, our Chief commercial officer, and President of Highway services guarantee older President of intermodal and Nick Hobbs President of dedicated and final mile services.

This time I'd like to turn the call to our CEO Mr., John Roberts for some opening comments John.

Thanks, Brad the second quarter has confirmed the comprehensive nature of the virus throughout the period as noted we immediately committed ourselves to the priorities are taking care of our people and delivering on the promises we have made to our customer customers.

We're encouraged with our results in both areas through the second quarter.

75, or Ciber employee base has been I'm unable to work from home due to the nature of our business and the ongoing needs of our customers the safety practices and P.E. supplies. We deployed early and have continued to support and provide a proven substantially affected today.

We were view, both external and internal covered related data daily.

We'll continue to monitor the situation to maintain focus on these important probably words.

Additional facility investments have been and are being made to all work here is in low and across the country to help lower risk.

Equally rewarding has been a recognition encouragement from so many of our customers and acknowledging the performance of our people, particularly our drivers for providing consistent service and availability moving freight to where it is needed we stand ready and able to continue to serve them and their ultimate customers.

Another important discussion that has developed during the second quarter is about inclusion and diversity.

While this is not a new topic here JV hot the level and quality of dialogue has elevated in recent weeks.

I can report at the entire executive leadership team is actively engaged in understanding where we are in determining where we want to go in improving these vial elements through all levels of the company.

I want to get recognized and thank the amazing P employees or JV hub for their remarkable efforts to stay together strong safe and reliable over the past quarter. There is no quit in our people.

Our field operators drivers maintenance technicians, along with our support teams in the field and low have remained vigilant and true to our mission, we're extremely proud of the entire organization.

John cooler will comment on our current financial situation and as an enhancement to this call. Our segment leaders will address the performance and trends in each of the business unit I'll focus my remarks on the macro view, we have today across the top of the business.

Clearly we are off our original plans in many respects and comparisons to last year did not help eliminate much about where we find ourselves well. We do know is that during the quarter, we saw stable and steady cadence of demand, particularly in our dedicated in intermodal businesses and even see some of the disruption or highway services.

Brokerage in truckload signaling a similar upward slant to the demand curve, albeit difficult on near term margins.

From a business lines are slowly, but surely working their way back online.

Finally, our need to hire more drivers as an indication of what we hope is a bottom in the cycle.

This is particularly encouraging in that we have experienced some of the lowest driver turnover ever in the past four months.

While still too early to call at least we have some potential signs of inflection in the demand curve.

We will look for more direction from import data inventory levels and retail sales information.

As well as thoughtful input from our customers to build confidence in the trends into the second half of the year.

Until that confidence firms, we maintain our current state of cost control efforts, a conservative capital expenditure approach and contain payroll and hiring practices.

We have restarted some strategic discussions around growth channel prospects particular, it particularly in areas, where we anticipate potential demand driven rates supported needs to expand fleet sizes implementing dedicated vitamin contracts as sales come back online and positioning for new investments in technology all in.

Early stage preparation for what we hope is the inevitable return to normalcy.

Thanks, Phil that we're cautious recent cobot case count expansion in the uncertainty of what that May present will drive us to hold back from now on any directional changes from the current state a conservative thinking and again, we will maintain the priorities of keeping our people safe and striving to honor the commitments, we have made to our customers going forward.

With that let me turn it over to John cool over his thoughts Jeff.

Thank you John as mentioned in the segment leaders will cover business unit result, so I'll add some comments on the consolidated financial results and update you on our approach to addressing the pandemic during the current quarter and also going forward.

The effects of the pandemic are far reaching throughout her financial statements impacting revenues expenses, both positively and negatively and throughout the quarter, it's difficult to talk through the specific impacts on each of the line items at the endemic has had on our results. However, we have identified approximately 11 million specific costs in the second.

Order that were not planned prior to the pandemic.

These cost consists mostly of special paid time off for our employees quarantined or for reduced pay from slowdowns as well as costs for personal protective equipment cleaning insecurity directly related to protecting our employees.

As previously announced we incurred 15 million in the first quarter for cope and related items for approximately 25 million year to date.

We maintain a disciplined approach to capital deployment in our long term strategy around that has not changed however, given the uncertainty entering the second quarter, we made an intentional adjustment for the sake of protecting liquidity.

Our opportunistic approach to buybacks as always contemplated cash needs and with excess cash being used for buybacks. While we're confident in our balance sheet strength, we believed that the overall uncertainty or the market made it prudent to maintain higher cash positions until we receive some clarity on the environment.

Accordingly, we entered the quarter ended the quarter with approximately 275 million in cash or net debt of approximately 1 billion.

We still target our leverage ratio at one times EBITDA and expect to stay within close range of that metric throughout the year.

We expect our capital allocation process in the second half of the year to include stock repurchases and previously forecasted capital expenditures, but we maintain a careful watch on a daily basis.

We're currently forecasting our capex to be approximately 600 to 625 million for 2020.

Which is down from our original plan of 700 million, mostly due to the timing after causing certain projects within the second quarter.

Our investment approach continues with their long term strategy, we're carefully monitoring the market and environment assessing our power equipment and container needs in purchasing as conditions warrant.

