Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

All right. We're back. This is always one of my favorite parts of the conference, our transportation shipper panel. I never thought I'd say this, but I feel like I'm actually missing the turkey sandwich from the Marriott this year. But really happy to -- we've got some really good shippers on the panel this year. I think it's one of the benefits of doing this virtually is we've got some good ones. So we've got 3M, Del Monte Foods, Home Depot and Johnson & Johnson. I'm going to just ask each participant to just very quickly introduce their company. And just to frame the discussion, just give us a sense of the size of their transportation budget and then how it breaks down by mode. And then again, remember, please type in questions. And I'll make sure to get to them, but I've got a bunch for myself. So -- but first off, Dan George, he's the Manager of Transportation at 3M. Thanks, Dan, for being here.

Thank you and good afternoon. I'll just give a very quick update on 3M as a company. So last year, 3M had sales of $32 billion and truly, a global company. Actually, 60% of our sales last year took place outside of the United States. We sell our products in 200 company -- countries around the globe, and we actually have a physical presence in 70 different countries. If you can jump to the next slide, please. So when most people think of 3M, they tend to think of post-it notes and scotch tape. But you'll find that, that's actually a relatively small part of our portfolio. 3M is separated into 4 distinct business groups comprised of 23 operating divisions. Those products that you're most familiar with are part of the consumer group, which is the smallest of our 4 businesses. The reality is 3M has quite a wide portfolio of products. We sell 55,000 different products around the world, across 51 different technology platforms. So really, you'll find 3M products in almost any industry imaginable. And if you can jump to the next slide, please. I think a great example of the breadth of 3M is coming to light here in our response to COVID. I would dare say, prior to this year, most people did not know that 3M was a market leader in the production of N95 masks or respirators. So as COVID has impacted all of us, 3M has taken a three-pronged approach to combat this crisis. So the first step is just to maintain our pre-COVID output. So our environmental health and safety team has done a wonderful job keeping our factories and distribution centers running and allowing us to ship products on a timely basis to users. The second approach has been to maximize our internal production capabilities. So since the beginning of the year, 3M has already doubled our output of masks and within the next 12 months, we'll once again double the number of N95 masks that we are able to manufacture. And then lastly, we have collaborated with some external partners to further increase our output and our ability to service health care workers and first responders. I think one of the more well-known collaborations is with Ford Motor, who is now making respirators in conjunction with 3M.

Okay. Thanks, Dan. Appreciate that. Maybe just real quick, again, size of the budget and how it breaks down by mode.

Sure. So our global freight spend is in the range of $1.5 billion. My responsibilities involve the U.S. and Canada. So our spend there is in that $600 million range. And a very diverse spend, about 40% of our spend is in truckload, 20% in LTL, probably a good 15% in parcel and also a very significant use of ocean and international airfreight. So really, for us, rail is the only mode that we don't spend a significant amount of money in.

Okay. Great. And I think we can take Dan's slide down now. And now we're going to go to Del Monte Foods. We've got Randy Cooper of -- Director of Transportation. Thanks for being here, Randy. Just -- again, real quick, size of the budget and how it breaks down and anything else you just want to quickly highlight on Del Monte.

Sure. So I'm sure most everybody on the call is familiar with Del Monte Foods. We're a category leader in canned veg, canned fruit and canned tomato products in the United States. Our sales are roughly about $2 billion per year. And transportation spend that I manage is about $145 million. And that breaks down to about 29% intermodal, 25% rail, about 44% truck and just about 2% LTL. We do, do some import and export, but the spend on that is less than about $10 million.

Okay. Perfect. That's helpful, Randy. And now we've got Ron Guzzi from Home Depot. Thanks for being back, Ron. He is the Senior Manager of Transportation Carrier Relations and Sourcing.

Thanks, Scott. Look forward, hopefully, next year being back up there to Manhattan, but I appreciate you having me on again. So just a little high level on Home Depot. We've been around for over 40 years. We are the largest retailer -- home improvement retailer not just in the country, but in the world. I think the count is now officially 2,293 with over 2,000 stores in the U.S. and the rest spread between Canada, Mexico and Puerto Rico. We have over 400,000 associates across the country. We finished 2019 with $110 billion in sales. We just actually announced today our quarterly earnings. So really strong sales with the -- all the challenges that we've been facing with navigating around COVID. And just a little bit of our supply chain, so 70 DCs spread across the country. Half of what we move goes through 18 rapid deployment centers. We -- about 75% of everything we move goes through our distribution centers, the other 25% still goes direct to store, things like live goods, block cement and full truckload-type quality products. Huge investment into our final mile or our downstream part of our supply chain. So things like flatbed delivery, box truck, parcel, car, van, you name it. A big enhancement with about 100 facilities that we're building across the country. Over $4 billion in total train spend, breaking that down into 5 buckets. Everything that is truckload or flatbed, van or flatbed, about 40%; final mile and that includes parcel, about 25%, so getting stuff to end-customers; intermodal/rail is 10%; Ocean International is 15%; and then LTL is 10%. You see, we got about 200 carriers within our domestic network. And we consider ourselves to be primarily an asset-based shipper, so we invest in carriers that are buying trucks and hiring drivers. So that's a little bit about Home Depot.

