J.B. Hunt Transport Services, Inc.

Greetings. Thank you for standing by. Welcome to the J.B. Hunt first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Brad Delco, Vice President of Finance and Investor Relations. Please go ahead.

Good afternoon. Before I introduce the speakers, I would like to take some time to provide some disclosures regarding forward-looking statements. 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 J.B. Hunt's current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K, and other reports and filings with the Securities and Exchange Commission. Now I'd like to introduce the speakers on today's call. This afternoon I'm joined by our CEO, John Roberts, our CFO, John Kulo, Shelly Simpson, our Chief Commercial Officer and EVP of People and Human Resources, Nick Hobbs, our Chief Operating Officer and President of Contract Services, Brad Hicks, President of Highway Services, and Darren 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?

Thank you, Brad. As we discussed during our last call, we entered 2021 with a cautious but informed positive outlook on what we could expect in terms of demand and inventory replenishment needs from our customers. Aside from the temporary disruptions presented by weather events in February, most of the data supports a generally optimistic view of those expectations and encourages our direction going forward. As we evaluate current market conditions and the needs of our customers, we have determined that an increase in our capital investment plan is warranted. Accordingly, we are announcing a 40% increase in our originally stated plans to enable the procurement of incremental containers trailers and the needed supporting equipment such as chassis and tractors for JBI. The new projections for our capital investments now reach $1.25 billion for this year, a clear milestone for our company. We have secured contracts to increase our container fleet by another 6,000 units in 2021 for Intermodal, bringing our net addition target to approximately 12,000 units for 2021. a little over 1,000 of which are temperature-controlled containers. We are also increasing our trailer fleet and highway services by 1,500 units, bringing that total fleet expansion to 3,000 for 2021. All of this equates to just above an 80% increase to our original container growth plan and a 100% increase to our trailer fleet expansion plans for our 360 box programs. John Kulo will add his comments. on our capital expenditures in his remarks. Let's discuss margins. After announcing our plans to issue clarification for all segment margin targets during our last call, and with the understanding that we have had these margin goals under specific review for over a year, we will re-establish our targets with you here today. For Intermodal, we lower our margin goals from 11 to 13 percent to 10 to 12 percent. The fundamental reason for this structural change is that it presents the company with the ability to grow with and serve our customers while also generating an appropriate and sustainable ROIC. As a component of this adjustment, we also see opportunities to improve our asset utilization in the form of box turns per month and to evaluate our tractor and chassis ratios, all of which would be positive for the business and returns. For DCS, we increase our margin goals from 11% to 13% to 12% to 14%. While this change appears to be a step up in margin expectation, it is actually the realization of a fundamental increase in the fleet size which allows growth and startup expenses to occur without disrupting the core business as it has in the past. Another element revealing clarity for the fleet business is the removal of the final mile activities, which require a lower margin given the lighter asset requirements. As discussed, the margins are set to provide an appropriate return for each business, and given the asset intensity of DCS, a higher margin has always been needed. For JBT, we are adjusting our margin range from 8% to 12% to between 8% and 10%. The primary reason for this change is a recognition of a lighter asset position as we focus our investments on adding trailers and not tractors going forward. We do point out that we are in the early stages of transforming this model focused on more trailers and will continue to evaluate the margin requirements and market support to achieve growth in the appropriate ROIC levels to reinvest. For ITS, we reaffirm our long-term target margin range between 4% and 6%. And for final mile services, we reaffirm our long-term target margin range between 4% and 8%. Each segment leader will add comments on the main drivers for these margin targets and the resulting ROIC expectations going forward. Final comment from me on the availability of professional drivers for our asset-based businesses and our carrier providers is under unusual pressure currently. While we have face driver hiring issues at varying degrees, of difficulty during previous tightening cycles, we see the current pressure being meaningfully more pronounced and likely prolonged. Shelly and Nick will add more color on our perspectives. Accordingly, we are taking some unique steps in our efforts to address this critical challenge. These include reducing the eligibility time for new driver benefits from 90 to 30 days, expanded efforts to explore new ways to train and mentor new entrants to the field of professional drivers and, of course, a comprehensive overview of driver wages and compensation. All in, we believe we are advantaged by our brand, our recruiting and hiring systems, a focus on retention, and the vitally important increasing efforts in improving our inclusion and awareness for the vast diversity currently in place with our amazing driver and field management teams. I will now turn the call over to John Kulow for his comments. Thank you, John, and good afternoon, everyone. I'd like to start by providing a couple comments on our first quarter of 2021 from a consolidated perspective. Given the weather and other constraints facing the industry, we were pleased with our revenue, operating income, and EPS growth for this quarter, with notable achievements in our highway services revenue, as both ICS and JBT were up significantly over the prior year quarter. With respect to weather, we previously guided to a $15 to $20 million estimated operating income impact from the February winter storms. In closing the quarter, we determined this impact to be approximately $17 million, which primarily includes lost opportunities within our intermodal segment of approximately 25,000 loads. Other cost pressures in the quarter were primarily related to higher driver costs to attract and retain drivers, and higher costs across our various networks and operations due to congestion and the overall labor tightness from increased freight demand and capacity constraints. You will note we ended the quarter with approximately 550 million in cash, with this being driven in part by our review of the capital investments that John had highlighted. We had previously guided CapEx to be between 850 and 900 million for 2021, and we are now updating that to 1.25 billion, primarily driven by the intermodal container ads and the trailers for our 360 box program. This investment is supported by the current environment, but also our longer-term outlook. While not specifically included in the CapEx plans, our cash and liquidity also allows for further consolidation in our final mile businesses as opportunities may arise. With regards to margins, as noted, the conclusion of our review of our segmented margin targets was informed by the current and future state of our business segment in terms of our desired returns on capital, our revenue quality, capital intensity, and the desired market penetration rates. Other inputs to our ranges include underlying risks regarding the nature of our customer contracts, both in terms of reciprocated commitments and contract duration. Finally, from a capital allocation standpoint, we continued stock buybacks in the corner but found less opportunity in the back half and then fell into our blackout period. While we have guided towards significant capital investment, we still anticipate continuing our buyback approach throughout 2021. A final note on COVID costs, we continue to offer paid time off or PTO to employees that have needed to quarantine. During the quarter, we committed to providing PTO to employees to allow them to be vaccinated, thereby ensuring their W-2 is not impacted when needing time away from work to be vaccinated. We have been working with local healthcare organizations to host vaccine clinics at our corporate headquarters to provide vaccinations to employees, their adult family members, and other eligible community members. Together, we have inoculated more than 13,000 members of our community and are working with our field employees to provide vaccination assistance under applicable area guidelines and procedures. As a result of these efforts, we have incurred approximately $8 million in costs in the current quarter, designated as specific COVID costs compared to the $15 million that we experienced in the first quarter of 2020. That concludes my remarks, and I'd like to now turn it over to Shelly.