As previously explained our model and Dcs his success driven so to the extent, we win new business or grow organically or capital investment changes Accordingly, we are well prepared to do so.

From an M&A standpoint, I noted our target leverage ratio of one times.

But we're comfortable taking that higher if acquisition targets meter ROI see in margin considerations.

With respect to margins during the quarter, we focused our intention to discretionary spend.

In addition to eliminating travel we suspended hiring unless there is a critical need.

We're pleased with our ability to redeploy our people in assets from shuttered to surging accounts and while most of that as reverted back to normal operations will continue to use that strength as conditions warrant.

We focus on or driver productivity using our people in assets as efficiently as possible avoiding furloughs and lay offs to set us up to be in the best positioned as the economy comes back online.

We continue to carefully review our spend balancing the need to invest for the long term, but being mindful of the current environment.

As we discussed during our first quarter call aside from the uncertainty or the freight market. We were concerned with the overall market liquidity and the impact it may have on our customers and their ability to pay.

We experienced a slightly higher level of uncollectible accounts during the second quarter, which we call out in the release overall, we're pleased with how our teams worked with our customers to deal with any payment issues. We continue to watch your working capital metrics on a frequent basis.

With that.

Concluded my prepared remarks, and I'll turn it over to dare to expand on intermodal operations.

Thanks, John and good afternoon, everyone thought I would focus my comments on three primary areas performance in the quarter, an update on intermodal pricing dynamics in finally provide some thoughts on fluidity of our network as a whole.

First I'm extremely proud of the team's performance as they were able to react to significant demand swings from the start until the end of the quarter.

Sitting here three months ago, we had little visibility into the outlook for the quarter, let alone the year and to be honest not much has changed as we sit here today.

In April we were experiencing meaningful declines in our business with expectations that conditions could further deteriorate.

Based on expected port activity levels availability of trucks supply and lower fuel prices.

That said, we saw general improvement volume trends as the quarter progress with the biggest surprise occurring in June.

This is apparent with our monthly volumes, which were down 6% in April.

4% in May and positive 5% in the month of June.

Feedback we received from customers was that sales trends were stronger than they expected as the economy began to reopen.

And while we know there is a lot of focus on imports, we did not see a normal correlation between import data and our west coast volumes.

As it relates to pricing we discussed on our last earnings call. We would take a balanced approach to both volume and price during the bid season and I believe we have executed on that strategy for 2020.

At this point, we have completed pricing on approximately 80% of our published business with the remainder to implement in Q3.

October one will begin a new pricing cycle.

The rates, we have the rates have come in about where we would have expected.

We finished Q2 at flat revenue per load, excluding fuel on a year over year basis.

Mix in stronger West Coast Transcon volumes are providing an lift to the revenue per load above what we would have anticipated.

We have previously stated that we were very confident we would outperform the general industry trends on volume.

We based that thought on our awards from last year's bid process, which we will begin to lap in this third quarter.

Given our pricing strategy. This year, we do not anticipate significant deviation from general industry trends or at least not to the extent we experienced last year.

The balance of our network continues to face significant challenges that I expect to become even more difficult.

Third quarter.

The reality of the mix of our current customer base is significantly stronger off the west coast. We do expect we will have some cost pressure, while we ship empty equipment to the west coast at higher levels, and we would have expected going into the year.

Rail service has continued to hold up during the increase in volumes as June volumes increased.

We are experiencing a record level network rail service that occurred in March and April as volumes had declined but as we have experienced a significant swing in demand our real providers have all work strategically with us to solve for capacity challenges together with a real providers, we understand the critical path.

Great and time to prove the value and strength of intermodal is this solution with consideration for the massive capacity requirements.

That concludes my remarks at this point I'd like to turn it over to Shelly to discuss highway services. Thank you Dan and good afternoon, everyone. Today I'll discuss some highlights with regard to our performance in how we services, which includes our brokerage operation tonight's, yet and our truck operation in JBT followed by.

Some perspective, it gives us increased confidence and the rollout of the marketplace for JV had 360.

Finally, I'll offer some thoughts on how we see the business continuing to evolve to solve the needs of our customers and create raving fans.

Yeah.

First as we stated at our Q1 earnings conference call and John has alluded.

We highlighted two key objectives for this most recent quarter number when taking care of and focusing on the health and safety of our people and number two serving and making sure. We honor the commitments we have made to our customers.

I'm proud of the way our team and the organization responded to all the challenges, but we and our customer space in the quarter.

With regards to the quarter market dynamic in Q2, Q, where you need to say the late.

While we continue to see strong double digit growth in accomplish business spot opportunities for the most part we're nonexistent and revenue was further pressured by rates or revenue per lead versus a year ago.

Additionally, while part of our strategy is to grow our penetration with small and medium size shippers I believe the segment at the market was disproportionately impacted by the coping 19 pandemic, which also put pressure on some aspects of our business.

Second I'm extremely encouraged by the trends, we're seeing in the marketplace for Jvs Threesixty.

Which strengthens our confidence in the rollout of our platform.

The trended data support our belief that customers and carriers are increasingly wanting to connect digitally.

It enhances but visibility and transparency for both parties and we believe market adoption is continuing to build momentum as evidenced by our shipments per day in the platform continued to grow at double digits versus a year ago, and what I would describe as a fairly challenging environment to grow volumes.

