Q3 2020 J B Hunt Transport Services Inc Earnings Call

Ladies and gentlemen, thank you for standing by and what do JB Hunt third quarter 2020 earnings call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if your core EPS.

Further assistance please press the <unk>.

But.

I would now like to hand, the conference over to your speaker for today, Brad Delco, Vice President of Finance and.

Finance and Investor Relations. Thank you. Please go ahead.

Good morning, and thanks for joining us.

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.

This call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Words, such as expects anticipates intends estimates or similar expressions.

Are intended to identify these forward looking statements. These statements are based on <unk> current plans and expectations and involve.

And involve risk and uncertainties that could cause future activities and results to be materially different from those set forth in the forward looking statements.

For more information regarding risk factors. Please refer to JB Hans annual report on form 10-K, and other reports and filings with the Securities Exchange Commission.

Now I would like to introduce the speakers on today's call. This afternoon I'm joined by our CEO John Roberts our.

Our interim CFO, Chief Accounting Officer controller, and SVP of finance junk Gullo.

Shelley Simpson, our Chief commercial officer, and President of Highway services Nick.

Nick Hobbs president of dedicated and find a mild services and guarantee field president of intermodal.

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

Thanks, Brad.

Well, we're all learning to live with the changes that have been presented by the virus. We began in mid March the response to a very sudden change in how we do business was incredible from day, one we had to pivot to a new normal on the go and we're so proud of our teams across the country for the different ways. We have found.

And to make it work.

As noted we set out our priorities to deal with the situation clearly and from the Stark take care of the health and safety of our people and work hard to honor the commitments, we've made to our customers and.

Initially the adrenalin push this through but over time, we start to see why we worked together in person.

The benefits of being together and collaborating building on our culture solving problems as a team and sharing time with each other show their value to us more than more now than ever.

This reality is prompted good work to find ways to begin coming back together, particularly in our corporate office is very slowly and very carefully.

We should also call out that due to the nature of the business, 75% of our people in the field have been effectively in position since day one of the crisis.

Drivers and so many of the people that support them.

We are extremely grateful to all of our employees, both at corporate and in the field and thank them for their commitment.

The third quarter showed some new opportunities in spiking customer demands across all businesses that I don't recall seeing in the past.

At different points, we regrettably had to turn away business that was offered but not built into our original network plans and commitments.

The supply side of the equation our carriers in our rail providers, all experienced pressure and congestion during the quarter.

Also due to what we believe is a labor shortage at our customers, causing unloading delays, we have not been able to turn our trailing equipment as well as we have been able to in the past.

Topping off the list is an abnormally high demand higher company drivers for both replacement and growth.

Currently we are entering the typical annual bid cycles with more uncertainty about capacity and demand. We are actively discussing directional ideas for the next 12 to 18 months internally and with our customers, including support for fleet expansion in intermodal and highway services trailing equipment.

Oh I see has long been our guiding principle when it comes to determining where to allocate capital we ask ourselves what does the customer need and can we generate a proper return on the investments to serve those needs. How can we advanced the agreements and relationships, we have with customers to better align our d.

Sales cycles with our equipment cycles per.

Personally I think annual jump ball bids are dated and not good for the customers. We can't jump ball our equipment every year encouragingly, we have seen some progress in modernizing the business models in intermodal and highway services, we hope that will continue.

I'll ask our business leaders to cover the segments for the overall current state of our business. Let me just say that I continue to be encouraged with the work being done in our digital transfer transformation with 360 marketplace not only within our brokerage business, but also as a tool set for us to use with other asset and non.

Asset services I'm also encouraged with the progress so far in developing our big and bulky final mile services. This includes the performance of our acquisitions before co that and also the organic growth we have experienced both.

Both of these key plays recall to help the company evolves several years ago.

And as with any difficult business, we need time to reveal the progress.

We will continue to lean into both of these channels going forward, our more established lines intermodal and dedicated give us a solid base to work from and we believe that both of these businesses present sound growth and return profiles going forward.

Let me close by saying that during the past eight months that witness a true test of what I have long believed to be a culture. A JV aren't that is centered on people a commitment to each other and our duty to serve our customers, we see that duty as a privilege and know that we need each other to get the job done.

I've seen true leadership from our executives in every aspect of running the company and I look forward to building out our 2021 and 2022 plans together with this great team with that I will turn the call over to John cooler John.

Thanks, John and good morning, everyone joining us on the call today I'll provide a couple of quick comments on the third quarter from a consolidated perspective, and then let the business unit leaders cover their segments.

The most prevalent cost impacts in the quarter were driven by the disruption in our networks due to congestion and capacity tightness from labor challenges we saw.

We saw other direct costs related to the pandemic begin to moderate during the quarter, we continue to offer.

We continue to offer paid time off for employees that are quarantined as well as invest heavily and caring for our employees through protective equipment and workstation enhancements as we returned to office.

We incurred approximately $4 million a specific costs in the quarter.

We're not planned prior the pandemic for a total of $29 million year to date.

We performed well in repositioning in redeploying or people and assets as effectively as possible to avoid furloughs and layoffs, which was the right call given the labor challenges noted.

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

Management of accounts receivable were pleased with how our teams worked with our customers to handle payment issues.

And we saw customer loss reserve.