Thank you, John, and good afternoon. My commercial update this afternoon will focus on general market conditions and our expectations for the year, as well as an update on the progress we are making as an organization with our 360 platform. As John alluded to earlier, we entered 2021 with cautious optimism about the opportunities presented to us. These opportunities include a means to recover from the costs incurred last year as we honored our commitment to customers, but equally as important, the opportunities to solve capacity challenges for and on behalf of our customers. Those capacity challenges for our customers remain very present in the current landscape and will likely persist throughout 2021, highlighted by a tight labor market, elevated cost to procure capacity, and overall lack of supply chain fluidity. As an organization, we remain committed and focused on meeting the needs of our customers honoring our commitments, and doing so by striving towards our mission to create the most efficient transportation network in North America. I remain encouraged by the level of discussion and interaction with our customers on the very important subjects of revenue quality, capacity, and cost. And while our view on pricing is a little more elevated today than what we discussed in our last earnings call, the reality is that our cost to serve is also higher. This cost presents itself primarily in our labor costs, as well in the utilization of our assets or equipment terms. We, and the industry as a whole, are facing meaningful cost pressures to recruit, hire, train, and retain qualified professional truck drivers to meet the capacity needs of our customers. As our future outlook on cost remains fluid, so will our approach to price. to ensure that our investments to meet the capacity needs of our customers are supported with our expectations for an appropriate rate of return. These returns support our ability to continue to invest in our assets, which are our people and our equipment, as well as our investments in technology to serve the growing needs of our customers. And as we prepare for record equipment ads this year, we are working very closely with our customers on equipment turns and forecasts to enable better network fluidity. Shifting gears to our JB Hunt 360 platform, I could not be more excited about the progress we are making as well as the opportunities we have ahead. In the last quarter, I've been extremely encouraged by the level of engagement we are seeing in the platform from our carriers and shippers as our KPIs in this area continue to break new records weekly and monthly. We remain focused on reducing friction across the supply chain making it easier for shippers and carriers to match in our system to optimize and transact in real time. One of our big areas of focus is on improving visibility and transparency across the supply chain, and we are encouraged about the opportunities we have to make progress in these areas supported by our recently announced alliance with Google as we collaborate and co-innovate on solving some of the industry's biggest problems. I am extremely proud and excited for all the opportunities presented to us and our ability to solve for our customers' needs utilizing our people, products, and services. Our diversified services, or our scroll, powered by our technology platform continues to be valued in the marketplace and supported by our customers leaning into us to solve for their needs. As I've recently added the role of EVP of people and human resources, I would like to share how encouraged I am about the work we are doing enhancing our inclusive culture. While early in our journey, I see our organization leading in this area and with more to discuss and to share in the future. I'd now like to turn it over to Nick.

