J.B. Hunt Transport Services, Inc. ($JBHT)

Great. Next up, we've got J.B. Hunt. We welcome Brad Hicks, EVP and President of Dedicated Contract Services; Josh Phelan of Truckload Operations and Andrew Hall from Investor Relations. We welcome Brad for his fourth time to our conference. Andrew and Josh to their first BofA event but this is J.B. Hunt's 18th time attending the conference in the 25 years I've hosted. So glad to have you here with us. Thank you very much for your continued support. .

And Brad and Josh, I guess let me just open it to you for your initial thoughts on the state of the market? And maybe what 3 key things you want us to take away from here today?

Ken, thanks again for having us. It's always a pleasure to be here. When we think about the market, clearly, we've seen changes. We saw strength, I guess you could call it starting in Q4 that have persisted through. We're seeing a pretty meaningful adjustment from a spot capacity rate standpoint, that's finding its way into contract now, which is typical. We're seeing difficulty -- more difficulty in the driver market today. We think that 1 of the 3 that I'll just highlight right now is just the category of regulatory. That's definitely influencing because quite frankly, we're not really seeing any demand lift. Now I wouldn't suggest that we've seen a fall in demand. I think it's been pretty steady for the past -- or year-to-date, let's say. And I think that we've done an excellent job on our strategy as an organization, which we're really focused on disciplined growth through our operational excellence. We've highlighted that to you and everyone through our lowering cost-to-serve initiatives that we're proud of the progress that we continue to make there because we do feel like we have to continue to repair our margins, which is part of our strategy. But that -- going back to the regulatory environment, as I commented there, that's causing capacity to exit really on the front of a nondomicile driver situation that really state by state, and everybody is kind of approaching that a little differently. So it's not really a hit the eject button and all that capacity exits. It's a slower drip, if you will. But more recently, we've had a state like in Indiana that turn them all off. And I think even New York is contemplating what their next move is going to be due to some, I guess, pressure on federal funding to take action. So non-dom is one category. We have the English language proficiency being enforced. It wasn't a new law. They're just now enforcing it to the standard that we've expected to. That's causing capacity to exit. And then we've seen Cabotage, which is where we have Mexican and Canadian-based carriers come in and run domestic freight which is illegal and has been for many years also being enforced. So really, there's not new laws. It's really more around the enforcement, but that's what's causing, I think, the capacity tightening. Largely, we also have exits, normal exits at this part of the cycle where carriers just can't endure the current economics any longer and have to close up shop. But beyond that, we continue to see pressure on schools. There's been thousands of driver training schools that have been shut down. There's been a lot of pressure on ELD providers, which really dovetails into today, and I'm sure it's gotten discussed perhaps already, but road check or the DOT blitz, if you call it that, kicked off today and they're highlighting that ELD is one of their key areas. And so anxious to see. I know it will tighten up, Josh, I don't know if you want to offer any more color on the macro.

Yes, I just think the capacity tightness is real. Again, we started feeling it let's say, early part of Q4. And seasonally, you expected that tightness to moderate a little bit as you start Q1, and I think it just continued on. So the supply side correction for all the reasons Brad talked about things on solid footing at this point. And it's translating its way into the customer market, albeit it was slower inside the bid season. It's half the bid season that was really cooked when really things started to get a little more optimistic around how long that was going to stick. But we see it continuing, could get worse. I think the only really unknown is the demand side. .

Yes. Let me start off with that, Brad, because you just -- you started off by saying almost all regulatory no demand lift was what I heard from you, I'm surprised. So our truck shipper survey would indicate we're kind of seeing some sort of demand improving outlook from a shipper point of view. But you're just seeing it really all from the supply side coming out in terms of...