Okay. That's perfect. Thanks, Ron. And then lastly, from Johnson & Johnson, Eric Stone, Senior Manager of domestic and Supplier Performance. Eric?

Yes. Hey, thanks for having me, Scott. Yes. Just a quick rundown on J&J, similar to what Dan showed, J&J has got really 3 main business segments. From a transportation perspective, we manage the freight in all 3. So we've got our consumer segment, which is our over-the-counter products. We've got our medical device segment, managing shipments to hospitals for knee replacements and stints and things like that. And then we have our pharmaceutical ship -- pharmaceutical business, which is our largest business within J&J. From a spend breakdown, within North America, we have about $450 million worth of spend that we manage annually. And that's both import, export as well as domestic shipments. The breakdown by mode is truckload intermodal is about 30%; and within truckload and intermodal, the split there is really 85% truckload and 15% intermodal. Parcel was also 30% of our overall spend in North America, air is about 15%, ocean 10%, LTL is also 10% and then we've got all other -- we've got a couple of other modes, such as bulk tanker, capital equipment, things like that, that are very small spend that make up the balance.

Okay. That's perfect. So we've got a large -- some shippers with some large budgets, pretty diverse spend across mode, truckload, certainly big for everybody here. So we'll spend some time there. It's interesting that it feels like all the shippers that wanted to participate or at least were willing to participate in this panel are probably -- at least parts of their business are benefiting from the environment right now and the guys that maybe you're seeing some big negative impacts they didn't try to participate. So that's interesting.

But -- so maybe just each of you can talk about the near-term impact on your supply chains. To the extent that you've had -- you have businesses that were negatively impacted, are you seeing signs of that business bottoming? To the extent you have businesses that were positively impacted, are there signs that, that strength is sort of peaking? And then maybe as you've navigated this, have you had to do some shifting from one mode to the other? I'm just trying to understand which modes are benefiting or maybe being most negatively impacted. And again, this is -- we're trying to understand the impact more on freight and supply chains and less about your individual company as you answer these questions. But maybe we'll go in reverse order and start with Eric and work our way back.

Sure. Yes. So...

And again, everyone, this is -- I'll try and do a better job of this. Eric is from Johnson & Johnson.

Yes. As we look across our 3 business segments that I outlined, consumer, pharm and med device, within the pharm industry, everything pretty much stayed relatively consistent. I mean, obviously, like a lot of the other pharma companies, we're working on a vaccine for COVID, but nothing from a transportation perspective there yet. So that's been pretty consistent. Medical device has definitely slowed down due to elective surgeries being canceled or postponed. And then in our consumer segment, that really ramped up. We've seen it flattened really now recently, but there was about a 4-week period there in March and April where that was -- we were shipping 50% higher than our normal volume just due to the demand and people stocking up on products like TYLENOL and MOTRIN and things like that. We've really not had to do any modal shifting. We've been able to maintain our split as far as current modes, and we really haven't had to make any changes there. And short term, again, we saw some tightness in the market around that March, April time frame when we were seeing 50% increase in demand. However, that has certainly stabilized as things have gone back to somewhat of a normal status from a demand perspective. So from the short-term outlook, everything is pretty much back to normal and continues to look to be normal. We're not doing anything dramatic short term anyway as an impact of the coronavirus.

And just real quick, the area of weakness, the medical devices, are you seeing signs of that starting to pick up?

Not yet. Not yet. That still remains to be seen.

Okay. Let's now go to Ron from Home Depot.

Scott, will start with just kind of overall volumes. We announced this today that revenue was up about 7% plus in U.S. stores. I would estimate that overall transportation probably aligns with that, except for the caveat that final mile has been booming. And that has been incremental transportation spend because of set of customers coming into stores. Our dot-com business has grown dramatically with customers now wanting to have products delivered. So everything from parcel up to flatbed-type quantities of stuff. So I think overall mode conversion, I agree, we haven't seen any big conversions from one mode to another. It's just consistent volume. We did have a little bit of -- we peaked early in the quarter. And then after the panic buying, I think slowed down a bit. We saw 3 weeks, give or take, in which volumes were down, inventory levels were kind of slowed. But the last several weeks now have been booming. I think folks are now starting to come out of the house. And if they can't take vacations, they're using maybe some of that income if assuming for the -- with unemployment challenges, but folks are now using money to improve their home and us and others that are in this side of retail are seeing the benefits of it.