Thank you, Shelly, and good afternoon. I'm going to spend a few minutes today getting on several areas and topics, including the current driver environment, the results and performance of Dedicated, with some additional context for the updated margin target range that John mentioned earlier. And finally, I'll review the results and performance of our final model services segment. I'll start with some quick thoughts and comments around the driver market. In my opinion, the industry is facing the most challenged driver market that I've seen in my 37-year career at J.B. Hunt. We estimate that the decrease of the driving school applicants and graduates, the drug and alcohol clearinghouse, and the impact presented by the pandemic combined has resulted in approximately 220,000 fewer drivers available to meet industry capacity needs. As a result, we are taking a comprehensive approach to attract and retain our professional driving workforce, including adjustments to our wages and benefits, while also focusing on the quality of the job. We believe we have some of the best wages, professional drivers, professional driving jobs in the industry across our portfolio of services, including intermodal grade, dedicated, truck, and final mile services. Over 90% of our driving jobs are local and regional, providing consistent routes and opportunities for more home time. On dedicated results, dedicated continues to perform and respond in an agile fashion to the challenges thrown at it. Despite several weather-related disruptions in the quarter, ACS delivered its highest first quarter revenue operating income in our company's history. I believe that it is a testament to our operations team and professional drivers who responded and worked to recover for our customers, all while staying focused on safe execution and the efficient utilization of our assets. As a result, customers continue to see value in the quality and flexibility of our professional outsourced private fleet solution, as also evidenced by our strong pipeline. We ended the first quarter selling approximately 380 trucks in DCS as we are off to a strong start in 2021, all while customer retention rates remain above 98%. Regarding everyone's favorite topic about margin, we believe it is prudent to update the market on our targeted margin range, which now stands at 12 to 14%. to the DCS segment from the previous range of 11 to 13%. Informing us of this decision is the following. Our value proposition, scale, efficiency, as well as the capital intensity of our business. More importantly, it is worth noting that nothing in our pricing model has changed, but rather what has revealed itself is the realization that the current scale of our operations presents us an opportunity to grow the business while experiencing less drags and startup costs associated with customer growth. Said a different way, we see the same opportunity presented to us today to balance our desire to grow well into the future while maintaining discipline around our returns on capital. Wrap up my comments on final mile services. Final mile services was able to deliver a strong performance in the quarter as a continuation of fourth quarter peak season-like strength in our business rolled into Q1, which has not been the seasonal norm. While weather did disrupt the business temporarily, we were able to recover and get our customers' goods delivered and only experience a modest impact to overall performance as a result. We remain active in conversations to grow and scale with our current and new customers across our footprint, and plan to capitalize on these opportunities throughout the year. Additionally, we'll continue to invest to ensure we deliver a differentiated product focused on the high standards of service, safety, and customer satisfaction. With regards to margins, we are maintaining our targeted range of 4 to 8%. Our growth trajectory of our asset and non-asset final mile service offerings will continue to influence where we fall within that range as we gain greater scale with our value-added services. That concludes my remarks, so I'll turn it over to Brad Hicks.

Thank you, Nick. The organization's excitement and enthusiasm for our highway services business continues to be evidenced by the progress in our results and further supported by the opportunities our customers present us with to provide needed capacity solutions. My comments today will briefly touch on some of the highlights of our highway services businesses, which includes both integrated capacity solutions, or ICS, and truck, or JBT. In short, the marketplace for JB Hunt 360 continues to provide our customers capacity solutions utilizing a combination of our multimodal digital freight platform while complemented with our drop trailer pools powered by JB Hunt 360. I'll start with ICS. ICS was able to deliver revenue of $525 million or 56% growth over the prior year and deliver operating income of $7 million, which is now the second consecutive quarter of profitability since our journey along our digital transformation. Similar to the fourth quarter of 2020, the quarter presented us with opportunities to help customers source capacity effectively and efficiently on our platform in an otherwise constrained market environment. Segment volumes were down 1% year-over-year, driven by a decline of LTL volumes, offset, however, by truckload volumes, which were up 10% in the quarter. Higher spot market opportunities, higher contractual rates, and the previously mentioned mixed change contributed to the 58% increase in gross revenue per load. Going forward, we will remain focused on balancing the right mix of volume growth opportunities presented to us as we remain committed to our investments in three key areas, our people, our technology, and scaling the platform. As John alluded to earlier, our margin target remains 4% to 6% in this segment, which we believe is achievable as we move beyond our heavy investment cycle, achieve scale, and as the business model matures. In JBT or truck, the segment was able to deliver 43% year-over-year growth in first quarter revenue, falling just shy of $150 million. Operating income was $10 million, which is the highest for a first quarter since 2007. Growth in the segment continues to be driven by non-asset and asset-light service offerings powered and supported by the J.B. Hunt 360 platform. As JVT has shifted to more of an asset-light model, we have an ability to provide trailing capacity to customers that may be hauled by either JV Hunt-owned equipment, our independent contractors, or power-only capacity sourced through the platform. This is our 360 box offering. Demand for this service is strong and supports the previously disclosed 100% increase to our prior trailer fleet investment for 2021. Our margin targets in JBT are now 8% to 10% from the prior 8% to 12%, which recognizes the shift to a more asset-light model. That said, and similar to final model services, our performance relative to those targets will be dependent on the asset intensity of the business as it evolves. But as always, our returns on capital remain the core focus of our investments to grow this business. In closing, I would just like to reiterate the excitement and growth opportunities we see across our highway services portfolio to solve for our customers' needs in an efficient and, as Shelly alluded to earlier, more frictionless way. We remain committed to our investments in our people, technology, and scaling the platform, which includes our investments to expand our 360 box program. That concludes my comments, and I'll pass it over to Darren.