Reserves returned to pre pandemic levels during the third quarter.

We continue to closely monitor our working capital metrics and the change in credit landscape.

As we've communicated throughout the year long term approach to capital management has not changed however, like the second quarter and given the uncertainty in the freight markets and the pandemic we made.

We made intentional adjustments to our approach for the sake of protecting liquidity.

While still confident in our balance sheet strength in investment grade status, we maintained higher cash positions through the third quarter as we felt it prudent given uncertainty and market liquidity.

Accordingly, we ended the quarter with approximately $320 million in cash, but the resulting net debt just under a billion.

We still target our leverage ratio at one times EBITDA and anticipate staying within close range of that metric as.

As of today, we are forecasting our full year 2020 capital expenditures to be approximately 600 to 625.

Which includes revenue equipment as well as approximately $100 million of technology investment in our core transportation management system.

Overall, we're pleased with our balance sheet strength and feel we are in a great position to invest in our long term asset and technology plans.

That's all I had prepared and I'll now turn it over to Nick comps to expand on dedicated in final mile.

Thank you John and good morning, everyone I want to spend my time. This morning discussing the performance book dedicated and final mile segments. I'll also provide some updates on our pipeline and give some high level expectations for these businesses in the future I'll start with dedicated or Dcs.

Tcs had another solid quarter highlighted by strong Executional performance that delivered a 5% improvement in operating income year over year on roughly a similar tractor fleet.

In addition, strong utilization of our assets the benefits of greater density in our operating region performance was also driven by lower driver turnover lower TNT expenses versus the prior year and less customers start up cost.

As we stated last quarter, we expected new contract wins to be offset by some attrition attrition at accounts given all the unique challenges the current environment and a pandemic that has presented us a broad and diverse portfolio of customers.

And that would ultimately keep our truck fleet count stable for the remainder of the year well that is still the case, we are feeling a lot better about the pipeline, which will I will address next.

As of September Thirtyth, we have sold 890 trucks worth of new dedicated business year to date, which compares to 430 trucks sold as of our last quarter as.

As a reminder, we had previously expected to sales 600 to 800 trucks worked in new business. This year and I'm proud to have achieved this goal a quarter earlier.

We have seen a mean meaningful uptick in conversations and conversion of opportunities to sign contracts over the last three months custom.

Customer challenges, including lack of available drivers higher insurance cost the desire of companies to allocate capital to their core businesses. In addition to some of the Flexibilities offered by professionally outsource dedicated fleet solutions are all driving greater demand for our services, our service and ability to adapt.

Customer needs throughout the pandemic has served as a testament to the value we bring which we believe is evidenced by this positive update on our pipeline.

Looking out we continue to target, 11% to 13% operating margins over the long term as customer startup cost higher driver wages recruiting costs and travel and entertainment expenses normalize.

Now shifting gears to final mile or Fms Fms was able to deliver all time record revenue of $182 million in the quarter or 22% growth versus the year ago period and return to slot profitability as we predicted last quarter.

We are seeing strength across our portfolio in the furniture appliance in pool distribution business with ample opportunities for growth in new market segments like home exercise equipment and home improvement to pay.

To put it bluntly the pipeline of opportunities is as strong as I've ever seen it.

As a result, we are continuing to invest in our product and service offering to ensure the highest standards of service safety and satisfaction are met in this critical component of the supply chain as we deliver products of our customers customer.

Looking out we remain optimistic about our long term opportunities in this rapidly growing channel that concludes my remarks, so I'll turn it over to Shelly.

Thank you Nick and good morning, everyone. Today, My comments will focus on.

On our performance and highly services, which includes both IC EPS and truck.

We continue to respond to complex challenges on behalf of our customers and an update on our investments in the marketplace, but yes, we 16 as well as Threesixty box.

First I'm extremely proud of the progress the team in both.

In JBT made in the quarter on many strategic and operational Brian as we and the industry continue to face unique challenges.

Yes, we'll be able to deliver a record 431 million in revenue in the quarter, a 28% increase year over year, and a 42% increase versus the second quarter more.

More encouraging is the ability.

Ability to capitalize on this growth despite only a 5.5% increase in operating costs in the segment highlighting the benefits of scale and leveraging the build out of our platform.

JBT delivered 16% revenue growth versus the prior period, despite a 7% decline in average truck count.

[noise] JBT continues to evolve into more of an asset light service offering with the continued rollout in investment in 360 bought.

As a result third party capacity providers have tremendous visibility to select power only load hollinger trailers.

Threesixty botched really cool we can tell.

We continue to see promising data across both IC, EPS and JBT related to our customer activity and engagement and our ability to scale the model to grow to meet the needs of our customers.

Now I am also extremely encouraged by our team's ability to help customers solve further capacity challenges by providing solution tailored for west fit the customers' unique needs.

The marketplace for JBT Threesixty provides a platform to serve whatever customer wants whether that is a JV or third party carrier solution committed or spot capacity.

Or guaranteed kindred second and at the service levels that the industry standard whether the alternative is an asset or non asset solution.

In addition, we provide tremendous visibility with data and marketing analytics.

Our customers make informed decisions that will save the money through greater efficiency.

All the JV segments have visibility into the platform as well with the ability to leverage opportunities to drive efficiencies with our own asset.