Okay. Randy from Del Monte, anything different that you want to add on this question?

Yes. Just a lot of extra volume. I mean we saw volume explode in the latter half of March and all the way through April. And it started to abate somewhat, but it's still over what we would generally expect in the May time frame. We also haven't had to do a lot of modal shifting. We're heavy users of intermodal and rail and both of those modes transit times have improved. And even though we have seen pretty significant downward motion in the spot market, both seemed to be moving in concert. And typically, with our capacity needs, we wouldn't be doing modal shifts just purely based on price anyway.

Okay. And then Dan from 3M? You're on mute, Dan.

How about now?

Now we got you.

Okay. Sorry about that. Really a mixed bag for April. Overall, our sales were down 11%, but our truckload volumes were right in line with historical levels. We saw declines in the range of 15% to 17%, though, for LTL and parcel. Although within parcel, our percentage of air activity has actually increased pretty significantly.

Okay. And then I want to think about longer-term implications of COVID. So there's lots of talk about near-shoring, reshoring, leaving China. How do you guys think about longer-term production sourcing changes as a result of this? Is this something that you guys are actively starting to plan? And then what are some of the other longer-term implications that you think about? Maybe we'll start with Ron on this one and then work our way around.

Yes. So definitely not my area of expertise in terms of I'm domestic, but I would tell you that we -- currently 15%, maybe a little bit more of everything that we sell is imported. That probably has slowed just a tad. So I do think that the long term would probably be bringing more stuff domestic, but we are still highly dependent. And I think that will continue to be a big part of our future for international shipping.

And when you talk about that 15%, are you including or -- how are you thinking about Mexico in that number?

Yes. That number is in there. 85%, 90%, everything we import is from Asia, primarily China.

Okay. Maybe this is a good one for Dan at 3M, the near-shoring, reshoring question. How are you guys thinking about that?

Sure. We're the unusually [Technical Difficulty] company. We actually export more goods than we import. So not a lot of manufacturing that's going to come back to the U.S. We do have a problem that our supply chains tend to be pretty lengthy. So we have what we call regional self-supply initiative that's been underway for several years. So around the globe, I think we'll continue to see more expansion of international manufacturing, but that will be to serve those local markets.

Okay. Eric from J&J, anything to add?

Yes. I think from J&J's perspective, we typically see the pendulum swing in regards to inventory over the years, it increases and decreases in inventory levels. I think this will result in an increase in inventory levels to protect some of those longer lead time products.

Okay. All right. Let's get into the individual modes of freight here. Let's start with truckload, just because I think it's everyone's biggest mode. So two questions, and we've got a lot to cover. So hopefully, we can just sort of get some quick numbers here. Where do you see your tender acceptance rates in truckload right now? One number. And then are you seeing any signs of that market tightening right now? So why don't we start with -- sorry, Randy at Del Monte.

Yes. I mean over the last 6 weeks, we've probably seen upwards of 97% tender acceptance on truckload, and I'm getting no indicators right now that that's going to get worse for the next at least quarter.

Okay. So we look at like the -- some of the spot data, the market demand index, it looks like it's starting to get -- move a little bit higher, but you're saying that you're not seeing any signs of this in your data?

Not yet. No.

Okay. Why don't we go to Dan at 3M, anything different there?

Very similar acceptance rates, they've been in the 99% range. When we do go to the secondary market, those loads get covered almost immediately. And I don't see any tightening. In fact, our volume is falling off in May. So it's become even more abundant for us.

Okay. Ron or Eric, are either of you seeing anything different? And if you're seeing the same thing, we'll move on to the next question.

Yes. Same for us.

Okay. So...

Yes. The same.

Okay. So I guess then one of the other questions, and maybe we'll broaden this out a little bit to let's think about truckload, less-than-truckload and intermodal. And I guess the question is, have you done a bid this year? And if you have, what rate increase or reduction did you get? And then maybe we'll compare that versus the prior bid. So maybe we'll start with you, Ron. So let's just go down the line, truckload, less-than-truckload, intermodal. Have you done any bids? And what's been your experience on those bids in terms of rates up or down?