I believe this is also supported by the level of engagement and activity that we see in the platform.

When we talk about engagement activity, what do we really talking about.

Well, we're talking about the number of available OLED Numberplate searches number of offers offers per lead number curious approved inactivated as well as users in the platform in fact, all of the Cape Yes, we track in the marketplace for JV has reached 60.

Over 75% this Cape yet hit all time records in the quarter as we continue to scale. The platform, we have data to support that theres incredible value inefficiency first both the shipping and carry community as they transact in the platform.

Enhancing value and efficiencies for by shipping K community very much aligns with our mission to create the most efficient transportation network in North America. So we remain encouraged by the data not only how it creates value for the market, but also in terms at the visibility provides to our team and ensure that we use.

As our own assets as efficiently as possible.

As an example, we eliminated over 10 million empty back call now for both our JV and Dcs segments in the quarter.

Which exceeds what we eliminated and all of 2019.

This is just another example of how we see benefits across our organization from the platform.

Now focusing in on our investment in the marketplace for JV on Threesixty.

We remain committed to our investment targeted in three key areas are people technology and scaling the platform.

We believe our investments should continue at the current pace.

People and technology front.

We do not or we do expect to continue to gain efficiencies in the platform with automation, but also expects some of those efficiencies to be reinvested in our salesforce to help build greater scale.

Market dynamics will also play a significant factor in terms of our ability to scale. So we will have to see how the market evolves, but it is worth noting at this point scale in the platform is the primary opportunity and risk to achieving profitability by second half of 2021.

It's also worth noting that we remain committed to building out our Threesixty box program, which falls in our JBT segment as JBT continues to shift into more of an asset light service offering in closing, we continue to see but I see us and JBT as well as our Dcs and jbs businesses.

Growing in evolving to becoming even more complementary within the JV Atthree 60 platform I'd now like to turn it over to admit to talk about dedicated and final mile.

Good afternoon, I'll focus my comments on the performance above dedicated and bottle model in the quarter, what opportunities and challenges we've seen the current market and wrap up with some high level expectations for these businesses in the future I'll start with final mile or Fms as we've discussed on our Q1.

Earnings call, we expected final mile to be significantly impacted by the business disruptions.

As bucket would not saying and clearly that was the case.

While results were better than we expected it was largely due to the both the economy and in particular, our customers opening backup for business sooner than originally planned across the three primary areas served by Fms. We saw some of the biggest challenges from our pool distribution businesses, which as a reminder provides inventory we.

But services were off price retailers.

Most of which remain close for a significant portion of the quarter Nexstar furniture business with the second hardest hit and saw overall activity down about 30% and finally, our appliance business. Despite a slower start finished about in line with normal activity levels.

Well the economic I'll look in recent rising covered cases could create additional noise in Q3 at this point. Our expectation is are we should see Fms return to profitability this quarter to finish up on Fms, we remain remain very encouraged by the level of engagement with our customers as.

Well as the opportunities to grow this business over the long term, we believe our asset and asset life final mile solution provides customers with a range of value added services in this rapidly growing channel.

Now onto dedicated or DCF first I'm extremely proud of our performance in dedicated which delivered strong results in lot of all the challenges in the market. While the driver of this performance was primarily a result of strong execution from our team as relates to asset turns in utilization lower startup costs.

Stronger safety performance and lower driver turnover also contributed to margin benefit I.

I think the performance that this team delivered highlights the key metric that we focus on internally and that is delivering on our CBD or customer value delivery.

We perform an extensive review of each of our accounts throughout the year quantify the value we are able to deliver to the customer over the last two quarters with extreme examples we experience from customers closing down facilities to some accounts surging as much as a 150% above base level our customers in.

Joint Outstanding service and the flexibility offered by professionally outsourced solution.

Solution that we think cannot easily be replicated given our size in the across the country. I think this performance also speaks to our diverse portfolio industries, we serve.

From agriculture, food home improvement grocery manufacturing retail in others.

We sold 430 trucks worth of new dedicated business year to date, we still expect to fall.

Within our previously stated range of 600 800 trucks for the year and while the pipeline remains strong we do have some concerned with regards to new prospects entering the early stages of our topline as result of limited opportunities for our sales team to engage with potential customers.

We will have to see how this plays out.

But good slow the pace of sales and startup later this year and into early.

2021, net net as it stands now we expect the fleet count remained relatively stable from Q2 levels at some of our fleet additions will be offset some attrition we are seeing at some of our existing accounts.

That concludes my remarks, so I think we're ready to turn it back over to the operator and open the line for questions.

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again Navistar then the number one on your telephone keypad to ask a question.

Hey, Stephanie as you're building the Q, just just to remind everybody one question and one follow up please and just in for time sake.

And our first question comes from the line of Scott Graham with Wolfe Research.

Hey, Thanks afternoon, guys. So Doug just a couple of for you maybe any color you can give us on volume trends in April.

Your commentary around the West coast imbalances.

Our cost issue do you think that there's some offset where it helps.

Revenue per load and then.

Any change in thinking on the 11% to 13% margins longer term.