I think we saw demand in Q1 be better than what we would have anticipated. And I think our customers did feel optimistic. What I would say is that as we've moved on from that Q1, I would say steady is the word at least for sure and dedicated. And I think it does largely apply to our other businesses. What I would say though, Ken, is that I think that we've done a fantastic job at taking market share. Josh has had, what, 4 consecutive quarters of double-digit volume growth. We saw great really strong Intermodal growth in Q1 and we've seen really double-digit volume growth in our brokerage segment more recently as well. So I feel like we've done the right things at this part of the cycle with us focusing on operational excellence. The work that we've done on lowering our cost-to-serve has been really exciting. Our entire employee base has rallied around that. And we've had really unique ideas that have contributed. And that manifests itself in a lot of value back for whether it be lowering our cost to our customers that can help us drive more volume in the future, whether that can help us go to the bottom line, where we absolutely need recovery in margins in all of our businesses, some more than others in terms of how far they're off just because of all the inflation that we've experienced. So doing those right things, I think we announced that we're up to $130 million run rate, up from Q4 of last year where we had noted a $100 million run rate. So we're not satisfied, and we're not necessarily complete. And so maybe we'll continue to keep you apprised of that. And then part 2 of that is we've also signaled kind of transformational work through leveraging of technology, and we're still not quite hidden stride on a lot of those initiatives. And so I do think that beyond the lowering of the cost, there's more into the future that we're going to continue to create value, driving efficiencies. And with our strategy being really to grow and not having to add. And so it's kind of -- here's our teams and our staff and how can we scale leveraging technology as we grow from here, and we're really excited about the work that's in front of us there.

Ken, on demand add on to what Brad said. I think if you look at the first quarter, you go back to the fourth quarter, we said supply kind of drove the tightness. First quarter, I think the big change we saw was supply still continue to come out, but we saw demand a little bit better than we thought. We don't give intra-quarter updates. But I think Darren said on the call, based on the forecast and what he was saying in Intermodal, we didn't see demand falling off a cliff or a big pull forward in the first quarter, we kind of felt steady there. As I look across end markets, I think food continues to be good from a demand standpoint. Obviously, industrial PMI has been up 4 months in a row. So industrial demand feels okay. I just don't think we'd characterize the overall demand environment as robust by any means. More steady kind of okay. As you know, the big beneficiary for Truckload would be housing, and we haven't seen any real movement there to get us excited about that potentially market?

Yes. I think it's marginally better. I think supply is driving the rates though, is how we would. .

So Josh, what 2 to 3 signals would tell you this freight market is actually turning versus just capacity improving aside from our truck shipper services?

I mean I do think we've seen a rebound in the manufacturing side. So I think you said 4 straight months of expansion. We are seeing quite a bit of bid activity outside the normal cycle. So that's something we look at. That could be supply driven to the churn bids. But we're seeing a lot of opportunity with our customers outside of just the main bid. So it's really probably the biggest key that we focus on, obviously, rates and outcome, and it's been -- it's always competitive, but the ability to raise rates exist again for the first time in 3 or 4 years. Again, the customers we talked to, I think they were a little surprised that their Q1 was as strong. A lot of unknowns, obviously, is what's going on with energy prices and whatnot, but they had surprising Q1s. They're unsure about Q2. But I would say the difference between '25 and '26 in -- our customers, for the most part, were pretty pessimistic heading into '25. I won't say they're optimistic, but they're not pessimistic heading into '26. So it gives you a little comfort that demand is going to be marginally better.

So the bids outside normal or the ability to raise rates could just be the supply side. It doesn't necessarily have to be signals of demand side, which is why you're saying it could still just be flat on the demand side overall. All right. So Brad, let me jump to our -- to dedicated, right? So moving to your specialty, remind me, the sales target, is it now 800 to 1,000 new tractors?

800 to 1,000 net adds.

Okay, net adds. And the fleet itself was flat, right? So you're working to offset churn.

We had a good Q4 in sales, and there's always timing and we don't publicly disclosed the timing of when we sell a deal versus when it implements, but we had pretty decent starts in Q1, but -- so we did have some offsets with some either downsizing at existing accounts metaled in with a couple of losses. But I am optimistic. I think I mentioned this on our Q1 call that we -- our pipeline is sitting at record levels right now. . We added 40 new names last year to the portfolio, and that's always an entry point for us. That's always the hardest cell is the first one, right, with a shipper or a prospect. And when we get our foot in the door largely, we prove our value proposition and then we look to grow inside their organization and in other locations. And that's kind of been the recipe of our success for many years. And so I'm really excited about where we sit today. I think that we've done an outstanding job at managing our profitability, albeit we're not quite at our range, but we're really close. And considering the backdrop of the last 3-plus years, I'm very proud of our team's effort there. And so the fundamentals are there. We talk about disciplined growth and it's really important when we transact and dedicated that we have the right components. We have the right economics, we have the right term. We have the right equipment. And that's what enables for that forward view of success inside of Dedicated. So feel really good about that.