Yes. Scott, so the timing is ironic because we are about halfway through our national truckload bid. That's -- that includes intermodal, $750 million in spend. This is the normal timing. So we didn't pull anything forward or push it back. Because of the situation, we kept our normal cadence. What I'll say is there's still lot to go, but we're seeing favorability. We saw obviously favorability last year coming off of 2018 conditions. And I would tell you, when the dust settles, I think the net of those two will be slightly up overall because of driver wage situation. So I think a lot of what we -- the impact of '18 has been or will be removed from overall. But I think what will be left in there in terms of an overall increase over the 3-year period is still the fact that the driver wage increase is still in line with the changes that were made in 2018 or a lot of that change was still in line.

Just so I understand, so you're saying you went up a lot in '18, down in '19, you think you're going to go down again in '20. But in aggregate, over the 3-year period, you're up a little bit?

We are up a little bit. And I think it is because of the driver wage and 90%-plus of what we do were with asset carriers. And we look at it as well, making sure that we understand that we want to keep the drivers hold.

Do you think 2020, your bid is going to be down more than your 2019 or was 2019 down more than 2020?

I would say '19 is down more where we'll end up. And then if you ask what I think for 2020, 2021, I think the market, we could be set up maybe for another 2018-type condition as assets were being removed. And mid-2021, we might find some high shifting of supply and demand.

And why -- I guess why do you think -- let's stick on truckload for a second, then we'll get to everybody else and we'll go back to the other mode. So why do you think truckload could -- in next year could be set up for another 2018? And if that's what you think could happen, what do you do differently in this bid to prepare for next year?

Yes. I think in 2018, there was too much supply that was added to the mix, right? Many of the carriers saw everything from '18 and then they have reacted quickly, and then we quickly went the opposite way where we had not enough demand over oversupply. I think we're going to see some of the same. There's going to be a reduction in supply over the next 9 to 12 months. And then as the country and businesses start to kind of recover here over the next several months, I think the demand will increase. And it feels like it's very comparable to what we experienced in 2018 short of a pandemic obviously that was behind it, but in terms of the way that conditions are shifting pretty rapidly. What we're doing is we're continuing to really stay true to who we are, and that's an asset-based shipper. And I don't want to say we're leaving money on the table. But in some ways, if you look at brokers and some of the [ shippers ] out there that aren't maybe necessarily sustainable, we're staying with the core carriers that have kind of taken us through the good, the bad and the ugly. And we would like to think when conditions tighten potentially in 2021, we're going to still see some of that impact, but we won't maybe see it as severe as others that are maybe playing the market.

Okay. Let's now go to Eric from J&J. Same question. Let's stick with truckload for a minute. Are you -- have you done a bid? Did you -- anything changed about your bid because of COVID? And then sort of what are you expecting on the truckload bid?

Yes. We do every other year bids on all our modes. So this was an off year for truckload and intermodal. However, we have a project that we're working on, network project. So we did a -- it wasn't a bid, but it was a pricing or a few and on just a segment of our business, not the entire thing. But we did see -- through that, we did see low single-digit reductions from our rates that were in place in August of 2019. And we just completed that activity. We're actually going into another round to see if we can get further refinement by that, but we did see a small decrease there, low single digits.

And then maybe just -- so you did a larger bid last year, how much of those rates go down? It sounds like you'll do one in '21. It's way too early at assets, but any sort of preliminary guess about what that could look like?

Yes. So last year, when we did it, we were -- we went -- decreases about 10% in rates. And that was partly due to the market, partly due to some mixes that we made. We went a little bit heavier broker than we have in the past because there were some favorable rates there. Next year, and listening to Ron, I'm uncertain. I'm not really sure. There's just so many factors that have yet to be determined. Mainly the economic recovery is the main thing I'm watching and to see how quickly that happens. I think it's a slow recovery. I think the capacity will be able to adjust accordingly, and we'll be able to still see savings there next year. If it's a quick recovery, then I agree with Ron, like capacity is not -- the capacity has been pulled out, and it's not going to be there, and then we're going to have some challenges. But if I had to put a bet on it today, I would say that we'll still -- we'll have low single-digit savings next year.

Okay. Dan from 3M?

Pretty similar to the other gentlemen. We've been conducting a series of regional RFPs through 2019 and into 2020. We've not changed the timing of those RFPs. I would say, on average, we're seeing savings in the high single digits.

And Randy from Del Monte?

Yes. Not too much difference. We actually had a bid that went live. The rates went into effect in January. We typically bid in fourth quarter. We saw 7%-ish savings on truckload. And while I don't think we'll see something that drastic in the next bid, I do think we'll see low to mid-single-digit savings on the next bid.

So you think even your bid in early '21, based on what you know today, you think you can get another reduction in truckload rates?

Yes. The bid will actually go in Q4 of '20. But yes, effectively.

You'll go live in Q4. Okay. And so let's now talk about LTL. So everyone's seeing at least mid but mid to double-digit reductions in truckload rates over the last year or so as they're going through bids. I'm curious what we think about LTL. So again, maybe we'll start with Ron and just go down the list.