Okay, well that that was a predictable question I'll get that out of the way right away no, we havent changed or long term outlook on our margin target.

That continues to be our target.

From a volume perspective.

Yes, I think in the in the earlier comments in the call. We were we were highlighting that while prices were coming in.

Relatively in line with what we had expected going into the year.

Mix was contributing to.

Benefit our revenue per load and our revenue per load was was flat for the quarter. So.

Pricing is not necessarily flat prices have.

Have been slightly negative.

But the mix of our traffic is driving a.

A benefit to.

To that in keeping our revenue per load at at a flat level.

From a volume perspective, you know.

April was.

Headed down rapidly.

At the time, we did this call back in mid April we were seeing.

Bookings and feedback from our customers suggested that we were going to be.

Really really in a headed down and by the ended the month it did.

Obviously kind of stabilize with I think we said negative 6% in April.

At that point, you started with a lot of info on the.

Blanking of ships and import traffic really really falling.

And so we were concerned a lot about may and June.

But as the quarter continued on volumes hung in there and then as we got into June really volumes were significantly stronger than we had anticipated.

We did.

We did highlight that we're beginning to lap the comparisons against last year.

Last year at this time during the third quarter, we had some nice gains in our volumes from a through the pricing cycles with with customers and we're going to begin to compare against that so far.

Volumes being 5% up in a in June as we highlighted earlier.

Our volume run rate so far in July has been relatively in line with the same weekly volumes, we are doing in June but.

The comparison is certainly different so the comp will get more and more difficult as we move through the third quarter on growth percent.

Okay. That's helpful and then just.

Last one for Nick.

You've had two quarters of 15% margins how are you thinking about margins either back half of the year and then longer term relative to the 11% to 13% target.

We are we're not going to change our long term margins at this point.

We've got some really unique benefits from very very low driver turnover.

Thank you results that were phenomenal growth.

Less amount of traffic out on the road multi any so we just got a lot of things. So we need to let the boss before we really.

Reassess that but we're comfortable with our stated margins as they are right now.

Okay. Thank you for the time guys.

Your next question comes on line of Justin long with Stephens.

Thanks, and congrats on the corner.

So maybe that start with intermodal going back to some of your commentary Darren.

Any expectation you'd be willing to share on intermodal volumes, if we look into the third and fourth quarter and then in terms of market share now that were wrapping up bid season. It doesn't sound like anything change materially, but just wanted to get your thoughts around that as well.

Yeah, Justin I don't think I couldn't really give any kind of guidance on on volume.

Moving forward I would say, it's very clearly our expectation to grow.

With the market at a minimum we expect to maintain our market share and feel confident in our ability to do that.

That's probably about as much as I could say about that volumes moving forward at this point.

Okay Fair enough and then on intermodal pricing you mentioned that new cycle starts in October 1st.

I wanted to ask how you're thinking about intermodal pricing in the next year relative to TL pricing is your expectation at the rate of trend change from a contractual perspective should look similar as we kind of get into the early stages. If this recovery or is there a reason to think we see it.

Divergence between the two.

You know historically I think with with the length of haul is so much different between truckload and intermodal there are times that the truckload price might dip further than in intermodal, but at times when prices are climbing the inverse is true the truckload.

Prices climbing further as a percentage simply because it's a smaller revenue per load.

I don't know that.

How to forecast next year I do think that.

In the current environment as we sit here today July 16th.

It feels like we have some cost pressure coming at us and so I would expect that.

Prices will have some we'll be talking to customers about cost pressures certainly the railroads will have have have something to say about.

Their cost challenges and we'll all be talking more about that and learning more.

No I know John had highlighted in his comments you know, we're we're cautious right now in this environment. We just don't hard to see three months four months from now much less next year in that pricing cycle, but as we sit here today I do think that we're all feeling.

Some some challenges on the cost front headed our way.

Okay. Thanks, I appreciate the time.

Your next question comes from the line of amid a broker with Deutsche Bank.

Hi, Thanks, Thanks, operator, congrats everybody on the on the solid results.

Darren if I could I just wanted to follow up on the intermodal June outperformance I mean, we've heard a I mean, it's been pretty pretty much out there that shippers are being a little bit more aggressive on per diem box costs and of course, you guys have an advantage there with your with your huge container fleet.

Anything there that that may explain some of the outperformance in June or any specific about you know poured inventories being relatively high and there was maybe a pent up demand releases. The economy started the opening up I'm just trying to figure out what the underlying dynamics are with respect to the volume improvement and if those are sustainable or maybe you explained by.

Specific things are happening and what is really kind of a unique and volatile environment.

Sure, Okay, well I know I don't know that I think our ability to.

That do marriage on on box time at customers and detention billing, whether it's a rail own piece of equipment or private in a different philosophies amongst all the different providers for modal has a lot to do with it I think over our experience with our customers I'd like to believe we.

I have proven ourselves as a high quality service provider. We have we do have a large fleet of containers and we certainly have been have relationships with.

A wide variety of customers and let that lend itself well to us in June we were positioned with equipment in the right markets. When we needed the equipment. It was right there for us and available to add to help.

Our customers with their demand just.

The the data around imports and port activity compared to our.