Do you think that then turns 26 into fleet growth? Or is it still a focus on utilization first.

Yes, we're right now. We're looking to grow as much as we possibly can. And so we haven't slowed any growth, although we did see the customer behavior late last year and late last year and even earlier this year, be a little bit slower to their decisions. And I think that the macro environment, the tariff environment had just the uncertainty and maybe people were taking longer. Typically, we work a deal it's 12 to 18 months. And so we had deals that were at that juncture in time, say, 6, 9 months ago, and then they stalled out a little bit. And it doesn't mean that they're lost opportunities, they've just been tabled. . The shippers had other priorities that revealed themselves that took their resources in time. And I do think many of them have started to revisit them. We've seen a little bit of a pickup in the timing speed thus far this year. I think the healthier, larger pipeline is an indication that more people are thinking about what the next 6 to 18 months are going to look like on capacity and how can they maybe think about securing in a dedicated solution that will make sense for them, where perhaps maybe have been a combination of dedicated in one way or maybe just one way, but can we craft a solution that creates the right value proposition and for them to consider a longer-term commitment. on that business. Now I do want to say that we're not in the business of doing what I would call capacity fleets in our Dedicated segment. We feel like Josh' segment in JBT and even ICS are better suited for a pure capacity solution. And so we really do want it to look and feel like our version of Dedicated. Is it a private fleet conversion. Does it have the characteristics that Dedicated is going to stick in any cycle because the last thing we want to do is just grow really fast when times are good and then immediately when the market shifts back, all that business goes from dedicated back to one way. And so we're very intentional about making sure that we maintain our discipline around that. The other thing that we're seeing is the driver market is tightening. We're seeing that not across the board, but certain markets and pockets, we're seeing it be more difficult to recruit and hire. We've had to reintroduce some sign-on bonuses. That's always one of the levers when things get tough. If I take you back to kind of the peak of COVID, call it, '22, we probably had sign-on bonuses at 90% of our jobs. As of the last 2 years, it's been 0. And now we're starting to see those find their way back in. We're seeing tightness in markets like Texas, and then also kind of the Rust Belt, I think Ohio, Indiana, Michigan, we think that cabotage is a factor and us seeing the driver tightness in those markets along with the other regulatory things that I mentioned. And so I think that that's just how it starts, right? And Ohio has long been a tough market to hire drivers, but it's tougher today than it was 6 and 12 months ago. And then I think you're just going to see other parts of the country continue to be more demanding. And what that means is, listen, we're going to need driver wage. And so not only do I need to repair margins, I'm going to have to account for wages that are going to be higher in the future than what they are today. And that's where I think it gets pretty realistic. When you hear Josh talk at least this morning in some of our other sessions, talking about what he thinks the 2-year cycle for what rate needs will be, it starts pushing 20%. We've not been at our return targets for a really long time. And this business takes a significant amount of capital, as you all know, and we deserve a fair return for our shareholders and our risks.

So let me drill that down to understand that 20% then. So you're talking about revenue per tractor at 2% in Dedicated in the first quarter ex fuel, what -- are you talking about.

Well, mine is going to be a lot less than his. We do have rate increases.

Truck load in ICS [indiscernible] market rates today up 20%.

Well, we think that they're going to go up through this cycle and into next year's bid cycle, we think we'll see them be at or north of 20%.

So a 2-year stack of 20%. Yes. being and then 1 year half that? Can you get half that level to start.

I don't think you get a run rate of -- you might get a run rate of half by the end of this year, but you're not going to realize half this year. Is that fair to say?

Yes, I think you can get double digits, back half a bid season, but that won't be a full calendar year rate increase. .

And then Dedicated not to -- I guess I was bouncing around from company to my BU. So I apologize for that. Most of our agreements have terms that govern the rate movement. And typically, we see that being in the 2% to 4%, I would expect it to probably be in the 3% to 3.5% if I were going to dial that in a little bit. But when radical changes.

