Operator:

Ladies and gentlemen, good afternoon and thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the J.B. Hunt Transport Services Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] And I would now like to turn the conference over to Brad Delco, Senior Vice President of Finance. You may begin.

Shelley Simpson:

Thank you, Brad, and good afternoon to everyone on the call. I'd like to start by saying I'm humbled and honored to have recently assumed the role of CEO and to lead our great company on the next phase of our growth journey. While recognizing this is a big moment as only the fifth organizational leader in our company's 62-year history, let me be clear our vision, our mission, and our focus has not changed. We have large addressable markets. We provide excellent service for customers. We have talented people across our organization. We are primed and we are ready to execute on our opportunities for growth. My message to the team on day one was quite simple, ready, set, go. As you've heard us say consistently, we remain committed to our investments and managing the business with a long-term mindset. These investments span across our company foundations, which include our people, our technology, and our capacity. Through investments in these key areas, we have a significant number of opportunities to provide value to and on behalf of our customers across our suite of complementary service offerings. Our focus remains on deploying capital in areas of the transportation industry where we see a long-term opportunity to generate compounding returns. We operate in an industry that is cyclical, but we have focused on businesses and areas that we feel confident we can compete effectively, take share, and win. We do this by remaining financially disciplined, keeping our focus on the long-term while managing costs in the near term, and relying on our vast experience. We will be prepared to meet the growing needs of our customers while driving long-term growth for the company and our shareholders. Earlier this year, we introduced our priorities for 2024, and we as a management team and as an organization continue to execute on these priorities, which as a reminder are, one, to deliver exceptional value to our customers through operational excellence. Two, scale our long-term investment in our company foundations, which are people, technology, and capacity. And three, drive long-term value and returns for our shareholders. While the first half of this year has been challenging in terms of our financial performance, we remain focused on delivering exceptional value to our customers. In 2024, we've continued our record performance in safety and our service levels to customers has been exceptional. We have received multiple awards this year for our high service level from our customers. Our joint Intermodal service offering with BNSF, Quantum, is running well above our initial expectation from an on-time service performance. In Dedicated, we continue to prove our value to customers as we've been able to balance the need to be disciplined with underwriting new business while providing customers some flexibility with meeting their needs. Final Mile continues to make progress on its profit improvement plan and we continue to work on areas around cost, integration, and growth in ICS, and see some progress in the business. Finally, we remain encouraged about the value proposition for customers in our drop trailing business in JBT and the future potential of that business. While admittedly the market has been challenging, we have invested throughout this downturn to set us up for future growth and success across the business. We continue to focus on controlling expenses in the near term without jeopardizing our long-term potential, managing our headcount through attrition, while at the same time continuing to deploy and enhance our technology to increase the productivity of our people. We took advantage of a strategic opportunity to acquire the Intermodal assets from Walmart earlier this year, which added capacity to our network, but also increased the long-term growth potential of our company, which we believe will drive long-term returns for both the company and our shareholders. The team will provide more details with their prepared comments, but in summary, we will stay the course, focus on the long term, with the same vision to create the most efficient transportation network in North America. With that, I'd like to turn the call over to our CFO, John Kuhlow. John?

Spencer Frazier:

Thank you, John, and good afternoon. It's a pleasure to be joining the call. My remarks will focus on our sales and marketing strategy, but will also include some perspectives on the market, as well as feedback we are hearing from our customers. During the second quarter, we saw more normalized seasonal patterns across our business. On the demand side, the second quarter felt more like what we're accustomed to seeing prior to the pandemic disruption. April started a little slower from a demand perspective, primarily due to the timing of Easter, but we did experience what used to be a typical end of month and end of quarter lift in June. This was evidenced particularly in both JBI and JBT in the quarter, where we've seen strong improvements in bid compliance levels in the mid-80s to 90s levels, which we haven't seen in quite some time. We were able to meet this seasonal demand for our customers with high service levels across our businesses. Our customers have worked through most of their excess inventory and feel appropriately right-sized with current sales activity levels. While we cannot predict when the market will inflect, our customers know we stand ready to meet their growing transportation needs across our entire scroll of services. Regarding our scroll, our customers buy capacity across our suite of services and have come to expect a consistent high service level experience. In fact, greater than 90% of our Top 100 customers buy more than one service from us and greater than 75% buy from three or more services. Among our segments, JBI and ICS have the highest overlap amongst our Top 100 customers. We see the power of the scroll in our sales efforts as customers have recently wanted to de-emphasize their use of brokers in favor of assets. And we've converted some nice wins over to JBT as a result. Being mode-indifferent and offering customers the best solution will always guide our go-to-market strategy. As we look at the overall freight market, we still see oversupply across all modes, with shippers having options on both mode and provider to move their freight. Now, while capacity is not a top concern right now, there is an awareness that this will change at some point, but the timing of which though remains unclear. Currently, cost and value are the primary differentiators right now for customers, and we continue to lean into the value we can deliver to customers with our premium service. As we have said in previous quarters, we don't know when the cycle will shift and aren't going to make a prediction. But we remain committed to investing in our business for the long term and being ready to grow with our customers over many years to solve their transportation needs with high service levels they've come to expect from J.B. Hunt. I'll wrap up with some of the feedback we're getting regarding peak season. We see the same datasets that most of you track and read the same headlines around what's happening in the ocean freight market. The feedback we hear is an expectation for a peak season this year, but the magnitude or length of peak remains to be seen. That said, some customers have pulled a portion of their peak freight forward a couple months, given the multiple macro factors that could impact the supply chain later this year. This pull forward has created an early peak on the water, but that hasn't translated into domestic inland moves just yet. We are working with customers on peak season plans to ensure we have resources properly positioned to meet their transportation needs. That concludes my remarks. So, I would now like to turn the call over to Nick.

Darren Field:

Thank you, Nick, and thank you to everyone for joining us this afternoon on the call. I'll review the performance of our Intermodal business during the quarter, give an update on the market and service performance, and highlight the continued opportunity we have to deliver value for our customers and all of our stakeholders. I'll start with Intermodal's performance. Overall, while we saw seasonality that resembled more normalized pre-pandemic demand trends during the quarter, the impact of a depressed truckload market and competitive bid season in general, more than offset this and drove our volume down 1% year-over-year. This was primarily driven in the east where we compete more directly with one-way truckload where our volumes were down 7% in the quarter. This was partially offset by our Transcon business growing 4% in the quarter. We continue to see strong demand out of Southern California where volumes were up double digits versus the prior year. By month, our consolidated volumes were down 3% in April, up 1% in May, and down 1% in June. During June, we did see a nice seasonal lift in volume, particularly toward the end of the month, and importantly, we were able to meet our customers' capacity needs with strong service levels, highlighting the strength and flexibility of our network. As we look at the freight market, we continue to see a large amount of freight that we believe should be converted from over-the-road to Intermodal as it is more economical and environmentally friendly. As I've said it before and I want to say it again, we stand ready and have the capacity and people in place to meet and exceed our customer service needs and recapture share from the highway moving forward. During the quarter, we did see margin pressure both year-over-year and sequentially. This is largely related to the market pressure on our yields but also due to our capacity investments. While volume does mean more to us now than ever before given our underutilized capacity, our modestly lower volume year-over-year and only slightly higher volumes sequentially wasn't enough to absorb our higher cost and deflationary yield pressure. As discussed earlier in the year, bid season was competitive and largely wrapped up during the second quarter. We continued to see truckload pricing that we believe is unsustainable, particularly in the east, and shippers took advantage. Given the nature of our pricing cycle, we will be living with a large portion of the recently completed bids into the first half of 2025. With regard to our rail service providers, we have been pleased with the service from each of our providers, their commitment to the intermodal offering and growing the overall market. That said, we and our railroad partners know the true test of our collective service will come once freight volumes increase with higher overall demand on our networks. We remain confident in the collaborative work and investments being made to maintain high service levels as the inflection occurs. In closing, we continue to strongly believe in the strength of our intermodal franchise. Our customers trust us and we continue to find new and innovative ways to better serve their transportation needs. Our service levels are exceptional and we are confident that this level of service can continue as our customers’ overall demand for our capacity increases. While we are not pleased with our current results, our optimism on the future growth of our business hasn't changed. We remain excited to work with our customers to meet their growing demand with an efficient, cost competitive, and more environmentally friendly solution. That concludes my prepared remarks and I'll turn it over to Brad Hicks.

Operator:

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jon Chappell with Evercore ISI. Your line is open.

Darren Field:

Yeah, I appreciate the question. Certainly, Spencer's comments just on overall imports through Southern California is one of many factors resulting in just a general improving trends throughout the first quarter -- or throughout that second quarter. I do want to highlight, we referenced a negative 1% volume comp in June. June of ‘23 had two more working days than June of ‘24, and so that's certainly an influencer in that comparison. But again, as the quarter went on, we experienced some improving trends from our customers. I also highlighted in the prepared comments that we were up double digits out of Southern California for the entirety of the second quarter. So certainly some customers would highlight that maybe that was a result of early shipments for peak season. Some customers highlighted that generally their business had improved. And in some cases, we had converted back Highway business to Intermodal. So, it's kind of a mash of everything to see some improvements that occurred during the quarter.

Operator:

And your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is open.

Darren Field:

Well, certainly we highlighted that this current, what I'll call the 2024 bid cycle, largely completed during the second quarter. Those prices and the yields that we achieved were not strong enough to give us margin improvement that we believe our system can and should run. We're not changing our long-term margin target. We're not satisfied with the current returns on our business and do recognize that pricing improvement is one of a couple of areas, but the most important area in order to get margin improvement. Certainly, volume is worth more to us today than ever before. We've said that quite often, and that's just a result of having as much underutilized equipment as we currently have. And then all things cost. What can we do to be more efficient as an organization? That can be inside the activities of our drivers and our drayage operation, that can be certainly inside the activities of our people. How do we utilize technology better? How can we just be more efficient with our customers? But over the long term, pricing will always be the most valuable element to improving margins more than volume or just operational efficiency, but we will work on all three every day.

Chris Wetherbee:

Hey, thanks. Good afternoon, guys. I guess I wanted to touch a little bit on that margin comment. I guess we saw volume up sequentially, and I know yields were going down, but we also saw profit down sequentially. So I guess, from a seasonal perspective, that doesn't necessarily always show up. So, I guess I just want to make sure I understand from a cost perspective, if there was something incremental you were dealing with this quarter, if it's the kind of thing that we see improvement in volume from here, should we be able to see margin or operating profit improvement sequentially from here?

Operator:

And your next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Darren Field:

So, listen Scott, there's a lot in your question there. Certainly, the bid cycle has always implemented at the same cadence that it did this year. We implement portions, big chunks, 30%, call it, of this pricing cycle throughout the second quarter. So I guess you could expect that something after the second quarter would entail all of that fully implemented. So, over time, I mean that, we did have negative pricing pressure. I don't have any guidance for you in terms of big step downs. There's certainly, I don't anticipate anything like that, but we're certainly getting everything fully implemented throughout the second quarter, and so the third quarter is a better reflection of the fully implemented pricing cycle. In terms of share gains, I mean, we have, I think, are dominating the Transcon marketplace. I do believe our volume growth there has been substantial. And we've highlighted that -- in the east, we have some significant headwinds from truckload pricing. I think that as we get into the second half of this year, we are optimistic about the discussions we're having with our customers about the value proposition that we represent, as well as concerns about highway capacity, and we will continue to look to grow. So that's probably all I have to comment on your questions today.

Daniel Imbro:

Yeah. Hey, good evening, guys. Thanks for taking our questions. Maybe one, shifting to the Dedicated side. Nick, we continue to hear anecdotes of a competitive Dedicated market. Dedicated margins were a bit softer, kind of underperform seasonality and you sold a few hundred more trucks. I guess with 1,000 trucks sold in the first half, should those startup costs start to moderate as we move through the summer with that business online, where we start to see margin inflection as that rolls off, or how would you think about that business as we move through the summer?

Brad Delco:

Daniel, hey, this is Brad Delco. I'll add a little bit more to that too, just to clarify some things that were in some of Nick’s prepared comments. He did share he expected the ending fleet count for the year to be similar to what we saw in Q2. But how we really get there is, we do have visibility, some fleet losses for the remainder of the year. So think of losing trucks that are sort of at their mature state, if you will. And at the same time, we have startups that are -- that occur in Q3 and Q4, and obviously those startups have a little bit of headwind to them on the margin side. So we wanted to give a little bit more clarity on that. And that was our -- the comments we had in our prepared remarks were an attempt to sort of give you guys a little bit of forward guidance on that expectation going forward.

Ken Hoexter:

Hey, good afternoon. So I want to delve into kind of some of the discussion that your Transcon growth was up 5%. You talked about double digits from the West Coast ports, but they were seeing kind of mid-teens volume growth, kind of some conflicting statements. So you noted early peak season hitting shores, but some of that has yet to move. So I just want to understand are we building inventories? Are we seeing share loss to other rails that are now being more variable on rates for some of the peers that used to be on Burlington with you? I want to understand kind of the market dynamics in there, if you can.

Operator:

And your next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open.

Nick Hobbs:

Yeah, Ravi. Thank you for the question. It's been an incredibly difficult and competitive market. That's certainly been a factor. As we stated in previous quarters, we've been focused largely on quality, and that's also weighed in on some of our volume losses. And in the commentary and my prepared remarks, I made reference to the impact of some of the challenges that we've had on the BNSF acquisition. And so really what we see there is that we lost some business shortly after acquiring the brokerage assets of BNSF Logistics that were unexpected. We've also accelerated and I'm happy to say that we have been largely successful at integrating from a technology but that came with some incremental cost in the first half. And so that's also weighed us down. When we think about the bigger picture and where our focus has been, there's no doubt that we're dissatisfied with our performance in ICS. I am, however, encouraged at what we saw, and Spencer referenced it kind of on the seasonal trends. I think even Darren mentioned what they saw in their business. We saw something very similar, both not only in ICS but also in JBT when we really think about breaking down the second quarter month by month and we saw a really good step forward from our May volumes into our June volumes on a workday basis. And so, I feel like we saw a step-up greater than what we historically would see, and I do believe that in part that is our strategy starting to take form on growing back with quality partners, quality customers, and quality carriers. Again, can't quite see it fully in our results yet, but we took a nice step forward on our volumes.

Jason Seidel:

Thank you, operator. I want to get back a little bit to the Intermodal side on the margins. How should we think about some of your commentary about lower utilization and increased cost related to equipment? Is that coming from the Walmart assets and how should I think about that sequentially?

Operator:

And your next question comes from the line of Tom Wadewitz with UBS. Your line is open.

Darren Field:

Well, I think as much as anything, and I'm going to ask Spencer to maybe jump in here when I'm done. Just our -- as we moved through the second quarter, we were feeling momentum and we've kind of tried to highlight that and do feel like our customers are aware that last year, they kind of caught us by surprise with some of that volume and everyone is aware that surprises are not always best when it comes to an efficient transportation network. So we're engaged in conversations with all of our customers. We have capacity to solve their needs, and we'll look for ways to continue to grow our business, both sequentially and year-over-year will always be our goal. We'll have to wait and see, but certainly we have felt some momentum as the second quarter went on.

Operator:

And your next question comes from the line of Bascome Majors with Susquehanna. Your line is open.

Shelley Simpson:

Hey, Bascome. Thanks for the question. This is Shelley. I think Spencer did a nice job highlighting that we are having those conversations with our customers. I would tell you this is normally the time that we would be having those. And I think you heard Darren highlight that we're encouraged with more seasonal demand similar to what we've seen pre-pandemic. So I would tell you this looks and feels more like pre-2020. This would be consistent with how we had conversations with customers in the past. I think our customers have done a better job on their bid compliance and understanding their volume better. I think we're all just a little bit hesitant. We've had some false starts over the last couple of years, and we just want to make sure that things are steady and that we can see clear line of sight. I think our customers are even a little bit skittish about what they can expect. So, third and four quarter, last year, they did catch us by surprise. We did an outstanding job. Us, our railroad providers, I would say across the board, we did a great job servicing our customers. Our customers realized that. Now that's why we're having those conversations. What is the plan? How do we think about that? Certainly, if we move back to a more seasonal pattern, we would expect those same things to occur from a demand perspective and from a profitability perspective.

Brandon Oglenski:

Hey, good afternoon, and thanks for taking the question. Shelley, maybe if we can follow up from there, and welcome to the hot seat of CEO, but this is the seventh quarter of material operating income declines for you guys. I mean, do share owners just at this point need to wait for an inflection in the market or is there more that you can do from your position? I mean, I know we talk about Highway conversions, but if we look back six or seven years, Intermodal volumes really haven't changed all that much in your business. It's the sixth consecutive quarter of pretty material losses at ICS. So what can you do in the interim to change outcomes in your business without the market maybe potentially inflexing better for you?

Operator:

And your next question comes from the line of Jeff Kauffman with Vertical Research Partners. Your line is open.

Shelley Simpson:

Well, thank you, Jeff. Good question. I will say, I think one of the things that we didn't understand, same thing we didn't understand going through the pandemic, was how much the change would occur. And so if I look back on our experience, in 2009, we had the Great Recession. We understood and we were prepared and ready. One of the changes that happened then, as price went downwards during that Great Recession, so did our cost. We're in an inflationary cost perspective with price pressure coming down. And those two things really is the first time I've seen that, at least in my history inside the organization. I don't know that anybody believes those two things would occur as they have. You typically look at history, try to learn from what you know there, and then make sure you're prepared and ready. That, I would say, was more of a disconnect than maybe what we expected. And then just the depth, one of the things that we've used in our history is what's happened with capacity. And so we've estimated that carriers are losing money for now greater than two years. That is unusual. It's unusual from our history. That typically would mean that capacity would come out of the market and that we would start the recovery. That has not happened, and I think that's been the biggest myth of this last two years of a freight recession. We haven't been able to predict when capacity will leave the market, and we know that that has to occur, or demand has to pick up greater. But I would tell you, more likelihood that the capacity side would exit more quickly than demand would increase even more. So I would say those are the two things. I'm going to ask the team if there's anything else that they see. But those would be kind of the two things I would say that we -- if we'd known better, we probably could have thought through a few things.

David Vernon:

Hey, good afternoon, guys, and thanks for being here. I just wanted to ask a question about within the Intermodal service, can you give us some context or color around how the Quantum product is performing that you guys announced a little while ago? And then with the shift over of the Mexican traffic from the KCS to Mexico [to the FXE] (ph). I'm just wondering if you could just give us an update on how that transition is going? Has there been any impact on customer attrition or anything like that in the North South trade? Thank you.

Operator:

And that concludes our question-and-answer session. I will now turn the conference back to Ms. Shelley Simpson for closing remarks.

Operator:

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

Operator:

Good day and welcome to the J.B. Hunt Transport Services, Inc. First Quarter 2024 Earnings Call. Today's call is being recorded. I would now like to turn the call over to Brad Delco, Senior Vice President of Finance. Please go ahead.

John Roberts:

Thank you, Brad and good afternoon. I will be brief with my comments but I want to hit on a few topics before I turn it over to our team to give you their updates and to address your questions. Last quarter, we said goodbye and good riddance to 2023 and welcomed the new year with some reservations and concerns but nonetheless confident in the strength of our organization and the journey we are on to build an even bigger and better company. Over the last several years, you have heard us talk about how we manage the business for the long term, remain focused on being financially disciplined and being for our people who have the knowledge and talent to help us execute for and on behalf of our customers. From that perspective, nothing has changed and we remain committed to staying the course. Over that same time, we have faced challenges, have taken some calculated risks and made some strategic decisions that I remain confident will positively impact our company and our future growth. To be fair and somewhat critical, the current environment we're in has remained persistently challenging and for longer than we had predicted. But what I remain confident in is the strategic decisions and the direction and course we are on is well charted. Our conservative nature, financial discipline and coming from a position of strength has afforded us the opportunity to invest throughout this period to better prepare us for the eventual turn. We stand ready. Our company and our teams are working hard. To use a sports analogy, we are putting in the work, exercising the muscles, becoming more lean, challenging the playbooks we know and better preparing ourselves for our future state. While it's hard to see that in light of what I would characterize as a disappointing financial performance against our standards, I remain appropriately metered with optimism. Elements that support that view should and will be revealed in the following discussion from our leaders. Finally, as recently announced, this will be my last earnings call as Chief Executive Officer. It has been a tremendous honor to serve in this capacity for the last 13 years. Our Board of Directors has taken a very thoughtful approach to succession planning and has tremendous confidence in my successor and our entire leadership team. So now I'd like to turn the call over to our President and incoming Chief Executive, Ms. Shelley Simpson.