As you will hear from Darrin. This helps us serve customers and meet our commitments with circumstances might not otherwise allow.

It's a comprehensive approach to being able to the best of our ability to tell our customers yet.

When we or others might otherwise say no.

We will continue to focus on partnering with customers that see the value of our comprehensive team approach with our goal to build rating team.

In closing our investments remain focused on our people technology and scaling the platform and we continue to be on track with our long term player.

As we stated in our last call scaling the platform is one of the greatest risk and opportunity to achieving our long term target and.

And our recent performance has an even more encouraged.

In the third quarter Threesixty saw truckload volume growth of 22% in all time records in the number of carriers users one lives on the platform.

In JBT, we are and will continue to make investments, albeit on a smaller scale in building out our 360 box program. We see that business continues to evolve into a more asset light Lynn of trailers third party carriers with some blend of company trucks and being complementary value added.

Service offering to our customers.

I would like to turn it over to Darin to talk about intermodal.

Thank you Shelley and good morning, everyone. Today I wanted to focus my comments on three key topics network performance, the current demand and pricing environment and some general thoughts around how we begin to move forward from here.

First I continue to be encouraged with our team's relentless effort to solve capacity challenges for our customers.

Despite what I'd use the most difficult environments from a network balance and fluidity perspective, I've seen during my career rail.

Rail terminal congestion at a slower pace of unloading at customer destinations have contributed to a meaningful slowdown in the velocity of the supply chain and thus the productivity of our equipment.

Primary seem across both of these challenges is centered around labor shortages are rail providers are working through labor shortages at some key rail terminal operations. While we are confident that they will get back to their productivity targets. This negatively impacted the quarter.

Also our customers have also been challenged with labor at the warehouses and the time it takes to unload our equipment has increased meaningfully year over year impacting our overall equipment productivity and otherwise available capacity, we can provide to the market.

JB I, we have also experienced cost challenges related to availability of labor given the tight an extremely difficult driver market, which negatively impacted margins in the quarter, we are making progress on the driver, but the driver shortage remains a challenge for the industry. We certainly expect some improvements in all of these.

He is moving forward, but we don't yet know if we can achieve even last year's velocity in the fourth quarter.

During the quarter.

Demand was extremely strong the challenges from weaker velocity began to impact us in late July and continued throughout the quarter.

Growth in July was 6% August was flat in September grew 2%.

Across the board our customers have asked us to provide more capacity our ability to flow empty equipment back to the west coast to support the east bound demand was limited during the quarter due to the velocity challenges previously mentioned, which we estimate.

Prevented us from completing as many as 20000 more loads in the quarter many.

Many of you may want to ask if we were able to yield managed our capacity during the quarter.

In an effort to chase higher prices JV, how we communicated two priorities as the pandemic began number one the health and well being of our employees and two to honor commitments, we made to our customers. We believe a business that takes care of its people and honors its commitments to customers, particularly in challenging.

<unk> is a recipe for long term sustainable growth with that in mind all of our capacity has been consumed with meeting minimum commitments during this difficult capacity constrained environment.

On a positive note we have worked closely with bolt I C. S JBT and Dcs to provide additional capacity solutions for our customers. While we continue to focus on work our way.

Our work to improve velocity in our network, we believe that working collectively to provide solutions for our customers provides a strong foundation for long term growth.

As we move forward into Q4 and 2021, we don't see anything changing on the demand front.

We continue to make small steps and progress on the velocity front at this stage of the peak season shipping cycle, we expect to velocity challenges experienced in Q3 to continue in Q4 was small improvements in all the areas the pricing bid cycle for 2021 is just beginning certainly.

We would expect a lot of discussion with our customers regarding capacity planning and cost management, we are prepared to expand our container fleet for growth, but we will need to balance appropriate targeted returns on our investments to do so and we will engage with all of our customers with that thought in mind.

In closing my prepared comments I want to say that we're not satisfied with these results in our volume trends margin performance for equipment utilization, we're not changing our long term margin target of 11 to 13, and we continue to believe we have a pathway to improvements in this area that.

That concludes my remarks, I'll turn it back to you Brad.

Thanks Darren.

And just as a reminder to all those on the call asked for you to to just provide one question and one very quick follow up so we can get to as many questions as possible. So Stephanie I'll turn it over to you to open the line for questions.

Your first question comes from the line of Jon Chappell with Evercore.

Thank you very much Darren just wanted to ask you about the volume trends were good to here as we think about the repositioning the imbalances, even the shortages of labor.

Did that get any better July to September entering October.

Especially considering that the volumes were maybe the greatest in July or was it kind of equally bad throughout the quarter and no kind of meaningful improvement yet as you are through the first month of this quarter.

Well I would say and in frankly in July we had slightly better.

Slightly better fluidity in the system as we got into the back half really August.

Throughout the quarter, we have continued to really struggle with it the velocity of the equipment. So July had 6% growth as we highlighted.

Over the previous July.

July of 2019, as we went throughout the quarter, though velocity of the equipment and our ability to relocate MTS has remained a very challenging and so far in October that challenge continues.

Okay. Thanks, and then Shelly Super quick follow up for you.

Just on the IC EPS the growth on the topline has been tremendous but the margin pressure remains any change to the thought of becoming breakeven in that business by the middle of next year does that get pushed to the right at all given some of the investments that you're making.