Even the domestic intermodal business as a whole just we haven't been able to five figure on a direct correlation as to how that looked in June. It just feels like there was a little bit a disconnect demand certainly seemed higher than what the import data would have suggested.

I don't know if that is pent up demand from equipment at ports or if it's simply there was more inventory in the west coast warehouses that you'd have to ask customers too.

To help help determine that but at the end of the day I think.

Our customers were trusted us and gave us the opportunity for strong business in June from all the years of experience we've had working with those customers.

Okay.

Colin just for my follow up question.

The intermodal margins.

We're obviously I think I'd grade in the context of volumes and general pricing.

But I guess the network was obviously still on balance in the quarter and that introduce some extra costs and havent detrimental kind of network effect is that is that getting easier in july or the third quarter.

In terms of some of those headwinds on the on the profitability of the intermodal business and then and then obviously box turns have been.

Lower than where you'd like.

Do you expect that to get better kind of sequentially as as.

Volume environment gets better.

Well certainly with the overall second quarter being at negative 2%.

You know if we can if we can get our volume back to something north of 2% I would expect to turn number in the third quarter to look better I mean, the turn number is.

Is.

It is going to be related to two volume in April and May weren't very good in the quarter. So.

From a box turns perspective, I would expect a slight improvement from a margin perspective.

We've had.

Nick highlighted in some of his comments you know we had very successful quarter on the safety front that was effective for us and.

Helped us on the margin front, we had low driver turnover that helps us on the margin front, we were able to use our drayage assets at a higher percentage and we dipped into some of the outsourcing we do in that area, that's beneficial to 200 margin.

We do still need price to really move and helping improve margin, but if you just on a on a sequential perspective, you know I think that.

I I highlighted that the network balance in Q3, I think is actually going to become a larger challenge for us in Q3 than it was in Q2 for for a lot of the first half of the year. We were we were positioning our equipment into the market, where we expected volume to return.

Turn.

And so we had equipment already in California, we had equipment in the Midwest in Chicago, where demand.

Gains and come back faster well as the networks running today, we're going to be moving more empty equipment.

And not all of our customers are back at the same pace and thats, creating a little bit of.

The hard prediction of the network impact from from balance, but I expect in Q3 to actually be more challenged.

On the network balance than we were even in Q2.

Do you think 50 margins could be down in Twoq is that just still going to be dependent on the volume environment how strong.

Well I, just we just aren't going to comment on that expectation at the margin in that in the next quarter.

Okay. That's fair Thanks, a lot for taking my questions should it.

Your next question is from Ravi Shanker with Morgan Stanley.

Thanks definitely one you guys have done a pretty good job as you said.

Keeping you.

Share in intermodal growing much faster on the overall industry, where are you surprised it all the intermodal volumes haven't come back stronger than they have in the back half of two Q, especially relative to what fucking when you didn't.

Well I'm not I'm surprised.

Robbie I don't know how to how to characterize month my thought on that you know.

In in a global pandemic I guess I, just don't know what would have surprised us.

Or what we would have expected any more than what did happen I mean, the networks are all.

Busy today I'm certain we have competitors that are that are experienced a lift in their volumes as well I mean, the whole entire system is moving more business in in the back half at June and it certainly was in April and May.

Okay understood.

[music].

And then maybe a follow up for Shelly actually can you.

Give us an update on the competitive environment in the truck brokerage business.

Both from some of the larger incumbents as well as some of the new digital entrants can have you see any change in either of them.

Some of their behavior.

I think the market's been difficult, particularly in the brokerage business. It has had wild fluctuations from a margin perspective and that also wins right and then let that last part as a bid process. So I think it's been difficult to estimate what margins would look like in the month much less putting in a fee.

Full year price for customers to we have seen.

Really the front half of the quarter to the back half a quarter prices did change from a bid process and.

What customers are awarded volumes that I would say with more competitive in the first half of the quarter versus the second half of the quarter.

And weve seen customers across our segments I'll come back with more many bad and.

Bids that weren't getting implemented or carrier smart taking the volumes that were awarded those are kind of back out any bids from a tighter capacity environment really across the board in general I would say we've seen.

Some larger brokers I think defend their position much like we would as well. So I don't think anybody was ill behaved in the market, but I do think it's been a more competitive price environment.

From a large incumbents and then from the digital freight perspective, I think that there's not a lot of change there. There's always been an aggressive mentality from a price perspective with customers, but I don't think anything is different.

Very good thank you.

Your next question is from Jordan, Alexander with Goldman Sachs.

Yes, hi.

Question can you refresh my memory on what your Dcs dedicated margin target is.

Obviously, it's been pretty solving I know you mentioned something in reasons behind it.

If you could catch on that a little bit that hey, great.

Yes, it's 11 to 13 is where we're at.

And.

That that kind of the guidelines, we try to bounce around then.

Between and the fact that a lot of we have a lot of startup sometimes it gets a little banner.

Right, but a lot of factors go into that but that's our target.

But is there any reason to think in the near term that.

The pace year at now from a margin standpoint would be different in the coming quarter too.

It.

What's going to happen in the next two or three months, where the pandemic and I can probably helped beyond that.

But I really don't know I don't know.

Welcome volume going to do with our customers were very agile, but.

