Ladies and gentlemen, thank you for standing by, and welcome to J.B. Hunt's Third Quarter 2020 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. [Operator Instructions] I'd now like to hand the conference over to your speaker for today, Brad Delco, Vice President of Finance and Investor Relations. Thank you. Please go ahead.

Good morning, and thanks for joining us. Before I introduce the speakers on today's call, I'd 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 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 J.B. Hunt's Annual Report on Form 10-K and other reports and filings with the Securities and 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 Interim CFO, Chief Accounting Officer, Controller and SVP of Finance, John Kuhlow; Shelley Simpson, our Chief Commercial Officer and President of Highway Services; Nick Hobbs, President of Dedicated and Final Mile 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?

Thanks Brad. Well, we are all learning to live with the changes that have been presented by the virus. When 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 are so proud of our teams across the country for the different ways we have found to make it work. As noted, we set out our priorities to deal with the situation clearly and from the start, take care of the health and safety of our people and work hard to honor the commitments we have made to our customers. Initially, the adrenalin pushed us through, but over time, we start to see while we work 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 showed their value to us more now than ever. This reality is profit good work to find ways to begin coming back together, particularly in our corporate offices 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, our 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 us some new opportunities and 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…

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 other direct costs related to the pandemic begin to moderate during the quarter. We continue to offer paid time off for our employees that have quarantined, as well as invest heavily and caring for our employees through protective equipment and workstation enhancements as we return to office. We incurred approximately $4 million of specific costs in the quarter that were not planned prior to the pandemic for a total of $29 million year-to-date. We performed well in repositioning and redeploying our 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 and resource needs. Regarding the management of accounts receivable, we are pleased with how our teams worked with our customers to handle payment issues, and we saw customer loss reserves return 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, our 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 intentional adjustments to our approach for the sake of protecting liquidity. While still confident in our balance sheet strength and investment-grade status, we maintained higher cash positions through the third quarter as we felt it prudent given uncertainty in market liquidity. Accordingly, we ended the quarter with approximately $320 million in cash, with the resulting net debt just under $1 billion. We still target our leverage ratio at 1 times EBITDA and anticipate staying within close range of that metric. As of today, we're forecasting our full-year 2020 capital expenditures to be approximately $600 million to $625 million, 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 will now turn it over to Nick Hobbs to expand on Dedicated and Final Mile.

Thank you, John, and good morning, everyone. I want to spend my time this morning discussing the performance of both 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. DCS 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 [0:15:39.6] our operating region, performance was also driven by lower driver turnover, lower T&E expense versus the prior year, and less customer start-up cost. As we stated last quarter, we expected new contract wins to be offset by some attrition at accounts, given all the unique challenges, the current environment and the pandemic that has presented us a broad and diverse portfolio of customers. And that would ultimately keep our truck fleet account stable for the remainder of the year. While that is still the case, we are feeling a lot better about the pipeline, which I will address next. As of September 30th, 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 a reminder, we had previously expected to sell 600 to 800 trucks worth of new business this year, and I am proud to have achieved this goal a quarter early. We have seen a meaningful uptick in conversations and conversion of opportunities to sign contracts over the last three months. Customer challenges, including lack of available drivers, our insurance cost, the desire of companies to allocate capital to their core businesses, in addition to some of the flexibilities offered by professionally outsourced dedicated fleet…

Thank you, Nick, and good morning, everyone. Today, my comments will focus on our performance in Highway Services, which includes both ICS and Truck, how we continue to respond to complex challenges on behalf of our customers, and an update on our investments in the marketplace for J.B. Hunt 360, as well as 360 box. First I'm extremely proud of the progress the team in both ICS and JBT made in the quarter on many strategic and operational front, as we and the industry continue to face unique challenges. ICS was 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 encouraging is ICS' ability to capitalize on this growth despite only a 5.5% increase in operating costs in this 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, as JBT continues to evolve into a more of an asset-light service offering, with the continued rollout in investment in 360 box. As a result, third-party capacity providers have tremendous visibility to select power-only loads, calling our trailers, utilizing our 360 box trailer pool. We continue to see promising data across both ICS 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. Next, I'm also extremely encouraged by our team's ability to help customers solve for their capacity challenges by providing solutions, tailor to what fit the customers' unique needs. The marketplace for J.B. Hunt 360 provides the platform to serve whatever customer wants whether that is a J.B. Hunt asset or a third party carrier solution, committed…

