J.B. Hunt Transport Services, Inc.

Hello and welcome to today's J.P. Hunt's fourth quarter 22 annual conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star one on your telepathy pad. And I'd like to hand over to Brad Delco, Senior Vice President of Finance. The floor is yours. Please go ahead.

Good morning. Before I introduce the speakers, I would like to take some time to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt's current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings of the Securities and Exchange Commission. Now I'd like to introduce the speakers on today's call. This morning I am joined by our CEO, John Roberts, our President, Shelly Simpson, our CFO, John Kulo, Nick Hobbs, our COO and President of Contract Services, Darren Field, President of Intermodal, and Brad Hicks, Executive Vice President of People and President of Highway Services. At this time, I'd like to turn the call to our CEO, Mr. John Roberts, for some opening comments. John?

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 rail 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 markets and some modest improvements in equipment availability. Conversely, demand for transportation service in the fourth quarter was seasonally weak as customers managed 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, Shelly Simpson. Shelly.

Thank you, John, and good morning. My comments today will mirror many of the things I shared last quarter and will focus on our priorities for 2023 and beyond. If you recall, we discussed three priorities as an organization. First, to remain committed to disciplined, long-term investments in our people, technology, and capacity. Second, to deliver exceptional value to our customers across our entire organization and third, to deliver long-term compounding returns for our shareholders. As we have discussed the last two quarters, and as John mentioned, we've seen a shift in our market dynamics, but our focus as an organization has not changed. We continue to manage our business to put us in the best position for long-term growth. We believe first and foremost that it starts with our people, who are responsible for delivering exceptional value and service to our customers, who in turn trust us to meet their growing transportation needs. We believe our suite of services across the JVM scroll provides customers exceptional value from a company they have learned to trust over the many years and cycles. Our challenge for 2023 is to deliver exceptional value for and on behalf of customers in this market. In the past, We talked about what customers value from their trusted transportation providers, which is cost, service, and capacity. During the pandemic, customers valued capacity most with less weight on cost and service. We see the shift occurring now where customers are putting more value on cost or how to save them money and on service quality as capacity is less difficult to source. We believe our suite of services can and will present our customers opportunities to save money with our industry-leading intermodal franchise, highly engineered dedicated capacity, a scaled asset-light highway services offering, and one of the largest final mile services in North America. In closing, I want to say that we're approaching 2023 with some caution around recent demand trends. but remain highly confident in our ability to thrive in any environment. We will focus on controlling what we can control, managing our business with a focus on long-term growth while remaining nimble. We will compete in the market to earn, reinforce, and gain our customers' trust and their freight. We are excited about the many ways and opportunities we have to deliver value to our customers, which we believe will reveal itself over the course of 2023 and well into our future. With that, I'd like to turn the call over to our CFO, John Kulow. John?

Thank you, Shelly, 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 gap earnings per share declined 16%. We incurred a rather large income statement item in the quarter for approximately $64 million or 46 cents per diluted share for an incremental pre-tax 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 percent 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 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 one times 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.