John Kuhlow:

Thank you, Shelley and good afternoon, everyone. My comments will cover a high-level review of the quarter, provide some additional color on our costs and the impact on margins as well as provide an update on our capital plan for 2024. As a general overview, we continue to face inflationary cost pressures despite also facing deflationary pricing pressure. Our financial performance is not where we want it to be, particularly in Intermodal and our Highway Services. We recognize that some of this is driven by market dynamics, while some is related to our decision to remain committed to our investments to drive future growth. As Shelley alluded to, we remain committed to our efforts to control our costs while trying to maintain the right balance of resources to support our future growth. I'll start with a high-level review of the first quarter. On a consolidated GAAP basis compared to last year, revenue declined 9%, operating income declined 30% and diluted earnings per share decreased 35%. The declines were primarily driven by a combination of lower yields and freight volume combined with inflationary cost pressures. Our tax rate in the quarter was 28.7% versus 24.7% in the prior year. The increase was related to discrete items and other adjustments and we continue to expect our annual effective rate to be between 24% and 25%. As previously mentioned, in addition to the market dynamics, our commitment to our investments in our people, technology and capacity are putting additional pressure on our cost structure and, as a result, our margin performance. We have visibility to these costs and their impact on the performance of each business segment. On a consolidated basis, these costs aggregate to approximately $100 million related primarily to having too many resources with our people and capacity for our current business levels that we plan on scaling into overtime. That said, we remain committed to our cost initiatives and have identified additional areas of opportunity to address which should not impede our ability to support meaningful growth of our business. We are confident in our ability to scale and leverage our investments. But right now, our focus is on how we best control our costs in the near term without diminishing the long-term earnings potential we have built in the business. Switching gears to our capital plan, we are focused on maintaining a strong balance sheet to provide us with ample liquidity to deploy capital as needed to drive long-term value for our shareholders. We have navigated this challenging freight environment while remaining conservatively leveraged at or below our target of 1x debt to trailing 12 months EBITDA. We did retire $250 million of our senior notes that matured in the quarter with availability under our credit facility. For net capital expenditures, we previously stated an expectation to spend between $800 million to $1 billion for 2024 and we have no change to that range despite some recent announcements to further expand our capacity in our Intermodal segment. And finally, we will remain opportunistic with share repurchases. This concludes my remarks and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick and thank you to everyone for joining us this afternoon on the call. I'll review the performance of the Intermodal business during the quarter, give an update on the market and service performance and highlight the continued opportunity we have to deliver value for our customers and all of our stakeholders. I'll start with Intermodal's performance. Overall, demand for our Intermodal Service was weaker than our expectations, while imports into the West Coast have improved and inventories per our customers are in a more balanced position. We have yet to see that translate into any meaningful pickup in demand for our valued service product. Volumes in the quarter were flat year-over-year and by month, we're down 2% in January, up 3% in February and down 1% in March. While we are seeing growth in business in some lanes, particularly outbound Southern California, we are seeing pressure from truck pricing in the East. We have been surprised by how much competition we are seeing in bids but are remaining disciplined with our valued service offering. In February, we announced, we entered into a multiyear intermodal service agreement with Walmart in an arrangement that includes the purchase of Walmart's intermodal assets. This will increase our available container capacity as we execute toward our stated target of 150,000 containers. While this capacity is not needed at the moment, we saw this as a unique opportunity to make an investment that we feel confident will be beneficial to the organization over time. After not having enough capacity to meet our customers' demand in 2021 and '22, we have consistently been growing our capacity to ensure we are out in front to meet our customers' growth needs while also providing a high-quality service product that is reliable. We are pleased with our rail provider service levels and their approach and commitment to growing Intermodal. We are in constant communication with the railroads on ways we can work together to drive growth. While we believe that weak truckload pricing due to overcapacity is influencing customer decision-making, we continue to see a large amount of freight that should be converted from over-the-road to Intermodal and we have the capacity and people in place to grow with our customers and recapture share from the highway. As we have previously discussed, we continue to work with our rail providers to launch new services based on feedback from our customers. Our announcements last year, launching Quantum with BNSF and our new Mexico service in collaboration with BNSF and Ferromex, are two examples. Both service products are performing well but we are still early and see opportunities to grow with both services moving forward. Finally, on costs. As we have said previously, we have the resources and capacity to handle significantly more volume than what we are currently handling, to the tune of at least 20%. This has been a drag on our margin performance and more than anticipated given both the depth and duration of the current market dynamics. We continue to challenge ourselves on our costs while trying to balance the future needs of the business to support meaningful growth. In closing, we continue to strongly believe in the strength of our Intermodal franchise. Our customers trust us and we continue to find new and innovative ways to better serve their transportation needs. We are pleased with current results and have the people, technology and capacity in place that will allow us to scale into these investments. We remain excited to work with our customers to meet their growing demand with an efficient cost-competitive and more environmentally friendly solution. That concludes my prepared remarks and I'll turn it over to Brad Hicks.

Brad Delco:

Lisa, in light of the time, could we have the analysts ask one question and one question only?

Jason Seidl:

I wanted to talk a little bit about the pricing market. You mentioned how it was a bit challenged on the Intermodal side. What percent of the book is already done now? And then what percent reprices in 2Q?

Operator:

We'll take our next question from Ken Hoexter with Bank of America.

John Kuhlow:

Yes. So Ken, as we kind of said in the opening remarks, we've been talking for a while now about our investments in our people and our equipment and we thought it would be helpful to provide some additional transparency on the impact of these investments and so we've quantified as best we can for that for you. We do have good insight into our productivity and utilization metrics and that's informed us of this cost measure. And so if we were focused on the short term, there could be a different play to call here. But we have a very long-term view on the company and our investments and we believe in our strategic decisions and around our valuable resources. So if there was a major economic environmental change, we may consider but right now, we're focused on growing into this capacity and holding on to our commitments to our people for the long term.

Brian Ossenbeck:

Darren, just thoughts on the volume trends, seeing a lot of international intermodal volume going inland and intact [ph] -- and clearly, a big disconnect with your volume and your primary rail partner in the West when you look at transcon versus their total volume. So I wanted to get your thought on that. Is that a precursor for more transloading, more domestic coming, imports that have been pretty strong now? Or do you think there's some sort of shift and this is going to be a bit of an overhang for a while and perhaps losing some share to the international track?

Operator:

We'll take our next question from Ravi Shanker with Morgan Stanley.

Darren Field:

We've said that we're probably out of the business of trying to predict the future because it's been really, really difficult for over 4 years now. Certainly, pricing in intermodal, whether it be from truckload capacity or other intermodal competitors, it has been competitive. And history would tell us that it is where we are in the cycle right now and that there will come a time when pricing and volume will return. I think that Shelly's prepared comments really highlighted that we're in a spot where it's out of balance and certainly, customers have taken advantage of that and the future really gives us an opportunity to seek both growth and pricing improvements.

Justin Long:

John and Shelley, congrats to you both on the announcement. Maybe to pivot for a moment to DCS, Nick, I wanted to ask you about the commentary from the prior call that it could be hard to grow Dedicated revenue and profitability this year. But when I look at the truck sales in the first quarter, they were pretty strong and it sounds like you're a bit more confident that you can backfill some of the attrition you see ahead. So when you put it all together, do you feel like Dedicated can hold relatively flat in 2024? And maybe you could just comment more broadly on the competitive environment in Dedicated as well.

Brad Delco:

Justin, this is Brad. I mean, consistent with what Nick said, I think our direct comments last time were, say, in light of our visibility to some fleet losses, it would be difficult to grow. But I think most of the market has interpreted that as relatively flat. I don't know that we want to be on record providing guidance for that. But I would say the pluses or minuses, since we've previously stated that, I think clearly, the sales performance in DCS coming out of Q1 is a lot stronger than we anticipated. We talked last year about the pipeline being very strong and some bigger deals begin there, obviously, some of those landed. But I would also say that's the positive side. On the negative side and this was in Nick's comments, we have seen a pickup in some bankruptcies and so that's maybe a little bit of a negative that offset some of the positive on the new sales performance that we've seen to start the year. So, I just want to add that in.

Tom Wadewitz:

I wanted to ask you a little bit more about the Walmart contract. I think the way you talked about it in the prepared remarks was along the lines of adding containers. My understanding was that you were also adding new freight along with those containers. So I wonder if you could just give us a thought on kind of how well utilized were the containers that you're bringing on? And how should we think about the pace of that? Is that something that kind of ramps across a couple of quarters? And I would think that would be big enough to see in your volume numbers but just really wanted to see if you could give us a bit more perspective to understand that. And also, I'd be remiss if I didn't say something. Just congratulations, John. And Shelley, congratulations to you as well.

Shelley Simpson:

Thank you.

Brad Delco:

Tom, can you repeat the last part of your question?

Darren Field:

Yes. I probably really can't comment on the volume related to it. Certainly, we're looking to grow with all of our customers.

Operator:

We'll take our next question from Bascome Majors with Susquehanna.

Darren Field:

Well, I'll jump in from an Intermodal perspective and then we may have others that want to comment. But going through 2021 and '22 when we really could not provide enough capacity for our customers, I think, really did teach us an important lesson, as well as commitments between us and our rail providers to grow with each other. I mean those are our genuine commitments. The announcement back in '22, jointly with BNSF to grow the fleet, was a joint commitment to expand capacity for the intermodal market and both companies are honoring that commitment and making sure that our customers are aware that we're there and ready to support them when they need to grow. Now clearly, if the magnitude of the cycles really inflects much greater, that can mean that the down cycle can be a little more painful and then it's hard to be out in front enough to cover the up cycle. And so we will certainly adapt as best we can. We'll continue to work with our customers to ask for better forecasts and how can we get better identification of the opportunity. But we know this, when we're there to support our customers' growth demand, it certainly bears fruit for our shareholders over the long term as those customers just gain more and more confidence in our ability to serve their needs.

Operator:

We'll take our next question from Scott Group with Wolfe Research.

Darren Field:

Scott, I'll quickly jump in on your first question around Q2 versus Q1. We're a non-guidance organization and we're trying hard not to be predictive. Certainly, history would tell us that volumes in Q2 on average are better than Q1. That doesn't mean I'm telling you that Q2 would be better but history would suggest that's been the case. And so beyond that, we don't have a visibility into pricing at this stage to make any prediction as to what would happen with that.

Operator:

We'll take our next question from Jordan Alliger from Goldman Sachs.

Jordan Alliger:

Can you hear me now? Is that better?

Jordan Alliger:

Can you help me understand a little bit how the operating leverage is going to work in Intermodal? I think you mentioned about 20% over resourced. So when the cycle does turn up and we get that inflection in volume and price, how quickly can that get absorbed? How quickly do you think margins could get back to the targeted range you guys have talked about?

Operator:

We'll take our next question from Amit Mehrotra with Deutsche Bank.

Brad Delco:

Amit, I'll start, just first on your question about Q2 and forward guidance. I mean, we just, in the history, don't provide intra-quarter updates on volume and we're not going to do that here. So I'll turn it over to Darren if he wants to comment on the second part of your question but we'll be limited on what we'll say there, too.

Brad Delco:

And then the final thing I'd make and again, just to sort of point, Amit, you did mention volumes down sequentially by around 9.5%. That certainly is worse than normal seasonality. I would point out, though, if you wanted to look at that same analysis, historically, we've seen Q3 and Q4 volumes relatively at parity and we saw and we talked about seeing a stronger peak season than what was expected and I think what was sort of experienced by the overall market. And so if you compare where our Q1 volumes came in relative to Q3, again, assuming that normally Q3 and Q4 are relatively flat, volumes were down 7% which is a little bit closer to normal seasonality.

Jonathan Chappell:

Darren, I was going to ask you basically what Brad just talked about. The fourth quarter, you said a peak season that no one was expecting. Your volumes are better than typically in the third quarter. Pricing was even up sequentially, if we look at just revenue per load and then the first quarter, a pretty substantial step back. So I'm just trying to understand, what changed in that 6-month period? Why was 4Q better, 1Q worse? The trucking market seemed to stink all the way through. So is that front-end loading by customers? Was that something indicative of the economy of rail service? How can we had kind of like the green shoot period in 4Q and then another step back from 1Q?

Operator:

We'll take our next question from Brandon Oglenski with Barclays.

Brad Hicks:

Yes. Thanks, Brandon. It's Brad Hicks. It's certainly been extremely competitive for several quarters now. As we think about the brokerage market, in particular the spot market and what we've seen there, we see a modest tick-up in January, only to see that kind of level back down to the trough that it's been really for probably the last 4-plus quarters in terms of what rate and quality of revenue has done. We're certainly focused on trying to grow where we can grow and grow with customers that we believe that we can create value for, such that that's stickier in the forward view. As I've mentioned in previous quarters, those that we supported at their time of greatest need have seemingly gone the way of finding the lowest-cost solution that they can possibly find and that certainly harmed our business, our volumes. But I do feel like our gross margin recovered throughout the quarter. We saw it hit severely during the winter storms in January which is abnormal for us. But we were able to recover and deliver a gross margin of a little over 14%, I think it was 14.3%, so we were encouraged by that and we're certainly focused on volume.

David Vernon:

So you mentioned in the press release the disciplined approach to the market for the value of services in the Intermodal segment. I'm just wondering if you can give us some expectations around kind of how you're approaching the market the rest of the year, anything you've learned out a bid season that would speak to kind of what the volume outlook might be for full year Intermodal growth, in the segment.

Operator:

We'll take our next question from Jeff Kauffman with Vertical Research Partners.

Shelley Simpson:

So Jeff, I think you're talking about the end of period versus the average. Is that right?

Brad Hicks:

Yes. I'm showing what we reported in the period for Q1 for our Truckload segment at a little over 13,000 trailers which is just down 100 from same period in 2023.

Brad Delco:

Yes, Jeff, let's cover that off-line. I think we did have some trailers that were transferred over to DCS. So if you noticed, the DCS trailer count is higher and that's a lot related to some of the business that was transferred at the start of 2023. If you recall, we moved some business out of JBT into DCS and some of the ownership of that trailer stayed in JBT for the year. We transferred those over.

Jeff Kauffman:

That's the context I was looking for.

Tom Wadewitz:

Yes. Great. There was some discussion on bad debt expense. It sounded like it was meaningful. I think you referred to like the tenth largest customer in Dedicated. And so I'm guessing that was maybe a meaningful effect on the margin in 1Q. Can you give us any quantification how big that was year-over-year or absolute, just if we could kind of think about potentially parsing that out or just understanding that impact?

Brad Delco:

And Tom, most of that would have been in DCS.

Operator:

And that does conclude the question-and-answer session. I'd now like to turn the call back to Shelley Simpson for any additional or closing remarks.

John Roberts:

Well, I appreciate that, Shelley. You know I don't like a lot of attention. I'll tell you that it's been the greatest honor of my professional career to get to be a part of and lead this team through some incredible growth years, through some learning years, through some evolution. Even with this quarter and even the last few and as you mentioned in the last couple of years, I could not be more proud of this group of people, all 35,000 of them, for everything that has happened under the banner of our scroll. And the way that we always put our people and our customers first knowing that we have a duty to return compounding growth and reliable, credible information so that our shareholders, our owners can make good decisions, I think that that's something we want to protect and we want to be candid and transparent. I can say with no hesitation at all and I've been up here the last couple of weeks hanging around and kind of watching for the things that I look for when I want to see my team win the Masters, win the Super Bowl, win the NCAA tournament, I see it all. I've seen it really for the last couple of years. But right now, the fire is hot and our people are responding to that. Our leadership is guiding the way they're supposed to go. Our priorities are right. And I get to hand this institution, this brand, to a very, very capable person in Shelley. And importantly, she and I both agree, neither one of us can do anything without our team and specifically our leadership team. We have the highest level of responsibility to be sure that we get it right and when we don't get it right, get it right, redirect, evolve, make sure we keep our focus on the right things. It's an honor. I am humbled. I'm amazed. I am thrilled. I am sad. I am all of the above. The best news is that I still have a seat at this table. I look forward to being the Chairman of this company and working in a different capacity. But I hope to continue to leverage my 35 years of experience. And 25, 13 of which was at Ford's running dedicated contract services where I learned so many things; and the last 13-plus of being our CEO, just thank you for your trust. I feel like we've had a great relationship with you folks and it's been a lot of fun. It's been a lot more fun than it hasn't, it's just not a lot of fun right now; so we got to go to work. So, thanks for calling in, and we'll be back with you next quarter with Shelley at the helm.

Operator:

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the J.B. Hunt Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Brad Delco, Senior Vice President of Finance. Brad, you may begin your conference.

John Roberts:

Thank you, Brad, and good afternoon. I would like to hit on a couple of topics before I turn it over to our team to discuss our results and how we are investing and managing the business. We remain long-term focused and we'll continue to do so while being disciplined in our approach. I'm a believer in taking the bad with the good and the good with the bad, so let's start with the bad, as well as the obvious. On the topic of Insurance, we have been routinely covering with you the inflationary cost headwinds we faced as a Company, as well as an industry in the areas of professional driver and non-driver wages, healthcare benefits, and equipment cost. However, as an industry, we are also seeing unprecedented pressure in the area of claims, cost, or settlements. As you saw in our release, we incurred $53 million of additional costs in the quarter, largely related to higher claims cost and exceeding coverage limits in certain insurance layers. And this, despite 2023 being the Company's best performance in history on safety, measured by having our lowest DOT preventable accidents per million miles. We remain one of the safest carriers in the industry. Yet our insurance rates continued to increase as the industry experiences higher virdicts, and as a result, higher litigation settlements. During verdicts in trucking cases where the verdicts exceed $1 million, have seen an 867% increase in the average size of verdicts from 2010 to 2018. This is according to the U.S. Chamber of Commerce Institute for Legal Reform. Given that the majority of motor carriers in the industry carry only $1 million in coverage, just above the legal minimum of $750,000 in coverage, it's the larger carriers who bear the brunt or disproportionate share of the escalating insurance and claims cost and ultimately these inflationary costs get passed on to customers and consumers. As you've heard from us repeatedly, we are continuously focused on our safety performance and you've heard updates from Nick on our latest investments in this area. Our intense focus on safety and our investments in the latest safety technology and compliant equipment helps to protect our drivers, the motoring public, the environment, our customers, and your investments. We remain steadfast and committed to the safety of our people and the motoring public and will continue to invest in the latest technologies and training to support these efforts. On the freight environment, we have turned the page on 2023, goodbye and good riddance. As you are aware, 2023 presented many challenges, but I am very proud of our team and their perseverance in how they responded to these challenges. The experience of our leaders and the investments made during this downturn, I am confident, will drive long-term value for the Company. While the New Year has begun and the calendar has flipped to another page, not much has changed in regard to the freight environment. While we see opportunities across all of our businesses, good work is needed in the areas of revenue quality, controlling cost, and execution to earn an appropriate return while delivering value to our customers. We remain committed to our focus on return on invested capital and managing for the long-term, but the freight environment remains in a challenged state. With all of that out of the way, I am truly encouraged by our team's collective efforts and the opportunities presented across all of our businesses and for our relative performance in this market for 2023. Intermodal is seeing some momentum on the volume side the last few quarters and our work with BNSF and our other rail providers presents opportunities for growth in our future. Dedicated continues to be a steady performer, and along with Final Mile both had record years in segment operating income performance. And while ICS and JBT has faced the brunt of the market challenges, we still see great opportunity to scale our investments in technology, to drive efficiency in our customer supply chain in both our brokerage and power only offerings. Now I'd like to turn the call over to our President, Shelley Simpson. Shelley?

John Kuhlow:

Thank you, Shelley, and good afternoon, everyone. My comments will cover a high-level review of the quarter and fiscal year and will include more color on the insurance expense impact on the quarter as well as provide an update on our capital plan for 2024. As a general overview, outside of Intermodal and to a lesser extent Final Mile, we didn't see many signs of a peak season in the quarter. Starting with our fourth-quarter results, on a consolidated GAAP basis compared to last year, revenue declined 9%, operating income declined 28% and diluted earnings per share decreased 23%. The declines were primarily driven by lower freight volumes in our yields combined with inflationary cost pressures. Our fourth-quarter results include a $53 million charge or $0.38 per diluted share related to higher insurance and claims expense primarily related to negative developments of claims and exceeding coverage limits in certain insurance layers. This charge is similar to a charge we incurred in the fourth quarter last year as certain claims from prior incidents continue to settle at much higher amounts than we have historically experienced. For the full-year 2023, on a consolidated and GAAP basis, revenue declined 13%, operating income declined 25%, diluted earnings per share decreased 24%. These full-year results include the impact of the insurance charge I outlined previously. Looking to 2024, we expect inflationary cost pressures to continue in the areas of insurance premiums, capital and people costs. Part of the increase in insurance relates to increases in underlying premiums largely due to market conditions, but also to provide greater coverage across the businesses. We are focused on maintaining a strong balance sheet to provide us with ample liquidity to deploy capital as needed to drive long-term value for our shareholders. We have navigated this challenging freight environment while remaining conservatively leveraged below our target of one times debt to trailing 12 months EBITDA and maintain flexibility with our credit facility that has ample borrowing capacity, if needed. Looking into 2024, we are planning for net capital expenditures between $800 million and $1 billion. Going a level deeper, our 2024 capital plan assumes $250 million to $300 million for new power equipment, primarily in Intermodal and dedicated and $250 million to $300 million for new trailing equipment which includes containers, chassis and trailers. We also expect to deploy $300 million to $350 million for real-estate and other investments, including technology. In addition, our capital allocation plan in 2024 contemplates continued support of our dividend and we expect to take advantage of opportunities in the market to repurchase shares when they present themselves, all while maintaining our leverage ratio around one times EBITDA. This concludes my remarks and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick, and thank you to everyone for joining us this afternoon on the call. I'll review the performance of the Intermodal business during the quarter, give an update on the market and service performance, and highlight the continued opportunity we have, to deliver value for our customers and all our stakeholders. I'll start with Intermodal's performance. As you heard, we remain in a challenging freight environment, but we have been seeing improving trends in Intermodal since this Spring, which continued as evidenced by our 6% increase in volume for the quarter. In fact, we have seen an improvement in our year-over-year monthly volume trends since April or for nine consecutive months. By month in the fourth quarter, our volumes were up 6% in October, 6% in November, and up 8% in December. During the quarter, we saw a peak season in Intermodal that neither we, or our customers, nor our rail providers were expecting, yet we were able to solve for our customers' capacity needs while maintaining high service levels, highlighting the strength and flexibility of our network. While we are encouraged by the volume trends we are seeing, it is worth reiterating that volume is historically a leading indicator, while price is typically a lagging indicator. We continue to see a large amount of freight that we believe should be converted from over-the-road to Intermodal and we have the capacity and people in place to grow with our customers and recapture share from the highway. During the quarter, we saw margin pressure both year-over-year and sequentially, largely related to the impact of bids priced in prior periods and also, our results in the fourth quarter included approximately $16 million of higher insurance-related expense. We are currently in the early innings of bid season for 2024 and believe it is too early to comment on our expectations or the success of bid so far. Given our strong service levels and the unique value our Intermodal network can provide, we are working with customers to ensure this value is realized and that we earn an acceptable return on our investments to meet and serve their capacity needs. With regard to our rail service providers, we have been pleased with the service from each of our providers, their commitment to the Intermodal offering, and growing the overall market. We remain encouraged by the work we are doing with BNSF in the West and the collaboration between our companies. We announced our new Quantum offering during the quarter. We are very excited about this service and the potential to expand the Intermodal market by working with customers that have service-sensitive freight. During the quarter, we also announced our new Intermodal service out of Mexico with GMXT through the Eagle Pass gateway connecting with BNSF. This gives our customers more options to solve their cross-border capacity needs, leveraging the networks of both GMXT and BNSF. In closing, our focus for 2024 will be on regaining share from the over-the-road market, scaling our business to better leverage our assets and investments, and delivering excellent operational execution for and on behalf of our customers. We strongly believe in the strength of our Intermodal franchise. Our customers trust us and we continue to find new and improved ways to better serve their transportation needs. We have the people, technology, and capacity in the network to handle significantly more volume than what we are handling today and remain excited to work with our customers to meet their growing demand with an efficient, cost-competitive, and more environmentally friendly solution. That concludes my prepared remarks and I'll turn it over to Brad Hicks.