Great with normal time, maybe I could give you a better prediction, but I'm just nervous about what what it's going to do with all the cobot cases coming back up and and all those things I don't know for them its yet business now.

Perfect.

Industry different way.

So I really wouldn't feel comfortable addressing the next couple of quarters.

Got it and then just.

On truck brokerage is very helpful or run down on the pricing front Im just curious as you well so many moving pieces and truck brokerage. These days and second quarter was probably a tale of two pads as you alluded to.

What do you feel like.

Taking into account pricing.

Competitiveness that the framework excluding all the costs you have 360, a framework for truck brokerage is looking a brighter at this point I'm.

Profit perspective.

I would say that as we have ended the second quarter and began that third quarter that the margins are unsustainable.

Inside brokerage.

I would say across the industry right now so you're really seeing the supply and demand tightness occurring I think it's one of the most constrained environment I have seen obviously, we are in a pandemic bed I think that in this market. The number of turndowns that are occurring from customers the challenge.

Is that are happening from a capacity perspective, and then the lack of margin. If you will I think things. If they were to continue as is I think things will change in near term versus long term I do think that brokerage as an overall is a great answer for our customers. It.

Had gained market share over the last several years I'm as a total as a percentage.

Total shipments that are happening and that's because the flexibility and being able to be agile in price and capacity for our customers. When surges in demand are happening. So I think the outlet is good we just have to get through the near term headwinds that are trying in the business.

Thank you.

Your next question comes from the line of Ken Hoexter with Bank of America.

Hey, great good afternoon.

Great job in the quarter, John or Darren maybe talk a little bit about the opportunity to grow capacity you mentioned that earlier, but then you also mentioned kind of John mentioned being cautious on the use of cash. So obviously conflicting thought there maybe you can just delve into that a bit.

So.

At this point to grow capacity for intermodal would require you know you're going to place a container order with a manufacturer there aren't a lot of manufacturing opportunities are located here in North America. So.

It is as much about the opportunity to.

Produce and provide that the transportation for the containers into the country in a timely enough manner to assist in a in certainly.

This year. We you know we are trying to be more balanced in error. We are trying to be balanced in both volume and price as we've been talking about for really several quarters now.

And you know our our margins needs. Some some improvement in so we're cautious on how quickly we want to go add capacity at the same time, we're keeping a close eye on a.

Truckload capacity is there an opportunity to to get back to a stronger growth trajectory for intermodal into eastern network that would certainly drive.

Some consideration in expanding our fleet and investing in more capacity. It will always always always be our goal to grow intermodal, but we understand the return profile. Our shareholders expect we expect and hold ourselves to is going to drive that decision first.

Thanks, and then of course correct quick follow up on the Kelly.

Talking about the losses.

Going to 12 to 18 month today, yes. When you started the plan just want to understand how do you think about that is now and maybe in the answer you talk about your thoughts on on spot and contract pricing as you as you see the market now.

Yes, I talked about that in my opening remarks that.

Really scaling the business is an important component in our return to profitability as we have created a level of investment right. Now that is should be able to scale really from here and depending on how quickly. We can add revenue will depend on how quickly returned.

Profitability in total I am a somewhat cautious as to what the second half will look like but as Nick said earlier, we really don't have great forecasts from our customers as to what revenue is going to do or shipments are going to do so I think it's too early to tell what would happen from that perspective, when I look at will.

It's happening both spot and published I think that you saw inside the quarter spot revenue per shipment new down substantially and then back up with a rebound in June and so things were very different by month in the quarter in total and published pricing really is at a low water.

Mark that I think has room to move as carriers are pushing prices and on a day to day basis from a brokerage perspective, I think price will change at the customer view as well you know there before co, but there was a change occurring.

I talked about this in our Q1 earnings release call that January and December were both unusually and seasonally tight in those weeks that I talked about we've seen some of that emerged back here in June and continuing into July So I think.

Published pricing will move I think it is moving asking any speech.

And I know you certainly we're talking through with customers what that means when it comes to other business that there are talking tests about and I'm certain talking to others about as well.

Thanks I appreciate.

Got it thanks.

Your next question comes from Chris Wetherbee with Citi.

Hey, Thanks, good afternoon.

Just picking up on that last point Shelley can you talk a little bit you mentioned sort of the two halves in the quarter.

Gross margin side can you give us a little bit of since the magnitude of the potential change downward as you kind of exited CPQ and maybe a little bit of a sense of what maybe things look like here in July just trying to gain scale the magnitude of the potential changes in the quarter for us.

Yeah, I would say and and at the start of the corner, we experienced a what I would characterize is.

At the high end up our margins and at the end of June we finished at the low end of our margins tell us the swing was significant throughout the quarter in total.

I think the into July theres been an even further tightening and as evidence of that and reports around turndowns and what we've seen coming from an MDR perspective as well in the industry. So we're certainly feeling that impact from on price perspective.

At a spot capacity.

With carriers, so I would say, it's probably tightest right now here in July.

Okay. Okay. That's helpful. I appreciate that and then just back to the 360 scaling commenting how that relates to the back half of next year and the potential for turning profitable profits at that point.

I guess I, just didnt quite understand I think you said it was an opportunity but also potential execution point, you think about that scaling up so could you maybe help us a little better understand what you know now is for the back half of next year still sort of.