Thank you, Brad. Hello to everyone. Today I will provide some additional details on our first quarter performance. give you some thoughts about network fluidity and balance, provide some perspective on the demand and pricing environment, and cap it off with comments on our updated capital investment and target margin range that John highlighted earlier. Volumes declined 3% in the quarter, broken down by month as plus 3% in January, a 16% decline in February, and plus 4% in March. As we called out in the earnings release, the weather challenges in the quarter are estimated to have impacted us by 25,000 intermodal loads, primarily in February, but the effects did carry over into March. The rail network has shown signs of improvement so far in April, although we are not fully back to pre-weather service levels we have and continue to expect to see improvements as we move through the second quarter. While rail challenges are well known, another challenge we face is what we refer to as customer street time, which has increased as our customers are falling behind on unloading inbound delivered units in a timely manner. We believe both the rail terminal congestion and the customer unloading challenges are direct results of labor challenges. Inside our operation, driver hiring continues to be A significant challenge in the industry will take on higher wages in order to attract and retain new drivers. We fully expect the same is true for the rail terminal contractors and customer warehouse labor. Demand for intermodal service remains at incredibly strong levels. The pricing market is performing at a level to cover our cost increases from last year as we honored our commitments as well as the inflationary cost pressures we are experiencing this year related to driver hiring. Certainly, the increasing driver wage and rail costs are topics with our customers, but we are also highlighting the velocity challenges and the cost of equipment ownership. As you should be able to conclude, the pricing environment supports our decision to add additional capacity to our fleet, as John highlighted earlier and as we discussed last quarter. During the last call, we said we expected pricing to come in at high single to low double-digit increases. And at this point, we feel more optimistic about things trending towards the higher end of that range, adjusting for mix. As we entered the quarter, just over 10% of our business had implemented 21 bid cycle rates. By the end of the quarter, just over 40% of the volume had current bid cycle rates. We will expect that to climb to 70% by the end of Q2 and the remainder to finalize during Q3. As John covered in his opening comments, we have adjusted the margin target range to 10 to 12%. We have highlighted many times that we remain focused on generating the appropriate return on our invested capital in the business. And while margins are an output of achieving our targeted returns, Returns are also influenced by other factors, including asset turns, capital intensity, and consideration of contribution per load. We believe this new target range strikes the right balance between generating appropriate returns that support reinvestment to capitalize on what we believe is a long, sustainable growth opportunity presented by the market. The future of Intermodal remains bright as it provides an economically attractive alternative to some of the challenges our industry is facing, including the driver market, higher fuel costs, capacity, the carbon intensity of the supply chain, and the need for investment in public infrastructure. Also, as John highlighted, we have expanded our container order in 2021 to approximately 12,000 new containers, including both dry and temp controlled, that will begin to arrive in Q2 and continue through the end of the year. As we have moved through the current bid cycle, it is clear that our customers want more capacity from us, and we are responding. The commitments from our customers thus far during bid season fully support this additional investment in capacity. We are confident that focusing and delivering value to our customers will support the appropriate returns needed to invest to meet their needs and put us on a strong path toward long, sustainable growth. That concludes my prepared comments.

As a reminder, to ask a question, you will need to press star, then the number one on your telephone. To withdraw your question, press the pound key. To allow everyone a chance to ask their question, please only ask one question. While we compile the Q&A roster, I will turn the floor over to Brad Delco.

Yeah, thank you. And just, we presented a lot to you guys there. We know our prepared comments went long, so we are going to cut you off with one question.

just this one quarter, so I appreciate you guys following those instructions.

And your first question comes from the line of Allison Landry with credits.

Please go ahead.

Thanks. Good afternoon. So I just wanted to see how we could think through the ROIC on intermodal. I mean, obviously, you know, you talked about the lower margin target, which you alluded to on Q4. But it sounds like what you're saying is that, you know, the returns on invested capital are not going to change. So maybe you could help us think through that. And then, you know, just maybe more broadly, you know, you've moved the business towards or are moving the business towards a more asset light model. And I'm just curious on your thoughts or expectations for longer term consolidated ROIC. Thank you.

Well, let me first touch on intermodal, Allison. Appreciate the question. At the end of the day, at times in the past, we know it's been a while since we ran in the 11 to 13. At times in the past, since that time, our revenue per load has increased substantially. 2018 and, again, this year, prices are increasing pretty rapidly, so have costs. leaving us at a profitability level on a per load basis that is still similar to even better than it used to be when we were in the 11 to 13 range, which translates to returns on invested capital in intermodal even at a slightly weaker margin that are still as good as they used to be. And that's really what's driving some of that conversation. And I'll let Kulo probably speak to more on the enterprise side.

Yeah, so I, you know, Allison, we look at really ROIC from... We manage it from a consolidated basis. And so we obviously have investments in the individual segments, different times. For example, we announced the increase in the container order. That's a huge capital investment in the current year. But we look at that overall investment over the 20-year life of those. And so... We manage the balance of the segments on a consolidated basis, and those are going to increase and decrease just depending on the level of investment that we have at that time.

Thank you. And your next question comes from a line of Chris Weatherby with Citi.

Yeah, hey, thanks. Good afternoon. I wanted to stay on Intermodal if I could and ask about the 12,000 containers. I guess what I'm trying to understand is, when you look at the market today, I think you said your customers want more capacity from you. Can you talk a little bit about these containers and enter how well they're already spoken for? And I think taking maybe into account just sort of the core demand that's in the market, but also maybe the sort of under utilization that's been caused by this congestion. So I guess in other words, how long do you think it takes to deploy those sort of actively in the market? Or do you think this actually creates a little bit more supply relative to what demand is today?

So I would say our customer demand is significant, and the 6,000 containers we planned to order when we announced that in the fourth quarter earnings call back in January, and the current velocity environment just wasn't giving us as much capacity as our customers clearly wanted from us. I'm not of the opinion that adding these containers puts an oversupply in any way into the market. I still believe that the market will be under supported with capacity based on velocity and some challenges there. We've made this decision knowing that we could fully utilize those containers that we announced we've expanded the order on.