Well so as I mentioned in my prepared remarks, we are encouraged with the growth we are experiencing and also the appetite that our customers have to really be interested in doing business differently, John talked about that in his opening comments that jump balls scenario.

We believe could be something different and we are pushing ancestry 60 to deliver that on behalf of our customers, having said that we have more confidence as we progress through the quarter and into the fourth quarter that our comments around the second half of next year remain intact and that we should return to profitability by sometime.

To your second half.

Great. Thank you Shelley Thanks, Dan.

Your next question comes from the line of Chris Wetherbee with Citi.

Hey, Thanks, Good morning, maybe thinking specifically about some of the cost the elevated costs on the intermodal side in the third quarter. It doesn't sound like they all come out of Fourq, you, but can you give us maybe a little bit of the cadence of how we should think about sort of regaining fluidity and what that means from a cost perspective understanding that you still think that the longer term margin guidance.

How quickly can you kind of recover towards those levels.

Yeah, you know as as as we get into the.

The bid cycle, we're talking about that very challenged with our customers I think weve you've heard that theme from our comments. So far as we've we've got to find a way to deal with that a little bit differently than what we've done in the past so.

The reality is we need time to implement new prices.

Certainly we need the rail system congestion to be relieved somewhat.

I don't really expect that to happen in Q4, and a and as we move into 2021, clearly I would expect some congestion challenges to to relieve a little bit in the first quarter that would be normal, but nothing about 2020 has been normal so far so we'll have to.

Wait and see but certainly new pricing.

Which would also help to cover some of our cost challenges.

Is not likely to be visible until Q2, or even Q3 of next year and that's when we would get the bulk of the business repriced as we go through the bid cycle.

Okay. That's helpful. And then a quick follow up is just on the loads. When we think about the fourth quarter. What it sounds like you are saying is we've not necessarily getting bigger on a year over year perspective, fluidity is not necessarily getting better so you're not going to get utilization enhancements.

Where you were in Threeq, you suits are roughly kind of that lower single digit run rate is a reasonable expectation.

Well I don't know that we're ready to provide any kind of guidance on volume, but like I said I don't really anticipate velocity changes to.

Changes to be beneficial during during Q4, and so it's difficult to think that we would have had.

Have you have any kind of material benefit coming in in Q4.

Understood. Thank you very much.

Your next question comes from the line of emit Mothra with Deutsche Bank.

Hey, Thanks, a lot I'm Derek.

I appreciate the comment on pricing just now I was hoping if you could just remind us.

Remind us of the cadence.

How much of the I assume in the third quarter, none of the book of business and intermodal reflected pricing that is reflective of what's happening and truck. What did you could talk to US you said twoq or Threeq you the bulk of the business, but the majority is it kind of equally through the fourth quarter, you get 20% of the book Repriced and if you could just help us.

That cadence and then.

I appreciate I'm sure. The shippers appreciate it kinda JB hunt standing by that with respect to honor and contract commitments, but.

That kind of implies that those shippers.

She'd be current workload kind of sell through before and if you could talk about that dynamic because it seems like there are certain carriers out there theyre revisiting kind of what minimum contracts <unk> volumes were a win win when the equation was the other way.

After the pricing leverage Sheppard. If you can just talk about kind of the exercise you guys did there to make sure that there wasn't necessarily money that would be left on the table or from a from a pricing perspective in the third quarter.

Okay, well from an implementation standpoint, I think what what you're hearing is we do want to engage with customers in.

Trying to rethink how we typically do this it's the jump ball is difficult.

In in fast changing times around us it it really gets amplified in terms of how harsh it can be on us and probably you know maybe some customers feel the same way it if it's moving the other direction.

But historically.

We will implement new prices on the smallest percentage of our business. During Q4. So you know call it 10% to 15% of the business gets a new price on it implemented and running through the system. During the quarter Q1 would be more like 25 to 30 and.

And the same for Q2 and Q3. So if you just kind of break it into maybe call. It 30% in the first each quarter or the first three of the year and more like 10%. In Q4 is is just a good rule of thumb I don't have you know I'm not going to give you the exact percentages, but that's a good.

Kind of benchmark for us as it relates to.

Volume commitments and did you know our our willingness to honor those commitments relative to this demand environment compared to a customer's willingness to honor a commitment maybe when when times are changing.

You know I.

I think.

I think were.

We felt confident that we needed to do a minimum expectation because you know at the end of the day, while our commitment to the customer we would we would like for the customer to have an equal commitment to us, but but there the customer I mean, we're going to have to we have to earn their business. Every day, we have to continue to provide.

Pasadena and serve those customers in the way that we we set up our plan to do and we felt like right now in this very very difficult time for us to take capacity away and do something different with it would have been a challenge that was just extremely difficult to overcome.

So I know Shelley may want to have a comment or two about customers relevant to that in a and I'll. Let her comment at this point.

Thank you Darrin, so and that we took a similar approach that we have in our past if you looked at our 2017 and 2018 cycle, which was a very similar.

Very similar, albeit this time has a lot more disruption about it we did stick with our customers throughout that cycle, and then started having conversations that they've got planned for it do appropriate budgeting and I think that was prudent on our part and our customers part in EMEA and we were able to grow with our customers.

