Ladies and gentlemen, thank you for standing by, and welcome to the J.B. Hunt Fourth Quarter 2020 Earnings Conference 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.

Thanks, Catherine, and good afternoon, everyone, and thanks for joining us. 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 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 CFO, John Kuhlow; Shelley Simpson, our Chief Commercial Officer and EVP of People and Human Resources; Nick Hobbs, our Chief Operating Officer and President of Contract Services; Darren Field, our President of Intermodal; and Brad Hicks, our President of Highway Services. At this time, I would like to turn the call to our CEO, Mr. John Roberts, for some opening comments.

Thank you, Brad. Well, 2020, we bid you farewell and good riddance. All kidding aside, we are thankful to enter 2021 to start a new chapter and to continue our intended journey. 2020 taught us many lessons, not the least of which is that we have a community of employees, drivers, and providers that are more than capable of dealing with change in crisis. The past year also revealed the essential nature of the services we provide as we experienced challenging and dynamic but ever-present demand through 2020. We affirmed again that all of the businesses we have committed to and invested in complement each other and create a very differentiated model for our customers. We look ahead to 2021 and beyond with confidence. During the fourth quarter, we experienced some very traditional demand cycles from customers across all services consistent with holiday activities. These needs were coupled with unusual inventory restocking and import challenges, particularly on the West Coast. Our fleet in the highway and contract businesses presented reliable capacity, held up well, and we discovered new ways to integrate our assets across customers and accounts.

Thank you, John, and good afternoon to those joining us on the call. I apologize for the technical difficulties. I will provide a couple of comments on the fourth quarter from a consolidated perspective and then let the business units cover their segments. Overall, we are pleased with the revenue growth this quarter with notable achievements in the Highway division as well as dedicated. Cost pressures in the fourth quarter were primarily related to higher costs across network and operations due to congestion and labor tightness from increased freight demand, higher driver costs to attract and retain drivers in a capacity-constrained environment, and we also incurred higher group medical costs in the quarter. A quick update on COVID costs: We continue to offer paid time off to our employees who are quarantined due to COVID concerns, and we incurred approximately $5 million of costs in the quarter designated as specific to COVID for a total of approximately $34 million year-to-date. While I believe our facility work is complete, we expect COVID PTO costs to continue given the current level of case counts and will likely be a headwind for us over the near term. We continue to closely monitor our working capital metrics and changing credit landscape as we enter the new year but are encouraged as we experienced what I would consider to be somewhat of a normal fourth quarter concerning customer collections. We resumed stock buybacks early in the fourth quarter but found less opportunity in the back half of the quarter and then fell into our blackout period. We anticipate continuing our normal buyback approach in 2021.

Thank you, John, and good afternoon. My commercial update this afternoon will focus on general market trends, our expectations on how this will impact our organization and our customers in 2021, and how J.B. Hunt's investment in an innovative culture continues to drive our ability to help us solve for our customers' supply chain needs. It is with little doubt that 2020 was one of the most challenging and dynamic freight markets in my career. The pandemic created a tremendous amount of uncertainty that was felt across the global supply chain. The massive shift from a services to a goods economy and the inability for supply chains to keep up with demand have put inventory levels in a precarious position that will take time to rebuild. Import levels have surged and congestion and dwell time at ports, rail terminals, and customer warehouses are also contributing to the inefficient use of available capacity. Combined with the challenges that this pandemic has had directly on our industry heroes are drivers. The supply of qualified and trained driving professionals have been impacted by capacity limitations at driving schools, quarantine protocols, retirements, in addition to pressure as a result of escalating insurance costs in the recent drug and alcohol clearinghouse. Unfortunately, these challenges have put inflationary cost pressures on us and many businesses and, as the market is anticipating will put further inflationary pressure on transportation rates in 2021.