Thank you. And your next question comes from one of John Chappell. Chappelle with Evercore ISI.

Thank you. Question for Brad Hicks and maybe Shelly. Six months ago, you guys expected ICS to turn a profit in the back half of 21. Then you went out and did a nice profit in 4Q20, said you expected profitability in second half 21, did an even better profit in 1Q21. So the question is, Are we looking at still achieving the scale that you were hoping to attain in the second half of 21? And if that's the case, is there an even greater step change in the profitability and the gross margin potential of this business, especially when you layer in this collaboration that you're hoping to achieve with Google?

Good afternoon, John. I'll take a stab and maybe send it over to Shelley to add any other further comments. We may have been too cautious when we spoke at the end of Q4 about what the first part of this year held. We still are in a heavy investment window, as we clarified, I think, eight quarters ago. But the market conditions really are very favorable as we think about revenue quality and our overall ability to get the rate at a level that accounts for the increase in PTE that we have seen. The revenue per load levels are amongst the highest we've seen in our history, but also, too, is PTE. And so the combination of those two with where we're at in our platform development, which we feel very encouraged by as we turn into Q2, is very favorable for us. And so, you know, did that allow us to get further ahead than we had anticipated? Certainly the outcome and output of Q1 would reinforce that to some degree. But we still have work to do. We still have heavy investments. But we are at a place that we are very satisfied with on our journey. Shelly?

That would add to we are still very focused on scaling our business. When we started our bid season, really across all of our segments, our customer alignment on cost and capacity wasn't necessarily reflective in the feedback we were getting versus what the competitive market looked like. So if you look at what happened in first quarter, we moved a disproportionate amount of spot shipments versus what we would historically move and published volumes were lower than we expected at the beginning of the first quarter. As we have progressed through that quarter and even moving here into April, we have seen our customers lean into us significantly and really giving us larger bid awards across our segments and particularly inside highway. So I would say our beat in Q1 was a more robust environment, more spot price in general. And as we move into Q2, I think that there will be seasonal margin pressure and in particular having published pricing that should be more on an annual basis. But having said that, more specific to the work that we are working on, with Google in our alliance. We still are very focused on our co-innovation together to solve industry challenges focused primarily right now on transparency and visibility. We do think that that will help connect to our bottom line, which is why Brad reaffirmed our margin targets. In ICS, we are encouraged with our results. We are laser focused on getting to scale very critical to have a great platform to create that most efficient transportation network in North America.

Thank you. And your next question comes from the line of Ravi Shaker from Morgan Stanley. Go ahead.

Thanks, evening everyone. Just a clarification on the margin targets. It looks like you guys are obviously in IM and also a little bit in BCS, kind of keeping your margin targets flat to slightly down as a trade-off for higher top-line growth, which seems like a very, very reasonable approach. But what level of revenue growth roughly are you underwriting to get to those margin targets?

Hey, Robbie, this is Brad. You know, we don't typically give guidance, but, you know, in terms of other things we've said publicly, particularly around intermodal, you know, we believe we should be over a long period of time growing at a faster rate than the market. And the reason for that is because we feel like we have some advantages. And so that's kind of what we've talked about in intermodal. And then with dedicated, I think, Nick's provided comments about what we target to sell each year, but we're not going to give you specific revenue growth targets. We've obviously worked hard to get you guys more transparency on what we feel like is the right margin target range that generates the appropriate returns on our capital and allows us to continue to grow well into the future as the market presents us those opportunities.

Thank you. Your next question comes from one of Scott's group with Wolf Research.

Hey, thanks. Afternoon, guys. So you guys have been at a, call it a 10% intermodal margin the last three years. As the rates reset higher, do you think you'll be closer to that 12% margin on an annualized basis? And then this one point, $2.5 billion of CapEx. Should we think about this as a one-off or a new normal?

Well, Scott, this is Darren. I'll take the margin question. You know, we just don't. We've given you a long-term target, and so to say we expect anything, we expect to land inside that target, and that's certainly our goal, and that's what we come into work every day and focus on. Hey, Scott, this is John from a CapEx standpoint.

We've obviously elevated this. There was a little bit of carryover from last year that we paused just going through the pandemic, and there might be a little bit of pull forward, but I wouldn't use this as a run rate specifically. It's elevated from a little bit from where our normal run rate will be going forward.

Thank you. Your next question comes from Jordan Allager with Goldman Sachs.

I'm just sort of curious on the final mile business, which is pretty strong from a profit standpoint. Maybe give some thoughts around that and specifically, the pace has been really strong and obviously there's a lot of trends fitting that. I'm just sort of curious, you know, How long do you think we can extend that outlook? I mean, would you say it's going to be fairly robust this year and beyond in the final mile trend line? Thanks.