Brad Delco:

Thanks, Brad. Hey, Krista, let's open the call for just one question without follow-ups given the time. Thank you.

Brandon Oglenski:

Hey, good afternoon and thanks for taking the question. I guess, Darren or Shelley, you guys mentioned a couple of times about how pricing is just a lagged indicator and volume being the lead here. I know your volumes did accelerate in Intermodal business this quarter. I guess, how can you help us think about the progression on operating profitability through 2024? Are you going to have the ability to get that value and greater yield from your customers as the year progresses?

Operator:

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead. Your line is open.

Darren Field:

Sure. Well, I don't know that -- when I highlight cost pressures, I wasn't intending to just highlight taking containers in and out of storage. I mean, just inflationary cost pressures from wages for our drivers are higher, rates with our railroads are higher. Certainly, just all employment costs, maintenance the equipment itself cost more. Just across-the-board, we have cost increases and that inflationary cost lives across our enterprise, not just Intermodal certainly. And so those are challenges that we're all faced with. It's certainly the same thing that our customers are faced with. And that's why we're working with our customers to deliver more value and look for how do we partner together and take cost out of each other system as we move forward. And in terms of when, you get to see that, just like the last question. We're just going to have to wait and see until we can get the volume growing on a steady base and get the pricing cycle behind us. We don't know exactly what to expect in that. We know that the service quality we built in 2023 has earned us the right to really dialog with our customers around these cost challenges we're faced with.

Operator:

Your next question comes from the line of Bascome Majors. Please go ahead. Your line is open.

Brad Hicks:

Hey, Bascome, this is Brad. I'll give a shot at this. First, I mean, you guys treat insurance how you want. I think the intent of sharing the $50 million change in net loss on sale of equipment was more of a year-over-year comment versus sequential, and I don't have that in front of me to share. In terms of what you should expect from 4Q to 1Q, while there's still a lot of 1Q left, we don't typically provide guidance. So I'm sure over the course of the quarter, you and the market will inform itself on kind of what's happening. But as you've heard from our executive team, there's a lot of things that we're working on making sure we're delivering value for customers and making sure we're focused on getting ourselves to earning the right return on our investments and that will be the focus going forward and we'll just have to compete in the market that's given to us.

Scott Group:

Hey, thanks, good afternoon. So, Darren, I heard you talk about taking share from trucks, didn't hear you talk too much about West Coast port share gains. I guess, I'm wondering how you think you may or may not benefit from that. And then on the Intermodal pricing side, I'm guessing you're -- I mean, I hear you're not seeing much. Maybe I'll ask it this way. Do you think we need to wait for truckload pricing to start going higher for Intermodal pricing to go higher too? Or just given this improved Intermodal demand environment, can we see a decoupling where Intermodal pricing goes up without -- before truckload pricing starts to go up?

Operator:

Your next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead, your line is open.

Darren Field:

Yes. Okay. I appreciate the question. I think that certainly the new services, we're excited about. I don't want to -- the Mexico service announcement was a conversion from business we were handling through a different method, so I don't want that to be portrayed as an immediate growth movement. But as we move forward, it solidifies our capacity plans for Mexico to allow us to grow further in the long-term, over the long-term future. And when I think about December, the comp was certainly easier. I think that is a factor. I also believe that our mix of customers and the particular group of shippers we serve, had a more significant peak season that they even predicted and that's really why we've highlighted that the peak season was a surprise. And I'll even go as far as to say, our capacity, what I call the coiled spring for many quarters, solved for us this fourth quarter and that peak season, it really allowed us to execute for our customers at a very high level and we're really, really proud of that. I'm extremely proud of my team and I want to make sure and say that.

Justin Long:

Thanks. And maybe I'll pivot and ask a Dedicated question for Nick. I know there are lot of moving pieces with some fleet losses and downsizes in the last year or so, but Dedicated has been pretty resilient as well. When you put it all together, any initial expectations on the level of fleet growth for Dedicated this year? And anything outside of insurance that we should be aware of as it relates to swing factors on costs with depreciation, start-up costs, or anything else?

Operator:

Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead, your line is open.

Darren Field:

That was impressive, Amit. I think that, look, as volumes came at us in the fourth quarter and like we've highlighted many times, our customers were even surprised by that. So, I think that the volume momentum that built during that quarter was largely related to activities that those customers had going on in the fourth quarter. And again, because they were surprised by it, I think that's why we feel a little bit more unclear right now about what the early part of this year holds. Certainly, traditionally, the first quarter is a drop-down from the fourth quarter. I would say that for my entire career, that's been the case and so I don't know that I am going to guide you on what will happen, but certainly, our customers' inability to tell us about the peak season continues to be a challenge for us to get good solid information about what to expect.

Chris Wetherbee:

Hey, thanks. I guess I wanted to ask about cost inflation and maybe tie it into the insurance. And so I want to get some -- just trying to understand. We've got two years with fourth quarter hits from the insurance side. And I guess I'm trying to figure out what that means for the go-forward periods. So does the charge that you take in this fourth quarter mean that there is some degree of incremental approvals that are required for 2024? And then, maybe if we could just tie that into the broader cost inflation. If you look at the portfolio of the businesses, where do we think cost inflation is kind of running as we're getting into 2024?

Operator:

Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead, your line is open.

Nick Hobbs:

Hey, Al. First of all, I would say, on our ability to replace some -- clearly, the way our business works is, we usually have waves when we get start-up so we incur the cost. And so, with us losing some of our trucks in 2023, we don't have the momentum we normally have going into 2024, and so we replaced them quickly, but it just takes a little time to kind of get the momentum and get the revenue and the profitability up and going. So, that's the reason that we're talking about 2024 the way we are. Now, as far as any vertical, we looked through our book. I would say, on the furniture side, we had a little bit of that in dedicated. It's impacted some. But I would say that one that's probably been the strongest has been the grocery side of things have just been consistent throughout. And then the others, it's kind of -- just as the economy is going, they're kind of going. Nothing really sticks out anywhere else.

Operator:

Your next question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Nick Hobbs:

Yeah, I'll jump in and this is Nick. Clearly, we think we had record safety year when we look at DOT preventables for the entire organization and we're very pleased with that. We're doing things like -- and we're placing cameras. We're about 65% complete on that rollout. We will have all of those other trucks [retro'ed] (ph) by the end of Q3. So, we clearly think that will help us with our accidents. And then if you think we're also -- we got 65% of our fleet that's got Side Guard Assist that helps us on the right side. Those we can't retro, this is going to take us another couple of years. So we think we're out leading well on the safety side, but the fact is that the individual claims are just going through the roof and the cost of those. And quite honestly, those are in state courts. And so it's a state-by-state that's got to be addressed. We're working with the American Trucking Association and trying to go state-by-state to get tort reform. So, it's going to be a long battle there unless there is some federal legislation that would kind of help us interstate truckers out there. So, John, I don't know if you want to --

Operator:

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead. Your line is open.

Brad Hicks:

Yeah, Jordan, thank you. It's Brad Hicks. It's incredibly difficult brokerage environment as we will note throughout the entire year. We did spend a tremendous amount of time focused on our cost as we saw volume decline and revenue quality back up significantly. Maybe it's extremely difficult through the bid season that really pick your spots in an ever so declining rate environment. And I do feel like last quarter or quarter and a half, we've been just kind of tried to long that model. As Darren mentioned in his opening question around, we're taking this wait-and-see approach through bid season, but we do feel like things did inflect. The one thing I would mention that if you really look at the growth that we experienced through the pandemic, we're there for our customers in their greatest time of need and really felt like we were strategic. And really what we saw from a behavior standpoint from several of our customers throughout 2023 is that they really acted more transactional on the back-end of that pandemic. Multiple round bids, driving down to that lowest price. And so, we do have to recalibrate how we think about how we step forward. What I can tell you is we're focused on growing, but we're focused on growing at the right rate where we can add value to our customers' networks.

Jason Seidel:

Thank you, operator, and thank you all for taking the question. Can we focus a little bit on reported yields in terms of the outlook? It seems like there's going to be more mix changes coming with the move back to the West Coast ports. How should we look at that as it flows through the model for 2024?

Operator:

Your next question comes from the line of Tom Wadewitz from UBS Financial. Please go ahead. Your line is open.

John Roberts:

Well, I think that certainly the fixed costs that we're carrying is material. And we highlighted that at least for the fourth-quarter, the coiled spring unlocked a little bit and we were able to spread growth volume over more loads and that's certainly was a contributing factor behind that. No, there certainly was not a price improvement during the quarter. Pricing will continue to be and forever will be the fastest way to repair margin. But certainly volume in our current state is worth more to us than it ever has been in our past given the asset count that we currently own. And so volume is worth more than it used to be and certainly in the fourth quarter was able to show that.

Brian Ossenbeck:

Hey, thanks for taking the question. I know you don't want to talk about rates given all the uncertainty at this point, but maybe you can talk more about just the conversations with the shippers. Some of that momentum and that surprise upside in the fourth-quarter, is that really carried into the conversations as they unfold here? Are they looking for longer durations? Are they looking for back-half locking in some capacity? Darren, would love to hear if there's actual truckload conversion that's happening. And then maybe, Brad, you can just give us a sense in terms of what you see in the truck market itself from a capacity spot rate improvement, what do you expect here standing in the first part of the year looking to the rest of it? Thank you.

Brad Hicks:

Yes. Brian, I would just add -- this is Brad Hicks. Similar to what Darren said, it's really way too early in the bid cycle to see what's ahead of us there. But at least from our perspective, from a trucker standpoint, rates have to go up and I can't tell you exactly when that's going to happen, but the cost, the inflation, when we look at the operating cost of not just our own fleet, the fleets in general and we're rates plummeted in the Truckload space, which are down more than 2 times what they were in terms of a percent reduction than we see in Intermodal over the last 12 or 14 months, something is going to have to give there. We obviously pay real close attention on what's going on with Truckload capacity and we do start to see exits in the marketplace there. And at some point, that's going to have to inflect. We'd like that to be sooner than later. As Darren mentioned, customers are still under tremendous pressure. They are just not going to give it to you, but I do feel like something will turn at some point. It's a matter of if not when. And so that's how I would respond.

Bruce Chan:

Hey, thanks, operator. Brad Hicks, maybe just sticking with you here on the ICS side. I noticed that sequential gap down in the contractual business percentage, I was just wondering if that's due to maybe capturing some seasonal spot opportunity. Was that more of a function of the mix from BNSF or was that a function of the calling that you're talking about? And then maybe just thinking through profitability in the segment, do you expect the acquisition and integration cost to kind of moderate this quarter, are we still working through some of those?

Bruce Chan:

No, not at all. Just looking at that move down in the contractual business percentage to I think it was 59%. Is that seasonal spot opportunity? Was that BNSF mix? Or was that some of the calling that you've been doing?

Operator:

Your next question comes from the line of David Vernon from Bernstein. Please go ahead, your line is open.

John Kuhlow:

So, when you're talking about the GAAP, could you repeat that first question again for Dedicated EBIT?

Brad Delco:

Yes. I think David, I don't want to answer that. This is Brad Delco. I don't want to answer that question, because it sounds like if we answer that, it provides a little bit too much on guidance. I think, Nick's intended purpose there and Shelley's intended purpose there was, we have visibility in some fleet losses. And as a result, it's going to be hard to grow revenue and operating income in the quarter. Don't necessarily want to try to distinguish between whether that's on a GAAP or non-GAAP basis, because we report and we speak to everything in our financials on a GAAP basis.

Operator:

Thank you. And we have no further questions in our queue at this time. I will now turn the conference over to John Roberts -- sorry. John Roberts, Chief Executive Officer, for closing remarks.

Shelley Simpson:

Thank you, John. And there is a saying that John Roberts has said for many years around here and it is, growth is oxygen. And I think that you saw some of that come into play in the fourth quarter in Intermodal and that's exactly why we are built for scale. We do look at our investments for the long term and we know that our customers want more of our services and want us to be more comprehensive and solve our new supply chain challenges over the long term. And so we have spent 2023 getting prepared and ready for our customers. Now, in 2024, we need to grow into our investments, in our people, and our technology, and our capacity. One of the ways that we will do that and why it's our priority number one, is making sure that we continue our operational excellence to further separate ourselves as the best-in-class in all five of our business units. That will allow us to create more value for our customers. They will recognize that value. And then, we believe we can earn the right to have a conversation with our customers around cost. That is a key focus for us and that started on January 1. Finally, that will allow us to continue focusing on driving long-term compelling returns for our shareholders. So, those three key priorities as we march into 2024 lets us have a happy dance that 2023 is over and we're moving into 2024, because we're built for scale, and we're ready for growth. But I would be remiss if I did not say we are remaining committed to people being our top priority. Our team of 35,000 people have worked so hard this year, they have been resilient, they have labored harder this year than likely any other year, at least in my 29-year career, and sometimes the fruit of their labor doesn't necessarily show it on paper, but we do believe over the long-term, that fruit of their labor will prove it for our customers, for our people, and for our shareholders. With that, I thank you for your time and your interest. Cheers to 2024.

Operator:

Good afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the J.B. Hunt Transport Services, Inc. Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Brad Delco, Senior Vice President for J.B. Hunt. Please go ahead.

John Roberts:

Thank you, Brad, and good afternoon. I would like to take a minute to highlight and reinforce some of the key tenets around how we manage the company. While the challenges in the freight cycle are well known and documented, and as a result, there is no need to rehash here,. I will again remind you about our long-term approach to the business. Our focus is on deploying capital in areas of the transportation industry where we see long-term opportunity to compound returns. We participate in an industry with a large, addressable market that is cyclical. Remaining disciplined around our investments with a long-term focus on our people, technology that enables and capacity to deliver for and on behalf of our customers will support and drive long-term growth for the company and our shareholders. In March of 2022, we announced a joint initiative with BNSF to substantially improve intermodal capacity and service for our customers. We recently announced and closed the acquisition of the brokerage assets of BNSF Logistics. These are key examples of how our companies are working together to best align efficient and value added solutions for our customers. While the brokerage market is challenged, we see lots of opportunities to drive efficiency in the supply chain with our people, powered and enabled by our technology, our J.B. Hunt 360 platform. We continue to work closely with BNSF and all of our rail service providers to strengthen and create a more reliable intermodal product. And I am pleased to see the progress in our intermodal segment relative to the market in our results. Dedicated and final mile continue to show resiliency in this environment, proving again that our premium service products can be differentiated from the competition. Our J.B. Hunt 360 box product in our truckload segment continues to experience growth, providing an asset light solution, while also leveraging our investments in technology to efficiently serve customers. In closing, we have a tremendous team here at J.B. Hunt with a lot of experience. We will remain disciplined on costs and investments to best prepare the company to serve the growing needs of our customers. We will remain focused on earning appropriate returns on capital and driving efficiency in the supply chain to drive greater value for our customers. I remain confident in the future growth of the company. Now, I'll turn the call over to our President, Shelley Simpson.

John Kuhlow:

Thank you, Shelley. Good afternoon, everyone. I'll be brief with my comments, but I want to hit on a few items, including a high-level review of the quarter and an update on our capital plan. So starting with third quarter results, overall freight activity remained under pressure during the quarter as compared to last year. On a consolidated GAAP basis, revenue for the quarter declined 18% year-over-year. Operating income declined 33% and diluted earnings per share decreased 30%. These declines were primarily driven by lower freight volumes and yields combined with inflationary cost pressures primarily in the areas of salaries and wages, capital costs, and insurance and claims expense. We did have a discrete tax item in the quarter which lowered our effective tax rate to 18.2%. The overall impact to our earnings in the quarter was $0.16 per share spread across the tax and interest expense line items. We continue to make investments in our business for the long term across our company foundations, our people, technology, and capacity. From an invested capital standpoint these investments are in real estate, equipment, both trailing and power, and as previously mentioned, we did close on the purchase of the brokerage assets from BNSF Logistics in the quarter. Our balance sheet remains strong with ample liquidity available to support our investments. We are conservatively leveraged at still below our target of one-times debt to trailing 12 months EBITDA. Our $1 billion revolver remains undrawn and available as needed. I previously guided to $1.5 billion to $1.8 billion of net capital spent for the year. Excluding the acquisition, we anticipate falling around $1.6 billion for the year. Similar to last quarter, some of this is timing related, but also we are being prudent where it makes sense with our spend. In terms of our capital priorities, no change on this front. First and foremost, we will continue to invest to grow our business. We will maintain an investment-grade credit rating and support our dividend. And finally, we will use excess cash to repurchase stock. In the third quarter we repurchased approximately 267,000 shares and will remain active as opportunities present themselves. This concludes my remarks and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick, and thanks, everyone, for joining us this afternoon. I'll review the performance of the intermodal business during the quarter, give an update on the market and service performance, and highlight the continued opportunity we have to deliver value for our customers and long-term growth for all of our stakeholders. I'll start by reviewing intermodal's performance in the quarter. As I said last quarter, and you heard Shelley say earlier, we believe the inventory destocking trend started to moderate in June. And we saw evidence of that trend continue throughout the quarter as our volumes inflected positive for the first time in three quarters. By month, our volumes were down 1% in July, up 1% in August, and up 4% in September. In September, we had our largest intermodal volume week in our history and we're able to meet the strong demand with exceptional service. I'm encouraged by the fact that we are seeing the volume lift across both our transcontinental and eastern network highlighting overall increased customer demand for our intermodal service. We believe this is driven by the overall market, but also we believe we are taking market share with our strong service that is outperforming the competition. During the quarter, we did see margin pressure both year-over-year and sequentially, largely related to the full implementation of the recently repriced bids, which is a reminder trended toward the lower end of our pricing expectations as bid season progressed. We continue to carry resources and capacity and the related costs to ensure that the quality of our service holds up as customer demand for a differentiated service product grows. With regard to rail service providers, we have been pleased with the service from each of our providers, their commitment to the intermodal offering and growing the overall market. In fact, I'd say that our rail providers are dialed in both in the East and the West. We believe that the railroads realize that the true test of their service will come once freight volumes increase with overall demand on their networks. But we and they are confident in their ability to maintain high service levels throughout the recovery. We are very encouraged by the current work we are doing with BNSF in the West and feel even more confident about our differentiated service. We now have J.B. Hunt employees in their headquarters in Fort Worth working side by side together to create and customize solutions for our customers and solving to eliminate service challenges as they arise. We continue to work collaboratively to solve for and on behalf of our customers a clear differentiation in the market. We believe Intermodal presents a strong value proposition to customers with significantly improved rail service at a discount to truck pricing, all while cutting carbon emissions on a load by 60% compared to the truck alternative. As such, we see an enormous amount of freight that we believe should be converted from truck to intermodal. We continue to work closely with the rail providers and are encouraged to see the strong service which contributes to a better overall experience for customers. In closing, we strongly believe in the strength of our intermodal franchise and the opportunities to drive significant growth over many, many years. Our customers trust us, believe in our product, and want more of it. We have the people, the technology to enable, and the capacity to handle significantly more volume than what we are handling today, and are excited to work with customers to meet their growing demand for efficient transportation solutions. That wraps up my prepared remarks and I'll turn it over to Brad Hicks.

Brad Delco:

Thank you, Brad. And just for the audience, given the number of folks in queue, we're going to limit the question to one question with no follow-up. Krista, you can go ahead and start the Q&A.

Chris Wetherbee:

Hey, thanks. Good afternoon. Maybe really wanted to start on the margins, particularly intermodal and maybe get a sense of how you guys are thinking about that and really maybe more specifically from 2Q to 3Q, it seemed like the cost per load went up decently. And I guess I'm trying to make sure I understand if that's mixed or if it's just sort of the full brunt of labor costs, labor inflation. And how do we think that that kind of trends going forward because we did see a step up in load sequentially. Curious if we see that continue, if it'll start to drive some operating leverage in that part of the business.

Operator:

Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.

John Roberts:

Well, I don't -- Allison, I don't know how to give you a firm guidance on how quickly it'll come on board. We're engaged with our customers every day looking for ways to save them money. And one of the primary ways we do that is convert highway business to intermodal. We're looking to create better balance where we can with onboarding new business that supports our network and those will be our focus areas in terms of how quickly it comes on. I guess that gets determined by how quick our customers grow and how the overall market reflects on us. I'm confident in the service product we're offering. That's what we can control right now and so that's what we're focused on.