Thank you, Shelley, and good afternoon. I'd like to spend a few minutes discussing the performance of both Dedicated and Final Mile and also shed some light on our pipeline and some high-level views on our outlook. First, on Dedicated results. Dedicated had another solid quarter that delivered the highest fourth quarter revenue and operating income for our segment in our history. And we have previously discussed the benefits of our diversified customer base, and the flexibility of our operations has allowed us to serve with customers who needed while scaling back with customers who have been negatively impacted by the current state of the economy. Demand for our professional outsourced private fleet solution continues to build as customers and potential customers are faced with rising insurance costs, greater challenges recruiting and retaining a professional driving workforce, and the realization that the capital tied up in their own fleet does not provide them the flexibility that we have been able to deliver for our customers. We ended 2020 selling 1,331 trucks in DCS, which compares to 890 trucks sold year-to-date through the end of September quarter. As you can see in our fourth-quarter stats, we added 192 trucks sequentially, which did impact the quarter in terms of start-up costs, and we would expect some pages of fleet growth and start-up costs returning to the business for the near to mid-term. Also, we expect the industry has and will continue to face driver wage pressure, and we will be keeping a close eye on it. We monitor the performance of our fleet and believe we have some of the best wages and professional drivers in the industry who enjoy the consistency of working in a dedicated environment. Finally, we do expect to return to the previously stated range of selling 800 to 1,000 trucks a year. On Final Mile Services, Final Mile was able to deliver an all-time record revenue of $223 or $213 million or 17% greater than the previous record set last quarter. This growth was driven primarily by new contracted business throughout 2020 and supplemented by acquisitions. In fact, we track our contracted sales progress very similar to DCS, and I was proud of the team's performance in selling $84 million of new business and Final Mile throughout 2020. We are continuing to see strength and robust opportunities for growth across our portfolio and are excited about further building out our exercise equipment channel with the most recent acquisition of mass movement. Going forward, we will continue to make investments in our service and product offering to ensure the highest standards of service, safety, and satisfaction are met in this critical and rapidly growing part of the supply chain. We believe these investments are critical as we deliver goods inside the home of our customers' customers. As a result of these investments and our desire to provide a differentiated service product, we'll be focusing on appropriate returns in our business to support these investments. Also, while still early in the new role as COO, I thought I would share some high-level thoughts on how I think we can leverage our platform to manage our assets more efficiently across the enterprise. If I learned one thing in DCS over the years, it's the benefit of having density in markets and what flexibility that provides our customers and our own operations. I see tremendous opportunity for us to leverage the platform to drive greater efficiencies across all assets across the enterprise and look forward to providing future updates in the near future. That concludes my remarks, and so I'll turn it over to Darren now.

Thank you, Nick. Happy New Year, everyone. The quarter presented similar challenges for our Intermodal network fluidity and balance that were presented in the third quarter, similar to what we communicated that we expected would occur on our last call. This afternoon, my comments will focus on network fluidity and balance, the demand pricing environment, and then I want to talk about 2021 and our focus for this year. First, our volumes were minus 2% in October, flat in November, and plus 6% in December. Rail provider velocity challenges and terminal congestion weighed heavy on our container fleet productivity during the quarter. While we weren't able to move all the volume available to us, we were able to accomplish one of our top priorities that we have communicated since the start of the pandemic, and that is honoring our capacity commitments to our customers. Throughout the quarter, we utilized a much higher percentage of the outsourced dray capacity in an effort to drive productivity through the network. This included efforts to pull containers from the rail terminals to assist in the congestion challenges. We also rerouted significant volume over Phoenix, Arizona, and Stockton, California that would have normally moved from a Southern California origin rail terminal. These higher costs of the drayage operation are reflected in the results of the quarter. Our customers participated with incremental revenue to help cover those costs, but that revenue fell short of providing the same margin as what we would have seen without that activity. We have commented on the labor challenges we are all facing during the pandemic on the previous earnings calls. California was particularly difficult during the quarter. We certainly believe the rail network faced some labor challenges at terminals and at locations where we believe our rail providers expect and will deliver better productivity in the future, certainly better than what we experienced in the quarter. I make these comments primarily to highlight that we faced conditions in the fourth quarter that we can address and improve as we move out of the pandemic. So far in January, volume demand remains extremely strong, and the cost to serve our customers remains elevated. Rail velocity and congestion has improved for now, but labor challenges and increased demand will continue to impact rail velocity as the year goes on. We fully expect pricing in this bid cycle will cover the cost increases that we are experiencing that are more structural in nature in our network. We believe 2021 will present opportunities for us to make progress on the margin front. Costs on all fronts, dray, rail, and productivity have all come at us at a fast pace in 2020, and this New Year presents our opportunity to price those costs into our business. We must find growth opportunities that complement our network and provide balanced benefits while also increasing core pricing that reflects the current cost to serve our market. The very early and small percentage of pricing results achieved thus far are encouraging. We are confident that our customers want to grow with us at prices that support investment in capacity expansion. We have ordered over 6,000 containers that will be manufactured in 2021, and we have flexibility on how and when those containers will be rolled out. We have strong confidence in the ability of our network to consume growth, particularly in the East. We also recognize that we still have significant cost and velocity challenges in Southern California, and simply adding containers is not the only solution required to grow capacity in that key market. BNSF and J.B. Hunt are working together to find better capacity solutions for our customers, and our prices will reflect those efforts. Importantly, as we progress through bid season, we do have opportunities to increase our container order if market dynamics support the need for additional capacity. Throughout 2020, our employees have been the backbone of our conviction to honor the commitments we made to our customers. I am so thankful to our employee base for that conviction, and I believe we will translate that culture into benefits for our financial performance and our returns in 2021. That completes my prepared comments, so now I will turn it over to Brad Hicks.