This is Nick. I would say that we saw a lot of fourth quarter pushing into Q1 because of the supply chain disruption. And so that carried forward. Q1's normally very slow and are at least profitable. but really we got a big boost and it was almost like q4 and q1 and so we expect everything to go back to normal and final miles q2 q3 and we'll hit our target range is where we think we'll be for the year thank you and your next question comes from a line of tom reidwitz with ubs

Yeah, good afternoon. I wanted to ask you a little bit more about the intermodal contract rates, and I guess you could talk about contract rates overall if you want. You know, clearly pointed to some strength. Is this, it seems like a big step up after the February weather impact. Should we be thinking about potentially 15% contract rates, or are you saying instead of kind of 9 or 10, we ought to be thinking about like 11, and just trying to get a sense of

how large that step up in in the expectation for contract rates would be well tom i appreciate the attempt um you know we highlighted uh high single to low double and we we reiterated in earlier comments that we're feeling more confident about the higher end of that as outside of that statement i really don't think it's i don't even know enough yet to say anything beyond that so i i don't know how to

guide you to anything beyond uh double digits tom we'll update you if we think it goes triple digits how about that thank you and your next question comes from the line of andreston long with steven thanks and congrats on the quarter on intermodal margins i know john you called out uh

17 million dollar weather impact on a consolidated basis, I was wondering if you could quantify what the impact was in intermodal to and if you could share what intermodal margins would have looked like X weather. And then thinking about the longer term intermodal margin guidance, can you go into a little bit more detail on what that assumes for the progression of rail service versus where we are today?

Yeah, sorry, Justin.

As far as the weather impacts on intermodal, we really look at it from a load standpoint. You know, what we said was the 25,000 loads. To translate that into margin, it takes a lot of speculation, calculating snow removal, insurance and claims. And so what we have good insight is the impact on the loads. and the volumes, and I think that's the best way. I don't know how to translate that into what would margins have looked like had we not had the weather event. There's just too many subjective things in there. And I apologize, I forgot your second part of the question.

I'll probably take that one. I think he was asking do we, you know, how much does it play into our ability in the new margin range to get either an improvement or, in rail service or the expectation that it will remain somewhat stuck or slower or challenged velocity. I think more than anything, we have probably some belief that rail velocity has slowed down since the days of our 11 to 13 margins. And I'm not ready to tell you that I have an expectation that it's going to get back to those levels. Do I think that rail velocity will improve in 2021 and beyond? I do. I mean, I think that has a lot to do with this labor supply challenge that we've highlighted many times. And I don't think the railroads are, they're impacted by that as well, particularly at the terminal level. So I would expect some improvement, which can help us. But I don't know that I can see rail velocity getting back to the levels it was, you know, two or three years ago.

Thank you. And your next question comes from the line of Ken Hexter with Bank of America.

Hey, good afternoon. If we can just talk a little bit about the congestion and tightness. Maybe your thoughts on how long this lasts given the low inventories and the benefits of the tightness that you're seeing now. versus then contrasting that with the fear of overordering equipment. So as congestion clears, do you see in the near term then you're stuck with some excess equipment or impacting rates?

Yeah, I think from intermodal's perspective, there is such a strong demand for intermodal services for highway conversion in the eastern part of the country that isn't necessarily attached to congestion at ports or particularly difficult congestion along the West Coast. We have a lot of confidence in our ability to continue to grow intermodal. Will there be a blip some quarter somewhere? I guess that's possible, but I think we feel very good about the long-term projection of the equipment ads. That's frankly why we did it. I would just add to that, Darren,

We see congestion also on the highway services side, predominantly with our box program, and not so much from a rail congestion or port congestion, but in terms of our customers' unload behavior. Those labor challenges that Darren mentioned that we can see the impacts from at ports and ramps, we also see on the customer behavior side. We're paying very close attention to that. We would hope and expect to see a lift from where we are at today. And we really saw that deteriorate beginning to middle of COVID last year. And so that equipment velocity and availability is being negatively impacted by our customers' ability to unload the equipment. And we're working very closely with them to try and solve for that.

And I would say, maybe just from a customer view as well, inventory, I think, will continue to be an issue and will persist through the second half. of this year. I think that is newer news, and particularly what's happening on the import side, really trying to replenish. If you just see how consumers are spending, that is continuing from 2020. I would say the challenges that we're experiencing, whether it's at the port or the rail, and in particular the labor side for professional drivers, that is a major issue that that is very different this time that will take us more time to work through. And we are very focused with our customers on cross-selling and coming up with better peak planning. We do have across all services a good line of sight as to how we'll help our customers be right and have a successful peak season, whether that's in Q2 or happening in the back half of the year, feel really confident about the work we're doing together.

Thank you. And your next question comes from Brian Offenbeck with JP Morgan.

Hey, good afternoon. Thanks for taking the question. So I just wanted to see in terms of the ICS and 360, you announced the Google Alliance, you announced another partnership with Keep Trucking. Where do you feel like you are in terms of partnerships as you're trying to build out scale in the network? And then clearly you're benefiting from a bit of spot Spot market strength, as you mentioned, but how far do you think you are from really getting to scale? What sort of measures should we look for and how are you tracking against them?

Well, thank you for that, Brian. We have three key areas that we're focused on in JBN 360, really access, transparency, and visibility, and that directly relates for our customer in cost, service, and capacity. We do have multiple, as you call them, partnerships. across each one of those as our strategy and our work continues. We don't announce every piece of that because we don't see the advantage in the market to openly discuss that, but we do have specific work that is happening inside that. From a scale perspective, we will continue to work on removing friction. We want to make it simple for a shipper or a carrier to be able to connect quickly and efficiently. And so any of the connections that we can make and leverage other people's expertise and really bring that or solve for that through JVM 360, we will review and implement. So I would say our scale, our ability to scale will be continuing to solve for our customers, number one, from a full scale or from a full scroll perspective, but also making sure that we highlight the technology so that they can get access to the right mode, the right truck at the right time. Pricing then will be reflective and transparency. And then ultimately, customers want to be able to track their shipment the same way we track a Domino's pizza from the time we call it in to the time it gets to our home. And that's what we're focused on.