Thank you, John, and good morning. I'll review the performance of our dedicated and final mile segments and update you on other areas of focus across our operations. I'll start with dedicated. Demand for our professional outsourced private fleet solutions remained strong as we sold approximately 330 trucks in the fourth quarter, which was greater than the trucks sold in the third quarter. This brought our full-year truck sales number to just over 2,000 trucks, which compares to our stated target range of 1,000 to 1,200 per year. Our backlog also remains strong with more opportunities in the pipeline today versus the same time a year ago. but we have seen some moderation in the breadth of the backlog. Our net truck ads in the quarter declined 187 units as compared to the third quarter, largely as a result of us making progress on our equipment trades as new equipment availability improved, but also because some of our downsizing of fleets to match our customers' business levels. As we've discussed before through our CVD process or customer value delivery, We optimize and re-optimize our fleets to present value savings opportunities for our customers. This ultimately supports our 98% retention rate of our customers, as well as supports future growth opportunities with these same customers. Going forward, we will remain confident in our ability to demonstrate the strength and resiliency of this business as we deliver superior value for our customers with our highly engineered outsource solution. Shifting to final mile. We remain focused on improving profitability in this business by working through contracts and making sure we are fairly compensated for the value we deliver. Achieving the appropriate level of profitability will support further investment needed to meet the growing needs of our customers and this sexually growing segment of the market. We will continue to be disciplined on our commitments and remain willing to put business at risk to achieve the appropriate levels of profitability. which could ultimately influence our top line performance in the segment. Demand for big and bulky products, including appliances, furniture, and exercise equipment, has moderated some, as the headlines might suggest. But we have seen strength in our fulfillment business with off-price retailers seeing lots of opportunities with discounted inventory in the channel. Closing with some general comments on operations. Similar to my update last quarter, we continue to see improvements in areas around professional driver recruitment and retention, but at elevated cost. We are a touch more optimistic about equipment availability in 23, largely as a result of bringing in a third OEM into our mix, but maintenance cost remains elevated across the company. We remain focused on our safety performance, but are doubling down on strategic initiatives across the company to improve performance in this area, given the elevated cost the industry is experiencing. That concludes my remarks, so I'll turn it over to Darren.

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 air modal capacity was seasonally weaker than normal as peak season 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 Shelly discussed, customers have shifted their focus more on cost 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 costs and carbon emission savings. While import volumes 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 in 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 being assessed 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.

Thank you, Darren, and good morning, everyone. I'll review the performance of our integrated capacity solutions and truckload segments, what we collectively call highway services. I'll also provide an update on JB Hunt 360 and how we continue to see the platform bringing together our scroll, but specifically highway solutions to drive value for and on behalf of our customers, whether with or without a drop trailer solution. I'll start off with ICS. ICS top line revenue was down 33%, comprised of a 27% decline in volume and a 9% decline in revenue per load. Our truckload volume in the quarter was down 21%. Transactional or spot truckload volume was down year over year, but contractual volume was up slightly year over year. We experienced additional pressure on our transactional and contractual business in the fourth quarter as demand and volume were unusually soft during what is normally considered peak season. Maybe said differently, there was no peak and demand was actually weaker in the fourth quarter versus the third quarter, which is atypical. As we've discussed in the past, our goal remains to leverage our platform and make investments that will allow us to scale our business by outpacing the market. Despite the poor performance on our top line, which did influence our profitability, we do remain in our people and our platform, J.B. Hunt 360, to deliver exceptional value for our customers and our shareholders over the long term. Shifting to truckload, while the freight environment was challenging in the quarter, we continue to see evidence of demand for drop trailing capacity holding up better relative to the overall market, which we believe was demonstrated in the quarter. volume in JBT increased 6% versus the prior year quarter. We believe customers continue to see value in the blending of their live and drop trailer capacity needs that we can provide by leveraging our platform powered by JB Hunt 360. As we move into 2023, we will remain focused on leveraging our investments in our people, technology, and capacity to further scale the business. We see a long runway of opportunity for future growth in 360 Box, supported by disciplined investments, solid execution, and earning an appropriate return on our capital. Wrapping up on JB Hunt 360, I wanted to take the last minute here to make sure the investment community understands that our digital freight marketplace is a tool that drives value across our entire enterprise. For example, it allows us to source third-party intermodal freight capacity, it provides us back-off freight opportunities in DCS, and allows us to prop up a startup fleet as we hire drivers or source equipment. I believe more obvious, you see the results in ICS and JVT as we are able to run non-asset or an asset-light business leveraging our data and systems to provide almost unlimited capacity for and on behalf of our customers. ICS and JVT collectively is our highway solution for our customers, representing the largest segment of the North American transportation market. Whether the customer needs drop trailers that historically could only be provided by large asset truckload carriers or a spot load in a live load, live unload network, we are one solution on one system backed by the J.B. Hunt brand. That concludes my comments, so I'll turn it over to Brad Delco to give instructions before the operator opens the call for Q&A.

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. Thanks, Elliot.

Of course. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Chris Weatherby from Citi. Your line is open.