Jordan Alliger:

Yes. Hi. I know it's hard to put all the moving pieces together, but I'm sort of just curious. The third quarter margin in intermodal, I mean, do you think this could represent the bottom of the cycle if volumes continue to inflect positives and box turns move up sequentially, which occurred in the third quarter? Thanks.

Operator:

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

Brad Delco:

Hey, Ken, this is Brad Delco. I'm going to try to see if we can answer all five or six of those questions with each of the executives. So I’ll let Darren address the intermodal one and let John Kuhlow address the CapEx question. And if we missed one, sue me in email, because I know we already cut you off.

John Kuhlow:

And Ken, just from a CapEx standpoint, broadly speaking, we've been talking about how we had to retain a lot of equipment in 2021 and 2022 just because of the inability to get that. I think that we've made a lot of great progress on working through our replacements in 2023. We'll still have some in 2024. As you know, all of our growth CapEx is principally success-based through dedicated and even with intermodal. We are carrying, as we've talked about, excess container equipment right now, but we'll work through that and then we'll purchase new as our growth plans deem necessary.

Scott Group:

Hey, thanks. Afternoon. So Darren, as we enter 2024 bid season, do you think there's further downside risk to intermodal rates into the first half of the year? Is the next wave of contracts will start to reset or is there a shot that intermodal pricing can start to get better? And then just separately, just quickly, the dedicated retention went from 98% to 94%. Is that a one-off sort of blip or is that sort of a new potential trend?

Nick Hobbs:

Yeah, this is Nick. I'll talk about [Indiscernible] retention. We did face some pressure in the quarter on some losses of a couple of accounts that to competition. We also had an account or two, smaller account or two that went bankrupt. And then just our CBD process as our customer's business slows down, we try to value engineer and reduce fleets. So with all that being said, the way we reduced or we measure that retention, there was some loss in there from same store sales a quarter ago. Can't tell you what the future is going to be. I don't know what the economy is going to be. I do feel very confident with our execution and our discipline around all that. And so, I feel good about the future, but I can't predict what the next two or three quarters are going to provide.

Justin Long:

Thanks. I wanted to ask one on the acquisition of the brokerage business from [BNSF] (ph) Logistics. Is there anything you can share on the impact this could have on both the top line and the bottom line? And as you think about the longer term, does this deal change your strategy for ICS, including your targets on profitability?

Operator:

Your next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.

John Roberts:

Well, Amit, thanks. I think the tough part about a volume conversation is, our customers haven't been very accurate with their forecast or their ability to predict what their needs are. What they are confident in, and our confidence remains high on is that, when they do have a need, we're a go-to provider for them. And we continue to grow confidence out of our customers in our execution ability, our capacity, our willingness to start up new business quickly. And so, our approach to that will continue to be the same. Our customers are under cost pressure. And one of the ways they can save money is convert their highway business back to intermodal. And so, we're going to be very focused on our ability to grow there. I also can't help but -- I mean, we're winning share in the market. Any kind of growth to the West coast will be a benefit for us. I also think the last 12 months have been so confusing based on the way our customers managed inventory. It's really, I don't think anything has been predictable. And so, we're very confident in the product we're offering. We're confident that we're going to be there for our customers and we're going to continue to offer a product that they want to use and that's what we can control.

Brian Ossenbeck:

Hey, good evening. Thanks for taking the question. So maybe just to tie all that up, Darren, can you give us some sense as to how the rest of peak season is going here into October after those records in September? And then just more broadly speaking, as you talk to folks for next year and the shippers that you're dealing with, go you get a sense that any of them are trying to lock in capacity for potential uptick and they want to get something on board before rates start to move up? Or do you feel like there's still a little bit more inflation that they want to get out of their system from freight rates and maybe they're taking a harder look to start the year. And maybe one more last bite of the apple. So any sense in terms of partnership positioning and outlook for next year will be helpful? Thanks.

John Roberts:

Now, I think you asked the question, Brian, about expectations and whether or not shippers would have another bite of the apple. I just -- I think Darren sort of already addressed, it's too soon to comment on what pricing expectations will look like next year…

Operator:

Your next question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

John Roberts:

Where do you want to start, Brad?

Darren Field:

I think we're taking share both from the highway and from other intermodal channels. I've been really proud of the team's focus and efforts on the highway conversion front, but inevitably there have been pricing actions by our customers earlier in the year, and maybe we didn't win something, and three months later, they come back, and through a mini bid, we win it a second time because maybe a provider struggled to service that opportunity. And that's not new. That happens every year, but that has certainly been something at play here this summer.

Brad Hicks:

And I'll round it out from maybe what we're seeing in brokerage. I think that in brokerage, as you all well know, it's been an incredibly difficult environment. Radical swings in rate from just 12 months to 18 months ago versus what we see today, so it is probably more competitive in the brokerage segment than what you heard from Nick and Darren. It's a fight out there. As I mentioned in my prepared remarks, we hold some freight that was not favorable for us, but we've also lost some freight due to the competitive bid process that our customers took advantage of or utilized during this bid season. But I'll tie it back to our acquisition and really the value of J.B. Hunt 360 and what we see is letting our platform execute and creating that value for our customers. And so with that acquisition and where we're at, I largely feel like we're at the bottom and just kind of bouncing along. But there is extreme pressure on PTE. And so we do see carriers pushing back on the floor of what PTE is today and really just kind of navigating those choppy waters as we work through the beginning of the fourth quarter.

Operator:

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Shelley Simpson:

Well, let me say this Brandon, I think our customers -- Darren mentioned this earlier, our customers are struggling still with what their forecast will look like. And I know we gave an update on this earlier but I just -- we completed bid season. I would expect our customers to have made material improvements in what freight they are giving us, so bid compliance. And we have not seen a major change in our bid compliance. So I think we're up into the mid-60s now in intermodal. Just for comparisons, if you went back to 2017, that would be in the 90s. So customers are struggling to know what's going to happen from a forecasting perspective. If you're to look at the one-way parts of our business, intermodal, JBT, and inside ICS, those businesses are ranging with bids fully implemented between mid-50s and mid-60s. That's difficult for us to think about our networks and what that will look like, but we also know that customers aren't satisfied with that either. This is the reason you're seeing mini-bids trying to find that equilibrium on or the right balance between price, service, and cost overall. And then I should say where we are investing, remember in 2022, a big part of our investment that carried over into 2023 was our lack of ability to get equipment, particularly on the tractor side. So if you see our fleet replenishment and making sure that we're in good shape there. But also in intermodal, what Darren talked about, our ability to move very quickly with our customer was a key to our success in September and even moving into October. You heard Darren say we're continuing to unstack. Those aren't 100 at a time. You're talking about big numbers that we're swinging dramatically. And so for us, we know what it looks like to shut down our supply chain. We did it in 2020 in intermodal. It was very difficult to onboard equipment and to get things moving again. I do think that we're doing a nice job evaluating what our customers are saying with our own experience to that and trying to plan out how much equipment that should look like. We still believe in our long-term future. Our customers believe in it as well. And I might just echo one more thing. I think our customers had a lot of questions in the first half of the year. They were struggling on inventory. They were trying to determine. Our conversations have shifted slightly into now they have confidence at intermodal, at least our intermodal products can deliver. That's what's given them so much confidence to talk through this, but also recognizing there are so many shipments on the highways that need to convert. That's why we made the release to go to 150,000 intermodal containers. So for us, it's down to a little bit of timing. Certainly we don't price our business based on how much equipment we have. We price our business based on each customer, what the market looks like and what balance looks like as well. And if we want to move into storage, that's us being disciplined in our approach not to distort the market dramatically.

Jonathan Chappell:

Thank you. Good afternoon. Shelley or Darren, I just want to revisit the leverage part of the intermodal model. Your volumes were up again, but the margin was at a cycle low, maybe a multi-cycle low. So is this strictly a function of carrying too many resources, you need the volume to come back, once you get the volume you can add significantly more without adding resources and you get the margin improvement there. Or how much of it is actually moving the pricing needle and then therefore do we have to wait for kind of a full year of resetting the price before we can kind of revisit the bottom end of the long-term range?

Operator:

Your next question comes from the line of Jeff Kauffman from Vertical Research Partners. Please go ahead.

Shelley Simpson:

Yes, thank you for that conversation Jeff. And you know I would say we have had a lot of experiencing managing through the cycles. I do want to repeat something that I've said previously, and that is, this great recession largely resembles the great economic recession of 2009. I think when I look back to what we did, and we did a great job was really investing in our people, making sure that our people felt safe, our people understood our long-term strategy, and we did a great job coming through that. I believe for us in this near term, continuing to evaluate what our customers are saying compared to what's happening in the market and making sure that we're prudent in our short term costs while not losing long term focus, I think is very important for us continuing moving forward. You've heard Darren talk about pricing, you've heard Brad talk about pricing. I think the cautiousness that you hear from us is, we can talk about a freight recession. We're not experts on what's going to happen in the economy. We don't have customers negative. I would say they are neutral to positive. But I don't know that anybody is an expert here as to what's going to happen from an overall freight demand perspective. So it's difficult for us to see what's happening moving forward. I will tell you, we're not changing our margin targets. We are very focused on delivering value for our customers. We know that we can deliver value for customers. Our customers will pay us an appropriate return and therefore delivers long-term compounding returns for our shareholders. That's our focus. Our entire company, all 35,000, really focus on making sure we do that very well. We deliver for our customers and we look at it from their lens. We have a great opportunity to eliminate waste through mode converting into intermode, using the power of the platform and how we service it, continuing to differentiate our value inside our final mile business segment, and delivering the most efficient fleets through our dedicated contract services. That's our overall vision. That's how we talk to customers, and we believe that can deliver the right returns over the long term. But also if we see something changing in the near term, we'll continue to adjust, have conversations with customers, and make sure that we are delivering on the promises that we're making.

Bascome Majors:

Your quarter end dedicated truck count rose for the first time in a year this quarter. Can you talk a little bit about if you think we're through the worst of the like-for-like shrinkage and in customer churn and whether or not that can be stable to grow again? And you know if we end up in that environment the next year, do a lot of costs have to come back to support that growth after you've been in degrowth mode for several quarters? Thank you.

Brad Delco:

Hey, Bascome, this is Brad Delco. I do want to add just a little bit more to that, though. I mean, keep in mind, too, when Nick's saying that the fleet is stable, there have been startups throughout this year. And so, we -- as Nick alluded to, we expect to hit our sales target of 1,000 to 1,200 trucks this year, that has come with some shrinkage at some of the accounts, that has come with losing some accounts that we've already talked about and reflected in sort of the 94% retention versus what was previously usually north of 98%. But we have had startups and we've had margins hold up relatively well. And so, hopefully, again, depending on things outside of our control with the economy, we could grow our fleet without seeing maybe the extreme types of pressure on margins that we saw during some of those COVID years when we were bringing on several thousand trucks a year, which was more unusual in terms of the pace of growth.

Shelley Simpson:

Nick, let me add to that just a bit, because that's exactly what I was going to try to talk through, is that, you've done a great job taking out the incremental trucks that we've had, having to carry, because we couldn't get new equipment. But also the CBD work that you've done, being offensive in our strategy there.

Shelley Simpson:

And I think my point to that is, that's our long-term view, making sure that we flex with our customers, understanding that we're in dedicated fleets for a long period of time in total, and I think that's a good thing.

David Vernon:

Hey, good afternoon, guys, and thanks for taking the question. So, team, I'd like to ask you a little bit about driver availability and hiring from a capacity perspective. And we've heard a lot over the last five, 10 years talking about driver shortages. Could you talk a little bit about the labor environment when you're hiring for dedicated and intermodal? And then also from a capacity perspective, as you look at the brokerage business, are you seeing any signs of capacity rationalization in the truckload market that you can point us to in terms of trying to get supply and demand back into a better balance? Thank you.

John Roberts:

I think from a carrier community, we are seeing the pressure kind of show itself with reductions or some losses and closures. But I also feel like that difficult backdrop of the brokerage environment and what -- when I mentioned that, they're pushing back on the lowering cost of PTE to kind of come in line with what customer rates have done. And so, to me that's the signal that says they're at that breaking point. And so, while it hasn't been in high volume yet, we do anticipate that we will continue to see an increase in losses or closures as we move forward deeper into 2023, into 2024, as long as this rate environment persists. And so, we have seen that continue to gain momentum, not at macro scale yet, but I think that that's just a matter of time. There's only so long that the carriers can hang on with the low rates.

Shelley Simpson:

So thank you so much for joining our call. I will say that you've heard us talk through this last hour really as to where we see the businesses today, but also focused on our future and what our long-term prospects are across all five of our business segments. We do love the complementary nature of all five of our segments as our customers really ask us to help them through the North American supply chain. We feel like that we can answer our customers with any of those five segments. Pleased with the volume growth in Intermodal and what our customers have told us that they want to buy from us. We're starting to see that in our results. We love the resiliency of our dedicated model and I think you're seeing that play out here in the third quarter. Very pleased with our progress in final mile. We didn't talk about that much, but very pleased with us continuing to push our customers on making sure that we are paid appropriately for the value that we create. And also pleased with what's happening inside 360 Box with volume growth overall. The freight environment has been challenging. That is nothing new to our team. It's not a matter of if, but when, we actually come completely out of the freight recession. But we are encouraged by some of the results in some of our businesses. I would say, in total, we're very proud of our people. And in this environment, for us to be able to flex in all of our businesses and make sure that we are delivering on what our customers are asking us for is the highlight of everything that we do. Sometimes our people are working so hard and they don't get to see the fruit of their labor, but I would tell you, they're working harder today than they've ever worked in total. For that we're super proud of our team. We remain committed to our team and remain committed in our three key priorities, delivering value for our customers, committed to our people, and finally committed to long-term returns for our shareholders. With that, I'd love to turn it over to John Roberts, our CEO, for final thoughts.

Operator:

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Operator:

Hello, and welcome to the J.B. Hunt Transport, Inc. 2Q '23 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Brad Delco, Senior Vice President of Finance. Please go ahead.

John Roberts:

Thank you, Brad, and good afternoon. Similar to last quarter, I'll touch on a few items and reemphasize some key aspects about how we approach and manage the business. As usual, we have key members of our leadership team here to discuss specific areas of each segment. We've noted for several quarters now the shifting dynamics in the industry, and we see, in part, the product for that shift in our results for the second quarter. That said, we remain pleased with the collective and complementary nature of our business mix, some of which is revealed in our current results. For example, we see expected resiliency in certain areas of the business like DCS, areas with meaningful and unique growth opportunities to capitalize on in our Intermodal business, areas with notable improvement in performance in Final Mile, and areas of investment with a large addressable market and growing demand in our brokerage and power-only 360box offering in Highway Services. We maintain our perspective that all segments present meaningful growth opportunities looking forward. As you've heard us say consistently and for quite some time now, we remain committed to our investments in managing the business for the long term. The investments span across our company foundations, including our people, our technology and our capacity. We have a large addressable market and meaningful opportunity to provide unparalleled service and value to our customers across our complementary portfolio. We remain in pursuit of being better prepared to meet the growing needs of our customers while staying disciplined on our cost and relying on our vast experience in the business and together here at J.B. Hunt. In closing, I remain confident in this leadership team. Our return-on-investment-focused approach for the long-term benefit of our stakeholders and our ability to differentiate ourselves in the market. Now, I'll turn the call over to our President, Shelley Simpson. Shelley?

John Kuhlow:

Thank you, Shelley, and good afternoon, everyone. I'm going to touch on three topics with my remarks, including a high-level review of the quarter, an update on our capital plan, and a quick comment on our balance sheet. Starting on second quarter results. Overall freight demand was muted versus the prior year and also below normal seasonal patterns as compared to the first quarter. On a consolidated GAAP basis, revenue for the quarter declined 18% year-over-year, operating income declined 23%, and diluted earnings per share decreased 25%. These declines were primarily driven by lower freight and volumes and pricing trends and inflationary cost pressures, primarily in the areas of salaries and wages, capital costs, and parts and maintenance related expenses. We continue to manage and invest in the business with a long-term mindset, while also being prudent where we can on costs and expenditures. As it relates to our capital plan for the year, we expect net expenditures to fall within the range of $1.5 billion to $1.8 billion, which brings down the high end of our range, which was previously $2 billion. Some of this is timing related, but also we are being prudent where it makes sense in the current environment. Finally, I wanted to briefly touch on the balance sheet. At quarter-end, we had $296 million of cash on the balance sheet. We elected to draw funds available to us under the new credit facility we put in place last September before the term portion of the commitments would expire. As a result, you will see a corresponding higher debt balance, but our net debt level is about $40 million lower versus the prior quarter. This was done to maintain flexibility and maximize our liquidity. In terms of our other priorities, we have no immediate need for this liquidity other than reinvesting in our business, which is always our top priority for capital. Other priorities include supporting our dividend, maintaining investment-grade credit rating and opportunistically repurchasing shares. In the second quarter, we repurchased approximately 315,000 shares and will remain active as opportunities present themselves. This concludes my remarks, and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick, and thanks everyone for joining us. I plan to review the performance of our Intermodal business and give an update on the market, our service performance, and the opportunity we have to deliver value to our customers. I'll start by reviewing Intermodal's performance in the quarter. Demand for Intermodal capacity remained tempered, driven primarily by lower overall activity because of the inventory destocking cycle and the resulting declines in import activity. Volumes in the quarter declined 7% year-over-year, and by month were down 9% in April, down 8% in May, and down 4% in June. While we are hesitant to suggest the presence of any green shoots, we saw evidence from customers in June that the destocking trend has moderated. We experienced some pressure on margins in the quarter, largely related to the lack of volume and our inability to leverage our cost structure that is in the process of being built to handle significantly more volume. Volume growth is needed to drive down our unit cost as a broader portion of our portfolio was repriced this quarter. With regards to the market environment, but specifically to bid season wrapping up here in the near term, overall pricing for domestic Intermodal service fell within the range of our expectations as we entered the year, but our overall portfolio trended towards the lower end of those expectations as the bid season progressed. As it stands today, Intermodal continues to present a strong value proposition to customers with vastly improved service at a discount versus the truck alternative at least in line with historical averages, all while cutting the carbon emissions on a load of freight on average by 60% versus the haul truck alternative. We continue to see an enormous amount of freight to convert from Highway to Intermodal and have been working very closely with our primary rail providers to build resiliency in our networks, capacity and a comprehensive service offering to capitalize on the opportunity. As it relates to the overall service from our rail providers, I am encouraged by the trends we are seeing in velocity and on-time service quality, but more importantly, the commitments to collectively work towards an even better overall experience and value proposition for customers. We have stressed the importance of sustaining service through a volume recovery and that's where our joint focus is today. We'd like our position and feel confident in our rail provider's ability to handle more volume as recovery ensues. We believe we are in a unique position with our rail providers to accelerate growth for the domestic intermodal market by providing a differentiated service and value proposition for our customers. In closing, I want to make sure I reiterate the opportunities we have to deliver significant value to our customers with the investments we are making in our people, technology and capacity. As I stated last quarter and what has probably become more evident this quarter, we have a network built and resources available to handle significantly more volume than we are executing today. We remain in a coiled spring status better prepared to meet the future needs of our customers. That concludes my prepared remarks. So, I'll turn it over Brad Hicks.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

Darren Field:

Thanks, Allison. When we commented on a tremendous amount of loads that Intermodal can and should be the correct solution for, we've seen that for many, many years. I don't know that it's any more pronounced in the current environment than it's been for the last decade. The reality is we want to develop a better service product and better service experience for our customers with more predictability, and we're working every day today with our rail providers in order to achieve that. That will continue to be our focus as we move forward, and we know that the last, I'm going to call it, five years of rail service has been difficult. However, in today's environment, we're seeing significant improvements, and we're seeing significant commitments, including investments by our rail providers, to help us in this area.

Ken Hoexter:

Hey, great. Good afternoon. It's Ken Hoexter. I guess, Darren, you seemed a little hesitant to talk about green shoots, yet you noted you moved from down 8% to down 4% May to June. Maybe talk a little bit about that and your thoughts on discussions with shippers into peak season. How are shippers thinking about that and prepping you for volumes as you look forward?

Operator:

Your next question comes from the line of Jordan Alliger with Goldman Sachs. Please go ahead.

Darren Field:

Well, certainly, we were carrying extra cost in -- so far this year as we have extra equipment. We're not utilizing. We certainly took driver wages up a year ago. Those wages are certainly going to stay elevated and yet the market has challenged us with pricing and prices are negative. At this point, we really need more volume to unlock cost takeout from our system and improve the utilization of both our container fleet as well as our drayage fleet and then just the employee base supporting our business, all of which would give us an improvement in our margin profile.

Justin Long:

Thanks. I wanted to ask a question about Dedicated. That was clearly a source of resiliency and strength in the quarter despite the freight market weakness we've seen. But I wanted to get your expectations for that business over the remainder of the year. When you combine some of the fleet attrition you're seeing with new Dedicated sales, do you think the fleet can remain pretty consistent with the level we saw in the second quarter? And from a margin perspective, is there still room for sequential improvement versus what we just saw in the second quarter?

Operator:

Your next question comes from the line of John Chappell with Evercore ISI. Please go ahead.

Darren Field:

Well, that would constitute probably given a little bit of more direction on price than I really think we can. What I would say is our customers have asked for a better service, more consistent service product from us. We're working on providing that. I think that Intermodal has to provide the correct balance of value in the economics as well as the service quality. And that's why we're focused in those two areas. As we move forward, I think the discussions we've had with our customers are around how together can we take cost out to find advantages in pricing. And then, the Intermodal price will always lag the Truckload market. It's never quite as severe. And, certainly, the spot market in truck is a pretty small influencer on the Intermodal pricing overall. Contract drop trailer pricing plays a little bit more of a role in terms of our economics and the influence it might have on our customers purchasing of Intermodal. But I don't know that the spot market influence that we've seen on the Highway side is showing up in any form of dialogue with our customers. It's a data point. It's one of many that we keep an eye on.