I would just add to that, Shelly, that from an execution standpoint, as we establish those key partnerships. We're constantly focused on how it can improve productivity and efficiency so that we can provide for our customers that cost benefit, that service benefit, that visibility benefit. And so we pay very close attention to the internal aspect of those capabilities as we move on down the road as well.

And your next question comes from the line of Amit Amirotra with Deutsche Bank.

Thanks, operator. Hey, Darren, just wondering if you can give us some color on those 12,000 new boxes, specifically when it's coming, where it's going. My guess is it's mostly earmarked for the east, but if you can just talk about that and And also, just related to that, one thing that I'm trying to understand is how the KPIs in the business and the intermodal business kind of evolve as that new capacity comes online. It's obviously a lot of capacity, 12% new capacity. I assume it's good for growth because of the improvement in terms and maybe dilutive to length of haul and yield. maybe even slightly dilutive to margins, but not dilutive to ROIC. I'm just trying to think through that. Um, so if you can just talk about, there's probably like five questions in there, but, um, you know, when, when it's coming, where it's going and how did the KPIs kind of evolve as that new capacity comes online?

Sure. So, you know, we, we announced 6,000, uh, earlier in, in our fourth quarter earnings call. And today we're updating that up to 12. There are some, uh, temp controlled equipment in there. roughly 1,000 temp control boxes that will come in that have been in our plan for some time. And so those will all flow into the West Coast. Now, the dry boxes, the logistics plan to get those boxes into our system continues to evolve. In some ways, we're securing capacity to bring that equipment predominantly to the West Coast. predominantly to Southern California so that it enters our market at the right time. Those boxes begin to deliver during Q2 and really are spread throughout the rest of the year with, and there's probably a little bit extra during Q3 where you'll be receiving a little bit heavier flow of that equipment in to help us for peak season. Certainly for the longer term life of that equipment, we would expect it to be diversified into the Eastern network. But in 2021, it's really going to help us a lot out west for sure.

Your next question comes from the line of majors with Susquehanna.

Go ahead.

Thanks for taking my question. Wanted to turn back to final mile. Can you talk a little bit about your contract structure with local carriers in terms of your visibility into cost inflation. And you talked about your long-term margin target and reiterated it four to eight. A couple of years ago, you talked kind of two to four in the early stages. Are we sustainably, based on how you see this business trending in that longer-term range at this point? Thank you.

Yeah, thank you for the question. I think we are trending that way. From what we're seeing with contract rates, they are going up with our contractors. The market is very tight, particularly with the amount of background checks we do for security, safety protocols. We try to hold ourselves to the highest standard. And when our contractors that way, so the costs do go up. But we're able to pass that along to our customers. They're not structured yet the way dedicated contractors are. But we have very good relationships with our customers with the top performing metrics on service all the way around. So we think we'll be able to go back to our customers if the market demands it to get that. So, yes, I think we're in the right market range. You're going to see us work to improve the margins. And we've done some of that with rates with existing customers. And we're going to continue to do that as we move forward. So, yeah, we feel comfortable with the four to eight and where we're going there.

Thank you. And your next question comes from a line of Todd Fowler with KeyBank Capital Markets.

Great. Thanks and good evening. Just for clarification, you know, with the margin targets, what you're laying out and what you're updating is really, is it fair to say, is this the normalized range and it's how you're pricing business? And should we think about that there could be cyclical factors where you could be above or below those ranges for a period of time? And then secondly, it certainly feels like with ICS and dedicated, you can be in those ranges. But in the other segments, are there any investments or changes that you need to make to be within those margin ranges, you know, within a near-term basis?

I would just say I'll start with dedicated first. And we feel very comfortable. We're not changing our pricing model, as we said in our comments. We think we've got to the scale now. With the growth that we're seeing this year, we've had a very good Q1. We've signed 380 trucks already, and we're off to a really good start. Just last week, we signed 133 trucks. So we think that we've got the scale that we're going to be able to absorb that without it impacting our margin. And then also, we just have the density of the marketplace. We've got a 360 marketplace to help us be more efficient. Gain, you saw our productivity as well increased very nicely this quarter. And all that's about efficiency and density that really allows us to work on that margin without increasing our cost to our customers.

I'll add to that, Nick, from a highway services perspective. We did adjust slightly our truck targets, but mostly just a pure reflection, as John alluded to, of a movement towards more of an asset light position where we're growing our box program without having to make the historical heavy investment of the tractor. And so that really just helped us kind of shore up where we think that will be. We are still on that journey. Our box initiative really just launched less than 18 months ago. And as we've also stated today, we've increased the investment for incremental boxes just this year. And so we're tracking along per our expectations, and we see the ability to get back to that expectation. Switching gears over to ICS, similarly, we're at the end of our heavy investment period. But again, characteristics, productivity gains, the advantages that we're seeing and capitalizing on because of the platform, where we're able to just be more efficient and make better decisions. and really eliminate waste. We see those things that reinforce the affirmation of the range that John reiterated. And so those are the things that drove us. But again, I think it's important for all of our BUs. Fundamentally, it's about return on invested capital for us. And if things change in the model, whether that be a further movement past that light in our truck model, then that could influence things down the road. But at this point, those are the targets that we think are extremely realistic and achievable.