But most likely case for profit coming back from an EPS perspective, I just want to make sure I wouldn't sort of missing something that explanation.

Yeah, I think right now the back half of next year, we still have scheduled to return to profitability, but it will be I talked about this in my opening remarks, we have redeployed resources that we've already seen efficiency and scaling the business operationally into out.

Cost of our side as the business and so we have made investments in scaling the platform and technology and in people and so holding those cost flat as we build revenue each one of those as a percentage of revenue start to contribute more towards their bottom line. There is a revenue number that really takes us.

Into a profitable state as an organization and that will largely depend on how quickly we can get there and it Kobe it has an impact.

More than what it has had really in April and May I would say if the environment stays like it is right now I still feel comfortable with the second half of 2021, but things have changed throughout the quarter said, it's very difficult for us to predict what's going to happen.

Okay. That's helpful very clear thanks for the time I appreciate it.

Your next question comes from the line of Tom Wadewitz with CBS.

Yeah. Thank you for ahead of time.

Kelly I know you've been.

Asked a couple in a row I'm going to keep that string going.

Hi.

Looking at the freight market tighten did improve quite a bit in June.

In through the quarter and I'm, you know it sounds like you're pretty happy with how the technologies working and and the I get the you mentioned a lot of the KBR is working well.

Yes, we saw the volumes down 11%.

Yeah, I get to surprising not to see volumes do better in that environment.

And if you compare with intermodal thing. Some you know some improvement just down I guess, a one of the half. So what do you think it's happening that you're not getting more traction on the volume siding.

Yes.

And what do you think it is that that would really changed that because it sounds like that's really a key factor in.

Taking a lot of volume growth share gain and brokerage.

Hi, My opening remarks, I did talk about the platform experienced double digit volume increases and so you think about how we're connecting with shippers and carriers digitally that means that connecting points happening through our technology, so that actually scaled and the platform. If I also mentioned what.

Happened with spot volumes throughout the quarter, we have been growing and continued to grow in Q2 of our committed or contractual business with customers. So we call that are published business that business continue to experience.

Good good market share growth in those segments that was offset by what happened in the spot market in total so both from a revenue per load and total shipment. We just could not overcome the lack spot in both April and May we get to that rebound in June and kept.

Continued to see that moved forward in July.

Okay.

Thank you.

Mike.

My other questions just to kind of overall.

I.

Some of the comments are certainly point to tightness in the market in June and July I think you.

So it's a nice growth in June and volume, but your overall commentary seems kind of cautious on the outlook despite pretty significant tightness in freight right now what what is it the that really is driving the caution or do you think that you know there the framework that did create the keep improving you know as we look into a third quarter.

[music].

Well I think that cautiousness comes as a result of just our experience of what's happened here in Q2, if you'll recall our discussion points from the first quarter. We had a lot of caution as to what would happen in Q2, and I think that served us well because each month was different than expert.

Station and I'm not even sure we had good expectations from both our customers and also internally. So as we saw Q2 really go through a wild roller coaster ride we aren't sure what's going to happen in Q3, I do think that volumes could continue to move up and set up.

I think what Nick said earlier around whats happening went to pandemic wed cases, rising we just aren't sure what's going to happen to the end consumer and so it's just too difficult for us to say exactly what is going to happen. We really can speak about what's happening right now and the forecast for the next few weeks in past that our customers are struggling.

Knowing what's going to happen and certainly we are as well.

Okay. So it's really good right now, but just concerned on cobot.

Correct.

Okay. Thank you put us on.

Your next question comes on the line as Todd Fowler with Keybanc capital markets.

Great. Thanks, Good afternoon, everyone Shelley I'll give you a break and I'll ask a question.

On the expectations for final mile to shift to being profitable in the third quarter final mile at a point now where it can consistently operate in that 2% to 4% margin range and Nick I think you gave some comments on your expectation for dedicated growth on the fleet sizes. The back half what's your thought on final.

Mile with the shift that we're seeing right now and consumption habits, that's still a 10% topline growth business or does that change or accelerate either based on end markets and consumer trends.

I think that's a good that broke ports right now the demand is very high its a small niche industry, but to exercise equipment in home as Rick.

Strong right now so we're seeing that grow appliances. The said my statement is very solid in up.

And Richard really coming back.

Wrong not back where it was Rebecca wrong. So we really see that final mile is going to have some good growth then I'm excited about that the margin guidance I think will.

We're comfortable with what they had their that we'll see that so.

The demand is really good off price retailers or or final mile.

Normally it's okay. During this time of year, but it is really really.

Strong force at this point, so we hope that will stay up there and continue.

So that's good and then dedicated.

And we're still going with our 600 800 truck add as what we think.

We still love that model like the growth is going to be stronger next year. Once we get out of the planned they make that people can start seeing it because it is a big decision to replace the private fleet.

It it takes a while to sell it I've always said 18 to 22 mine, but it takes a lot of.

Well and it's hard to do on the meeting or is them or whatever you're doing so we're hitting the and a little pause there.

So 430 trucks so for this year.

And so hopefully that will pick up a little bit cafs.

Again, depending upon what are the pandemic doing.