That's for this year. That's in the mid season so at bid season, then we .

Business just our annual just Yes, our annual As you get through the year, we'll be going run rate of about 3%, 3.5%.

Okay.

When we have radical shifts in other cost categories like driver pay, there are times where that doesn't keep up. and we've seen those. We saw it in the peak of COVID. We saw it in the ELD mandate back in '17. We saw it in the tightening of the market back in 2012, 2013, it will cause us to need to have different types of conversations with our customers because we want to be successful on their behalf, and they want to make sure that their trucks stay full and their freight gets moved. And so there are times when we have to visit with them and evaluate, do I need more than that CPI and this could be one of those environments, certainly in some markets, we're having those conversations today. .

So if normally, you produce about 100 basis points of sequential improvement from 1Q to 2Q. I know you don't forecast, but is there anything on the timing of whether it's surcharges or the pace of rate increases that would make it a stronger or now weaker than seasonal improvement?

You got to think about, well, one, we're not going to give guidance there. But two, fuel the impact of fuel, it's going to be additive to the top line dilutive to the gross margin -- or to the margin percentage. No change in operating profit dollars for us though, because it's a pass-through for us.

Yes. I mean it's fundamentally as fuel going back 6 months ago, it was call it $3.50 on the diesel and now it's $5.63, I think, even as of today. that's all coming through 100 OR basically. And so it's going to be dilutive to our OR. I don't know if that's something we would publicly convey or not. I think about fuel. 40 basis points for Q1, I think, is what it was. -- for the quarter, but it really only flipped in March. So 1 of the 3 months was negatively impacted in fuel, and it still translated to a 40 basis point degradation in OR. I think you can expect normal trends from Dedicated. I don't think there's anything necessarily that would cause it to accelerate or decelerate from our normal Q1 to Q2 progressions other than the fact that, as Andrew mentioned, the impact that fuel has on that view. There's always timing of when we onboard contracts and those type of things, but we've always.

But your comment on starting out to increase driver pay is not offsetting your the speed of the rating .

Well, it's moving that fast. I mean these are conversations that all have revealed themselves in the last 30 to 45 days. So we're working hard in the spots that we feel like we're going to need to take action. There's times that we've got to do that on behalf of our customer before we get the rate. There's times that it happens simultaneous where we get the rate and pass along to the driver. It will be a little bit of a mixed bag there depending on which customer. And then there's some that we're going to have to wait until the anniversary of that agreed upon rate adjustment and maybe that's July. But if we feel like we need to move now on the driver pay, we'll do that to protect service.

And again, that's market by market -- and then the nonbonus as that Brad mentioned, again, that's market by market. And we're not talking $20,000, $30,000, $40,000 sign-up bonus -- we're talking small dollars still relative. We've gone 2 years without having to issue a sign-on bonus to try drivers. It's only in a handful of cities now. And to me, that's a good sign of what is happening in the industry. And to the comment on rate, we were talking about earlier. You go back to the first quarter, Nick Hobbs leads highway for us. I was talking about double digits in ICS. So that's not new news. That's what we talked about in the first quarter. That would be the first place you'd see it. Josh would be second is where you would see it just because those are the businesses within our portfolio that move first from a rate standpoint. And something I think the outlook for rates has certainly gotten better over the past few months. I think that's been echoed by every transport company through earnings season. There's more optimism there. But at the end of the day, it's up to what the market is going to bear from how much we can push rates and how much rate we're able to capture.

I just want to make sure I understand Brad's comment that you're not seeing -- or to you, Andrew, that you're not seeing the cost outpace that it would destroy the concept of the normal improvement of operating ratio.

And I think it's consistent with what you expect for Dedicated.

Okay. All right. So let's switch over to Intermodal. Talk about capacity leaving the market and the benefits of rising fuel costs and the capacity leave creates more demand. Do we have to wait for bid cycles before seeing that volume improvement? I guess revenue per load was down last quarter ex fuel. How quick can that reflect given the backdrop?