Thank you, Shelley, and good morning, everyone. Today, I wanted to focus my comments on three key topics; network performance, the current demand in 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 view as the most difficult environment from a network balance and fluidity perspective I have seen during my career. Rail terminal congestion and 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. The primary theme across both of these challenges is centered around labor shortages. Our 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, which 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. At JBI, we have also experienced cost challenges related to availability of labor given the tight and extremely difficult driver market, which negatively impacted margins in the quarter. We are making progress on the driver front, but the driver shortage remains a challenge for the industry. We certainly expect some improvements in all of these areas moving forward, but we don't yet know if we can achieve even last year's velocity in the fourth quarter. During the quarter, volume demand was extremely strong. The challenges from weaker velocity began to impact us in late July and continued throughout the quarter. Volume growth in July…

Thanks Darren. And just as a reminder to all those on the call, ask for you 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, I just wanted to ask you that - the volume trends were good to hear. 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 may be the greatest in July or was it kind of equally bad throughout the quarter and no kind of meaningful improvement yet as you through the first month of this quarter?

Well I would say, and frankly in July, we had a 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 the velocity of the equipment. So July had 6% growth, as we highlighted over the previous July of 2019. As we went throughout the quarter though, velocity of the equipment and our ability to relocate empties has remained very challenging, and so far in October that challenge continues.

And then Shelley, super quick follow-up for you just on the ICS, 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 the jump ball scenario we believe could be something different and we are pushing inside 360 to deliver that on behalf of our customers. Having said that, we have more confidence and 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 next year second half.

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

So maybe thinking specifically about some of the cost, the elevated cost on the Intermodal side in the third quarter, it doesn't sound like they all come out of 4Q. But can you give us maybe a little bit of a 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 is intact, how quickly can you kind of recover towards those levels?

Yes, as we get into the bid cycle, we're talking about that very challenge with our customers. I think we've - 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 as we move into 2021 clearly, I would expect some congestion challenges 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.

And then the quick follow-up is just on the loads. When we think about the fourth quarter, what it sounds like you're saying is fleets 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 from where you were in 3Q. So 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 be beneficial during Q4. And so, it's difficult to think that we would have any kind of material benefit coming in Q4.

Your next question comes from the line of Amit Mehrotra with Deutsche Bank.

Darren, I very much appreciate the comment on pricing, just now. I was hoping if you can just remind us of the cadence of how much of the - I assume in the third quarter, none of the book of business in Intermodal reflected pricing that is reflective of what's happening in truck? Or if you could talk to us - you said 2Q, 3Q, the bulk of the business, but is the majority - is it kind of equally through the fourth quarter? You get 20% of the book repriced and could you just help us with that cadence? And then I appreciate - I'm sure the shippers appreciated kind of J.B. Hunt's standing by them with respect to honoring contract commitments. But that kind of implies that both shippers that apply to J.B. Hunt workload which kind of fell to the floor? And if you could just talk about that dynamic because it seems like there are certain carriers out there, that will be visiting kind of what minimum contract volumes were? When the equation was the other way - and the pricing leverage was in the hands of shippers? If you can just talk about kind of the exercise you guys did there to make sure that there wasn't necessarily money that was being left on the table from a pricing perspective in the third quarter?

Well, from an implementation standpoint, I think what you're hearing is we do want to engage with customers and trying to rethink how we typically do this. It's - the jump ball is difficult, and in fast changing times around us, it really gets amplified in terms of how harsh it can be on us. And probably, maybe some customers feel the same way if it's move in the other direction. But historically, we would implement new prices on the smallest percentage of our business during Q4. So call it 10% to 15% of the business. It's a new price on it. Implemented and running through the system during the quarter. Q1 would be more like 25% to 30%, 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 of the first three of the year and more like 10% in Q4 is just a good rule of thumb. I don't have - 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 - our willingness to honor those commitments relative to this demand environment compared to a customer's willingness to honor a commitment maybe when times are changing. I think we're - we felt confident that we needed to do a minimum expectation, because at the end of the day well, our commitment to the customer - we would like for the customer to have an equal commitment to us, but they're are the customer. I mean we're going to have to - we have to earn their business every day. We have to continue to provide capacity and serve those customers in the way that 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 the customers relevant to that, and I'll let her comment at this point.