Okay. That's helpful that makes sense and just for one quick follow up on the co bid cost.

Into Q that 11 million.

Does it feel like that that's kind of the right run rate for the foreseeable future or are there anything that would shift that to get it would be higher or lower as we think about modeling into the back half. Thanks.

Yeah. So this is John color I think the most of that is some of the specialty Joe we've had for corn team and then also it's on a PE and so I think that the pp is going to continue we are seeing the pico drop off a little bit and as Nick and others have mentioned.

We really don't know whats if theres, a second wave or how it's going to look but right now I think that most of those.

That's a pretty good run rate.

Okay that helps thanks for the time Tonight.

Hey, good afternoon got time for one last question.

Our last question comes from a line of Brian Ossenbeck with JP Morgan.

Hey, good evening, Thanks for squeezing me in here.

I just wanted to come back to you on the truckload market and overall capacity you mentioned supplies been.

Different dynamics of different different points during the quarter, even last quarter. So what do you think is the underlying factors are few factors here and how do you see that progressing throughout the remainder of the year sort of independent of what the demand side does.

Well, Brian I think that's been a the question for us really for the quarter. We had that question also in the first quarter. The tightening that was occurring from a supply perspective early on we do you think that possibly pp and unemployment has had an impact.

From a supply perspective, I also think that prices really fell in April and May and there was a lot of frustration from it carried community because they live in a spot environment from a P.T. perspective, and so I think that and some of those carriers chose to stay home.

We intend to do other work.

Outside of the trucking industry until business came back or business.

As in a healthier state and so I think that could impact part of it as well you know I would tell you I think we're seeing signs of a change in the environment from a cost perspective that Darren talked about earlier, if that were to continue to occur I think that's putting pressure on.

Ah margins across the board and well have to think about what that means over the longer term certainly will be ready to handle that but as we're working closely with our customers to help our customers right. Now one thing that's happening is businesses out of balance and so we talked a little bit about what's happening.

On the West Coast, that's also happening throughout the country as there are different customer shipping right now and different lanes that are moving right now that's causing a problem in the market as well and so that problem. We're working closely with customers who want to make sure that we continue to deliver on the promises of our customers that's creating.

And environment also from a spot perspective, that's constraining margins.

Okay got it and then just one last one for Darrin.

It's back to the point a network balance.

It's always it's always been a goal difficult.

To do in practice for the reasons, we already talked about on it sounds like because actually be more challenging than in the third quarter. So maybe just help me understand what would it is the here you're doing differently, because I think historically we've seen.

Much easier obviously, the good balance and strong freight market, which we may or may not have going forward here. So.

Maybe just help help me understand what's what's different with this goal just sort of get their independent of freight market is or extra capacity you need to manage through lanes that needs to be adjusted.

What else is this going into that equation.

Okay. So really I mean, the balance challenges come from the opportunities for growth in the rate of shipping from our customers mean, there was a significant lift in west coast demand to come east bound which is predominantly imported cargoes.

The the cargo that's going west bound is going to be food products in consumer products to support the.

The large population bases on on the West coast. So the reality is our it's just it's.

It's been driven.

Mostly from.

Import goods that maybe consumer behavior and the high sales from some of various retailers.

And and that's what's driving the balance challenge from a.

If we you know and.

When we talk about balance challenges to you know we're a growth organization, we're always going to try to grow we want to grow that's our goal every minute of everyday.

So you're not going to grow with balance so I don't expect us to be balanced, but I do expect the ability to improve on the network from where we were a year ago and this year in this particular kind of very odd time, that's been more difficult than.

But I I view that more as a an outcome of the pandemic in kind of the the on state of of of.

Consumers in the way our shippers are the patterns that are shippers are moving in.

[laughter].

Okay got it thanks for that there.

It's definitely I think John is going to close off at some finishing comment.

Certainly go please go ahead.

Thank you. Thank you.

All of you for your participation today I think we've had some good discussion here I like say I'm really proud of our leadership team. This is a very experienced group of people. They we really have seen a lot.

Different conditions in different markets through different cycles, and I know that we are talking a lot about the future state gearing in after the pandemic what the demand changes will be in areas, where our core businesses and what the main changes will present in new opportunism course.

Technology and E commerce, and and think that feel like they're going to be a part of our conversation I think the quarter did present, some positive, but I think you the cautious tone that you here.

From US is that we just still don't have enough longer term data to say this is how we feel that you can rely on.

What were.

Looking for but we are talking and watching carefully so.

No that it's a it's a it's very active discussion.

We're still waiting to see that that that complements pharma and we'll obviously keep you posted on the questions around margin dynamics.

Obviously, we discuss those those questions and again, we're just not in normal times. So let us have enough to kind of see what a normal cycle normal demand will look like and we'll be able to have more thought on that for you going forward.

I think I'd say that.

We continue to be very highly integrated as an organization.

That's both with our people and with our customers several comments throughout this our had been around the sharing of data sharing with people working with customers and really finding ways to continue to deliver on those problems. So I.

I think that's important when you look a JV hot I think you have to think about the whole pack. We appreciate your in.

And we'll look for Dougherty next quarter.

Thank you. This concludes today's conference you may now disconnect speakers. Please hold the line.