The backdrop. Revenue per load, the biggest driver there is going to be mix. So we're growing faster in the Eastern network than we are in the transcon shorter length of haul. So it's lower revenue per load. If you go back to -- we're still living with the results of [indiscernible] on last year. So you go back to last year, we had modestly positive price in Intermodal. So we're still living with that from a core pricing standpoint, mix being the biggest impact on revenue per day. When does that inflect? I don't know. I mean we'll see what the new -- the third quarter of this year is when we'll kind of get our scorecard of how we did during bid season, and that will be the first time that you guys see the full impact flow through results. But I wouldn't read into a negative or lower revenue per load as anything more than the mix is the biggest driver there. .

I think if Darren were here, he'd want to share that we've taken rate on our headhaul wanes. We've had to give rate on our backhaul lanes. And so that's what's kind of keeping us somewhat muted on the macro there, but we have had really good success at moving rate up on headhauls. And I think it will take time. And I wish we could predict better the timing of when the truckload started to shift relative to the timing of bid season. We're probably not going to get a meaningful chance to move rate until the next bid cycle in Intermodal whereas we have a lot more here and now opportunities in truckload and in brokerage. There's many bids that constantly come back through. We don't see as much of that in Intermodal, although we are seeing more than we historically do, but it's not a meaningful part of of how their customers and that freight goes to bid. But that gives us a chance in JBT and ICS to move the needle a little bit faster. And let's be honest. I mean, there's still this merger potential. And there's another railroad that whether how they're approaching, the economics with their channel partners. And is that putting more of a continued pressure in Intermodal for it to follow a normal course, perhaps. We'll have to wait and see. But I know that UP has publicly stated that they expect to grow as part of the merger and they're out there trying to figure out ways to grow as well. And so maybe that's putting a little lingering pressure on what the normal economics.

Darren talked on the first quarter call about different pricing dynamics in the East and the transcon, the East being more competitive with truck. We're seeing shippers be a little more receptive to price increases because that's their natural competition. You're historically, a 10% to 15% discount intermodal to truckload in the East. I'd say right now with fuel, you're pushing 20% to 25% of a discount. So I mean, quite a bit of savings there. I think it's important to point out that go back to last year, absent higher truckload rates and you had low fuel prices, we were still growing in the Eastern network competing against truck. We grew throughout the year. In the first quarter of this year, our 2-year stack was 20% growth in the East. So we're seeing a lot of opportunities for growth. A lot of that is driven by strong rail service. And so having strong rail service edge reliability to that network. The transcon pricing is a little bit different. As Brad mentioned, there's a different dynamic going on there with the 2 Western railroads. It's just not -- also not as competitive with truckload. And so it's not as influenced by the factors that are playing in the truckload market as the Eastern network would be.

I mean if I'm a shipper -- and I'm hearing things like 20-plus percent in brokerage and 10-plus percent in truckload and $5.65 DOE, I would be pushing my team to do everything they possibly could to convert as much freight to Intermodal. That's your greatest value proposition in a way that they can maybe recover what their budget is or overcome the other hurdles they're going to face. But as this market goes, we're hopeful that we're positioned well. We believe that we've invested not only in our people and tech, but we've invested in capacity, and we believe we have a good runway of growth potential before we have to add one more container. And we can do that right here now. We don't have to work a deal and then place an order for that extra capacity and let it take months, we can transact on our customers' needs right now. And so if I were a shipper, I would absolutely be challenging my team to do everything I could to convert Intermodal.

So not to mention this not on a follow up on that right because intermodal loads were up nearly 3% in the first quarter versus a solid comp over 7.5% last year, but you exited March with 8% growth, right? So you saw some acceleration, but you were conservative on the timing of the benefits to Intermodal, given fuel, your tough comp in April noted anything that should slow it down or accelerate from that pace?

Nothing that we've talked about. I go back to I think there's certain markets and certain customers that are growing faster. And Darren talked about nothing we've heard from customers leaves us to believe that there's a material slowdown or everything coming. Are we going to grow 8% each month? I know I'm not going to sign it for that either. But I think that we see optimism from our customers on what the outlook for the year could be. .