Thank you, Darren. 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 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, so that they could plan for it, do appropriate budgeting, and I think that was prudent on our part and our customers part. And in the end, we were able to grow with our customers at appropriate margins. We've 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 swung twice now in this five-year period. We believe sticking to our commitments and walking our customers through it, we are so focused right now on making sure we help our customers through this very difficult time. That's why we're unleashing every lever we have internally in every piece of capacity that we have and making sure that we don't just fulfill our commitments, but also help them through this very difficult time.

Right and this debt?

I was going to jump in and say, we have the same customers and dedicated a lot of them that they haven’t got their 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 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.

And just one quick follow-up if I could, just going back to what Darren said, in terms of the pricing on the book of business, the puts and takes as you enter the fourth quarter, you have some of the pricing embedded in the book of business. Obviously, the fluidity is still an issue, COVID is still an issue. I assume it gets better. Do margins come down - sorry, do the OR come down as you move 3Q to 4Q? Just talk to us about the puts and takes as you move from 3Q to 4Q?

Yes, I think that's sort of the question 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 some really significant change in our velocity, it's hard for me to see a pathway towards any real material change. Certainly, we think that 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.

Your next question is from Scott Group with Wolfe Research.

So, Darren, I don't know if you have any thoughts on fourth quarter volumes, but if you do that would be great. And then just, as I think about third quarter, I look at IANA volumes that were up 10%. I see BNS intermodal train speeds were up, [indiscernible] were flat. Is this is a rail issue or is there a reason why you're lagging the broader industry in Intermodal right now?

Well, I understand that BNS train speed is - 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, and that has been a significant impact on our ability to drive a volume growth. Now, do I think that the IANA data shows significant growth? Yes, and some of that is in the LTL and parcel. So that business today moves - in the past, you would see that more in trailers. Today, a lot of that business has converted to 53-foot containers. So the IANA data doesn't really break out LTL and parcel and container moves, compared to the domestic Intermodal. So I feel like the industry was able to grow faster than J.B. 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 what we've highlighted. And I would expect to get back to where we are growing at a similar pace to the industry in domestic Intermodal, as it relates to all the parcel and LTL growth that the railroads are experiencing. I'm going to leave it to you guys to figure out better ways to see that. Scott, we're turning down. I mentioned in my prepared comments that we think we could have handled 20,000 more loads in the quarter, and that's a - I think that's a soft conservative estimate. We are turning down thousands of loads per week. In some cases, we're turning down Eastern Network growth opportunities, because we have to struggle to find the capacity to serve and honor these commitments we've made. And we feel strongly that over the long term that will absolutely benefit us. It certainly hurt us in the quarter.

And then if I can just ask one for Shelley. So I think in 2017, you were the - I think, the first one that prepared the market for double-digit rate increases in 2018. 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 the other?

So we did host a conference call with our customers. It's actually a video call. Had about 70% to 80% of our revenue, actually on that call. And we just had open discussion with our business segment presidents along with John Roberts. And really just wanted to give our customers an update in a view of what's happening in the market from a dislocation perspective and a labor challenge issue. We 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 just aren't prepared already to have that discussion. We really want to wait through more of peak season and past the election for us to really come to a better consensus on what we believe pricing will do. But having said that, Scott, 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 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 would be up; it could be up significantly or could be more modest. We'll just wait to see what happens, and I would expect to talk to them towards the end of the year.

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

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 those new business wins coming on board going forward? And then from a start-up cost perspective, what we should be expecting? I'm just curious if margins sequentially should be coming under some pressure because of start-up costs or if there is enough operating leverage from growth to offset that?

Yes. Thanks, Justin. The timing of those, you'll see some of those start 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 is 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 on it's typically 90 days to 120 days till you start seeing those trucks on the ground. So anyway, we feel good about that start-up cost. We've got a larger base to cover a lot of that cost. And so you'll see some 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 cost.

So just to be clear, it sounds like margins in Dedicated in the fourth quarter could be down a little bit sequentially versus the third quarter. Is that your expectation?

We haven't provided guidance on margins. But I think like Nick suggested, maybe a little bit of startup costs, but there is still pretty good momentum in Dedicated, and guys are executing. So we'll see winter weather can always play a role in cost, but no specific guidance for Dedicated margins other than what we say is long term being 11% to 13%.

And then, maybe shifting to ICS. Shelley, I was wondering how you're thinking about the level of tech spend and 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 months to 18 months?