Thank you, Darren, and good afternoon. I'd like to share how honored I am to be in this new role and just how much excitement there is in the organization for our Highway Services businesses, which includes both Integrated Capacity Solutions, or ICS, and trucks. My comments this afternoon will focus on the performance of both segments and, as Shelley alluded to, how we were able to solve for yes in a very dynamic environment for our customers and deliver the capacity of it in the quarter. ICS was able to deliver revenue of $587 million or 56% growth over the prior year, which was also 36% growth sequentially from the third quarter. As previous calls have referenced, our investments in technology and people have been around enabling us to scale the business, and we were able to see a lens of this dynamic play out in the quarter. As we talked about scaling the business, our focus has been on being able to grow revenue and gross profit at a disproportionate rate to operating costs. We were able to deliver $31 million of sequential gross profit improvement and a corresponding $24 million increase in operating income, which translates into a 77% incremental margin on every dollar of gross profit. Speaking of which, ICS did deliver positive $5.6 million of operating income in the quarter. And while we have shared our expectations for returning to profitability by the second half of '21, we are going to stand by that view as there were just a lot of unique dynamics in play in the fourth quarter, and we expect some seasonal effects plus continued investment to keep us on track for delivering on that expectation. In JBT or truck, the segment was able to deliver 50% growth in fourth quarter revenue year-over-year to $140 million. This is the highest revenue achieved in this segment since the third quarter of '08, as Shelley had mentioned in her opening remarks, and we have approximately 70% fewer company-owned trucks versus that time period. As you're beginning to see, the power of the platform allows both ICS and JBT to scale with and for our customers to solve for their needs. And in the fourth quarter, that need was capacity. As JBT has shifted to more of an asset-light model, we have an ability to provide trailing capacity to customers that may be hauled by the J.B. Hunt owned equipment, our independent contractors, or power-only capacity sourced through the platform. This is our 360 offering. This gives us greater options to choose what is best for the customer who is looking for a drop and hook capacity solution. And by best, I mean the most efficient option that eliminates waste in the system. To close out my comments, I would just like to reiterate how Highway Services powered by the platform was able to meet the needs of our customers in the quarter by delivering flexible capacity options. We continue to see strong activity between customers and capacity in our platform, which will continue to support investments into our Highway Services solutions whether it's in the marketplace or within the 360 program. I'd like to turn it back over to Brad Delco.

Thanks Brad. And Catherine, at this point, we're ready for questions. I just like to remind the audience, please given the length of the folks in the queue, one question one follow-up. Thank you.

And your first question comes from the line of Chris Wetherbee with Citibank.

Maybe I can start on John's sort of opening comments around Intermodal margins. I was just wondering if you could kind of give a little bit more color. It sounds like '21 is a year where you have the opportunity to see some margin expansion. I guess I'm curious around the timing of your comments about sort of maybe questioning whether the 11% to 13% is the right number going forward. Can you just give us a little bit more color on the thought process? And what you need to see to sort of make a decision on that?

So Chris, this is Darren. I’ll begin with that. When John mentioned those points, we recognize that the performance of our Intermodal margin over the past few years would be a topic of discussion. Instead of specifying when in 2021 we might publicly announce any changes, we wanted to emphasize that we believe 2021 is a critical year for progress. We fully acknowledge that the pricing environment and surrounding factors suggest this is the right moment to address it. Additionally, John pointed out that the comments about the Intermodal margin are not isolated, as he also referenced insights regarding the enterprise and other business units. That's why John wanted to discuss this.

And Chris, I might note that even if you look at the last five years, we have three years of unusual activity between our relationship with the railroads and also a pandemic. So we do believe 2021 will be a more settled year when it comes to our margin targets. And certainly, that's why we have split up our conversation around new equipment on behalf of our customers. We want to put the initial order in, and then we're going to work through with each customer through the bid process to determine if the returns will be appropriate for us to get inside that range.

Okay. Okay. That's helpful. I appreciate it. And then maybe a follow-up, speaking on Intermodal, can you talk a little bit about what the rate negotiations are looking like through the fourth quarter in terms of magnitude for '21? Any color you can give about what you think you might be able to achieve from a rate growth perspective in Intermodal would be helpful?

Sure. I think on the third quarter call, I think I said high single digits to double digits. And I would say that still remains to be a pretty good placeholder for pricing in general for our network. There are certainly key markets where it's substantially higher or it's absolutely in the double-digit area. West Coast capacity costs is a different challenge for us, frankly, than elements of, say, our Eastern network and what's going on there. When I look at the network and think about how will pricing translate in the bid cycle, a lot still has to be seen. We did say high single to low double digits. And I think that remains to be a pretty good placeholder. But certainly, there are pockets of our network where I think it will be higher than that.