All right. So maybe just talk about that mix for a second, right? So Eastern network growth of 7%. I guess are you seeing benefits from switching to CSX from Norfolk, given that the competitive view that you were talking about the merger, are you seeing service gains? And then on the transcon was flat, would you expect that to improve once we pass Liberation Day?

We didn't switch from -- we're constantly rationalizing which is the best channel partner to move our freight on behalf of our customers. I would say that if Darren were here, he'd be happy to suggest that both of the Eastern railroads have done a fantastic job at service and they both are motivated to grow Intermodal for their businesses, and they believe that they want and will continue to want J.B. Hunt to be a meaningful part of that growth story. I don't know if you want to add anything else?

No, that's I would just say there's -- I know that 1 switch of free you got a lot of headlines there's freight that moves back and forth and that one just happened to get all the headlines. So no, I don't think there's anything we're getting good service from both Eastern railroads there. .

So again, I know on margins, I know you don't forecast, but I guess if we just think about typically flattish 1Q to 2Q performance in Intermodal on your margins. Is there anything on the cost side or a fuel delay or recapture timing that we should think about that would push us in either direction, positive or negative from normal?

Ken, I'd be happy to give you projections and forecast. But that guy crucify me, so I'll let him answer that.

I would point out, again, fuel surcharge is going to be -- or the timing of fuel and the impact it has on the margin percentage. There'll be the same -- there will be an impact on Intermodal as well. From the cost side, we're continuing to execute on our lowering cost to serve a $100 million target on a $130 million run rate exiting the first quarter. No guidance on what that could be, but expect -- I think there's additional opportunity for continued improvement there.

Yes. I think it's important. When we set that out, what about -- it was about this time a year ago when we started to signal that, and we definitely felt it was important that you would be able to see it because I think the worst thing that we could do is stand in front of you all and give lip service. And then we're saying, no, we got it, and you can't really see it. And I'm really proud of all of our 33,000-plus employees and how we've rallied around that initiative. And I think you can see it and it is making a difference, and it will help us on our journey back to repairing our margins without a shadow of a doubt. I think it gives us an advantage in the marketplace that we've been that successful. And then honestly, we're just kind of scratching the surface on the next iteration of that, which we've signaled, which is kind of our business transformation and leveraging our investments in technology not entirely AI, but AI is a key component of that to get more better utilization out of our employees to let our data flow easier with less clicks and all those things. And we've got -- we've been spending a lot of time focused on that. We have some early wins. We've made some public statements about investments in companies through up labs. We've stood up 2 companies that will help us, and it's largely AI-oriented in terms of how it's helping us solve problems. And every area of our company has really defined out where we see the opportunities and we're making decisions routinely on what we want to go invest in. We're also seeing it's kind of cool, but the pace of rate of change has been pretty quick. When we think about how we used to develop technologies that require developers and those type of things, and we're leaning into those AI technologies, and we're able to do it so much faster and more efficient. And so really excited about where we sit right here and now with what the future holds for the next wave of that. And I think that we'll continue to signal that and it will probably contribute to what we've already stated as our kind of run rate of those savings.

Yes. So maybe a good leeway to the next question, which I was going to ask Josh to jump in on ICS and Truckload as an ops guy, maybe talk about how AI is changing how you manage the matching of freight and brokerage, the trailer pools in truckload. Maybe talk about the different level of bots or LLMs you're using to accomplish the tasks. Is that something we'll see and improve margins near term? Or is that longer term?

Yes, I think that's a great question. We've been using developing and working on either automation, AI bots for quite some time now. I think what's changed recently. It's just the confidence of what AI is capable of doing. And on the brokerage side, we're utilizing AI and still working to develop on AI, just around load prioritization, carrier matching, how do we make that better? If you think about our ability to track and trace, I think we've always had the data, but the data has been used manually, and now with the increased belief in the capability of what we can build around AI, I think it will help productivity for sure. But if it enables our people to work smarter, it will improve margins. So I think it's both on the brokerage side. And same thing for the asset side and drop trailer. I would say trailer management has been very reactive, right? And there's a lot of data. I mean, we do have a digital twin, if you will, of our trailer network through our tracking. But if we are able to use AI for better demand forecasting, understanding dwell, understanding empty moves, making decisions instantly versus waiting and being reactive. Our goal is to dramatically increase our trailer turns, which, again, would be productivity on the office side, on the people side. But if we increase our turns, we can dramatically improve our return on invested capital at the same margins.