We have our LTL bid every 2 years. It also launches give or take midyear, so that's going to be launching here next month. And I think probably just carriers are more disciplined, not as many LTL carriers, big guys that are in the industry. So I would say flat to maybe some modest decreases. But we also have to keep in mind that those rates have to be, for us, sustained over a 2-year period. So the carriers have to look at not just what's happening here for the next 6 to 9 months, but sustain. So we might put some midyear review in place because of the extremeness of the changes. But I would say, overall, relatively flattish we'll see from LTL.

And you broke up for 1 second. Did you say flat-to-modest increases or modest decreases?

Modest decrease. That's assuming we do a 1 year with a revisit at the 1-year mark I think of decrease. If we look at the 2-year and 1 flat rate sustained for all 2 years, I would say a flat would be sustained for that 2-year period.

Okay. How about Eric at J&J?

Yes. We're in -- it's okay. We're in a similar boat as what Ron said. So we do every other year, LTL RFP. This is the year that we're going out. We were actually scheduled to go out in April to the market. We decided to delay it until June based on just so much uncertainty and not really making -- not being sure what kind of pricing we would get back from carriers or their ability to engage in an RFP for that matter. So we will be launching in June. We're expecting low single-digit reductions. And we do have the same expectation that Ron mentioned around the 2-year pricing, carriers holding that pricing for 2 years. However, we do have a provision that it could be negotiated after 1 year. So we do allow that as well. But we are expecting a low single-digit decreases.

Okay. Dan or Randy, anything different to add here, relative flat to down a little bit? Okay. And so the other LTL question I think on people's mind has to do with YRCW. I think there's certainly some questions, concerns in the market about their ability to survive this downturn. How is that impacting your guys? I don't know who here uses YRC, but are you worried about issues there? Are you actively shifting business away from them? Are you implementing contingency plans? Do you think that's having some ability to support the pricing dynamic right now? Ron, you're nodding your head, so maybe you want to start.

Yes. They're a huge player. All 4 of their divisions are big within our network and overall the second largest carrier. We are staying close to kind of monitoring their status. We have no plans of really removing or reducing them. We do have a bid that's coming up. So obviously, everything is in play. They've been a big partner for us as long as I've been in this role for 10 years or so. So no immediate plans on reducing, but obviously, making sure that we have a contingency plan or 2 in place just to make sure that we kind of protect ourselves from kind of worst-case scenario. But we've been there with YRC from the get-go and our intention is to stick with them as they go through any challenging times.

Ron, I think it's known that you've been one of the big users of -- at YRC. Are you seeing any behavior from any of the other LTLs that are trying to take that business? Are you seeing anything at all reminiscent of maybe what carriers tried to do in '09, '10 in terms of pushing YRC over the ledge?

There's been -- there's consistent communication from other LTL players that just remind me in case we need them that they're there interested, if anything, were to come of it. So we -- and I would say YRC has been a strong performing carrier for us as well. So a lot of conversations going on. We do have an open bid, but we'll see how it all plays out.

But conversation, but anything that seems extreme, like maybe we saw 10 years ago?

No. Not to that. Just letting us know that they're available to kind of hold up on.

Okay. And then Randy, Eric, Dan, any of you YRC users that have a comment that you want to make or just broadly about the dynamic -- the LTL pricing environment? Are you seeing any signs of certain carriers getting more aggressive looking for freight, willing to negotiate on rate?

From a YRC perspective, we're -- yes. Just real quick on YRC, we are inviting them to our upcoming bid. They've been talking with us over the past year or so. And we'll see what comes with that. Given the risk and the situation that's involved, it's unlikely that we would bring them in as a carrier, but we'll see through the RFP process.

Okay. Let's turn to intermodal now, if we can. So we talked about 5% to 10% reductions in truckload rates. Is intermodal doing anything different? Are you seeing similar reductions there? And because of low truck rates, because of low fuel, are you shifting business away from intermodal and back to truckload? So maybe we'll start with Randy at Del Monte on this one.

Yes. We saw a more muted response in our bid to intermodal. We only saw a 1% to 2% decreases, mainly because they have to play with railroads, and they are not excited about lowering rates. So a lot of that just has to be absorbed by the intermodal carriers. We haven't had a lot of modal shifts due to capacity requirements. We tend to stick to our mode mix. Mainly what we've been seeing lately is with the fuel situation going on, if you are not using a more traditional fuel surcharge like we use Breakthrough Fuel, the fuel is so low for the intermodal carriers that we've been getting calls from them to discuss fuel. But no mode shifts or anything like that. It's too important for us to have the capacity when we need it.