Hey, thanks. Good morning, guys. Maybe a question for you, Darren. I know you don't want to talk a lot about the pricing volume outlook for intermodal, but maybe I could ask the question this way. You sit here in the beginning of the year, and as you noted, you have a different setup with your major rail partner in the West. I wanted to get a sense 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 finer point on that is you think about the historical relationship of intermodal versus, so to 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?

Sure, Chris, appreciate the question. I think universally our customers are positive towards reconverting highway business that should be intermodal. I think they're appropriately cautious in saying, hey, JB Hunt and BNSF, I need you to prove it to me that you're going to get your service and velocity quality back. And I think we're aligned, like we continue to say every quarter, more than ever with BNSF on that mission. I have talked to my team at length for months now about rebuilding confidence in our customers. Our customers are looking for ways to save money. And intermodal is a way for them to save money. And as velocity improves, it even helps in inventory carrying costs. And so there's a lot of opportunities for us to continue to talk about growing intermodal. And certainly, I don't know of a customer telling us, I'm not interested in converting business to intermodal. I think across the board, our customer base is very receptive But I do want to at least acknowledge there's a bit of a lag in that process, and I think we are busy proving to the customers that the service quality and velocity has improved and will continue to improve as the year goes on.

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

Yeah, you know, I would say – It's early, but so far in January, our rail service is the best it's been since the first quarter of 2020, and so that's a really positive sign. We're not quite to where we want to be fully, but there is massive improvement in the rail service today. Great. Thank you very much.

We now turn to John Chappell from Evercore ISI. Your line is open.

Thank you. Good morning. Aaron, sticking with you, obviously you're investing on your own, in your own capacity, but there's no kind of commentary on box turns. Tying it into what you just said about service being the best since 1Q20, can you give us an update on where box turns stand today? Where do you think they'll be in the next kind of three to six months? And probably more importantly, outside of your own investments, just from the box turns, the velocity, the productivity, fluidity alone, how much capacity do you think that adds to your network for the next 12 months?

So it's a topic for us daily. Our box turns in the fourth quarter were 1.44, nowhere near where we expect them to be. The realities are we're in a bit of a transition period when velocity, customer unloading, a host of challenges, created weakness in our turn ratio. As we come out of that scenario and get back into a more normalized velocity process, gain productivity with our dray fleet, look for productivity in the container fleet, we have lots and lots of capacity to grow into. That's an opportunity for us. I mean, in the fourth quarter and the second half of the year, we're extremely confident in our ability to serve our customers' needs as there will be a return to a peak season shipping. I don't have a number to give you in terms of how many containers come out of the improvement in velocity. What I would say is we're probably on a long march, and I'm not sure we can accomplish it in 2023, but we anticipate getting back to a turn ratio in the 175 to 108 in the future, and that will be a very direct effort on our part, and we'll be cautious with our container purchases, but we have to keep that supply chain open and moving, and we need to be onboarding equipment, at least some, but we'll be looking to grow our volumes as fast as we can for sure.

We now turn to Scott Crook from Wolk Research. Your line is open.

Hey, thanks. Good morning. So stick with intermodal. So you guys have more containers parked in 4Q than I think we've ever seen in a Q4, and it sounds like you're expecting box turns to improve. So I guess, why aren't you dialing back on some of the container ads for this year? And then, Darren, I know you don't want to give specific guidance, but maybe just directionally, do you think you're going to grow intermodal volume this year, and how do you think about overall revenue segment earnings? Do you think positive, negative, directionally, any thoughts? Thank you.

Well, I appreciate your attempt, 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, you know, there is a lag. You can see it in the import economy. I mean, there's 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's 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.

We now turn to Justin Long from Stevens. Your line is open.

Thanks and 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?

Yeah, so as we look back at Q4, we felt some pressure. I would say modest, not a lot. But there were some accounts that were given early signals of reduction, and we did reduce just a handful of fleets at this point. The primary thing I would say that we addressed was really we've been carrying a lot of older trucks, and so we're starting to pick up a few more new trucks and making some headway. and reducing that. So that was the primary, but there was some fleet reduction. Then we're going to stick with our guidance on what we'd set on sales in the 800 to 1,000 range. Our pipeline is still full. We feel good. We are experiencing what I would call just some hesitation from deals that are in there that the customer is trying to figure out what's going to happen the first part of the year, but we are still signing deals. We have 1,000 to 1,200 correctional, not 800 to 1,000. So 1,000 to 1,200 that we would sell. Also, we have 500 trucks already sold that we will be adding as we get the equipment available.