I'll just quickly on intermodal. Certainly, I would expect that, you know, we're kind of through a noisy period of time. What related to arbitration and underlying rail cost, we have what we feel like is a very good understanding of that role in our cost and felt like this margin gap adjustment was appropriate, as well as for growth. Do I think there is the opportunity to live at the high end of it? I guess at times that's certainly possible. You know, I don't know how to predict that, but I certainly would expect to be within that zone is certainly a sustainable plan for us to continue to grow intermodal.

I would just add maybe to wrap up as an organization, I think the cyclicality will come when we have underestimated or missed our cost basis for our customers. We will continue to honor our commitments, and any time we've made a commitment to a customer based on a fixed price and that assumption changes up or down, you could see us move in the margin target range. And even outside of that, either direction but over the longer term, We think that those margin targets are appropriate based on what we know today and based on our growth plan with our customers.

And your next question comes from one of Brandon with Barclays.

Thank you, operator, and good afternoon, everyone. Thanks for taking my question. I guess, Shelly, can I follow up with you here on... ICS volumes, because I do think it was down about 1% this quarter. You know, you did get a lot of price, obviously, were profitable again, which was better than expectations. But is there anything to read through on market share competitiveness? You know, because I think it's scale and number of transactions that you really want to get towards the back half of the year. So can you talk to whether or not that was a step back this quarter?

Yeah, great question. So our overall includes happening From an LTL perspective, we really have a key customer that we have been overcoming that comp. Inside our LTL sector, we're starting to see growth, particularly in our 360 platforms, so feel confident about our plan around the LTL side. In general, if you just looked at truckload volumes, particularly in ITS, those volumes were at a 10% growth plan. But I did talk about this earlier in this call, that the very first part of bid season, although we had been educating and talking through what we believed the cost base would be to serve our customers in all of our services. That didn't directly align to the competitive pressure we were feeling from our customers in bid season. I will say we held our ground on price in really all of our segments overall. And as our customers implemented those bids in first quarter, many of those bids were not working, they were falling apart because the price was not commensurate to the cost that the carriers and the brokers were giving to customers. So as we progressed through first quarter, we started picking up volume again, very much in line with what our strategy was as an organization in total and have a lot of confidence in our scaling and gaining more market share in Q2 and beyond. not just in ICS but also in JBT. Remember, the platform is not just an ICS product. It is across our entire enterprise, how we can leverage that for our customers to really allow them to have the right cost, service, and capacity. We saw scaling inside JBT as well in the first quarter, and we will continue to gain and take market share

in both jbt and ics from a 360 platform and then certainly in the intermodal space as well hey april we have time for one more question thank you and your last question comes from the line of david vernon with bernstein go ahead hey hey guys thanks for fitting me in here um just a question for you on the contour of the um intermodal volume trends in the quarter could you talk a little bit about what the exit rate was in march and how we should be thinking about the build over the COVID disruption volumes that we saw in 2Q last year?

Well, so certainly we highlighted earlier that February was just very difficult, as you're all aware, of weather-related impacts. And that did bleed into the first part of March. We did highlight that March overall grew at 4%. But remember, last year, March probably had a little bit of COVID impact. There was some disruption in intermodal at that time. So to say that volumes in March reached pre-weather disruption levels, we're continuing to work hard to rebuild the network, get the capacity in all the markets where it needs to be, and get back on a better velocity front with our container equipment.

Hey, David, this is Brad. The only thing I'll follow up with, you know, we did provide, and Darren did provide monthly, so monthly March was up 4%. That's probably the best data point we can give you in terms of what the expectation should be in 2Q. You know, I'll just remind you, we did start to feel COVID late last March, and then comps do get a little easier, but we're not going to try to predict what our volumes will look like in Q2 because there's lot of different variables that will ultimately play into how we perform.

I think, John, you're going to close this out.

Yeah, I'll close this out. I'll start with thanks to everybody for joining us today. I'll say that I am extremely proud of this team of leaders here that not only navigated us through a very challenging 2020, but hit the ground, as we can see, running hard in the first quarter. I'm also very proud of this organization for hearing our customers' needs and presenting discussion that was very consumable. These are big changes for us to make this early in the year, but please rest assured that there's been a lot of modeling a lot of debating and a lot of conviction to making investments like these to better serve our customers. That's why we're here. And it's what we do. And I love it when we hear that and lean in and invest. I'd like to reiterate this driver availability challenge again. I think it's a meaningful part of our midterm and potentially long-term future. And I think we'll be hearing and discussing more and more about that. And then the last thing I just love seeing the results from years ago, our prioritizing the need to invest in technology to bring the company forward and really, I think, at this point, the industry forward. I think 360, as Shelly just said, is a very comprehensive approach. It started out as kind of a migration from legacy to what could it be to what you're seeing and hearing today, and we have a really good hope in that effort and investment going forward. So I hope this call has provided some clarity on the questions around margin. We spent a lot of time talking about that as appropriate. I hope we brought that to a close now and we can continue to give you helpful updates. Thanks for the time today and we'll look forward to talking to you next quarter.