Appropriate margin Weve recognized that we have more cyclicality happening right now over the last four years or so usually the market swings about every five or six years. In this case. It's one twice now in this five year period, we believe sticking to our commitment and walking or customers through it we are so.

Focused right now on making sure we help our customers through this very difficult time, that's why were unleashing every lever we have internally in every piece of capacity that we have and making sure that we don't just bill our commitments, but also help them through this very difficult time.

Great and then I'll know there.

Hey.

I was going to jump in and say, we have the same customers and dedicated a lot of them that they have in the other business units and I clearly feel the impact of them being true to their customers. It pays big dividends on our side we have a.

We have a very high retention rate as you see in our business and that plays across our entire portfolio. So you take care of them in one segment that across all segments are there with you through thick and thin we've seen that historically.

Okay. That's very helpful and just one quick follow up if I could just going back to what Dan said in terms of the pricing on the book of business. The puts and takes as you enter the fourth quarter, you'll have some of the pricing embedded in the book of business. Obviously, the fluidity still an issue Cobiz is still an issue I assume it gets better do margins come down do Mark sorry, Oh.

Our come down as you move Threeq to Fourq, you just talk to us about the puts and takes as you move from Threeq to Fourq.

Yes, I think you know that's that's sort of the the question that that we all have we're continuously looking for improvements in our on our cost front.

Without implementing a significant amount of new pricing or are some really significant change in our in our velocity.

It's hard for me to see a pathway towards any real material change certainly we think that over over the course of the next year, we should be able to see a trend where we're moving back towards our long term guidance.

Great. Okay. Thank you for the time appreciate having a weekend.

Your next question is from Scott Group with Wolfe Research.

Morning, guys. So Doug I don't know if you have any thoughts on fourth quarter volumes, but if you do that that'd be great and then just as I think about third quarter I look at I out of volumes that were up 10% I Cbms intermodal train speeds were up North books were flat is this oh rail issue.

Or is there a reason why where youre.

Lagging the broader industry and intermodal right now.

Well I understand that be ends a train speed is up there hasn't been a lot of challenges.

In the line of road when the trains get out of the terminals, they're moving but terminal congestion is not a part of that velocity measure that you see in that has been a significant impact on our ability to drive.

Drop.

Volume growth now you know do I think that the.

In a data show significant growth yeah and in some of that is in the LTL and parcel so that business today moves you know in the past you would see that more in trailers today, a lot of that business has converted to 53 foot containers. So the Diana data it doesn't really.

Take out LTL and parcel and container moves compared to domestic intermodal so I feel like.

I feel like the industry was able to grow faster than JB Hunt I'm not going to argue that certainly we would have expected to maintain our same growth rate, but the congestion in our system.

Frankly didn't allow it during the quarter and that's that's what we've highlighted.

And I would expect to get back to where we're growing.

At a similar pace to to the industry in domestic intermodal as it relates to all the parcel and LTL growth that the railroad is roads are experiencing you know I'm going to leave it to you guys to figure out better ways to to see that you know Scott we're turning down I mentioned in my prepared comments that we think.

We could have handled 20000 more loads in the quarter and that's.

I think thats a soft conservative estimate we are turning down thousands of loads per week.

In some cases, we're turning down eastern network gross opportunities because we have to struggle to find the capacity to serve and honor. These commitments Weve made we feel strongly that over the long term that will absolutely benefit us, it's certainly hurt us in the quarter.

Okay, and then if I can just ask one for Shelly. So I think in 2017, you were the I think the first one that prepare the market for double digit rate increases in 18.

How are you thinking about the magnitude of pricing should it be similar in intermodal and truckload next year or is there a reason why one would be up more than that.

Yes, good morning, Scott So we did host a conference call with our customers.

Actually a video call out about 70% to 80% of our revenue actually on that cold. It was just an open discussion with our business segment presidents along with John Roberts and it really just wanted to give our customers an update and a view of what's happening in the market.

From a dislocation perspective, and a labor challenge issue, we've got a lot of questions around that from our customers really just looking to lean into how they should think about next year.

And we we just aren't prepared or ready to have that discussion, we really want to wait through.

Through more of peak season, and pass the election for us to really come to a better consensus on what we believe pricing will do but having said that.

Our cost challenges are real I think our customers are having cost challenges also we do want to have a metered approach and making sure we understand our growth with customers along with a cost recovery and I believe that we'll be talking with our customers towards the end of this year I really couldn't say what range I feel like that is.

Because if I gave one I think it would be quite off it could be I do think it will be up it could be up significantly or could be more models. We'll just wait to see what happens and I would expect to talk to them towards the end of the year.

Okay. Thank you.

Your next question comes from the line of Justin long with Stephens.

Thanks, and good morning.

I wanted to start with a question on dedicated it was good to hear about the activity in the pipeline.

Picking up Nick when you think about the trucks that have been sold year to date. I think you said 890 units can you help us think through the cadence of.

No no.

New business wins coming onboard going forward and then from a start up cost perspective.

We should be expecting I'm, just curious if margins sequentially should be coming under some pressure because of the startup costs or if there's enough operating leverage from growth offset that.

Yes, Thanks Justin.

The timing of those you'll see some of those started up in Q4.

Some of them are already starting up right now and some of them will come towards the end of the year and then there's a pretty good group of them that starts early in Q1, so towards the end of the year beginning of next year is when those that have been sold right now. So it's typically when we sign them, it's typically not need.