Amit Mehrotra:

Thanks, operator. Hi, everyone. I guess, first, just anything to note around the noise around Yellow right now. I know whether it's on the brokerage side or anywhere else, any comments on if you're seeing any shipper response from Yellow? And then, I guess, Darren, I assume bid compliance is still really, really low, 55% or something like that, and you're still stacking, I don't know, 18% of your containers. You guys have the highest variable cost structure in the industry. I was wondering, does there come a point in time because you have so much cost embedded in the system where you're willing to maybe take that price even lower to drive more volume? Just your thoughts around that, because it just seems like this could be a great market share opportunity, and you can offset some of the pricing with the variable cost structure and then the cost leverage as well.

Darren Field:

We have long asked ourselves if you just cut rate, do you just get more volume? And the reality is the two are not as yoked as you would think. You can cut your price and then haul the same amount of loads for a lower price. We spend a lot of time growing experience in our pricing teams, our sales organizations. They work very closely together in our pricing exercise and process is not quite as commodity like the way you described it. Certainly, as the correct opportunity presents itself, and it comes with volume that contributes to our organization at the correct investment level, if those economics we can meet, then we do that. And we look at them one opportunity at a time, always have, always will.

Scott Group:

Hey, thanks. Afternoon. So, Darren, it sounds like you think volume is the key to getting Intermodal margin and earnings higher. It still feels like maybe there's still some downside risk to price. So, which is the bigger lever in the near term? I guess ultimately, I'm trying to figure out, do you think Intermodal margins and earnings keep resetting a bit lower from the second quarter into the third quarter? And then, maybe just separately just longer term question for John. You guys have made a lot of investments in 360 in a tougher market. The business is now -- the brokerage business is back to losing money. Do you think about dialing back some of those investments? Just how you think about that? Thank you.

John Roberts:

Yeah, let me make a comment just overall, then, Brad, I'll ask you to comment on kind of where we are with 360. But in general, I think the vision and strategy here is that while we know we're in some turbulent water, the opportunities that we see to invest in are probably as good as they've ever been in all aspects of the organization. I see certain changes being made lately that are even more encouraging from a capital allocation discipline standpoint. For instance, moving the power out of the JBT business into Dedicated is a step that is very consistent with long-term investment strategy and a perspective that we have such a huge addressable market and such really, really high-quality services and brand and team of people that are so committed that we would just be remiss to slow down. I know it feels a little off timing right now, but I -- even as of this morning, I continue to be super confident in the opportunity and our ability to execute on what is in front of us. And Brad, let me let you hit.

Shelley Simpson:

Hey, Scott, I might add to this. I think one of the things in our company foundations is technology. And when you think about our ability to serve our customers in 2021 and then 2022, we were able to leverage our technology investments to really step up, have a step function change from a growth perspective and delivering more value for our customers. As if you look at two of the tighter years, if you will, 2018, and then again coming into COVID, our technology further enhanced our ability to serve our customers. So, we look at our technology and not just as an investment of what return can we get on the investments that we're making, that is across our entire organization. And we evaluate every idea that comes across from our people from an investment lens. And so, for us, we let our customers give us feedback. They help drive our technology strategy. And then, you see that play out over a longer period of time as the company continues to grow and have long-term compounding returns on behalf of our shareholders. So that's a key part of our strategy. I don't see that changing. But we're always going to be prudent and watch how we spend and what returns we can get over the long term.

Chris Wetherbee:

Hey, thanks. Good afternoon. Darren, I guess just in terms of the details of how much you're through the contracting in Intermodal in the second quarter? I guess, in other words, how much of the business has been repriced in the environment we're in and maybe what's left in the third and fourth quarter to go? And then, as you look at the box count, the growth sequentially was the lowest it's been quite some time going back to when you sort of launched some of the longer-term growth initiatives. How do we think about that going forward? It sounds like in your comments that maybe we could see that be a bit constrained here in near term as sort of the return profile of the growth is maybe not exactly where it needs to be. Is that something that we'll see kind of slow down a little bit more from where we are right now?

Operator:

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

Darren Field:

So, I'll start on the West Coast. We had a number of customers that highlighted as soon as that contract negotiation was complete, they would consider moving back some of the East Coast imports through the West Coast. We haven't seen. It's not been real visible to us, but we are in dialogue with many of our customers talking about that opportunity. We still feel confident that the West Coast import opportunity for our customers is the fastest lowest cost answer. So, we're confident that we will see a slow move back to the West, not all of it. Some that went to the East will stay in the East, and we serve those markets as well. So, we're certainly glad that the West Coast labor negotiation is behind us at this point, and so, we'll continue to look for some benefits from that as the year moves on.

Operator:

Your next question comes from the line of Bascome Majors with Susquehanna. Please go ahead.

Nick Hobbs:

Yeah. Thanks, Bascome. I would just say what we're seeing is there's a lot of pressure on our customers. And I can't answer when the economy is going to turn around, demand is going to pick up. But if things remain slow, they'll continue to put pressure and our CVD process is all about [cranking out] (ph) cost and redesigning routes and optimizing fleets. And so, we'll continue to do that till the volume picks up. Our volume has just been steady, I would say, because we're coming outbound from the DCs and we want to deliver to stores and homes, and so it's been consistent. I can tell you when it's going to turn around, and we'll just continue to drive out cost as our volumes dictate. We've not -- I don't want to misspeak here, but we're not seeing hardly any pressure from our competition. What we're seeing on our existing fleets, we're just seeing cost pressure internally for the most part. And so that's kind of where we're at.

David Zazula:

Hey, good evening. Thanks for taking my question. Brad, you had mentioned a little bit of a mismatch in resources relative to the activity you were seeing in your businesses. Can you unpack that and talk about how you're planning on managing that moving forward and how you're setting yourself up for the eventual upturn?

Operator:

Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead.

Darren Field:

So, why don't I start with the inventory question. What we -- what I think we recognize is coming into 2022 in the first half, our customers had made significant orders and they had a lot of inventories as sales began to decline. As those sales declined, they were full flushed with inventory, and it took them some time to burn through that. We're not suggesting that we've had any dialogue with any customer that suggests they don't want to maintain some level of inventory that is aligned with their sales. I mean, they're trying to match inventory with their sales. I'm not aware of any customer that wants to miss a sale because they didn't have inventory. Obviously, they don't want to do that. They're just being a little bit more cautious on the ordering process, and I think supply chain actually allows customers to get their orders faster than they were during the pandemic, and all of those factors are playing in a role. But I'm not aware of a single customer that wants to intentionally hold inventory down if that meant at risk their sales.

Operator:

Your next question comes from the line of Jason Seidl with TD Cowen. Please go ahead.

Darren Field:

Well, Jason, that's with the guidance, I think, what all I'd say is we continue to be encouraged by dialogue we have with our customers. We're prepared to grow. We're specifically prepared to grow on the West Coast as imports continue to improve and our economy, we're still waiting to see if there will be any kind of a holiday shipping season. Not a lot of predictions around that, but we'll have to wait and see. And I would -- the mix was a factor in the first quarter. We talked some about that, and you could see it just in the results of growth. As we move forward, it just depends on what our customers doing, what their sales are like, and unfortunately, I can't really answer your question as we're all waiting to find out the same answer to that question.

David Vernon:

Hey, good afternoon. Thanks for fitting me in here. Darren, can you give us a sequential monthly look at how sort of RPUs ex fuel are trending in the quarter? And then I'm just trying to understand if we exit sort of 2Q at whatever the exit rate is, what would that look like in terms of a year-over-year decline for 3Q?

David Vernon:

Well, I mean, it's more of a question about the [indiscernible] guidance.

Operator:

Your next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.

Darren Field:

Well, I don't think volumes in the East in the quarter were significantly impacted by anything in Ohio. That [indiscernible] occurred back in, I think, early February if I'm not right if -- I don't recall the exact date. But certainly, the eastern network volumes in the first quarter were encouraging. They remain encouraging. I think a year ago, we had a lot of strength in our eastern network business. And we continue to present pricing and service solutions to our customers in those markets. I would also say that the Highway price is more competitive in the East than it is in the West, and so that plays a slightly more significant role in our eastern network. And I think that as the quarter went on, we really saw enormous improvement in our service performance from our well providers. And that wasn't the case necessarily in the first quarter, but we really experienced a lot of excellent service during the second quarter and we've got a let that play out and work with our customers so that they can see the quality of service and continue to give us an opportunity to grow as the year goes on.

Tom Wadewitz:

Great. Yeah, good afternoon. Thanks for the opportunity for the question here. One clarification for Darren. I know you've talked a lot about volume, but think earlier in the call, you said something about easier comps being a factor. Is that the primary reason the year-over-year was better in June or did you actually see a little bit of ad loop pickup that might be better than seasonality? And then, maybe one just for John or Shelley. I know the crystal balls aren't that clear, but it seems like the last couple of cycles, we have seen greater volatility and bigger moves up in rate and capacity and bigger moves down. Do you think that pattern is going to continue? I don't know if that's market structure driven, if that's technology driven. But do you think when we look forward, maybe we'd see another potentially bigger move up in price as we saw in 2018 and over the last couple of years? So, anyways, thanks for the thoughts.

John Roberts:

And maybe just for the benefit of everyone on the call, Darren provided the monthly down 9, down 8, down 4 as the quarter progressed. In the prior-year period, April comp was plus 4, May was plus 9, and June was plus 10. So June was our toughest comp in the quarter.

John Roberts:

Thanks, Shelley. Great thoughts there. I've noted, as we discussed here, as we usually do in this call, we spend most of our time on the kind of current state, near term, appropriately. That's what you need to help continue to evaluate what you see here. I want to mention that we do manage and run our segments with intense focus on detail. It's one of the qualities that I think can set us apart when we do it right. And that's a daily, weekly, monthly evaluation of the critical elements of the business. And so when we look at the macro, when we talk about big compliance and other elements that are vital, it's also important to know that it's a very almost surgical approach that we take. I think we see short-term focused decisions yielding short-term results. And, accordingly, we just are more focused on positioning for that future opportunity than dealing with the current conditions, knowing that that future opportunity will need us to be ready. It does remain a when, not if question. And I can tell you that while I appreciate our composure on our long-term vision, we have great from a real-time work and focus under Shelley's leadership on the current issues that we face because of the freight recession that we're in. And so, I just want to emphasize, our focus here is on our customers, enriching our people's ability to serve our customers, and we are thinking of ourselves as a coiled spring. It's a great analogy, and I'm very, very pleased with the work so far. And we look forward to a great future and calls that we'll be able to give you updates also. So, appreciate you joining us today.

Operator:

Good afternoon, everyone. Thank you for attending today's J.B. Hunt’s 1Q 2023 Earnings Conference Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for question and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Brad Delco, Senior Vice President of Finance with J.B. Hunt. Please proceed.

John Roberts:

Thank you, Brad, and good afternoon. I'll touch on a few items, but will be brief with my comments as we have members of our leadership team here to cover specific areas of our business. As we have discussed, shifting dynamics in the market for several quarters now, it should be evident that freight demand is muted even when taking into account seasonal factors. As I stated last quarter, I believe this environment presents both opportunities and challenges for our company that will ultimately put us in a better position in the future. I am seeing, firsthand, how this team and might I add this experienced team is responding to set our company up for long-term success and compounding growth as we navigate through these demand patterns. We remain thoughtful in our approach to managing the business and controlling costs where it makes sense without sacrificing our preparedness to capitalize on large, meaningful and addressable opportunities for the company. We have and will always manage this business with a focus on long-term growth built on our company foundations, people, technology and capacity. In closing, I remain confident that the collective and complementary nature of our distinct business will again prove resilient in this environment, coupled with experience, a strong balance sheet and a long-term mindset, key elements which will continue to differentiate us in the market. We remain committed to investments and achieving our required return on those investments to support our long-term sustainable growth for the benefit of all our stakeholders. Now I'd like to turn the call over to our President, Shelley Simpson, for more details. Shelley?

John Kuhlow:

Thank you, Shelley, and good afternoon, everyone. I want to touch on three topics with my prepared remarks, including a quick review of the quarter, some details on our capital plan for 2023 and bring to your attention some small changes we made in our segment reporting. First, on the quarter's results. As previously discussed, overall demand for freight capacity has moderated versus the prior year period as evidenced in our results. On a consolidated GAAP basis, revenue for the quarter declined 7% year-over-year, operating income declined 17% and diluted earnings per share decreased 18%. These declines were primarily driven by lower freight volumes moderating pricing trends and inflationary cost pressures, particularly in the areas of salaries and wages, insurance and claims, and parts and maintenance-related expenses. Our balance sheet remains strong with ample liquidity available to support our investments to drive long-term value for our shareholders. Regarding those investments, our capital plan still contemplates between $1.5 billion and $2 billion of investment in 2023. To provide some greater detail, we expect about $400 million to $500 million for real estate, which will support our long-term growth plans for the company. The majority of the balance is almost evenly split between our tractor and trailing capacity needs. Keep in mind, trailing capacity includes both dry and temperature controlled trailers and containers, as well as chassis. The growth in our intermodal and dedicated fleets in the past two years, coupled with the lack of availability of new equipment as OEM supply chains were constrained, required us to hold our equipment longer. Accordingly, a large portion of our 2023 tractor capital is for replacement needs. We did repurchase some shares in the quarter and remain committed to be active in the market as opportunities arise. Finally, we moved the majority of our J.B. Hunt owned tractors out of our JBT segment into DCS. These trucks have consistently operated in a dedicated like manner for customers over many years and makes more strategic sense to be managed out of our DCS segment, while also allowing JBT to focus its efforts on scaling our J.B. Hunt 360 box service offering. Second, we moved our non-asset LTL business out of ICS and into Final Mile, which has similar operating characteristics as our Final Mile business. These realignments best position our organization for our future and focuses each segment's people and assets in particular areas of expertise. We have included an addendum in our earnings release to provide a historical perspective for these moves. This concludes my remarks, and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick, and thanks everyone for joining us. I'll review the performance of our Intermodal business in the quarter and reiterate the opportunities we have to deliver significant value to our customers with the investments we are making in our people, technology and capacity. I'll start by reviewing Intermodal's performance in the quarter. Demand for Intermodal capacity was tempered, driven by overall freight activity. But specifically lower imports and elevated inventory levels across the supply chain. Volumes in the quarter declined 5% year-over-year and by month were down 2% in January, down 4% in February and down 8% in March. As we stated in our earnings release, transcontinental volumes were down 9% in the quarter, but our Eastern volumes were up 1%. I think this is an important call out as we have been growing volumes in the East, which is the most truck competitive market, while being in a depressed truckload environment. This mix shift to shorter length of haul freight does influence contribution dollars per load which did impact us in the quarter, but also should signal our ability to deliver value to our customers in this market. Rail service predictability and consistency has improved to near pre pandemic levels, while customer detention of equipment improved even further and as the quarter progressed. While we have seen a decline in revenue associated with the detention of equipment, we have not yet offset that impact with the onboarding of new volume. As I've stated recently, our network and service offering is a coil spring that can handle significantly greater volume today and unlock a lot of value for our customers and our company. We have the people, the drake capacity, and the containers that could handle upwards of 15% to 20% more volume today. As we have shared recently, we have been meeting with customers and continue to be encouraged by the feedback we are receiving about our service. Customers trust us and our say/do culture. They believe in our Intermodal product and they want more of it, but part of that is influenced by the economy and overall freight demand. We feel very confident that we have a differentiated product in the market that will support our ability to take share. We are encouraged by the results we are getting so far in the bid process and look forward to the opportunity to prove the value we can deliver to our customers. In closing, we strongly believe in the strength of our Intermodal franchise and its opportunities to drive significant growth over many years. It provides significant value for our customers with opportunities to save money by converting freight from the highway to intermodal which reduces costs and is further supported by fuel costs and carbon emission savings. We are in the best position to commit more intermodal capacity to our customers as we progress further through the current bid season, which should present meaningful opportunities to unlock value in our network for the benefit of all of our stakeholders. That concludes my prepared remarks, so I'll turn it over to Brad Hicks.

Brad Delco:

Thanks, Brad. And Sierra in the interest of time and based on the number of callers we have in queue, we're going to do one question with no follow ups. Sierra, you can queue for questions.

Jordan Alliger:

Yes. Hi. Question, can you maybe touch base a little bit on -- little more color around the customer signals you're hearing on Intermodal. I know it's sort of a cautious outlook, but perhaps relative to what you're thinking in January with inventory restocking, even thoughts on second half peak season. Is there any sort of change in signaling from when you guys talked to us back in January? Thanks.

Operator:

Thank you for your question. Our next question comes from Jon Chappell with Evercore. Please proceed.

Darren Field:

Yeah. So I'm not going to give any guidance on this call to be clear. I think we're encouraged by both and encouraged by both price and volume, meaning, I think we're winning volume that our customers believe that they will have. And encouraged by price in that, I don't think it's behaved any more challenging than what we expected coming into the year. Look, there's challenge on price, there's also cost to take out, part of the cost to take out comes with volume pouring over the top. And so, we're encouraged by the volume wins we have received on paper. We are -- we haven't seen all that volume yet. So there are, again, kind of like the last question still a handful of question marks out there. But I would say the bid season -- I remain optimistic about our future. There is going to [how many day] (ph) when imports improve from where they are. When will that be? I don't know the answer to that. But it will improve and we stand to gain tremendously when that happens.

Scott Group:

Hey, thanks. Afternoon. So, Darren, you've got 17% of the boxes parked in Q1. Are you still buying boxes? Are you -- and parking more? Are there any green shoots that have you un-parking any boxes? And then, as I look ahead, I suspect Intermodal price probably moves lower from Q1 to Q2. In that kind of environment, can Intermodal margin earnings improve from Q1 to Q2? Or does price naturally just take the margin earnings down a bit more?

Operator:

Thank you for your question. Our next question comes from Chris Wetherbee with Citigroup. Please proceed.

Darren Field:

So listen, on the first -- on the fourth quarter call back in January, I did say I expect it to grow revenue loads and income. J.B. Hunt's growth company, that's our expectation around here every day, no matter what the conditions. That statement wasn't intended to be guidance, but clearly that's how it was interpreted. Again, as we go through the year, we're working with customers, talking to them about what their expectations are and that largely defines our own. And as we go through -- as we were coming into the year, we've probably had a lot of confidence in demand growth as 2023 went on. At this point, our customers have been less accurate than ever before. And so, we're still waiting to see what happens. As far as an update to that statement, I don't have an update for you. I know our system is built to handle 15% to 20% more as I said in my prepared comments and we look forward to growing with our customers through the rest of the year.

Justin Long:

Thanks. Good afternoon. Maybe I'll just take a step back from Intermodal and John Roberts. I had a high level question for you. So, if we see weakness in the freight market and the economy persists into the second half, how does that change the way you think about managing the business in terms of both your growth plans and the cost structure? And are you already making any pivots today based on how your expectations for the rest of the year have evolved?

Operator:

Thank you for your question. Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed.

Darren Field:

And it is impressive how you guys get more than one question in. So bit compliance is sub 60, middle 50’s. It's terrible. It's an all-time worst. So we'll see when that improves. Obviously, our transcontinental business is largely tied to imported goods and there's real significant challenge with bid compliance on that business is pretty poor. The cost takeout, one of the thoughts there has been, hey, we had weakness in velocity, so spreading the fixed cost of owning the equipment over more loads with better velocity is a cost takeout, but that comes with volume. We had driver productivity challenges as a result of poor rail service. And as rail service improves, we get stronger driver productivity and better utilization of our drayage assets. That's a cost takeout on per load economics. And then just staffing and overhead and how do we pour more loads over the system without adding overhead? And all of those actions are available to us that come with volume. Will we sustain the current op income per load? I don't have any idea. I know this that we're going to be happy with the return profile on our business. And our customers want more of our product, and I think that gives us an opportunity to price it fairly and anticipate a fair return for the work that we do. We must provide them an excellent customer service experience and we have to be good at communicating what their experience should be like, but I don't have any guidance on income per load. What I know is, we have a long-term margin target. We'll live within those boundaries and we expect that our return is going to be warrants reinvestment in our business.

Brian Ossenbeck:

Hey, good afternoon. Thanks. Just a follow-up on the, I guess, normalization of operating profit per load. Can you just talk about the congestion fees? It sounds like the costs are still there to come out, but what about the congestion fees if you're not really seeing the detention times as high as they were at the customers? And then if you can just talk broadly on safety, you did mention a few times. I think it might be a little hard to move the needle but it has been a challenge in the past. So be curious to hear your thoughts on how quickly you can make some improvements there? Thank you.

Nick Hobbs:

Yes, I'll take the safety question. We were faced with some challenges clearly in Q1, saw some last year. We had a tremendous growth. In the meantime, we have tremendous growth across the organization with new managers, new drivers. It presents some challenges to us. We're encouraged by the progress we're making. Still got a long way to go. In addition to that, the inward facing cameras, we're rolling that out. And so, we think that's going to -- well, we know it's going to take us another year and a half to two years to get fully implemented, but we're encouraged by the progress we're seeing there. So I would just say we're focused on it and we'll keep chipping away on our safety numbers. And we've seen good results so far at the end of Q1 from what we've seen.

Allison Poliniak:

Hi. Good evening. Just on Intermodal volumes, could you maybe talk about the sequential trends you saw in the quarter and how they compare with what you would typically see in terms of seasonality in Q1? Just any thoughts there?

Operator:

Thank you for your question. Our next question is from Ken Hoexter with Bank of America. Please proceed.