So just two things I just want to follow up with you, Randy. Can you explain that fuel part again? One. And then secondly, if truckload rates are down a lot and intermodal rates are just down a little bit and what -- where do you see the now the price difference, the cost difference to you for intermodal versus truckload?

We're still seeing in a lot of our lanes, it's still more economical to go intermodal. It's still, say 10%-ish less to go intermodal in some of the longer lanes. The fuel thing that I was talking about is we use a company called Breakthrough Fuel to reimburse fuel. And because we are not zero-based, right now, fuel is so low that we're under our peg on rail fuel. So...

So you're not paying any fuel surcharges, is what you mean?

For the rail portion, which means something that we thought we might pay a couple of hundred dollars in fuel alone, if it's got a short dray, we're paying maybe $20 in fuel alone. So obviously, the intermodal guys aren't terribly excited about that.

Okay. And it's the rails that are coming to you or it's the IMCs that are coming to you asking...

The IMCs. That's the IMCs.

Okay. Perfect. Okay. How about Dan, anything different on intermodal? Dan from 3M?

I think the one thing we might do differently is we bid our truckload and intermodal activities together. So throughout 2019 and into this year, the intermodal providers have lost some market share to a truck in those bids just through a combination of better pricing and better service.

Okay. And so it's a similar situation with Randy that your truckload rates are down more than your intermodal rates. But because of that, you're shifting from intermodal to truck.

That's correct.

Where do you see the pricing gap now between intermodal and truckload?

Where we do use intermodal, those savings are still in that 10% to 15% range. But yes, overall, that gap has shrunk as evidenced by the conversion of some activity.

Okay. So it's that -- it's on the lanes where that gap has gone away that you're shifting back to.

Right.

Right. So how much do you think that truckload rates need to start moving up before you start shifting back to intermodal? And then does rail service that feels great right now, does that play a factor in your decision?

Yes. I don't think we're going to convert anything in the short term based on price. We're having some concerns about the cycle time we're seeing with intermodal lately. So we need to get comfortable with that first before we had converted any business there.

So you're saying that you're actually seeing cycle times for intermodal get worse right now?

In some cases, yes.

And do you -- can you tell if that's a rail or a dray issue?

That's a rail issue. We're running into some reductions in frequency of trains.

Okay. So if they're going -- instead of running 4 days a week service now in that lane, they're now running 2 days.

2 days, yes.

Okay. Understood. Okay. Ron, I think you mentioned earlier, you do truckload and intermodal together. So maybe just how you're thinking about it?

Yes. We're -- we got through round 2. And what we're seeing is a slight conversion from intermodal -- potentially intermodal to truckload. We do kind of a targeted negotiation with our biggest carriers, and that includes big IMCs. So we would like to feel between them, working with their rails that will make up maybe some of that gap. But we are, give or take, seeing the rates in parallel with each other, meaning as the truckload rates are dropping, the IMCs or rails kind of stay somewhat in line, but we are seeing a little bit of a shift. So maybe not quite in line but close. And yes, we do look at everything inclusive of fuel. I would say, for us, it's more of a length of haul factor. So maybe from 2018, that sweet spot was 800-mile length of haul, 800, 900, in which intermodal might look more appealing. And with truckload rates that are going down, maybe that length of haul is going up a bit. But it's just really -- I've said before, it's a math equation for us. We look at all costs inclusive of fuel. We put a factor to the extra lead time carrying costs for the product, and we just kind of let the math kind of roll out. In terms of service, we would say both are consistent. We deal with the biggest asset intermodal guys. So I think we feel that service for them also is really good in terms of the dray component. And I'd say, precision railroading has maybe helped a little in terms of timeliness. I do agree that maybe the amount of ramp loading days has declined, but overall service I think is slightly better now than 2 or 3 years back.

Okay. Just maybe just a yes or no from everybody. Does -- is -- does ESG have any impact at all on how you make modal decisions? Meaning, is there any sort of corporate ESG policy or viewpoint that says when the tie goes to intermodal? Or is ESG just completely something that you're not looking at in your world? So maybe Ron, and then we'll just go to everybody.

I'd say, yes, a tie. We are big on sustainability and a tie would be factored more on the -- on reduction of emissions.

Yes. Same for us. Even if it's slightly worse than a tie, we would still tend to favor intermodal if the difference is very, very small.