120 days till you start seeing those trucks on the ground. So anyway, we feel good about that startup costs, a we've got a larger base to cover a lot of that cost.

And so you will see some cost is.

Cost, it's hard to predict just because drivers are very tight and so driver wages and recruiting costs are going to be up as we try to find those drivers so it's pretty hard to predict.

But I think you'll see a slight pressure on us from some of those costs.

Okay. So just to be clear it sounds like margin than dedicated in the fourth quarter could be down a little bit sequentially versus the third quarter is that your expectation.

No we haven't provided guidance on margins, but I think like Mick suggested maybe a little bit of.

Maybe a little bit of startup costs, but there's still a pretty good momentum and dedicated sales guys are executing so.

We'll see winter weather can always play a role in in cost, but no specific guidance for dedicated margins other than what we've stated long term being 11 to 13.

Okay Fair enough and then maybe shifting to I see yeah. Shelley I was wondering how you're thinking about that level of tax and then operating expenses in general.

Going forward is the idea that operating expenses can kind of hold with current levels and you can scale the business to get to profitability in the back half of next year or how should we be thinking about that operating expense trend in the next 12 to 18 months.

So from an investment perspective, we really talked about investing in three areas in our people and our technology and in scaling the business and so you saw.

You saw some.

Benefit actually inside the third quarter vis buried in there from some of the efficiencies that we're seeing from our operations groups from Threesixty, we've reinvested some of that into our shipper work and that has been part of our plan as we continue to scale through the rest of next year, we believe that our cost basis is today.

Relatively the same may be up slightly.

But if you were to look through this year, we've done a great job really managing our count people in a very constrained environment I might add that our platform has really produce great results for us I spoke of that.

Earlier in my prepared comments that the platform has reached record and continuing to reach record instead or segment, that's allowing us to scale more quickly and that part and invest in the rest of it. So for next year I would expect our margin improvement for the second half of next year to come as a result of costs as they pursue.

On a revenue both labor and technology to improve as we progress.

As we progress throughout the year.

Okay, Great. That's helpful. I appreciate the time.

Your next question is from Ravi Shanker with Morgan Stanley.

Thanks morning, everyone Shelly on the July call you, what the force to kind of flagged that gross margins are.

We're running at I think what you call an unacceptable rate.

Seems like gross margins were pretty tough for the entire quarter, but can you just talk about how that trended through pre Q and how that's running in October so far.

Yeah, Great question. So the third quarter was the exact inverse of what we saw in the second quarter as the brokerage market was really trying to find that balance between supply and demand. So as we look into July that was our worst gross margin performance and we continue to improve.

As the quarter progressed and as we move here into October I think our customers have responded well there is a lot of business.

That is moving that is unplanned or that really published pricing would not be appropriate you saw some of that in our percent of business. It's actually in the spot market, but I would say margin in September and October are better than they were in both July and August.

Great. Thanks for the color and maybe as a follow up on the intermodal side, John kind of do you I mean, it seems like some of these issues are not going to be resolved overnight clearly investors are focused on the extremely tight truck market and the potential for spillover from.

Truck into intermodal do you feel like the upside opportunity could be restricted somewhat because of these operating issues at the end of 2020 and 21.

I'm going to have their name so that yes.

I'll do it.

So certainly we're we're.

Well, we're working with our customers across the board, where we're talking about what we're capable of doing with our intermodal capacity.

And like we've said honoring those commitments and then when we run out of capacity and but weve entered into commitments. They still have more demand and we're talking as an organization about how we can how we can drive.

Value into the organization into the customer with the capacity, we can fund as it relates to the railroads I just think I think.

I think all of the railroads want to have ongoing dialogue about improving productivity at their terminals and I think we're engaged in those conversations now it's very difficult to implement significant changes in that area. During the course of this really unusual rapid climb in demand that it.

Kurt over the course of this summer as we go into next year, we will be talking about how what are the ways that we can expand capacity in the rail system without necessarily investing or just buying new new terminals. The long term value in it for railroads can't just be that they're going to expand and buy more.

Parking in order to accommodate intermodal growth, we all have to work with our customers railroads in us together in order to drive more productivity through those terminals and I'm, 100% convinced the railroads want to do that and that's not going to be something that we have to push for they want to do that.

It has been painful in 2020 and yet in the remaining part of this year certainly I don't expect a I would be surprised if that really changed in any material way.

Great. Thanks, that's what I mean.

Your next question comes from the line of Jason Seidl with Cowen.

Thank you operator, and good morning, everybody you mentioned, a little bit about changing sort of how you view jump ball bids I'd love to get some more color on that and how that would change across your different units is this something where you're going to look to set up contracts more like dedicated attendance.

Yes. This is John so.

So we've all been in this business for quite some time and and I have.

And just a great deal of evolution in many areas of not only what we do but what the industry does but one area that really hasn't seemed to changes.

Frankly for nearly three decades or longer how we price and a range for the services presented in our highway and intermodal business and we have learned different ways to position that service contractually with some some.

Knish.

Kind of approaches that really work and if you think about the nature of the equipment that we need to procure to service customers.