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

Darren, it seems like there's going to be very little reprieve in the next couple of weeks and months. The typical Chinese New Year slowdown post-peak season just based on ship schedules and activity, it seems like the port is going to be running hard the next couple of months. What's your confidence level in the rail's ability to continue to improve this imbalance in fluidity to actually see a significant change in your ability to meet the volumes that are out there in the first quarter and into the second quarter without any type of February slowdown?

I am confident in our communication with our rail provider out West and our joint efforts to enhance capacity in that region. I believe our organization is well-equipped to handle capacity challenges. While there may be a slight decrease in parcel demand and other effects on the rail network, it seems that full truckload Intermodal is gaining traction in our efforts to increase capacity westward. Consequently, I anticipate we will be in a stronger position in the first quarter compared to our outlook at the beginning of the fourth quarter regarding moving empties out West. However, this does not imply we will meet all customer demands for movement. We have faced challenges with congestion and slow velocity, but I believe the first quarter of 2021 offers the possibility of improved velocity compared to what we encountered in Q4.

And then just as a direct follow-up to that, you'd mentioned kind of briefly the opportunity in the East Coast. Are you seeing significant freight shift to the East Coast, just given the challenges in the West Coast? And is the congestion in the imbalances in the eastern part of your network similar to what's been going on in the West Coast?

So there was meaningful opportunity for us in the Eastern network during the fourth quarter that we had to delay implementing Intermodally. We serve those customers with our highway solutions, but we were delaying implementing some new business in the East during the fourth quarter while our equipment was consumed in serving some customers on the West Coast. As we go through the first quarter, we have already experienced growth in the East Coast and feel confident that, that will continue to be available to us. That growth is not tied to customers rerouting to different imports. That's highway conversion of business that has been available to us for some time now through the back half of last year. We are aware of some customers that are talking about altering their import strategy. We'll continue to look at what their plans are, and we'll provide solutions as those opportunities present themselves. We certainly believe the Eastern network moves more fluidly than what we had experienced in the West, certainly in the fourth quarter, but we fully expect the whole network to see gradual improvements as '21 continues.

I might make a note on that as well, just the growth in the Eastern network. If you look at our sales activity, across the enterprise, we are up year-over-year and it accelerated into the fourth quarter, so our customers asking us to solve for their needs in total. And then our benefits of seeing the data in our platform now, we've recognized the number of shipments that actually should or could be moving Intermodal that gives us even more confidence. We saw that number grow substantially throughout the year as well. So the combination of more activity along with what we see in the platform that we actually moved over the highway that should be moving Intermodal, those two pieces really help us in our confidence in our plan in the Eastern network.

Your next question comes from the line of Brian Ossenbeck with JPMorgan.

Maybe just a follow-up for you, Shelly, on that last commentary about where you can see that should be moving on the network. In the past, you said it's around 8 million to 10 million, maybe as high as 11 million loads. Can you just talk about the progress you think you've made in getting some of that conversion? It sounds like you have started to see some in the East. And do you think the service challenges, as they've appeared, is that really delayed or impaired the opportunity you feel there is to convert some of the freight off highway?

Brian, so similar to what Darren talked about, which is the opportunity for us to work across the enterprise. Here coming into the fourth quarter, we certainly felt pressure from our customers from unplanned activity but also just the level of demand not matching the available capacity there was in the market, and we did a great job across the Company solving for our customers. And so think more of what do our customers need, and then we applied what was the best answer based on the capacity that we could source at their price and service that the customer really could work with. We still think there is a huge opportunity in intermodal. I go back to what we see in the platform. It is a significant number of shipments that are moving on the highway that really should convert into Intermodal with more fluidity and our ability to really get the network more in motion. But our objective, Brian, is really to own that business. If you look across our entire organization, whether it's one pallet to everything a customer moves, we now can handle that in North America. And so we're trying to solve for our customers, recognizing there are constraints. But certainly, our mission statement to create the most efficient transportation network in North America, the most efficient is to move into Intermodal. And so we are intense working closely with our customers to do just that.

Okay. Maybe a follow-up on the ICS performance in the quarter, it was clearly a very strong sequentially year-over-year, having a look at it votes per employee were way up and it looks like there's some mixed impact as well. But I think the comments were that you're still sticking with the second half productivity or the profitability trend rather. So maybe you can just bridge the difference between what happened in this quarter, which was quite strong? And what do you think is maybe one-time? Or is going to evolve from here a little bit more seasonally, just that you're going to still kind of hit the same target that you were before after such a strong result?