Okay. So just real quick, so at 1:30, so Eastern right now, Hawaiian Airlines is about to start and Hunter Keay is going to be running that one. I don't have another freight thing. So I'm going to keep going. If you guys have a few more minutes, I'm going to go a few minutes over, but if anyone cares about Hawaiian and you want to hop, go for it. So I want to talk about the brokerage landscape. And maybe just quickly on the trucking side, each of you, what's your split between asset-based and brokers? And as you think about the next year or the next several years, do you think you shift more towards one versus the other? So we'll start there, and then I want to go a little bit into the digital brokerage world. But maybe start with Dan. Again, asset-based versus broker and then where you think -- which way you think that shifts?

About 5% of our activity moves with our broker partners. And at least looking out to the next year, I think that's going to shrink a little bit.

Eric from J&J?

Yes. We're about a 90-10 asset, 90% asset. I don't expect that it will shift a whole lot. Typically, we stick that way for multiple reasons, but one is operational to make sure that we have the drop trailers, and we're able to do that better with an asset provider.

Randy, Del Monte?

Yes. We're probably approaching 25% to 30% broker at this point. And some of that was for cost reasons, but we've seen excellent service from the broker partners that we have and we tend to center on 3.

Okay. Now -- and then, Ron, I think you've always said that you're a lot more asset-based, is that right?

Yes. 92% asset, 8%. And we're always -- there's always an appetite or at least a temptation to consider brokerage. What we're doing a little bit different this year's bid is we're separating maybe 4 or 5 brokers that we'd say maybe act most like an asset carrier in terms of drop trailer service and be able to sustain kind of the volatility in the industry. So if we go up, it might be really focusing on those 3 to 5 brokers that might be a little bit more less risky for us.

Randy, I want -- from Del Monte, I want to go back to you on this because I think that you've -- I think we've talked a bunch in the past about your view of some of the newer digital brokers in the space, and I think you've done a bunch with them. I guess if that's right, I'm curious your views of what we heard from Uber yesterday as it relates to Uber freight. If you're seeing Uber freight act any differently in the market, do you think of -- do you have any insight? Is this a business that's now going to start to go away? Any thoughts or insight you have here?

Yes. I mean, I think that there's still quite a ways from going away because I think that can be a business unit for them that does work. Indications that we've gotten from them are that they're still here to service us, but I mean you would kind of expect them to say that. We are heavy users of both Uber and Convoy, and they've done really well for us from the service side. From a cost side, they've gotten better over the last -- this last bid, and I would expect them not to be basement dwellers from rate just because they've got to get that business to be profitable. But if they continue to service the freight at the level that they have over the last couple of years, I mean I -- they don't have to dwell in the basement from a rate standpoint.

So when you said they've gotten better in the last bid from a cost standpoint, that means their costs have gone down more than others have gone down. Is that what that means?

They've been able to keep up with some of the decreases that we've seen from the other carriers. However, some of what I mean by that is it doesn't feel like they're still in by-the-market mode. In our last bid, they were leading the way on decreases. And on this one, they were a little more moderate with their decreases.

And when you see the news from yesterday, does that make you -- do you feel comfortable continuing to use Uber freight? Or are you naturally going to shift some of that to Convoy that you mentioned or other brokers or after these guys?

Yes. So I mean it would be disingenuous for me to say that I felt totally comfortable with the news yesterday. I did make some phone calls, like I said, and got some reassurances. We're definitely going to take a look at the split going forward if we don't especially see some improvement in their overall financials. It's not something that they can afford to prop up forever.

Okay. Eric, Dan, Ron, anything that you guys want to add on the digital broker side or Uber freight specifically? Any experiences or how you treat yesterday's news?

We just started using -- sorry.

Go ahead. Go ahead, Eric. Yes.

Yes. We just started using Convoy. And so far, the experience has been really good. I think the value that they're bringing is certainly their traditional brokerage and the digital part of it. But beyond that, they've started to provide us some insights into our operations, meaning where we are inefficient in our operations and where we can make some operational changes to either be a better shipper of choice or reduce costs or make our freight more attractive, however way you want to look at it. So that's certainly a value-add that I see that they can bring that's beyond a traditional broker or, frankly, even some of our asset providers, they don't really have that level of information.

And for us, we kind of introduced ourselves to the digital guys in last year's bid. We might -- and they've performed well, both cost and service comparable to some asset carriers that we have on the same lanes that they've operated. So I think we might increase that a bit. We just use really the big guys. I think the risk or the concern we still have is we need to see them perform through what we'll call that the good, the bad and the ugly. I think in 2019, with soft conditions, they've done really well. It's going to be interesting if we go through another 2018. Maybe a year from now or so, will they show that same level of consistency? So I think we continue to take a conservative approach until they can kind of prove it for all 3 of those type conditions.