The bulk of the lifecycle of those equipments and those contracts that we need to have a range with railroad providers and other carriers is out of sync with the way, we do business with our customers and we studied in fact, they're not just had a really good conversation about this last week that historically there is no real bad.

Oh, you to the customer in that constant you know annual event that really takes a lot of time doesn't really present, a lot of value and if we work more collaboratively with agreements that were more logically aligned with the services and the equipment we will provide.

Adding I think everybody when we'd have better understanding for our networks, we have appreciation for how to buy the equipment I think it probably do good for our labor in our drivers our utilization all those things.

All the things that go into really what we learn a dedicated which is an engineered answered I I don't suggest that we could apply all of the logic that we've learned from our Dcs business, but there is a much better way to to a range these contracts to where particularly our larger show.

Dippers, who need this year in and year out frankly.

Could be set up at two advantage both of us are providers.

And our customers and I'm I'm I've seen it already happened.

And in some cases, we're in the middle of that and we are all benefiting from it and so my encouragement to the organization and to our customers is consider you know changing the way we do business in this one way world to up to a more thoughtful and frankly logical approach and I'm going to be I'm going to be pushing for.

And that's something I'm, assuming it will take years to sort of move over customer contracts like that.

Most likely but you got to start somewhere.

No I agree.

Go ahead please.

Just wanted to add to that.

Customers are really asking us to grow across all of our segments. That's something we're seeing great success, and we believe that that will be for longer term, but from a growth perspective, and so when we think about how we plan. We don't just playing with ourselves. We also plan with the railroad providers in the more in.

Formation, we can give them and the more understanding we can get them about the customers that are really secured and locked in a lane level. The better that we can do together to make sure that we have great capacity across the board. So I feel like doing a one year, because it's very difficult for us to walk our railroad.

Certainly what we need from a driver perspective, it it's like where short term planning in a tactical environment versus really focusing on a better long term strategic cancer.

No that that that makes all the sense in the world and let me throw really one quick one and you mentioned a growing the trailers on highway services is this because you need them with ketchup business or is there something changing and how the supply chain is working that requires you to own more trailers going forward.

Well one of the things that we heard from our customers as we have introduced Threesixty marketplaces.

For the most part that has been for our brokerage segment and that's how the business started but if you look at the truckload industry about half of the business actually requires a more cap.

More capital from a trailing perspective, and so if you think about the capacity that is available in the market, 83% of the capacity available as in the small care community with 10 or less trucks, so moving into the marketplace now we've actually blended.

Both the drop trailer environment with a live load environment, creating one network instead of two and our customers are loving that product. So we leaned in with our customers early in bid season. It's one of the reasons our growth really started out strong. This year, we continue to have customers ask us how many boxes we will.

But as I said in my prepared remarks, we're moving to a more asset light answer and so we do have a great blend company truck and independent contractors, and even brokering summit that business Oh sitting inside the platform. So I think the market is large and the ability to create.

A bit better more efficient network exists significantly and putting 360 box or drop trailers in that network just make sense from a capacity perspective for our customers.

Well. Thank you for the color I appreciate the time as always.

Your next question comes from Todd Fowler with Keybanc capital markets.

Great Thanks, and good morning.

I understand you know the reluctance maybe to give some near term guidance on am dedicated margins, but Nick it sounds like that you know in your comments you said that.

Margin should kind of get back to the 11% to 13% range longer term, but you know it's been close to seven quarters, where you've been above that range.

Is there a reason why structurally the margin profile of that business can't be higher, especially in an environment, maybe where you know travel and entertainment isn't what it was historically.

So just a thought on why you can't continue to run at this range. Even if you do see some of the expenses normalized longer term.

Yeah, I think the the way we looked at our deals we process. Each one of our deals based on a set targeted return on invested capital.

And so if we get some deals that are little lighter on assets say customer has their own trailers.

Each deals priced differently and so I'm just trying to look at the long range. If we don't know which mix of heavy assets lot assets are going to come in so we think long term that's still the guidance that we're very.

We're very comfortable with based on deals that we see in the pipeline and so forth just based on pure ROI state.

Yes, Todd Hey, this is Brad maybe you have to say it a little bit so to say that a little bit differently.

Is I think regardless of what happens overtime the way that dedicated will approach pricing deals is.

Always focusing on return on invested capital and to the extent as as Nick alluded to some of the deals are more capital intensive.

Yes that could push margins higher in order to achieve the same targeted return on invested capital.

And so that you know to the extent there is changes in margin yeah that could be a big driver.

Of that change, but I think more importantly, what will not change is how the U.S.. We initially approach those deals which is a focus on those returns.

Okay, Yeah that makes sense and so I think what's maybe difficult for us to see as a little bit the mix of the deals that are coming through the asset intensity versus the asset light and that's just something that you know it's difficult to kind of tease out of the numbers the way they're reporting it sounds like.

And just for my follow up Nick I guess, maybe sticking with you know with the growth that you're seeing right now in final mile and kind of the trends that you talked about can you talk about the platform that you have in place to support the growth that you're seeing both near term and kind of what you expect longer term do you think about that business continuing to grow is that something that is.

All organic at this point and requires more infrastructure or is that something that you would look to do more acquisitions and how do we think about you know the cost that would be associated with facilitating our it looks like some pretty decent growth in that in that segment.