Yes. Thank you, Brian. The comment was that we would still maintain the goal of getting into profitability in the second half of this year. And there's no question that with the profits generated in the fourth quarter that we anticipated that question. But the reality is that the fourth quarter of '20 really did have some pretty abnormal things that drove incremental volume our way. As Shelly just mentioned, our ability to say yes and find that answer for our customers. But each and every one of them are now reevaluating what their network and what their makeup of carrier mix is going to be for 2021. So we still have work to do on our tech investments that will be somewhat of a drag for us in the first half as we close out the investment component. And so as we think about that, there's just a little bit of unusual in this in Q4 that makes it very hard to predict as we move into 2021. What I would say is that we are incredibly satisfied with how the platform performs with that rapid growth and that rapid pressure of customer needs. And so it does tell us that we're on the right track, and we have a high confidence level to reiterate our previous expectations. Shelly, I don't know if you want to add anything to that?

I would just say, Brian that I hope that we can convert out of ICS into our more efficient ways to do business inside the organization. That is a huge focus for us. We are working with our customers. We recognize that there were unplanned activities and costs that don't necessarily make for an efficient way to move goods over the long term. Having said that, we are still very focused on taking market share and making sure that we continue to grow. Our customers are on board, and we did gain very favorable marks from our customers throughout the quarter and ending the year with some of our highest ratings from customers. So our ability to solve was excellent. Now we're trying to solve for overall cost for our customers. And I think that's some of the things that Brad is referencing. We want to get some of this business converted into Intermodal. We know the Eastern network is an easy place for us to start. And then we want to continue to work on where the platform can create benefit for our customers so we can start to grow in those new channels.

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

Yes, and congratulations on the strong results in brokerage and ICS. It's impressive to see profitability achieved ahead of schedule. I have a question regarding the longer-term perspective that John mentioned earlier. You indicated that the margin outlook for Intermodal might decrease. What can you share about the volume outlook? Although you don't have a formal target, it has been lower in the past couple of years compared to your historical figures. It appears that there is a favorable setup for Intermodal volume growth in 2021, but how should we approach the multiyear outlook for Intermodal volume in comparison to what we've experienced recently or in previous years?

Tom, this is Brad Delco. I will respond to that, and I'll let Darren or anyone else add to it. Historically, our message has been that we believe the Intermodal market still has characteristics for long-term growth. We expect Intermodal volumes to exceed the growth of the general transportation industry. Given our scale, size, and ability to meet our customers' needs, we anticipate being able to grow faster than the Intermodal industry. That is our long-term perspective. Clearly, when there are capacity constraints in certain areas, our performance may vary, but that has been our consistent message. I just want to ensure that point is clear for the audience. I will pass it over to Darren to add anything else.

From a volume perspective, I understand the emphasis on the question regarding the fourth quarter. There was significantly more volume in the market than we could handle due to velocity challenges. However, we remain confident, and as Shelley mentioned, we are acquiring customers in Intermodal at the right time when we have capacity available. This does not mean we're reallocating capacity from existing commitments. As we enter 2021, we mentioned that we have ordered more containers and expect pricing to adjust accordingly. If our rail system's velocity is indeed more structurally slower than it was four or five years ago, pricing will need to reflect that when we consider investments in long-term assets. This is a major focus for us, and we highlighted that we're purchasing equipment this year because we believe in customer demand for that service. As Brad mentioned, we anticipate Intermodal volumes to grow at least as strongly as the industry overall. The second half of last year posed challenges for us, particularly regarding network constraints and capacity demands on the West Coast. Moving forward, we will need to grow where capacity exists and look to improve operations in markets with limited capacity, especially to enhance efficiency in the West. We are having discussions with a rail provider there, and we believe we can achieve greater efficiency in the coming years in that region.

It seems like you're indicating that you're not evaluating the volume perspective for Intermodal, but you are assessing the margin perspective. What about examining historical...

No, we want to grow. We're going to increase volume in 2021 and expand margin. We need to achieve both, and the market will support that.

Right. What my follow-up would just be, historically, I think, 100 basis points, maybe 130 is a pretty good margin improvement year for Intermodal. It does seem like there's a stronger formula for Intermodal margin performance in 2021. Do you think you have a chance to do kind of better than historical in terms of margin performance in '21 in the Intermodal segment?

I think it's just too early to say. I'll leave that to Tom. We don't provide that specific of guidance, so we're going to avoid answering that.

Your next question comes from the line of Allison Landry with Credit Suisse.