Okay. I want to ask just quickly on UPS, FedEx. So all we hear from them right now is we're seeing this major massive mix shift in our business, the B2B is down, B2C is up, and it's just so bad for our margins. So obviously, they're making much lower margins delivering something to a house than to a store or a business. I guess the question I'm going to ask each of you or whoever has the thought, are you seeing any evidence that -- of UPS or FedEx coming back to you saying, "Hey, we just -- we don't need a 2% rate increase. We need a 10%, 20%, 50%, 100% rate increase because we just can't make money doing e-commerce anymore." And so is anyone maybe just yes or no, is anyone seeing that change in behavior from UPS?

Yes. We're launching a global parcel RFP. So they're not -- now obviously will not be a good time to come to us for that.

Right. And if they were to come to you, what would you -- what is -- if they both came to you and if they were to somehow get discipline and say, "We just -- we can't do this at a 0%, 1%, 2%, even if it's 5% margin, right? And we just -- we need more." What do you do, Eric?

I think it would depend how far into the contract we are because typically, we sign 3-year contracts with each of them. And there's a GRI build into that. So it would depend how far we were into that contract, how we would address that. I mean, ultimately, if both of them came to us, we probably have to negotiate something. With the power that they have, I think we'd negotiate something. Obviously, we try to minimize it and push it off as long as we possibly could but ultimately, we have to do something.

Okay. We're -- just last couple of minutes. Maybe just quickly, I'll go to Dan from 3M on the airfreight market. How are rates right now for you on the airfreight side? Are you seeing any signs of that craziness in airfreight pricing level off? And how do you guys manage through that right now? Are you shifting to whatever you can?

Well, I'll be honest, I don't manage our international airfreight group. But anecdotally, I know we're paying more and we've not gotten those rates back to pre-COVID levels yet.

Okay. Does anyone have insights on their international air business?

Yes. I don't manage it, but I've been connected with that team. Our rates are over 100%. We're spending a tremendous amount on air freight to the point certainly where it's -- we've had to readjust our budgets and reallocate money for that. So yes, our rates are typically 100% or more higher than our normal contracted rate. It really has not eased up. It's a little bit better than it was at the peak of March, April, but really not eased up a whole lot. It's still continuing to be at very high level.

Okay. Just last really quick -- two quick things. So maybe let's try first one word answer. So one of my thoughts has been we've had some back-to-back supply chain events. We've got COVID this year. We had the trade war last year. We had 2018 arguably the tightest truckload market ever. I've had a thought that all shippers maybe are going to run or some shippers are going to run with higher inventory safety stock levels in the future than maybe what they've done in the past. Maybe just a quick yes or no from each of you. Is that something that you think is likely or not? Maybe starting with Randy.

Yes. At least a little bit more.

Okay. Eric from J&J?

Yes.

Dan from 3M?

We've got a corporate initiative to reduce inventory levels, which will continue. But for specific products, specifically COVID-related, I expect inventory levels to increase.

Ron from Home Depot?

And for me, I'd say very modest to keeping inventory levels flat versus historical.

Okay. And the final, final one. As I think over -- as you think over the next not 12 months, but the next 3 to 5 years, which mode of transportation do you think has the most upward pressure on rate? Which mode of transportation do you think has the most downward pressure, if any, on rate relative to what you're seeing right now? So maybe we'll start with Ron from Home Depot here.

I mean, I think final mile, especially what we're seeing from overall e-commerce, huge demand going up. So I would put that both in the volume and the potential risk for rate. And again, over the next 12 months, we might see some really favorable results from truckload, but I think there is a little bit of a risk beyond that with -- similar to what we saw in 2018.

Okay. Randy from Del Monte?

I would say truck would definitely have the most upward pressure. I mean it's not getting any cheaper for them to operate. And while the same is for rail, I think in order to keep rail and intermodal competitive, there's going to have to be some downward pressure on railroad.

Okay. Eric from J&J?

Yes. I agree with that. I was initially thinking parcel, but I think Ron said it well, final mile kind of broadening that definition. There's the most upward pressure there. And then I agree with the intermodal on the downward pressure. I think they're going to have to have that downward pressure just to stay competitive in the short term and the long term.

And Dan from 3M?

I would say, upward pressure on LTL rates. And I actually expect to see some downward pressure on the international modes as more companies do near-shoring activities.

Okay. And Ron, your final mile, was that a package comment or a heavier comment?

I mean, parcel -- both are -- well, both are booming and those [ 100-or-so ], we're opening are going to be heavily dependent on flatbed. So contractor-lumber-type building supply size along with box drop appliances, big and bulky. So across the board, Scott.

Okay. All right. We're going to wrap it there. Thank you guys so much. I thought this was fantastic. I really appreciate you guys taking the time. We'll speak soon.

Thank you for having us.

Thanks.

Thanks.

Thanks guys.