Yeah, I would just say the existing business that we're we're running today not a lot of infrastructure infrastructure cost of facilities or anything like that a lot of the new deals that we're doing is running out of customers locations doing two home deliveries. So.

So we don't see any big capital expense going in on infrastructure or anything like that and so we feel good about continued growth acquisitions. We're we always look but you know that as those come in the right deals approaches we'll look at them, but there's a big runway just on organic growth.

Right now from what we're seeing with with a five or six of our largest customers were just a small percentage of their business and they are rolling out their networks, and and we're kind of running longer coattails.

Okay got it thanks for the time this morning.

Your next question comes from Bascome majors with Susquehanna.

Yes. Thanks for taking my question I, just wanted to follow up on the jump ball comment and a couple of prior questions on that.

The evolution. If you guys were able to move to what you think would be optimal for the industry and in a way that your customers would agree to is this is it more of a cost plus type longer term commitment that you have in mind that accounts for the capital intensity of that.

Customer is that is that you know setting some revenue or volume floors that would also protects you in down markets I just want to understand more tactically.

What a new world could look like your intermodal pricing that you think would have a win win sort of a sort of set up for you. Both you and your customers. Thank you.

Yes, Thanks, Brad I'll start and then ask shelly or bearing or anybody else to come in I think you hit on a lot of ideas that we have explored and had I've had success with in the past with different customers. One of the things we implemented some time ago and dedicated was kind of an index based.

Pricing strategy, where you know we have a way to recognize labor cost and other inflationary.

Pressures that are visible and easy the process and recognize and applied to our pricing in a way that doesn't require all the activity. We presented a bid work out and we spend that time working on the business. We have a program we call customer value delivery, where we are.

The five metrics.

Keep key performance indicators that keep us on track with service and performance.

All of those things can be tied together so that the energy is on the service not the one way as we called jump ball pricing.

I think the you know volume and different levels of either lane or total commitment can be helpful to us as Shelly said provide the the really needed guidance that we would want to present I say to our rail providers to say this is what we've got on the books and.

If you look at Nics business Nicholas our retention that Knight's still 90 97 in Cincinnati High Ninetys. So we know what's happening in that business year in and year out and can really plan for that.

I think the reason that we have such high retention is because we do a really good job for the customer what else would they stay with us and so that's the that's the idea here is can we apply some of that logic.

We have had some experimentation with this we've seen it work we do think it's better for the customer I mean, it's not just better for us, it's actually really better for the customer and we frankly made a living prioritizing that Andy let me see if failure do you want to add anything to that.

Bascome I would say our customers really want a prediction for their budgeting and I think our ability to give them that prediction, particularly from an asset perspective, largely comes down to how long we can do business together because in our cost basis to that.

You think about bid season, we're able to actually fill in gaps to fill in lanes that are embedded in our price the longer that we have the business together I do not think that our customers are interested in nor do I think it's good for us to do cost plus and all of our business that does not leave it.

Dick Hipple budgets and the customer and I don't think that's a good business model. However.

However, I believe in the bid process that.

The business that should be in there would be business that is static and regular.

That business can be published and predicted for a customer that business also could go into a longer term agreements, but there is a lot of business that news anymore dynamic nature and that business is stale and old trying to go up against a published price.

That really is not commensurate to the market every time and that's what causes so many issues in the market and as we're talking to our customers about that whether that's in intermodal or any of our highway services area as our customers have Wayne and load center.

Actable and if we can't get into a repeating pattern that business really needs to match.

Directly with capacity in the moment and we have found that over a longer period that actually is better for customers that is a factual a number that we.

Number that weve assigned to that internally to say, we actually could save our customers more money. If we were able to do that for them and improve their service and capacity.

Thank you for the thoughtful answer.

And Stephanie will do a one more quick question before we hang it up.

Your final question comes from the line of David Ross with Stifel.

Yes, thank you everyone.

Nick I, just want to talk a little bit about the Fms segment and.

See nice growth, there slight turn and profitability, but obviously not where you want to.

What's the biggest obstacle of getting the margins.

Either in line with dedicated or where you want them because I know, they're not going to be in line with dedicated because more asset light, but how do you get from here to there.

Yeah, it's it's a very very fragmented industry and so I try to look at it and take the same approach and dedicated you give a customer fantastic service.

And great people, that's executing that service then you'll be able to go in and get the appropriate returns that you need on rates as the contracts come up and so it's just a very methodical approach to executing being best in class home service.

Taking care of our customers customers and then over time, you will be able to improve the margins to an acceptable rate of return and we're methodically going down that path right now.

Trying to execute that but it is a very fragmented industry and so you have to be very careful because there are lot of small the barriers to entry right now is pretty low but.

But we think with a lot of our background checks safety and security and things that we do.

Going to set the bar higher to come into the industry and then we'll be able to get our price on our product and a better return.

And are you seeing much consolidation yet in the industry or is it still is fragmented de lever.

No. There's there's some consolidation coming in there's four or five folks that's starting to do some acquisitions.

So it is seeing some consolidation, but it's still a slow process.

Excellent. Thank you.

Mm Hmm.

Hi, Thanks, everybody for the time, we will be in touch.

You touched few during the quarter in a couple of conferences or if not we'll talk to you next quarter. Thank you.

Thank you. This concludes today's conference call you may now disconnect.

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