Darren, just following up on some of the comments you made in response to Tom's question. You said something about maybe rail pricing, there needs to be some contemplation of that. And so I wanted to ask you, so where do you sit today? I mean, obviously, John, I think in your opening remarks, you're sort of alluding to something more structural going on with rail costs. Does that mean when you think about the bid season in the next few months that the Intermodal rates need to go up significantly more than TL rates? And then the second part of my question, you can count this as my follow-up. In your discussions with the rails, they're all talking about sort of broadly wanting to grow. Is there any willingness on their part to maybe become a little bit more accommodative on rates to sort of drive more traffic onto the network? So if you could share your topic your thoughts on those topics, that would be great.

Sure, I'll address your last question first. There isn't a rush to reduce costs. That's not going to happen. In some markets, Intermodal prices likely need to exceed truckload rates. However, in other markets, Intermodal prices can be at or even below truckload price fluctuations. It's too general to claim that Intermodal rates must always outpace truckload rates, and I don't think that's necessary for our entire network. Still, there are certain key areas where I believe they will.

Your next question comes from the line of Scott Group with Wolfe Research.

Darren, I got a couple for you. So first on the volume side, what changed in December to allow the volume growth to accelerate? And do you have any perspective you can share? Has that continued so far to start the first quarter? And any thoughts on how to think about volumes in the first quarter?

Yes. I believe that as the quarter progressed, we experienced a slight improvement in our ability to reposition empty containers in the West, which became evident in December compared to earlier in the quarter. Some of this may be attributed to a decline in December 2019, to be candid. However, January has met our expectations thus far, with strong demand and a more efficient network.

Okay. I want to clarify something about margins. I believe you mentioned it, but I want to make sure I understood correctly. You’re not providing margin guidance, but you believe Intermodal margins improved this year. Regarding the longer-term outlook, as you reassess this, is it primarily based on how margins have performed in the past few years during tougher times, or is it more of a caution that we shouldn't anticipate margins reaching that 11% plus range during favorable conditions? We understand the past, but we are trying to look ahead. Are you indicating that we might not reach 11?

I don't think anybody is trying to get. Okay, Scott, I want to clarify that we're not suggesting anything other than recognizing that the Intermodal margin has been a key concern for our investors for quite some time. We are emerging from a very challenging period. Shelley pointed out that we have faced arbitration charges for three years, we are in the midst of a pandemic, and there are difficulties in driver hiring. The outsourced market has been particularly tough. We have kept our promises to customers. As we move through 2021, we are optimistic and expect that while I want to be careful about using the term stability, many of those challenges should be behind us. The market is certainly prepared for significant price increases, and we will see what we can achieve. Our message has been that we hope for a more stable year to assess that, and that was the essence of our communication.

Yes, I would like to add that we hope several issues, such as arbitration and PSR, are now in the past. The pandemic has impacted us this year, and one outcome of that is the current situation with driver availability. While we plan to seek market rates to address changes in our cost structure and return to expected levels, we want to emphasize that our expectations have not changed. We believe this year will lead to a more stable environment, even if it’s not entirely smooth. Regarding driver availability, schools are facing challenges as drivers retire, which affects the number of new drivers entering the workforce. This situation, along with PSR and arbitration issues, is more settled. We need to assess whether customers are willing to pay for J.B. Hunt to provide company assets for dray services and maintain a significant fleet presence. Their choices regarding business awards and pricing will answer that question this year. If we cannot achieve our target margins, I will ensure that we communicate clearly about the situation. Early discussions with our sales team give us reasons for optimism, as we believe customers still value our unique services. However, we require their support and for margins to improve to regain the returns we once enjoyed. It's critical to highlight that this evaluation of margins is not just limited to Intermodal; it applies to the entire company. We need to carefully assess our business and the returns associated with our assets as we streamline our operations. This includes our truckload business, where we have experienced growth and are exploring potential changes in our capital approach based on different margin profiles. It’s important to frame this as an ongoing process and not just a one-time assessment. The company is committed to evaluating its expectations this year, and we plan to provide progress updates along the way, ensuring clarity in our communications.

I might just note, from a customer view, we have a lot of confidence in the orders we placed for both Intermodal and highway services. And you heard Nick talk about the pipeline that he has. So our customers' demand is high. We have confidence that we can get to appropriate returns on that we have ordered already. And now we just want to make sure we understand, is there more appetite than what we've already set up structurally for 2021? And I will tell you, I think that our customers want more from us than what we are planning right now. But we'll see that through the bid season and be able to establish that. And then to reiterate what Darren said, our margins will improve in Intermodal. That's what we're launching towards. We took care of our customers. We reiterated that through the entire pandemic all through 2020 that we would honor our commitments, and it is very much like what we did in 2017 and 2018. We honored our commitments. We came back to customers in 2018, and our customers matched up with us cost to price. We don't expect to change from that, but we want to walk through our bid season to see if we should take more of a stance on equipment ordering past what we've already committed.