Brad Hicks:

Yeah, Ken. This is Brad. I'll start from an ICS perspective and anybody else is free to add in there. As we came into the year, Darren covered nicely what our kind of macro thoughts were and we're seeing more pronounced in highway and in ICS in particular kind of the freight recession impact. We're not really seeing a high volume of carriers exit at this point, although you can see in our reported data that we did reduce our active carriers. That was in part to my comment on some of the [indiscernible] that that we saw occur in in the quarter. And so, we kind of called out and establish new parameters there. So that's not an indication necessarily of carrier loss. It was our processes and protocols that we implemented to create better protection for us against that specific set of circumstances. And quite frankly, the market itself more pronounced in spot. We were a little bit over indexed through the height of the pandemic in fisting our customers and their disrupted need. And quite frankly, we were probably behind on the published side coming into this current environment. We work tirelessly to recover from that. And I think you can see we're north of 60% on published freight at this point in time. But obviously the heavy volume was in spot and what occurred to spot in the back half of last year in the first part of this year with a negative to our overall book and our overall performance.

Operator:

Thank you for your question. Our next question is from Tom Wadewitz with UBS. Please proceed.

John Roberts:

Well, I think there's a lot in that question. Mix of our business can play an enormous role and we highlighted that we were negative 9% transcon, plus 1% East. That's going to influence our overall revenue per load. Certainly, all of the factors you highlighted are part of it. In terms of the way we implement pricing, what we've highlighted multiple times is, we implement approximately 30% of our business in Q1, 30% in Q2, 30% in Q3 and 10% in Q4. Current cycle, so I don't know that it's any different than that. There's -- customers -- our ability to predict what's going on with that. I mean, Shelley just highlighted it. It's never been more challenging to know just what's going to happen with volumes. And I said earlier, I mean, the pricing market has largely behaved like we would have expected. And we expected some negative pressure on price. So I don't know how to give you any kind of further info on what to expect with price. I just know that certainly the impact of shorter length of haul and growth in the East more than transcon, once our transcon gets back to normal, you can expect that that would be helpful to the revenue per loan.

Ari Rosa:

Hi, good afternoon. So we've seen a lot of changing dynamics out West, obviously, with some of your IMC competitors switching between railroads. I'm a little surprised to see, I guess, the extent of the weakness in volumes. I was hoping you could just talk about the dynamics of what's driving the weakness out West. Is it really just that kind of international intermodal business? Or is there an element that's being driven by competition? And then in that context, how are you thinking about your ability longer term to take share, particularly in the West? Thanks.

Operator:

Thank you for your question. Our next question is from Bascome Majors with Susquehanna. Please proceed.

John Roberts:

Well, I mean, I don't know that we anticipated strength or rebound in imports in Q1. When we talk about what might have gradually changed over the course of the quarter, again, it was that compliance and just continued uncertainty from our customers about what the consumer was going to do and what order would be like. I think we felt that a lot in the first quarter as we met with customers and you could see as time went on their ability to forecast and even know what to expect, we had questions and that's what has created our change to some degree. What do we need to happen? We need imports to improve. We need a West Coast labor agreement to finalize and give customers confidence in the West Coast to import programs more than anything we need in the economy and the goods economy to improve. That will drive the fastest response and inventories to bleed off.

Operator:

Thank you for your question. Our next question comes from David Zazula with Barclays. Please proceed.

John Roberts:

Thanks for that question. We've had -- we've been talking about and looking at our sales compared to last year and last year was just terrific and our sales have slowed down a touch. But we're very optimistic when we look in the pipeline. And we're starting to see some of our customers really ask some questions on some private fleets that we're working on to really take out cost and using our engineering resources to really not just put out a procurement bid, but really how can we do things more efficient since their volume was down. So we're encouraged by that. So I would say we still will hit our targets. We feel comfortable hitting our sales targets that we lay out every year. So we're optimistic. Our volumes in general are okay, I would say, in Dedicated. So we're continuing to go to the stores and all the things that we do on a consistent not robust, but we have a lot of interest from a lot of different customers looking for us to help them with some solutions to take out cost. And we think that plays into our strength very nicely.

Elliot Alper:

Great. Thank you. Staying on the Dedicated side. You spoke out about the pipeline beginning to soften a bit. I guess, is there anything more you can share on that? Are these customers reducing their freight need by, say, X number of trucks? Are you seeing pockets of weakness in certain product categories?

Operator:

Thank you for your question. Our next question is from Bruce Chan with Stifel. Please begin.

John Kuhlow:

Yes. I think -- I don't want to draw too much attention to this, it was a little bit more of a reporting. And looking at our services, we felt like those as we talked about, we felt like those services -- could be better managed and/or more aligned in some of the different segments. And so that's why we made the move. We do feel like once in those segments, there can be some margin improvement there. But for the most part, it’s more of an accounting and reporting issue to get those more aligned to where the other similar services are.

David Vernon:

Thanks. Good afternoon. Thanks for fitting me in here towards the end. I'm wondering if you can maybe talk about your posture into this bid season. Are you are you kind of approaching it in a more balanced fashion? Are you focusing on maybe a little bit of share take just given that we're in what sounds like based on your commentary, a temporary downturn in in freight demand? Just trying to think about how you guys are thinking about managing this period of uncertainty, particularly around the Intermodal bids?

Darren Field:

So I'll hit on intermodal on that question from a posture going into the bid cycle. I mean, we spent the better part of 2021 and 2022 without enough capacity to truly do everything that our customers wanted us to do caused by weakness in velocity, caused by slow unloading, slower rail service. And so, our posture in 2000 -- this bid cycle, in the 2023 bid cycle has just been to communicate with our customers that things are normalizing with our velocity and our capacity, we went out and acquired and announced publicly a mission to grow our capacity up to 150,000 containers in three to five years. And we're trying to really give our customers confidence that we're going to be there for them, that we're aware that costs had increased for them and that we felt like we could get some cost takeout by growing volume in our system. And so our approach has been to grow with our customers, but our approach is always to cover our investment with appropriate returns. And so, that's a balancing act. If you're asking, did we just set out to take share? We set out to grow because that's always our mission. That will be our mission next tomorrow and the next day and from here on forward. So that was our posture as we move into the bid season.

John Roberts:

Thanks, Shelley. I'll just close this by saying that, as we look at this turbulence, we are very confident in our structure overall, our asset structure for each business makes sense to us in a way that it hasn't always for me. And I think we finished a lot of the work coming into 2023 that needed to be done. So that things like 360 box could have a chance to get that traction. It's looking for as a very unique and we think very needed service. I'm thankful that we asked a question here about Dedicated, although it did take 50 minutes of the hour call to get to it. Because I think we're again reminding everyone that that's a very different business than I think what is it is interpreted as. And in this tough climate where you see radical changes in some of our channel demand, you see a real steady state, a very resilient business that is asset intense, but also has a very different rate and contract structure that we are the industry leader at providing. And I think when we take it up to return on invested capital, we look at the performance of margins in intermodal at this point. We look at the performance and all of the businesses that do require more capital, that's why I say I think we're in a better position than we've ever been in. Shelley talked about responding to the market signals, the market changes. Right now, we are doing that. And I think there is a very, very quick response at this level with this team to address challenges that are weren't expected necessarily. But with the most important part of that conversation being about the long-term, we are a long-term company. Our addressable market is somewhere in the high hundreds of billions of dollars. And so, when we say we're a growth company, that's because as industry leaders, we have fractional percentages of the markets that we serve even in the number one spot. So we like where we're at. We have a strong view. We will make tweaks. Remember on CapEx, when you think about that, a good portion of our CapEx is replacement. We had plenty of trouble through the pandemic in getting equipment replaced that we needed. I think we will look at timing on other elements of CapEx expansion and growth. And with DCS, that model is a pull system anyway. So it only triggers being our heaviest demand when it is asked to or after a deal is closed. So I think that that all goes back to the idea of probably more cautious about the rest of this year than we were three months ago to that question based on the facts and data that we're seeing. And we will respond, but we know this. Last point, it's not a question of yes, this is coming back. It's just a question of when and what position will we be in when our customers start ringing our phone again in ways that they have in the past. Thank you for calling in today.

Operator:

Hello and welcome to today's J.B. Hunt Fourth Quarter 2022 Earnings Conference Call. My name is Elliot, and I’ll be your coordinating you call today. [Operator Instructions] I would now like to hand over to Brad Delco, Senior Vice President of Finance. The floor is yours. Please go ahead.

John Roberts:

Thank you, Brad, and good morning. My comments will be brief today as we have members of our leadership team here to cover specific areas of our business with more detail. As we reflect on the fourth quarter and the full-year of 2022, we have seen and experienced a cyclical shift in market dynamics that will present both challenges and opportunities as we navigate through the upcoming year. That said, we remain encouraged by trends from our real providers that present opportunities for faster transit times and in-turn greater service quality and value for our customers. We also see some loosening in the labor market and some modest improvements in equipment availability. Conversely, demand for transportation service in the fourth quarter was seasonally weak as customers manage through levels of elevated inventories. As we've discussed in the past, we have confidence in the collective and complementary nature of our distinct businesses that are built to be resilient and durable through market cycles. I have a tremendous amount of confidence in our people led by the 14 officers of our company that have a combined 340 years of experience here at J.B. Hunt. In closing, our team will remain disciplined and focused on charting our course to compound returns on the capital we've deployed to support our long-term growth for the benefit of our stakeholders. Now, I'd like to turn the call over to our President, Shelley Simpson. Shelley?

John Kuhlow:

Thank you, Shelley, and good morning, everyone. My comments today will cover our recent performance in the quarter and for the fiscal year 2022. I will also provide you a preliminary view on our capital plan for 2023. Overall, results for the quarter were mixed. As freight volumes were pressured by unseasonably soft demand as compared to prior quarters of the year. That said, operating results were fairly resilient in spite of an unusual item that I'll touch on later. On a consolidated basis, revenue for the quarter grew 4% year-over-year, but operating income declined 13% and GAAP earnings per share declined 16%. We incurred a rather large income statement item in the quarter for approximately $64 million or $0.46 per diluted share for an incremental pretax increase in casualty claims expense. This charge is similar to a charge we incurred in the second quarter of this year as certain claims from prior year incidents continue to settle at much larger amounts than what we have historically experienced. For the full fiscal year 2022 on a consolidated GAAP basis, revenue grew 22%, operating income grew 27%, and earnings per share grew 29% versus 2021. Based on the solid performance for the year, we voluntarily paid out an 8.8 million appreciation bonus in the fourth quarter to our frontline employees in recognition of their contribution to a fantastic and record year for our company. Of note, we paid a similar appreciation bonus a year ago, so the year-over-year impact was not significant, but worth calling out when looking at sequential performance. We continue to focus on and maintain a strong balance sheet providing us with ample liquidity to deploy capital to drive long-term value for our shareholders. Our capital plan for 2023 contemplates between 1.5 billion and 2 billion of capital for business needs. This includes elevated levels of replacement demand as a result of equipment challenges experienced over the last two years; growth CapEx to support investments, primarily in JBI and DCS; and investments in real estate. Importantly to note, a large portion of our growth CapEx is success-driven based on our ability to secure long-term dedicated contracts. This growth component and the timing uncertainty is the reason for this range. Our capital allocation plan for 2023 also contemplates supporting our dividend consistent with our long-term practice, as well as taking advantage of opportunities in the market to repurchase shares. We will continue to monitor and manage our leverage target to around 1x EBITDA, but are comfortable going above this level if investment opportunities present themselves. This concludes my remarks. And I will now turn it over to Nick.

Darren Field:

Thank you, Nick, and hello to everyone on the call. I'll review the performance of our Intermodal business in the quarter and talk about our opportunity to deliver exceptional value and capacity to our customers in 2023 and beyond. I'll start by reviewing the performance in the quarter. Demand for Intermodal capacity was seasonally weaker than normal as PCs and activity leading up to the holidays was absent this year. Volumes for the quarter declined 1% year-over-year and by month were up 4% in October, down 3% in November and down 5% in December. We experienced improvements in rail velocity in the quarter and also saw some modest improvements in customer detention of equipment on a sequential basis. That said, we still believe we can see further progress on both fronts, which will further improve velocity and decrease transit times in our system. We believe that current trends around velocity present opportunities for us to sell a higher valued and reliable service product in the market. As we think about 2023, we see a lot of opportunities to deliver value to our customers with our industry leading Intermodal service product. As Shelley discussed, customers have shifted their focus more on costs and service versus capacity. We believe our intermodal service product presents our customers with opportunities to save money by converting highway freight back to intermodal, which reduces their costs and is further supported by fuel cost and carbon emissions savings, while [import volumes] [ph] have been weak, we still see opportunities to gain customers wallet share by converting highway freight and transloading more international freight into our domestic containers. Additionally, we are in the best position to commit more intermodal capacity to our customers as we progress through the current bid season based on solid improvement in rail service levels and our investment to expand our capacity. Finally, because I anticipate this being a question, I thought I'd address it here. As you are aware, we have more capacity and better alignment with our Western Rail provider, BNSF, and we have both committed to the long-term growth of our collective intermodal service offering. We will compete in the market on the basis of cost capacity and service and we feel confident in our ability to earn our customers' business and grow our wallet share. We are not approaching 2023 with a volume versus price mentality, but how do we set-up our business to drive the greatest shareholder value over the long-term. This was my eloquent way of saying, we historically have not given any guidance on price, volume or margins and we will continue that streak, but also the streak of managing our business to compounding our growth and returns over the long-term. That concludes my prepared remarks. So, I'll turn it over to Brad Hicks.

Brad Delco:

Thanks Brad. And operator, in the interest of the number of people we have in queue. Can we do just one question per caller? Thanks, Elliot.

Chris Wetherbee:

Hey, thanks. Good morning, guys. Maybe a question for you, Darren. I know you don't want to talk a lot about sort of the pricing volume outlook for intermodal, but maybe I could ask the question this way as you, [sitting here] [ph] in the beginning of the year and as you noted, you have a different setup with your major rail partner in the West, wanted to get a sense of sort of what customer receptivity has been to that increased capacity and the opportunity to potentially convert loads back onto the intermodal network? I guess maybe the, sort of finer point on that as you think about, sort of the historical relationship with intermodal versus, sort of say macro or truckload, do you think that 2023 can be a year of relative outperformance for intermodal just given some of the macro stuff that we're seeing right now?

Chris Wetherbee:

And just one point of clarification, just the BNSF for rail service where it needs to be to make that value proposition to the customer?

Chris Wetherbee:

Great. Thank you very much.

Jon Chappell:

Thank you. Good morning. Darren, sticking with you, obviously, you're investing on your own in your own capacity, but there's no, kind of commentary on box turns. How you get into what you just said about service being the best since 1Q 2020, can you give us an update on where box turn stand today? Where do you think it’ll be in the next kind of 3 to 6 months? And probably more importantly, outside of your own investments, just when the box turns the velocity, the productivity, the fluidity is alone, how much capacity you think that adds to your network over the next 12 months?

Operator:

We now turn to Scott Group from Wolfe Research. Your line is open.

Darren Field:

Well, I appreciate your attempts, Scott, to get me to give guidance. We're not going to be able to do that. Certainly, I do expect intermodal to grow this year on all fronts, on revenue, on earnings, certainly on volume. I think that as we come out of the first quarter, there is a lag. You can see it in the import economy. I mean, there is a significant lag in demand at the moment. Most of our customers, if not all, are optimistic about summer and the rest of the year. There's an inventory correction going on. We have real opportunities to grow our intermodal business and we're working on that every day. Certainly, we're not going to ignore the fact that right now the market is soft in Q1 and inventory is trying to correct. As far as boxes, we really haven't made any announcement about how much equipment we're onboarding this year. What I would say is, it's more than zero, but certainly we're going to meter back a little bit over where we have been as velocity has really, really brought a lot of capacity to our market.

Justin Long:

Good morning. I'll shift to a question on dedicated. So, Nick, maybe you could talk about how much of a headwind you saw in the fourth quarter from fleets reducing the size of their fleets? And then looking into 2023, we've got some moving pieces with new business you've won, but also cyclical pressure, how are you thinking about a reasonable target for both gross fleet additions and net fleet additions this year?

Operator:

Our next question comes from Amit Mehrotra from Deutsche Bank. Your line is open.

Darren Field:

So, I'll start Amit. Appreciate the question. I think that we have long said that there's real cost to exit our system in the form of velocity and improvements in driver productivity. Box turns gets most of the focus because it's an easy metric to see and calculate. Our driver productivity is a significant element inside our cost that can also improve as we grow our volumes and get more normalized into our system. Our customers are beginning to unload our equipment faster. The railroads are operating faster, all of which creates some cost takeout. So, as we grow our business, we really feel strongly that we can overcome any, kind of pricing pressure. We're not looking for any, kind of change to our long-term margin guidance and feel confident that we can deliver in that area in 2023 for sure. We said, we expected to grow volume, expect to grow revenue and expect to grow earnings in 2023. Kuhlow?

Operator:

We'll now turn to Ravi Shanker from Morgan Stanley. Your line is open.

Darren Field:

Yes. Good morning and thank you for the question. I started to talk about that pivot at the end of Q3 and we certainly saw that play out. And in my prepared comments, I used the word atypical. We certainly saw that throughout the fourth quarter, a continued weakening from October into December. As we sit here right now just through 15, 16 days in January. I would say, we're consistent with what we saw end of December. However, as Darren mentioned, we do expect sometime maybe second quarter going into third quarter with inventory resets. We would fully expect to see the freight market rebound, but I do feel like this is the area of our company that will most feel the volatility we've long discussed and documented what happened in the spot market and that still sits about where it was. And so, until we see some of that freight demand rebound imports start flowing, I think we'll be in a comparable environment to what we saw in the fourth quarter in brokerage.

Brian Ossenbeck:

Hey, good morning. Thanks for taking the question. So, Shelley, maybe you can elaborate a little bit more on some of the caution you're seeing on the demand side and we've touched on it a little bit, but it seems like the general view is that you expect a tough first quarter and then some improvements, sort of towards the middle part of the year. So, Darren, does that give you enough confidence from the demand side and also from the service side, both from the West and the East to really lean in and commit that capacity that you think your customers are going to be there and waiting for? Because it does seem like the timing of the recovery on the service side and demand is going to be a key factor here. So, curious on your thoughts there. Thank you.

Darren Field:

I just want to jump in, Brian. You asked a little bit of – you hinted at Eastern rail providers, and in both Eastern railroads, Norfolk Southern and CSX are also performing better than they have in 2022 and we're confident in their plans and continue to see really significant opportunities in that part of our network to grow highway share conversion back to intermodal as this year goes on.

Tom Wadewitz:

Yes. I wanted to ask you a bit about just beyond supply chain, if you think that there's going to be improvement in fluidity, I mean, it sounds like you're seeing that. Do you think that that happens fairly quickly? And how does that impact the storage revenues? Is that something we should see storage revenues go down a lot in 2023 or do you think it's more, kind of a gradual thing that there's a bit of stickiness in what happens with storage revenues? And I'm thinking in particular storage, container storage revenues in intermodal? Thank you.

Operator:

Our next question comes from Jordan Alliger from Goldman Sachs. Your line is open.

John Kuhlow :

Yeah, Jordan, this is John Kuhlow. I'll address that. We've seen similar to others in the industry over the last 12 months to 18 months a dramatic change in our settlement experience on our claims. All of our claims, but most importantly, our more severe claims are settling at much higher levels than our historical experience. Sometimes to 5x to 10x what they were five years ago. And so, our insurance coverage consists of layers and there are certain layers in there that have caps. And when we exceed those caps, the claims expense reverts to us. And the 30 million that we recorded in the second quarter and the 64 million that recorded in the fourth quarter for a total of 94 million in the current year represents our reserve adjustments on previously incurred claims. So, these are all prior period claims that we've increased our reserves based on our experience. With that, I will tell you that the reason why we've done this is because our insurance claims costs for the claims experience is dramatically going up. And it's a highly unpredictable environment. We are not planning in 2023 for another one-time charge. But as I said, it's highly unpredictable and we're continuing to watch our claims. Now, I will tell you that we have made some changes to our structure going into 2023. And so, we are going to be taking on more coverage and to contemplate this. And I'll go even a little bit deeper than we normally do just because this is a significant area that we're focused on. I think on a rate basis, our premiums are going to be up around 15% just on the core premiums. But as I mentioned, we're adding in new layers of insurance and so our premium base will also increase. That said, we're expecting our incurred losses to increase as much as 30% to 35% in the next year because of what we're seeing on these, just the movement today on how these claims are being settled. So, a little bit more insight than we would normally give, but wanted to give you a little bit deeper information on what we're seeing in the insurance area.

Brandon Oglenski:

Hey, good morning and thanks for the question. Darren, I think you spoke a couple of times about earnings growth in Intermodal this year, can you just reconcile that with tougher pricing in the truckload market and how that dynamic could impact your yield generation this year? [Now looking] [ph] for specific items there either.

Operator:

We now turn to Allison Poliniak from Wells Fargo. Your line is open.

John Kuhlow :

Yes. Well, it kind of goes through all fleets, Intermodal, Dedicated and Final Mile. Talking to our OEMs, they're still going to be constrained, they think this year. And so, we've publicly announced that we're going to a third OEM that will help us alleviate some of those constraints, but based on our forecast, we will still be handling a few hundred trucks that are past due at the end of this year that could move forward if the OEMs numbers come up. But we will have some trades that we're going to carry with us the most part of the year.

Ken Hoexter:

Great. Good morning. Shelley, just can we revisit some of the comments there on bid season? I think you noted that bid season was fully loaded by July 1. So, are we still looking at a March through May industry bid season for part of the business? And if it is then coming up, I guess Brad and Darren, you've each talked about maybe fourth quarter demand weakness and outlook into the New Year. Maybe can you talk about how you're thinking about where contract stands versus spot levels?