So from an investment perspective, we really talked about investing in three areas; in our people; in our technology; and in scaling the business. And so, you saw some benefit actually inside the third quarter that's buried in there from some of the efficiencies that we're seeing from our operations group. From 360, 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 base is to stay relatively the same, maybe up just slightly. But if you were to look through this year, we've done a great job really managing our count of people in a very constrained environment, I might add, but our platform has really produced great results for us. I spoke of that earlier in my prepared comments that the platform has reached records and continuing to reach records inside our 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 cost as a percent of revenue in both labor and technology to improve as we progress throughout the year.

Your next question is from Ravi Shanker with Morgan Stanley.

Shelley, on the July call, you were the first to kind of flag that gross margins were running at, I think what you call, an unacceptable rate. It seems like gross margins were pretty tough for the entire quarter, but can you just talk about how that trended through 3Q and how that's running in October so far?

Yes, 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 looked into July, that was our worst gross margin performance, and we continued to improve as the quarter progressed. And as we've moved here into October, I think our customers have responded well. There is a lot of business that is moving, that is unplanned, that really published pricing would not be appropriate. You saw some of that in our percent of business that's actually in the spot market. But I would say margins in September and October are better than they were in both July and August.

And maybe as a follow up on the Intermodal side, John, can you - 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 into 2021?

I'm going to have Darren answer that.

Yes. Well, do I - certainly, we're working with our customers across the board to 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 we've honored the commitments, they still have more demand. And we're talking as an organization about how we can drive value into the organization and to the customer with the capacity we can find. As it relates to the railroads, I just think - I think all of the railroads want to have ongoing dialog 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 occurred over the course of the 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 terminals. The long-term value 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 and us together, in order to drive more productivity through those terminals. And I am 100% convinced that 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 I would be surprised if that really changed in any material way.

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

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 has?

Yes, this is John. So we've all been in this business for quite some time, and I have witnessed 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 change is, 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 niche 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 life cycle of those equipments and those contracts that we need to arrange with railroad providers and other carriers, it's out of sync with the way we do business with our customers. And we studied - in fact, Darren and I just had a really good conversation about this last week that historically, there is no real value to the customer in that constant annual event that really takes a lot of time. Does it 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 were providing, I think everybody will have better understanding for our networks. We'd have appreciation for how to buy the equipment. I think it probably do good for our labor and our drivers, our utilization, all the things that go into really what we learn in Dedicated, which is, an engineer would answer not, 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 arrange these contracts to where, particularly our larger shippers who need this year in and year out, frankly, could be set up to advantage both us, our providers and our customers, and 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 changing the way we do business in this one way world to a more thoughtful and frankly logical approach. And I'm going to be pushing forward.

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

Most likely, but you got to start somewhere.

Yes. And, I'm...

If I...

Go ahead please, Shelley.

Just wanted to add to that, our customers are really asking us to grow across all of our segments. That's something we're seeing great success in, and we believe that that will be for longer-term from a growth perspective. And so when we think about how we plan, we don't just plan with ourselves, we also plan with the railroad providers. And the more information we can give them and the more understanding we can give 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 bid is very difficult for us to walk our railroad providers. Certainly, what we need from a driver perspective it’s like we're short-term planning in a tactical environment versus really focusing on a better long-term strategic answer.

No. That makes all the sense of the world, and let me throw really one quick one. And you mentioned growing the trailers on Highway Services, is this because you need them with catch-up business, or is there something changing in how the supply chain is working that requires you to own more trailers going forward?

Well, one of the things that we've heard from our customers as we have introduced 360 Marketplace is, 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 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 is in the small carrier community with 10 or less trucks. So moving into the Marketplace now, we've actually blended both the drop-trailer environment with the live-load environment, creating one network instead of two, and our customers are loving that product. So we've 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 move. 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 of company truck and independent contractors, and even brokering some of that business all sitting inside the platform. So I think the market is large and the ability to create a better, more efficient network exists significantly, and putting 360 box or our drop trailers in that network just makes sense from a capacity perspective for our customers.

Your next question comes from Todd Fowler with KeyBanc Capital Markets.

I understand the reluctance maybe to give some near-term guidance on Dedicated margins, but Nick, it sounds like that in your comments you said that margin should kind of get back to the 11% to 13% range longer term. But 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 travel and entertainment isn't what it was historically? So just give a thought on why you can't continue to run at this range even if you do see some of the expenses normalize longer term?

Yes, I think the way we look at our deals we price 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, the customer has their own trailers, each deal is priced differently. And so I'm just trying to look at the long range, and we don't know which mix of heavy assets, light assets are going to come in. So we think long term that's still the guidance that we're very comfortable with based on deals that we see in the pipeline and so forth. Just based on pure ROIC.