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

Just following up on the long-term OR target in Intermodal, but not to beat the dead horse. But I've always considered that business a very high return on invested capital business. And as we've known with Final Mile, you can have lower margins, but the returns on capital can be very high. And so I was just thinking about, as you guys adjust maybe or possibly adjust the long-term expectation of the book earnings to the book margins of the business, is there anything happening structurally that maybe allows the Intermodal business to retain the ROIC that it has now even though the margins are lower? Or any change in operating ratio expectations will directly correspond to the change in the return on capital of that business?

Hey, Amit, this is Brad. I'll let John or Darren add to my comments. When you consider the situation, if revenue or cost per load is increasing and the focus is on margin percentage, which seems to be a key concern in the investment community, it's important to remember that if revenue per load rises and the contribution per unit remains stable or improves, while the capital needed to achieve that remains constant, you can still see a similar return on invested capital even with a decline in margin. There’s a lot of attention on margin percentage, but this year, we will be thorough and clear with the investment community by examining all relevant factors. We will ensure that we are generating what we believe to be reasonable returns on our investments, and we’ll adjust the margin output based on this evaluation. That’s my input, and Darren or John, feel free to add anything else.

Well, I mean, we've said for many years now that we care first about our return profile. And really, Brad, I think you highlighted it. That's our measuring stick. And that's how we're going to think about have we been successful in our approach to managing the investments in our assets, are we presenting a strong enough return. And I'm quite certain that, that's what John holds me accountable to do is to find improvements in the way that our return profile is. So that's our focus in '21.

One of the points I mentioned earlier is that we aim to deliver the services we currently offer, but we also expect a reasonable return on that investment. If a customer indicates that they cannot support that, we have noticed this happening to some extent. For example, there was a time when we focused solely on company assets, and the associated expenses and margin requirements for that service were not viable in the market. As a result, we decided to discontinue that offering. Currently, we are experiencing significant growth by utilizing a different capital profile that allows us to operate at various margins while still achieving the returns we anticipate. This has been our guiding principle for a long time, and we are committed to it. If we receive feedback from this bidding process indicating that we cannot reach the 11% to 13% returns, we will then need to evaluate our fleet profile and explore alternative strategies for providing that service. This may result in lower margins, but we aim for comparable or better performance in returns. That is how we plan to proceed.

Yes, I think that's the point. When measuring the quality of the business, ROIC is the appropriate metric, and OR can diverge from ROIC depending on the context. That's a valid observation. If I could follow up, I know we're short on time, but Darren, I wanted to ask how congestion is affecting the Intermodal business in terms of volume and cost. The reason I bring this up is that, from our perspective, box turns are not significantly lower than they were before COVID, despite the ongoing congestion. I also know that you are adding more trailers this year, which should support growth. However, could you explain why box turns are maintaining such strong performance despite the substantial congestion in rail service? I would have expected a different outcome, so I’d appreciate your insights on this.

In the period before COVID, the box turns were similar to what we experienced during COVID, but we had a lot of storage capacity that was acquired during times of low demand and congestion before 2019. We expanded our fleet to manage somewhat weaker conditions, and pricing was supported by returns. As we entered 2020, our terms were not aligned with the size of our fleet, and our volume was lower than we had expected based on our fleet size. We were anticipating improvements in speed and were seeing that progress until the pandemic hit. Starting in June, demand surged, but everything slowed down considerably. Therefore, while we are not seeing significant changes in trends, it's clear that congestion has worsened the time required for containers to move on intermodal loads compared to a year ago. We expect an improvement in transit times this year or adjustments in pricing reflecting the necessity of owning the asset longer to meet customer needs. Overall, I believe that congestion and speed in our system will gradually get better in 2021.

So what you're implying them this year is a more balanced between loads and yield then, right? Because if your box turns improve, then maybe volumes improved commensurately and you get a more balanced dynamic in yield and volume?

Well, I think our lean this year is actually more to price than it is anything else. We've got to expand our margins, but we are confident in our ability with the equipment acquisitions that we're making in order to do that.

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

Maybe to follow up on that, that last question around rail service and velocity issues. Darren, is there a way to think about the magnitude of the margin impact we've seen in the back half of 2020, so Intermodal margins have been around 9%? If service were to get back to pre-pandemic levels, where would that margin shake out? I'm just curious if that's tens of basis points, if it's 100 basis points. Is there any help you can provide on that front?

I probably can't get too specific there, Justin. I just know this, that when you look at the fourth quarter, the amount of outsourcing we did was significant on the drayage front. We had employees of our own in quarantine. I think John Kuhlow mentioned how much the Company had spent on PTO related to COVID time for our employees. Yet, we're replacing the capacity that that employee was going to present by going to the open market and bringing outsourced costs that were significantly elevated in 2020. And so that's some of the major drivers of margin challenges in the fourth quarter. Service and velocity is a component of it. But really in the back half of last year, and particularly in the fourth quarter, drayage cost increases as we had to go to the outsourced market were significant.