Darren Field:

Well, I'm going to ask Brad to comment on the spot versus [Multiple Speakers].

Darren Field:

Well, I think Intermodal contract prices should continue to provide in most corridors a significant saving against highway contract rates, fuel inclusive. And that's been the case forever and there'll be no difference this year. Certainly, there's a handful of markets out there where I think truck spot prices may be applying some pressure at the customer level around their mix of highway and intermodal and we'll watch that and we'll try to adapt and we'll talk to our rail providers and look for ways to take cost out of our systems so that we can be competitive, but at the same time, we're going to be disciplined about our returns and our margin profiles and everything about our business that has been the case forever at J.B. Hunt.

Todd Fowler:

Great. Thanks and good morning. I think this has been touched on a couple of different ways throughout the call, but maybe just bringing it together. How do we think about the shape of the quarters and earnings as we move through 2023? It seems like that the volume environment is going to start-off weak in first quarter, but there's an expectation for some inflection mid-year, but at the same time, contract pricing is going to come in. So, how do we think about seasonality? And then if the demand environment doesn't inflect up, what are some of the cost levers that you have that can offset weaker demand? Thanks.

Operator:

We now turn to Ari Rosa from Credit Suisse. Your line is open.

John Kuhlow:

Yes, there wasn't anything in specifically that I was referring to. It was just more commenting on the strength of our balance sheet, our liquidity position, and the ability to take advantage of opportunities that exist. We still continue to look at buyback or excuse me, at M&A as it becomes available we'll continue to do so. But buybacks and dividends are also a core piece of our capital allocation process and we'll evaluate that as well.

Bascome Majors:

As you went through the competitive bids with Schneider leaving your rail partner and moving over to the [UP] [ph], can you tell us what you learned about your customers desire to perhaps stay with the BN versus create some competitive or maintain some competitive tension in their intermodal suppliers and how that's inflecting your strategy long-term to grow the business? Thanks.

Operator:

Our next question comes from Jason Seidl from Cowen. Your line is open.

Brad Hicks:

I'll start, Jason. And I think maybe you're asking about what we might see on the truckload side and then how we think about that impacting in any way, shape, or form, Intermodal contract rates, if I understood the question correctly. We certainly have seen and expect to see downward rate pressure on the highway side. The good news is from where we sit in the evolution of our truck line and now with the combination of ICS and JBT, we are for the most part variable on our power and so we're able to ebb and flow with that fluctuation in a much more favorable light than perhaps we were when we were an asset provider. But we do fully expect, you know I'm not going to give guidance on what we anticipate or what we're planning for on the overall rate movement, but we certainly expect it to be down somewhat substantially just as we saw it go up somewhat substantially or abnormally two to three years ago. We are seeing that kind of correction back downward. I think on the intermodal front, the only thing I would say is, historically and then I don't think it'll be any different today. Intermodal will outperform a downturn in truckload rates. I'm not going to ignore that certainly becomes a dialogue and a talking point for our customers, but the savings Intermodal offers against a truckload price continues to be significant and whatever is happening in the truckload contract pricing, Intermodal will continue to be advantageous for our customers for now and for the long-term, particularly when you add the cost of fuel in there.

Bruce Chan:

Hey, good morning everyone. Appreciate the time. Maybe another one for you, Brad Hicks on ICS. You talked a bit in the release about a pickup in [tech costs] [ph] in 2022. And I just wanted to get maybe a little bit more color on whether that was tied directly to volumes in that business, you know whether that was a structural investment in the platform or whether that was more inflationary? And then as you think about some of your comments around volumes this year, how much of an opportunity do you have to get more leverage on those costs? Thank you.

Operator:

Our final question today comes from Jeff Kauffman from Vertical Research. Your line is open.

Shelley Simpson:

Thank you, Jack. And I like to start with what Brad Delco said, which is our crystal ball is not very good and really not like anybody else's. It's hard and difficult, but we do talk to our customers. And what they're telling us is it's largely an inventory correction happening. I will say, I think they're evaluating part of the flip that Brad Hicks talked about last quarter was really around the capacity side, but also the flip is occurring from an inventory side as we're coming on that back end of COVID, what consumers were buying and what they're purchasing moving into the future. That's part of what's happening from an inventory correction perspective. But I would say, I don't know that we have a great crystal ball, but this is what our customers are telling us. We feel confident, but we're going to be fluid in making sure that we have good conversation around that and apologize, Jeff. It's Jeff, not Jack.

Shelley Simpson:

Great. Thank you so much. And I'll also hand it back to John here at the end, but I think you heard us open and talk a lot about the challenges that are being presented, but also the opportunities that we think exist for our customers and also for J.B. Hunt. We're going to continue to be fluid and we are cautious based on what we're seeing on the demand side, but we're very confident in our ability to really thrive in this environment and in any environment. And talking about our three priorities, and those really don't change whether that's this year, the next year, or years after. We're going to stay disciplined with our long-term investment around our people, our technology, and capacity, being fluid in those decisions and making sure we stay close with our customers. We will be very focused on creating more customer value. And this year, we are helping our customers with cost savings. You heard Darren talk about we're going to do that through efficiency. We are talking to them about mode conversion, to the most efficient lane transportation available into Intermodal. We're going to continue to build great fleets for them and create a more efficient fleet. We're going to differentiate our customers' experience in the Final Mile segment and we're also going to leverage J.B. Hunt 360 to bring a flexible cost and capacity solution. Finally, we are going to continue to have long-term compounding returns for our shareholders. Those are our three priorities, but before I turn it over to John, I want to make sure that I say, we are so proud of that over 37,000 employees that have delivered really over the last three years, but even in the fourth quarter, a little bit of noise there, but I'll tell you the effort that our people have made through 2022, our customers notice, our customers trust us, and every day we work very hard to be their trusted provider. We want to continue to accelerate with our customers, but without our people, technology and capacity really would be irrelevant. And so, I just can't emphasize enough the great work our teams have done. We're proud of the teams and we're looking forward to 2023. John?

Operator:

This call is now completed. We like to thank you for your participation. You may now disconnect your lines.

Operator:

Good afternoon, ladies and gentlemen. Thank you for attending today's J.B. Hunt 3Q 2022 Earnings Conference Call. My name is Tia, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Brad Delco, Senior Vice President of Finance. You may proceed.

John Roberts:

Thank you, Brad, and good afternoon. As we reflect on the performance of the overall business in the third quarter, we echo many of the same themes discussed on our last call with an intense focus on changes in the freight markets we serve. The results in many areas of our business achieved appropriate targets in light of the cyclical shift in market balance I've referenced last quarter. While some improvement has been seen in rail service and company hiring challenges in particular with our driver force, we continue to face difficulties in equipment availability for growth and replacement, along with the uncertainty of the direction of macro conditions. Clearly, there are also areas of our business with opportunity for correction. That said, let me be clear, the businesses we've built, the changes we've implemented and the team's collective experience have and will continue to reveal themselves as value-enhancing catalysts for our customers, our company and our shareholders. Let me address some of the points around the market dynamics referenced. Further evidence has presented itself over the course of the quarter that requires an increased level of caution and awareness on broader demand trends and economic activity. Data, experience and frequent dialogue with our customers will continue to guide us in this area. The complementary nature and diversification of our businesses will continue to serve us well in this changing market. As mentioned earlier, rail service has shown real signs of improvement in both velocity and reliability during the quarter with positive momentum building, the most notable increase coming from our friends at the BNSF. We are encouraged by the trends and Darren will expand on this area in his remarks. I remain in active and regular dialogue with the senior leaders of our primary rail channels on opportunities and investments required to fully restore service levels needed to capture the opportunities presented with Intermodal. We are optimistic about the path forward with Intermodal and with all aspects of our collective services. Members of our leadership team are here and will cover areas of our business more specifically for you. But at this point, I would like to turn the call over for the first time to our new President, Ms. Shelley Simpson. Shelley?

John Kuhlow:

Thank you, Shelley, and good afternoon, everyone. My comments today will be brief and will cover our recent performance in the quarter on a consolidated basis. I'll also provide a quick update on our CapEx plans. Overall, we are pleased with the results of the quarter on a consolidated basis. As John remarked, we hit targets in areas of our business and fell short in others, but that highlights the benefits of our diversified and complementary model. On a consolidated basis, revenue grew 22% year-over-year, operating income grew 32% and GAAP earnings per share grew 37%. From a cost perspective, we continue to experience inflationary pressures across most areas of our business but primarily around labor, equipment, including both parts and labor and in the area of claims. We are keeping a close eye on receivables, credit and bad debt as economic conditions change and we'll continue to monitor the environment and manage accordingly. We purchased just shy of 350,000 shares in the quarter, bringing our year-to-date spend on repurchases to approximately $300 million. We will continue to explore share repurchases going forward as opportunities are presented, and we remain committed to buybacks as a capital management tool with support from our Board. Our balance sheet remains strong with net leverage moderately below our target of 1x trailing 12 months EBITDA. During the quarter, we paid off $350 million of senior notes and entered into a new $1.5 billion credit facility, increasing our flexibility and overall liquidity for future needs. On net CapEx, we spent just over $1 billion year-to-date and expect to fall short about $1.5 billion plan for the year. Our capital expenditures in the future will largely be dependent upon business needs, but levels may remain elevated as our replacement needs are high, given equipment delivery delays and supply chain constraints experienced over the last two years. This concludes my remarks, and I'll now turn it over to Nick.

Darren Field:

Thank you, Nick, and hello to everyone on the call. I'll review performance of our Intermodal business, including an update on network fluidity and the opportunities we have to deliver exceptional capacity and value to our customers. I'll start by reviewing the performance from the quarter. Demand for Intermodal capacity continued to support growth in our business despite challenges related to rail velocity, customer unloading activity and overall supply chain uncertainties facing our customers. Volumes for the quarter were up 4% year-over-year and by month were plus 4% in July, plus 6% in August and down 2% in September. Today, so far in October, volumes have rebounded from weaker demand in September. Last quarter, we discussed the challenges we were facing from a rail network velocity perspective, and I expressed confidence and a bit of optimism that it would get better. While we are not back to where we need to be, I am pleased to say that we saw a meaningful improvement in velocity and performance from BNSF as the quarter progressed, but in particular in mid-August and throughout the remainder of the quarter. We continue to work with our primary channel providers at the most senior levels to improve our service quality and reliability, which presents our organization significant opportunities that I will address next. Recognizing John's comments about the shift in market balance, we remain confident in our ability to deliver value to our customers with our Intermodal service offering. With greater velocity in our network, we are presented with an opportunity to remove meaningful costs in our business due to lack of productivity. As I've said before, our customers will participate in those savings while also benefiting from faster and more reliable service. We think this puts us in a position to be able to deliver meaningful value for our customers as they look for cheaper, more efficient and the most sustainable way of moving their freight. As we stand here today, I'm confident that customers have greater demand for our capacity as speed and reliability improve. And I believe we have a greater line of sight to that now than at any other point over the last two years. In closing, I would like to drive home the point that our business and our rail channel providers all benefit from service quality improvements, and we remain motivated and incentivized to deliver it. We have significant productivity and cost saving opportunities that will present themselves in our dray operations as rail service quality makes further improvements. I look forward to discussing our progress in this area in the quarters ahead. That concludes my prepared remarks so I'll turn it over to Brad Hicks.

Brad Delco:

Thanks, Brad. I'd just like to remind all the participants on the call that we're going to do one question and then move on to the next, since we have such a long list of folks. So with that, Tia, we're ready to open it up for questions.

Scott Group:

Hi, thanks. Afternoon guys. Darren, just wanted to talk on the Intermodal side. Do you think -- was September impacted by rail strike noise or demand? And then maybe any color on how you think about fourth quarter volume? And then just a big picture question. It does feel like Intermodal pricing for now is holding up a lot better than Truckload but maybe that's impacting -- having some negative impact on demand. So I guess my real question is, how are you approaching bid season? Are you more focused on market share? And if volumes are up and fluid is up but rates are down next year, do you think you can grow Intermodal EBIT next year? I know there's a bunch but whatever you could take. Thank you.

Darren Field:

Okay. First of all, I don't want to spend all afternoon talking about potential rail labor situation. Look, September was obviously impacted by rail labor or the threat of that. Every year, we have network challenges that we don't always call out in these sorts of calls. And in some ways, the results in September was similar to a bad weather event. It was short term in nature. Volumes were improving coming out of August. The rail labor situation was probably one of a couple of several things that might have influenced customers. And that came and went, and volumes recovered back to where they were prior to that. So I do think that customer demand right now is -- was showing improvement in August and it continues to today. As far as pricing goes, I think we're just way too early in the bid cycle to kind of know what to predict there. Obviously, the bid cycle is important to us. We continue to dialogue with our customers about ways that we can take cost out of our system together. And as we have that dialogue, we fully anticipate the customer to get a benefit when we work together to do that. I've said that for the better part of the year now and still believe that strongly. I don't know where to even go next. I'm just going to stop there.

Brad Delco:

Thanks, Scott. We'll try to get -- I bet you we'll get some of those other questions from some next callers. Tia, next question, please.

Operator:

Thank you. The next question is from the line of Chris Wetherbee with Citi. You may proceed.

Darren Field:

Well, certainly, we contemplate the productivity we can generate on a container in a month. That certainly drives some of our thought process. So as we can move more loads on a container in a month as velocity improves, there's some benefit there that we would anticipate sharing with our customers. We're very focused on ROIC-only margin as an output. And as we layer on more volume and look for ways to grow, we would anticipate that there's a benefit in our underlying cost from that. And I would just highlight and tried to in some of the prepared comments, our drayage activity can also get a productivity benefit out of improved rail service. We would anticipate an improvement in the productivity of our drivers and our tractor resources as well as rail service improves. And that, too, is something that we would anticipate our customers can benefit from.

Operator:

Thank you. The next question is from the line of Amit Mehrotra for Deutsche Bank. You may proceed.

Darren Field:

Well, I'll start on the bid compliance. I think that somewhere in 2020 and '21, we've highlighted that bid compliance deteriorated from our previous marks and somewhere in the 60% to 70% range of an award. And maybe in prior terms, it would hover between 70% and 80%. I think that your question around spot capacity influencing that, we've been in this 60% to 70% range for the better part of two years. And I would not say that anything this summer or more recent with truckload spot prices falling, impacting customer bid compliance in our Intermodal business. I don't believe we're actually seeing that, so I don't know how much of an influencer that is. Certainly, truckload pricing will always be an influencer to some degree at Intermodal, but it's not the only influencer of it. And to investors concerned about or that to your second question, I would just say, historically, Intermodal prices haven't fallen and haven't moved to the magnitude that truckload rates maybe have at times. And the ability -- what's different this cycle is that ability for us to shed costs that I've highlighted. I mean, I think that the pricing strength of these last 1.5 years of pricing activity is because all of our costs are up so much. And I mean that's J.B. Hunt's cost, that's our rail providers' cost and it certainly is drayage activity in the industry, equipment costs more. It's everywhere you look, there were really significant cost increases. And so to me, that's one of the biggest differences moving forward. How does the industry shed some of that cost? And productivity is a big part of that. So some of our ability to move in that area really depends on how much additional productivity we can get out of our resources, both our assets and our people.

Operator:

Thank you. The next question comes from the line of Justin Long with Stephens. You may proceed.

Darren Field:

Well, I don't know that I can clarify where volumes are running quarter-to-date. What I would just tell you is we saw that -- maybe I'll say it like this. September ran minus 2%. You heard that in my prepared comments. I think that had we not had a disruption from the potential of a rail strike, volumes in September would have been more between 3% and 4% positive. And I think that we're back in line with where we were running throughout the quarter without that disruption. So I'll just answer that question that way. In terms of box turns, for the quarter, box turns were, hang on a sec, 1.5, so nowhere near where we would anticipate or expect our box turns to improve to. We called out that velocity really began to improve in the second half of August and continued to improve throughout September. And I just -- there will be somewhat of a lag as volume -- as velocity improves to the onboarding of new volume that our customers want to see and want to gain confidence in our ability to sustain that velocity and service performance. So we didn't experience any real benefits from that service and velocity improvements during those six weeks in Q3 in terms of volume and you had a lot of noise there that I just mentioned related to volume in September. So as we go through December and as we continue to highlight benefits from faster velocity to our customers and as we go through the bid season, we absolutely do anticipate an improvement in the box turns.

Operator:

Thank you. The next question comes from the line of Jon Chappell with Evercore ISI. You may proceed.

Nick Hobbs:

That's a good question. I would say typically, if our sales volume slows down, our start-ups diminish, you would see our margins improve. But we're facing a couple of headwinds. One, fuel cost is up and that dilutes our margin a little bit. But additionally, our maintenance cost is sky high because of all the growth we've added. We've kept trucks longer and so that's increased our maintenance. If I felt that we could get that fixed next year, I would say yes. But in talking with the manufacturers, and we're even adding a third OEM to our mix to try to help us, we're not going to have it solved as they see demand going forward. So we're going to be carrying used trucks all through next year, not to the level this year. So normal times, yes, but this is still abnormal just because of carrying trucks and the price of fuel.

Operator:

Thank you. The next question comes from the line of Jordan Alliger with Goldman Sachs. You may proceed.

Darren Field:

So I'd say -- something I haven't really highlighted yet today is just customer inventory levels are higher. And that's certainly influencing some of the demand and ability to process and speed up asset utilization. So that's certainly a factor. I would also highlight that I think throughout the third quarter, international import volumes continued to -- somewhat of a logjam at the ports. But as the quarter progressed, I think a lot of that business has cleaned up. But there still is a lot of noise in the system related to getting cargo out of containers, into warehouses, on shelves, to your home, all of those aspects. But they're -- the biggest factor to me right now is just inventories are elevated, and so customers are working hard to find a place to put inventory.

Operator:

Thank you. The next question comes from the line of Allison Poliniak with Wells Fargo. You may proceed.

Shelley Simpson:

Allison, we've been using a keyword here really since the pandemic started, and that word has been fluid. And that has been as our customers have been uncertain as to what the future has either been held for them or will be held for them in moving forward. They've really struggled to find out what was going to happen from a labor perspective, what would happen certainly with the rail congestion that you've heard Darren talk about. But also just overall from a consumer perspective, what people would be buying and how to put inventory in the right places. I think we've done a great job over the last nearly three years of making sure that we stay fluid. We stay fluid in our conversations with our customers, and that's going to continue. As you heard John mentioned in the prepared remarks, and then you've heard that throughout each of the segment presidents, we're going to continue to stay focused on creating value for our customers. We're going -- I've stated several times that I believe that the supply chain is the most inefficient at least that I can remember in several years. A big part of that's been from the pandemic. So we're going to be focused on taking costs out of the equation for our customers across all five of our segments where we can do that and sharing back with our customers in that cost while continuing to maintain our margin targets within each of the five different segments. So that fluid response to our customers, we're having to adapt more quickly, be more agile to the process. Our capital allocation process will continue to follow the exact same way that we have done over the last five years. But it will be with what I would tell you from a people and overall capacity perspective. We've been very offensive over the last year or two, making sure that we are prepared and ready for our customers. This is going to give us a chance to take a little bit more of a breadth and be a little more structured discipline, staying in tune and in line with what the market is doing.

Operator:

Thank you. The next question is from the line of David Zazula with Barclays. You may proceed.

Brad Hicks:

Yes, David. Good afternoon. Shelley just spoke about being fluid, and really what we saw at the very end of Q2 and we spoke of it in our second quarter and we saw more of that in Q3 is really just the downward pressure and reduction in overall spot volumes that we see inside of the marketplace. There's no secret to the downward pressure that, that's had on rates, in particular there, more pronounced than we historically see. In my prepared comments, I referenced the term several times, pivot. Others call it the flip, but we're going from this tight capacity market to a much looser capacity market. And that's being driven somewhat by a softening in volumes that are -- we see, first and foremost, inside of brokerage. But from a fundamental standpoint, we do feel like our investments inside of J.B. Hunt 360, and I would say that many times, it often gets linked specifically to ICS. It's important that everybody on the call understands that it is a product and a value for our entire organization. And we see several data points that it spins off that value inside of Intermodal, inside of Dedicated and even inside of JBT with 360box. And so those are the areas where we do feel like it's a longer play for us. It's not a one-month or one-quarter play, and we're just navigating this current environment the best we can. It's a fight out there for volume in the brokerage space. And I don't think that's any secret. But we know that, that will course correct at some point in time. We'll see some exits in the marketplace. There's already data points that reveal that capacity is leaving and likely more of it to come depending on how significant the downward trends are. And so we continue to feel confident. We continue to make investment both in the technology of 360 and also our people.

Ken Hoexter:

Hi, great. Good afternoon. And I guess just to clarify, I did turn on the Yankee game for this, so excited to be here. Nick, great job at Dedicated. But sorry, Brad Delco, just a quick one for Darren also. You took on a lot of boxes that you ordered a while ago into a peak season that didn't exist, it seems like. Can you remind us your thoughts on taking on capacity now versus the ability to get fluidity or increased turnover, what the impact is on margins and your thoughts then into '23 on margins? I'm just trying to contrast that with John's comments earlier about increased caution.

Shelley Simpson:

Ken, it's Shelley...

Shelley Simpson:

Ken, it's Shelley. Let me add one thing to that well. I think you heard Darren earlier -- you heard Darren say earlier that ROIC is our focus. And we've made sure through 2021 and 2022 that for our customers, that they could have an indifferent answer if they were to hold our boxes. And so for us, from a return perspective, us bringing that equipment, if you think about the problems we had from a railroad congestion and also from our customers not being able to unload our equipment, I think I would suggest that our volumes would be negative at this point based on those two factors. So us bringing in that equipment, being ready and prepared from an ROIC perspective, we are in an in and indifferent position. And so that allows to lean forward. Knowing that our customers' inventory issues and the rail congestion would be shorter term in nature, it would prepare us better for our long term. Knowing that we have such a great target and converting freight off the highway into the most efficient land transportation in North America.