Just to clarify on BDS, I want to come back to you on the bid season discussion you were talking about. I guess that's what -- 1/3 is done in 1Q, Q3, Q1 Dedicated and then 10% in the fourth quarter? Or is that -- that's truck, Intermodal is more balanced, maybe just refresh us.

Well, not in Dedicated. So JBT, ICS and intermodal, I would say typically 1/3, 1/3, 1/3 Q1 through 3 with. Not quite 1/3, call it 30%, 30%, 30%, 10%. Dedicated is 100% our pipeline and how we create our pipeline and how we're working with those customers. to solve and create a solution that creates value for them. And so it's not any typical annual. Now as we have contracts up for renewal, that's when we go sit down and talk with those clients about how do we extend those and what needs to change and what other value we can bring that perhaps they're not capitalizing on for whatever reason. Maybe it's a good time to do a reoptimized delivery schedule on behalf of that customer to see if we can't remove a truck or drive utilization up. So we're always looking -- we have an internal proprietary program called Customer Value Delivery, CVD, we call it, and that's our continuous improvement program. That's kind of our commitment to our customers that says, hey, when you buy us, you're not buying us to remain the same. You're buying us and expecting us to work in your best interest to constantly be finding ways to bring value back to you, which is typically through utilization. It always gets back to some form of utilization can we share resources with a sister dedicated account? So maybe I don't have to staff your fleet for 20 drivers every day of the week. Maybe I can shift some of your capacity to another one, and I'll give you credits when I'm using that at a different either dedicated customer or a different part of our company. And so the larger we've become and the more density we have, we're able to take advantage of those type of opportunities on behalf of our customers better. And everybody wins, right? The driver wins because they stay more utilized, their paycheck remains whole, and therefore, they're going to stay with us. The customer wins because we're leveraging their fixed cost of the fleet that we operate on their behalf by spreading that fixed cost over more of the variable activity that they have, and so it lowers their landed cost per mile. And so we're motivated and incented and I think speaks volumes that historically speaking, our customer retention rate in Dedicated has been in excess of 98%. That's, to me, the most important metric is our customers willing to stay with us after the initial term. And so we renew at a very high level, which I think is a good testimony that we have created value and continue to create value.

So over time, I'm going to squeeze 2 real quick ones in. Josh, ICS lost almost $5 million in the first quarter step down from the first 2 quarters. Thoughts on inflection and when the segment should turn profitable? I know you don't give targets, but maybe the path toward profitability.

There's a lot of momentum in ICS. 10% volume growth was good for us in the first quarter. We didn't see much change in our operating expenses. It was really gross margin squeeze from the China Truckload market as we continue to get more spot opportunities and work through bid season into reprice that contractual freight, I would expect that, that would be helpful for gross margin. I'll tell you, I'm not going to give you our plan, but we don't plan on ICS to lose money at how our budget was built. And so the expectation is that each business will generate return. And I think there's a lot of momentum in ICS that Nick's created there.

All right. And latest thoughts on the merger proposal, I guess ability for J.B. Hunt to succeed given long-standing partnerships with varied carriers with Burlington out West and Norfolk[indiscernible] .

I would just say that we're confident that we are in a leadership position regardless of the outcome. We think that we've done a great job at managing our rail partners and how we work with them. And given the size of the market share that we represent on behalf of the shipping community, they're all motivated to want to continue to participate and so I think that we'll find a way to win regardless. Beyond that, I don't think we have a public comment.

I would just say if the goal is to grow the Intermodal pie overall, as the market leader, I think that's a good thing for J.B. Hunt.

Okay. So if I were to try to sum up real quick, I guess, most of the benefits so far regulatory-driven, not really seeing demand kick in lower -- you're focused on lowering your cost to serve the $130 million, up from $100 million, leveraging tech watch driver pay dedicated. You're going to try to outpace it with rate increases, but it certainly can cause a squeeze depending on timing.

Rates are going up. Rates are going up.

Thank you very much for the time. Brad, Josh and Andrew.