And your final question comes from the line of Todd Fowler with KeyBanc Capital Markets.

Okay, great. I guess the good news is I'm probably set on the margin commentary, so the last question won't be on that. Darren, I guess maybe to some of the comments about the timing of the bid implementation into '21, do you think that you'll be able to show margin improvement in the first half of the year? Or is it really a function that you need to see the bids more fully implemented and in the rail service to improve to get to that margin progression or margin improvement kind of in the second half and for a run rate exit the year?

Well, I think some elements outside of our control can influence that still, given that we are still facing some pandemic conditions out there. Labor continues to be very difficult. I'm not sure exactly when. I know that we're implementing pricing and Shelley outlined it moves a little slower than maybe we would like for it to certainly at this point. But I would expect by summertime, to have new prices implemented. So back half of the second quarter, into the third quarter. You've got a substantial percentage of your book of business with new fresh rates based on the conditions today. And that should be better representative of the pricing market and the results.

Okay. That helps. And then maybe just to close out the call. Shelley, if you think about coming to the end of the spend on 360, as you look out beyond the second half of '21, is your expectation that 360 provides above-market growth just in ICS? Or can you see stronger revenue growth in the other segments? And how much of it's really predicated on seeing revenue growth versus lowering cost? Just kind of how do you see 360 coming together as you move kind of beyond the implementation and the spend base that you've been going through over the last couple of years?

Yes, great question. So one of the things in my standard role to really think about how we leverage the platform across the organization, and so I'll be able to really focus in on how we do that on behalf of our customers. So if you think about the work that I've mentioned earlier that's in the platform today that should be moving Intermodal, how do we get more prescriptive on the front end of that instead of running a report afterwards, actually making the recommendation and the predicting of how a shipment or recommending how a shipment can move. That's just one example, but many that we see across the organization. And I want to make sure that I clarify something. We are not at the end of our tech spend. We are at the end of our internal work that will connect our external platform with our internal platform. We will continue to invest in J.B. Hunt 360 as we see this as an accelerator for our organization from a revenue perspective. I think you were able to see that in JBT and ICS. It's the first place that we started in our 360 platform, that was really the place that was logically adjacent to the work that we were doing. And so we were able to see the benefit there, but you'll continue to see 360, that's why Nick made in his opening comments remarks around the platform and how we will leverage that. And then finally, I think you'll see this in our annual report, the number of millions amounts that we eliminated from our assets by leveraging the platform, we directly get to see that in cost reduction. And the more our platform scales, the more our own assets should be the most efficient assets or certainly at the top of the most efficient assets available in the market, so continuing to try to drive cost on behalf of our customers.

I want to take a moment to wrap things up as we approach the end of our time together. Thank you for your patience. I believe we addressed most of the questions. I want to emphasize the urgency we feel to resolve the margin question, which has been a dominant topic in our discussions. This focus restricts our ability to highlight the broader advantages we offer. Our discussions have touched on how our platform, along with enterprise solutions, addresses customer needs holistically. It’s crucial for us to acknowledge the volume of inquiries regarding this issue, and we are committed to resolving it promptly. However, our current systems' utilization is promising, particularly as seen in the fourth quarter. Our customers look to J.B. Hunt for solutions, not simply additional services. They recognize our approach and investment in being proactive—encouraging them to reach out to us for assistance. This entrepreneurial spirit is vital for uncovering new opportunities, which are important for the long term. While these efforts may not resolve immediate concerns, our comprehensive offerings, including Highway, Intermodal, Dedicated, Final Mile, and our platform, define J.B. Hunt's strong market position. As we move into 2021, we have a solid chance to address any outstanding questions, regardless of how we feel about the outcomes. I'm also thrilled that we’ve reached a point where we can expand our Intermodal fleet, which is set to exceed 100,000 units in 2021. This positions us uniquely in the market. The Final Mile segment is promising as well, and our business pipelines are in good shape across the board. I want to highlight that our leadership team is very united. We've made some behind-the-scenes adjustments that might not be visible to everyone, but our energy is high, and we are asking new questions. I am genuinely excited about this progress. While we are pleased and encouraged by this quarter's results, our focus is primarily on the long-term outlook. I want to take this opportunity to commend the incredible team at J.B. Hunt who, throughout 2020, not only navigated the challenges of the pandemic but emerged stronger and more connected as a team at all levels of the company. I take great pride in that. We wish you all the best, and we look forward to our next call.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.