Ken Hoexter:

Great. Thanks guys. Appreciate the time. Thanks everyone.

Brian Ossenbeck:

Hi, good evening. Thanks for taking the questions. Just a quick one for Brad Hicks. Can you just clarify if there's anything else in ICS this quarter that impacted margins? And you talked about spot and your need to pivot, but I think there's also a mention of some higher claims and bad debt expense. So anything incremental on that would be helpful. And then just looking longer term, as you think about Intermodal, historically hasn't been able to get volume and price at the same time or it's difficult to do that. So the secular growth has been a little harder to come by from our perspective. Do you think the investments that BN is doing expanding San Bernardino, you got Barstow, those are coming out multiple years from now. But you've been doing more on transloading. Are these the sorts of things that can make the volume growth and the earnings growth behind that a little more durable, a little more secular than what we've been seeing, primarily driven by the truck market? Thanks.

Darren Field:

Okay, I'll try to dive off into your question there, Brian, on Intermodal. I mean, clearly, in those years, 2015 maybe to 2020, you seem to have a lot of focus on whether or not we can grow both volume and price. Prior to that time, I think we had some success with that. And during that time window, there was a lot of choppiness related to our relationship with BNSF. There was PSR implementation, which in some ways, shifted some challenges from the railroads out to us. So just a lot of challenges related there. And as we move into the future, I think our relationship with BNSF has never been stronger, and we feel very confident about the work that they are doing, and we are doing together to grow our Intermodal product. We would anticipate that the value proposition we deliver to our customers is also driving enough value to warrant the quality returns that both BNSF and J.B. Hunt would expect. All that being said, does that mean we get a rate increase? I don't know. I know that expansion of their footprint is good for our Intermodal business. And so we're very excited about all the projects that they have underway. And certainly transload opportunities are big for us and will continue to be important strategies that we work on together with the railroad.

Operator:

Thank you. The next question comes from the line of Ravi Shanker with Morgan Stanley. You may proceed.

Shelley Simpson:

Thanks, Ravi. I might try to take both of those. Let me just talk a little bit about the opportunities that we have. I think as the market is moving and our fluid approach, we recognized in some of the areas that we've invested in heavily, there's some rightsizing that we have to do. Brad talked a little bit about that in being more offensive with our customers and trying to make sure we're set up from a sales perspective, but then also looking at what is the five-year plan around that business and making sure that we're more in tune with what the model would suggest. There are other areas of opportunity like what's happening in our maintenance. And that number for us, the amount of trucks that we actually have that we are holding is becoming more and more impactful to our bottom line. But it is allowing us to serve customers and we're staying in line with our customers from a price perspective. I think each one of the five segments have recognized where their opportunities are. Nick, I know, talked about Final Mile also in the beginning with our cost recovery efforts. And I was just making sure that the great value we create for our customers that we're in alignment from a return perspective. And that's going to take us more than a quarter or even more than a few quarters. That's a longer-term strategy for us with our customers walking each 1 independently through that. So I feel like that is really our greatest opportunity. I might add this. What I'm most excited about, our biggest opportunity is really to get the entire organization to understand the level of value we can create for our customers with our mode-agnostic approach. We have the best opportunity of anyone to give a customer an answer that is best for them in cost, service and capacity because we serve the entire supply chain in North America. And with five fairly healthy segments now with the growth trajectory, that really has a market for each one of them in a totally different number, totally different size than what it is today, we think we're just getting started. So I think I'm excited about our long-term opportunity for growth while maintaining our margin and being disciplined in the way that we conduct our business.

Shelley Simpson:

Say that one more time, Ravi.

Shelley Simpson:

Yes, I would say -- well, I would say we've tried to highlight those. Final Mile is one of the areas that we're focused in on. I think for ICS, staying long-term structured and disciplined in the long-term plan and just making sure our costs stay in line with that long-term plan is those are probably the two areas that would focus.

Shelley Simpson:

You're welcome.

Ari Rosa:

Great. Hi, good evening/good afternoon. So I wanted to ask about rate trends on Dedicated. Obviously, we've seen spot rates come down quite a bit. Dedicated seems like it's been more resilient. Just wanted to see if you guys could address to what extent you think those two can remain decoupled as we think about 2023 and bid season coming up.

Ari Rosa:

Got it. Okay. Thank you.

Shelley Simpson:

Thank you, and thank you for spending time with us on this quarterly call. I think you heard us talk a lot about the caution that we have. But I want to make sure that I talk about why we've mentioned caution. For us, caution is just a readiness to pivot. It's a readiness to be available for our customers and understanding what's happening in the market and how we can best prepare ourselves and be ready. With the executive management team having over 25 years' experience at J.B. Hunt, I think we've seen this before. We've seen signs similar, and we want to make sure that we can pivot with our customers and make sure that we continue to create great shareholder value. But might I say that this was our best quarter in our history. It is maybe more muted because we think about that readiness that we're attempting to really solve for. It was the best quarter for JBI. It's the first time DCS hit over $100 million in operating income. And so we're proud of the work that we've done. And I think that you see the results overall. And I also think that you see our diversified portfolio and making sure that we are mode-agnostic with our customers. But speaking of our customers, sharing improvements with our customers is good. It's good for them. It's good for our business. And I think that's going to be important for us as we continue to move forward. The supply chain is inefficient, and we want to help it become a more efficient supply chain. We're a growth company. And we have a complete and total understanding of the importance of ROIC. That will be our focus. We want to create more value for our customers by really trusting the people that take care of them every day. And so I close by saying thank you to the nearly 38,000 people. They work hard every single day on behalf of our customers. And we're going to continue to remain disciplined in our approach, but make sure that we are taking advantage of opportunities that are present with our customers and serving them with more value. With that, looking forward to speaking with you on the next earnings call.

Operator:

Good afternoon. Thank you for attending today's J.B. Hunt's Second Quarter 2022 Earnings Conference Call. My name is Amber, and I will be your moderator for today's call. All lines have been muted during the presentation portion of the call with an opportunity for questions and answers at the end. I now have the pleasure to hand you the conference over to our host, Brad Delco, Senior Vice President of Finance with J.B. Hunt. Brad, please proceed.

John Roberts:

Thanks, Brad, and good afternoon. Thank you for joining our call today. We are pleased with our performance in the second quarter despite challenges around key factors of our business, including labor, equipment availability, and rail service. The quarter did present evidence of a cyclical shift in market balance in certain areas of our business, and we see macrodata that informs us about our current position, such as spot rates and used truck values. That said, and most importantly, our results for the quarter continue to reveal the changes we have worked to implement to enhance our position in each segment of the company based on lessons learned and experiences gained over many, many years and cycles. There are different characteristics of our business segments that should be complementary to the needs of our customers in all economic conditions. These include a flexible, much lighted asset position in our highway services offerings, compelling solutions for private fleet conversions aiding in the nuances of managing advanced transportation networks, a more economical and carbon-friendly full-load services offering in Intermodal, and a Final Mile delivery position that addresses a growing demand channel, we remain in a leadership position across our many businesses, and from a position of strength financially and on the teams' experience and ability to navigate through an ever-changing, constantly evolving global supply chain, I am encouraged to be in healthy, cash-generating businesses across the company. Let me address the clear service challenges we are experiencing with our rail providers. We are in active discussions with the highest levels of our primary rail providers to continue our work on improving service reliability and velocity. We remain confident that the right decisions and investments will be made to bring us back to where we need to be. We remain committed to the path we are on with Intermodal, and have made no changes to our plans with the expectations for the noted improvements to show through in the second-half of this year. In fact, at this point, we have made no alterations to our plans for the year in our equipment and capital expenditure allocations. While we acknowledge there are timing and delivery challenges, we take a long view and know that we have extended needs in all categories for replacement and growth assets. This position recognizes so-called crosswinds we are experiencing, as noted, and will be covered more during this call. Our direction is fully informed using real-time data on all key aspects of each business and input from our customers. Our leadership team is here and will cover each business more specifically for you. But before that, I will turn the call over to our CFO, John Kuhlow, for his thoughts on the quarter. John?

Shelley Simpson:

Thanks, John, and good afternoon. My commercial update will cover current market conditions, and how we continue to have confidence in our position across our scroll of services to provide value for our customers. I'll also provide an update on our priorities across the key areas of our business which are our people, technology, and capacity, and how the combination of all three allow us to differentiate ourselves and in delivering exceptional value to our customers. The freight market remains dynamic, and continues to be presented with unique and evolving challenges at different cross-sections of the broad supply chain. Labor availability, network velocity and fluidity, in addition to varying inventory dynamics around product mix continue to put strain on the effective utilization of available capacity. Some trends we identified last quarter, like a softer transactional spot market remain, but also remains is a healthy demand for our Intermodal capacity and our professionally outsourced product fleet solution in DCS, and the frictionless way we connect customers with capacity in our highway services businesses by leveraging our J.B. Hunt 360 platform. The businesses we are in today across our entire scroll were not built or created overnight. Careful thought, planning, and execution, with durability, strength of financial discipline were, and remain top of mind. We do recognize that broader demand trends are a concern, and we continue to have frequent and open dialogue with our customers regarding their capacity needs. We remain optimistic on our ability to compete to deliver the best value to our customers by offering a full suite of services across the scroll that can help eliminate waste, create efficiencies, and drive out costs from the system. Last quarter, I said our opportunity to provide and create efficiencies for our customers is greater this year than at any point over the last two, and that remains true today. Freight has been moving inefficiently, creating additional cost, and we continue to see tremendous opportunity to eliminate waste in the system. Enhanced visibility, powered by the largest multimodal digital freight platform, J.B. Hunt 360, remains a tremendous opportunity for customers to effectively source their capacity needs. During the quarter, we launched new foundational principles that helps define who we are as a company, what we strive for on behalf of our customers, and what our employees should expect as a member of our organization. In fact, our innovative, entrepreneurial, and say-do culture is founded on these principles; people you trust, technology that empowers, and capacity to deliver. That is J.B. Hunt. It is by no accident that people comes first. As it is, it remains our top priority to take care of our people who take care of and deliver value for our customers. We empower our people, our organization, and our customers with investments in technology to help provide productivity and efficiencies in our collective processes. And finally, we continue to invest in our capacity to deliver on meeting the growing needs of our customers. I'll close in a similar fashion as I did last quarter, we believe our mode in different approach allows us to provide flexible solutions to dynamically meet and respond to the needs of our customers. Our investments in our people, technology and physical capacities have us in the best position to provide the right solutions for our customers in the three key areas of cost, capacity, and service. That concludes my comments. And I'd now like to turn it over to Nick.

Darren Field:

Thank you, Nick, and good afternoon, everyone. I'll review performance of our Intermodal segment. I will also give you an update on current network dynamics, customer demand and capacity. I'll start by reviewing the performance of the Intermodal segment in the quarter. Demand for our capacity continues to be greater than our ability to serve that demand. After seeing modest improvements in both rail velocity and customer activity in the first quarter, we saw performance deteriorate throughout the second quarter. Box turns in the quarter were essentially flat versus the first quarter and underperformed our expectations. That said, volumes by month for the quarter were up 4% in April, up 9% in May and up 10% in June on a year-over-year basis. We took delivery of an additional 1,300 containers in the quarter and expect to take delivery of more in the second-half of the year as we continue to invest in capacity to meet the needs of our customers, while our network velocity and resulting volume performance were disappointing in the quarter, the system and programs we have in place continue to protect the significant investments we've made on behalf of our customers. As we sit here today, we remain optimistic that rail performance and velocity will improve as the rails are not incentivized to move slower, near and long-term growth opportunities for Intermodal business continue to be in front of us and our rail channel partners are well aware of those opportunities. As John mentioned, we are working closely with all levels of our rail channel partners to address the velocity challenges. Starting early next year as new capacity becomes available to us on BNSF, we fully anticipate filling that available capacity, which is supported by feedback from our customers. When rail velocity does improve, we fully expect to improve available capacity but also demand for that available capacity as service levels improves. As inefficiencies are removed from the network, we fully expect that to be reflected in our cost to serve customers and rightfully so in the cost to our customers. In closing, our Intermodal product continues to present a strong value proposition to customers with significant capacity to serve their needs in a more sustainable, efficient and carbon friendly way. We will continue to prioritize investments needed to support our long-term growth and to better serve our customer needs. We believe our service backed by our people, and the ownership of our equipment is differentiated in the market, and even more so when combined with the power of the J.B. Hunt 360 platform that allows us to source capacity efficiently when needed. That concludes my remarks. I'll turn it over to Brad Hicks.

Brad Delco:

Thanks, Brad. And I just want to remind the audience if you don't mind, please ask one question and get back in queue. We have a lot of folks on the call this afternoon. So, with that, I'll turn it back to the Operator, Amber. Thank you.

Todd Fowler:

Hey, great. Thanks and good afternoon. So, I guess maybe to start, I don't know if this is for Shelley or maybe John Roberts, if you wanted to take a stab at this, but maybe to help level-set kind of some of the commentary that you have around the demand environment. Certainly, we appreciate that there's a lot of crosscurrents that are out there, but as you think about the progression into the second-half of this year, I'm just curious, are the indications that you're expecting a weaker environment in the second-half relative to where we were in the first-half based on customer feedback? Any color around the fall peak would be helpful? And then any potential pricing conversations or impact on pricing based on the change in demand environments right now? Thanks.

Todd Fowler:

That was Todd Flower, so…

Nick Hobbs:

Yes, I was just going to say, in our dedicated business, as we watch our load count in the day, which is basically from the warehouse to the store, our volume is up and trending up. So, it's looking good from that standpoint. So, we're still seeing consumer demand strong, and that's -- we're closest to that.

Operator:

Thank you. Our next question comes from Ken Hoexter with Bank of America. Ken, your line is now open.

John Kuhlow:

Well, let me start on service. We talked about velocity, actually deteriorated some during the second quarter. We know that none of our rail providers are satisfied with their operations today. I think the intensity at all of our rail providers is extraordinarily high today in all efforts to onboard new crews, and find a pathway to a better service product. I think that, collectively, us and our rail providers all understand that there's additional demand, additional revenue, additional volume waiting on us to improve our service. And I think that that's universally understood. And I do anticipate that we're going to see some improvements during the second-half of the year. The key question is when. And I don't have a great answer for that. I mean, I really think the railroads will have to answer that question. But we're confident in the programs they're initiating, and we are confident that they will see improvements as the year continues. I think all we tried to highlight on the pricing front is there's accessorial programs out there for delays at customers, those certainly are areas where that's cost to remove from the customers as velocity improves. But in addition to that, equipment ownership is not cheaper today; it's more expensive than ever to buy equipment. And so, when the rail velocity improves, really our industry, I would think J.B. Hunt and all Intermodal channels will have a slight pickup in equipment costs there. And certainly we would anticipate at least some of those would be passed along to the customers.

Operator:

Thank you. Our next question comes from Allison Poliniak with Wells Fargo. Allison, your line is now open.

Brad Hicks:

Hey, Allison, this is Brad Hicks. Thank you for the question. And when I think about 360, we're very public about the investments we made in '18 and '19, really leading into '20. We do continue to invest in 360 to expand its capabilities and the value that it can create on behalf of both our customers as well as our carriers. But by and large, the -- I guess the foundation of that platform, I would say, is behind us. But that's not to say that we won't continue to make investments and find ways to improve upon it. And then, remind me again part two of your question?

Brad Hicks:

Yes, certainly. Thank you for the reminder. We certainly saw margins expand dramatically in the second quarter with the pressure that had been placed predominantly in the spot and where we were at relative to the bid cycle with publish rates. Is that the peak? Hard to say, and I think it's still too early to tell. Certainly, PTE has come down, but it is still well north of historical or pre-COVID levels. Obviously, Shelley mentioned there are some structural costs that probably remain. But we'll just have to see what the second-half holds around capacity versus supply. But certainly, we were able to take advantage of the expanded margins, as you can see in our results for the second quarter, we were pleased by that, and we feel like we managed through that pivot in an appropriate way.

Operator:

Thank you. Our next question comes from Ravi Shanker with Morgan Stanley. Ravi, your line is now open.

John Kuhlow:

Hey, Ravi. This is John Kuhlow; I'll address the one-time charge. We tend to try to avoid calling -- referring things as one-time, but this one was a charge that we had incurred in the quarter for claims that result -- or were part of prior year. There were two or three claims that are going to settle or have settled outside of our coverage limits in one of the towers. And so, again, everything is part of the business, but these related to prior periods.

Operator:

Thank you. Our next question comes from Scott Group with Wolfe Research. Scott, your line is now open.

Darren Field:

Yes, okay, Scott, Darren here. I'll handle Intermodal first. I think, certainly, this massive change in spot prices that's evident out there feels like it is putting a little bit of pressure on Intermodal. But I don't know that I think it's this overwhelming influencer as highway capacity is still not typically the largest competitor to Intermodal out West. Typically, we're competing against all water costs or certainly other Intermodal channels or intact channels. And those costs will drive the Intermodal market, and then the underlying rail costs are doing to be the biggest influencers, far more than what is going on with truckload pricing. Now in the East, certainly highway rates can play in a real influence on our ability to convert business off the highway to Intermodal. All that being said, with fuel prices where they are, and with velocity being challenged to this point, I think we feel like preparing for the next round we should see velocity improvements which can translate to value for customers that Intermodal can provide when compared against the highway. So, I think there will be some convergence, meaning if trends in highway published prices are to trend flat or certainly slow or even take a tick down, certainly the Intermodal market will have to respond. But I think the cost, the underlying cost structure of Intermodal, really for all the channels, is a little bit different than what it is on the highway.

Nick Hobbs:

All right, Scott, this is Nick. To your question, I am looking at the entire book of '21 adds for us, and it's operating within 20 basis points of our base business that's been around for a long time. So, it is doing very well, that's including deals that started up in November and December. So, we're very pleased with that, and it's hitting our targets.

Operator:

Thank you. Our next question comes from Chris Wetherbee with Citi. Chris, your line is now open.

Darren Field:

Sure. So, well, we ended the quarter just above 110,000 containers, and we're often marching on our announced plan to expand our capacity up to 150,000 over the next three to five years. So, with only 1,300 ads in Q2 of this year, I think we would fall well short of that plan, if that is what we do. As velocity changes come about, and there's opportunities for us to gain capacity with the equipment we already own, we will adapt our pace of onboarding that equipment based on customer demand and what's going on in the market. I don't want to say that it's just going to be steady flow and will always be exactly the same. I don't think it will be but it would be certainly our opportunity to try to grow into new capacity that came from velocity improvements. But at this point, probably announcements related to our equipment will continue to just land on that march towards 150,000. And obviously, each quarter, you'll be able to see what we added, we would prefer to it to be steady, but at the same time we have to adapt and we know that ROIC will always be our Northstar and will guide us through that process. And we'll continue with the flexibility that we need to be prudent with as stewards of those investments.

Chris Wetherbee:

Okay, got it. Thanks so much.

Amit Mehrotra:

Thanks, operator. Hi, everyone. I guess I just had a couple of quick questions. One is wanted to understand the implications from AB5 potentially being implemented, my feeling is as it relates to the Intermodal business, it could be a pretty decent market share opportunity given you in-source the vast majority of your trade drivers, I think your competitors do not. So, if you can just talk about if AB5 is implemented or executed, what the implications are for the industry overall and specifically how J.B. Hunt's position in that and then, Darren, I was hoping you could update us on the joint initiative with BNSF, I saw the Intermodal, the transload facility I think you guys put up a few days ago in the press release, would just love to get an update on what BNSF the progress that they've made in terms of giving you a little bit more clear access to capacity, if that's being implemented now or is that sort of more to come that can maybe drive a step function improvement in the terms of the volumes?

Darren Field:

Yes, Amit I think I heard you say that you thought that we outsource more of our drayage activity than…

Darren Field:

Yes, you did it right, I'm sorry I didn't hear that right, just going to clean that up, if I didn't hear that right appreciate. So, yes, we don't feel like AB5 is going to be an influencer of our operation in any way. So, as it relates to all things joint efforts with BNSF, I think that our mission today continues to be probably more focused on elements beginning next year. I mean, frankly there's not new capacity announcements that have come from BNSF yet, as soon as something like that is available, I'm sure you'll read it, we still feel very confident in the way that we are communicating with BNSF on all things capacity. But I think that you should all anticipate and expect it right now. We're very focused on seeing velocity improvements and just service improvements in our system and that's dominating our conversations today.

Operator:

Thank you. Our next question comes from Jon Chappell with Evercore. Jon, your line is now open.

Shelley Simpson:

Well, Jon, this is Shelley, I have a higher voice than Nick, but I would say our opportunity with our customers, we are mode indifferent. And so, understanding their needs specifically is important in how we develop what our strategy is, and how we deploy capital as a result, much like what John Kuhlow talked about in his opening remarks. For us, we think that Intermodal will continue to deliver great value for our customers, and we're bullish on our growth plan in our Intermodal segment, but we're bullish in our growth plan across all of our segments over the long-term. So, for us, we think that there are some short term pains that have felt longer-term, but we do think that there is a window of opportunity here where the rails will get better, our customers will get better, inventory will get to right locations, and the supply chain will start to find a better balance, if you will. And we think having all five of our segments that really take product from the very beginning of the supply chain all the way in to the final home of our consumer will yield ourselves well in an environment that is more normalized and for our customers will be able to say, "Yes, anytime they need it." Each one of those segments has different margin targets and returns inside their own area. But we do see great growth across all five channels and Intermodal being one of our strongest growth vehicles over the next several years.

Operator:

Thank you. Our next question comes from Justin Long with Stephens. Justin, your line is now open.