Yes, Todd. Hi, this is Brad. And maybe I have to say it a little bit - to say that a little bit differently is, I think regardless of what happens over time, the way that Dedicated will approach pricing deals is always focusing on return on invested capital. And to the extent 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, to the extent there is changes in margin that could be a big driver of that change. But I think, more importantly, what will not change is how we initially approach those deals, which is the focus on those returns.

And so, I think what's may be difficult for us to see is a little bit of the mix of the deals that are coming through the asset intensity versus the asset light, and that's just something that - it's difficult to kind of tease out of the numbers the way they're reported it sounds like. And just for my follow-up Nick, I guess maybe sticking with you, 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? As you think about that business continuing to grow, is that something that is all organic at this point and require just more infrastructure or is that something that you'd look to do more acquisitions and how do we think about the cost that would be associated with facilitating what looks like in some pretty decent growth in that segment?

Yes, I would just say the existing business that we're running today, not a lot of 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 home deliveries. So we don't see any big capital expense going in on infrastructure, anything like that. And so, we feel good about continued growth. Acquisitions, we always look, but as those come in, the right deals approaches we'll look at them. But there is a big runway just on organic growth right now from what we're seeing with five or six of our largest customers. We're just a small percentage of their business, and they're rolling out their networks, and we're kind of riding along on their coattails.

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. Just - the evolution - if you guys were able to move to what do 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 it 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 in Intermodal pricing that you think would have a win-win sort of set up for both you and your customers? Thank you.

Yes, thanks Bascome. I’ll start and then ask Shelley or Darren or anybody else to come in. I think you hit on a lot of ideas that we have explored and had - have had success with in the past with different customers. One of the things we implemented some time ago in Dedicated was kind of an index-based pricing strategy, where we have a way to recognize labor cost and other inflationary pressures that are visible and easy to process. And recognize and apply to our pricing in a way that doesn't require all the activity we present in a bid work out, and we spend that time working on the business. We have a program, we call Customer Value Delivery, where we identify metrics, key performance indicators that keep us on track with service and performance, all those things can be tied together so that the energy is on the service, not the one way as we call it jump ball pricing. I think volume and different levels of either lane or total commitment can be helpful to - as Shelley said, provide the really needed guidance that we would want to present, i.e. to our rail providers to say hey, this is what we've got on the book. And if you look at Nick's business - and Nick, what's our retention now? It still 90.

It's 97% and some change.

High 90s, so we know what's happening in that business year in and year out, and can really plan for that. And I think the reason that we have such high retention is because we do a really good job for the customer while else would they stay with us. And so that's - the idea here is can we apply some of that logic. We've 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've frankly made a living prioritizing that need. Let me see if Shelley or Darren 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, in particular 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 bill 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 on all of our business that does not leave a predictable budget to a customer, and I don't think that's a good business model. However, I believe in the bid process that the business that should be in there would be business that is static and regular and that business can be published and predicted for a customer, that business also could go into a longer-term agreement. But there is a lot of business that moves in a more dynamic nature, and that business is still and old, trying to go up against a published price that really is not commensurate to the market at 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 lanes and loads that are unpredictable. And we can't get into a repeating pattern that business really needs to match up 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 number that we've 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, we'll do one more quick question before we hang it up.

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

Yes, thanks everyone. Nick, I just want to talk a little bit about the FMS segment, and we've seen nice growth there, a slight turn in profitability, but obviously not where you want it? What's the biggest obstacle of getting the margin either in line with Dedicated or where you want them? Because I know they're not going to be in line with Dedicated, because it's more asset light, but how do you get from here to there?

Yes it's a very, very fragmented industry, and so I try to look at it and take the same approach in Dedicated. You gave 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 of executing, being best-in-class on 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 are 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's a lot of small - the barriers to entry right now is pretty low. But we think with a lot of our background checks, safety and security and things that we do. We're going to set the bar higher to come into the industry, and then we'll be able to get a higher price on our product and a better return.

And are you seeing much consolidation yet in the industry or is it those fragmented than levers?

No, there is some consolidation coming in. There is 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.

Hi, thanks everybody for the time. We will be in touch with you during the quarter in a couple conferences, or if not we'll talk to you next quarter. Thank you.

Thanks. This does conclude today's conference call. You may now disconnect.