So we have some momentum on that side.

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

Thanks, operator. Hi, everyone. Darren, I just wanted to ask about how you think costs can trend in the intermodal business as yields continue to moderate. I'm just trying to understand if you think there's enough cost and efficiency opportunity to offset more pressure on the revenue side from yield. And then, John Kula, I just wanted to ask about 8.8 million bonus payment. That's great to see for the whole team. Just wondering if you can talk about Is it pro rata across the segments, or is there one segment that's taking the lion's share of that?

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. You know, 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 – 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. Okay.

Hey, Amit, that feels like a second question, but it's a good topic, so we'll grant it to you. On the appreciation bonus, that was for all frontline employees. That's predominantly drivers, but also includes technicians and then some of our office. So it's primarily in the JBI and the dedicated segments. That's where we have most of our drivers. I'll give you the 8-8. Three million was in intermodal and dedicated was another five, and the rest is spread throughout the other segments.

We now turn to Razi Shankar from Morgan Stanley. Your line is open.

Thank you. Morning, everyone. Maybe an ICS question. I think you guys were very clear in the 3Q to 4Q walk not playing out as expected because of the lack of PCs. How do we think about that going into 23? What's the 4Q to 1Q walk looking like? Is that demand weakness continuing, or do you not see as much of a step down sequentially into 1Q?

Yeah, good morning, and thank you for the question. You know, 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. You know, as we sit here right now, just through 15, 16 days in January, I would say we're consistent with what we saw into December. However, as Darren mentioned, we do expect sometime maybe in 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 stock market, and that still sits about where it was. And so until we see some of that freight demand rebound import start flowing, I think we'll be in a comparable environment to what we saw in the fourth quarter in brokerage.

Our next question comes from Brian Ossenbeck from J.P. Morgan. Your line is open.

Hey, good morning. Thanks for taking the question. So, Shelly, maybe you can elaborate a little bit more on some of the cautions you're seeing on the demand side. I know 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 in 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.

Good morning, Brian. We did use a theme word, and we have through the whole pandemic, and that was being fluid with our customers and just helping them understand where they're at and where we're at from a transportation perspective. We also talked a lot about being cautious in the last discussion, and I think those were some of the demand trends we were starting to see. If you look in the fourth quarter, you saw port activity continue to decline all the way into December, and certainly we're feeling the impact from that. As we have talked with customers, they have shared with us that there is an inventory correction happening that you've heard both Brad and Darren talk about, and that's really we expect to continue to occur all through the first quarter. We have had good signals from our customers about Q2 starting up, back to a more normalized or having a more normal environment. We're not sure at what point that is in Q2, but we do feel like the back half of the year, we have confidence from what our customers are giving us and the data points that they have, what they're going to be doing from an ordering perspective. The freight recession that we see right now is largely inventory driven. We don't see anything else from our customers in total. And then last thing I would say, Brian, If you think about bid season for our company in the one-way part of the business, so this should be all of intermodal and all of highway services, those really occur in the back half of the year fully loaded. So if you think about a July 1, if you will, that's really when bid season is complete and we know the results of what's happening in bid season. And that's what really drives what we're going to do from a capital planning. So you heard Darren say, We're going to be fluid in that part of the process. We have flexibility so that we know how much equipment we can onboard. But I would say we feel confident in our bid season strategy, our ability to win highway share converted to intermodal, and then continuing to grow inside our highway services. And you heard Nick talk about our confidence around dedicated and what our customers are saying there. And I would add I feel confident about what's happening in the final mile space as well.

I just want to jump in. Brian, you asked a little bit of a – you hinted at eastern rail providers. In both eastern railroads, Norfolk Southern and CSX are also performing better than they have in 22, 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.

We now turn to Tom Wadewitz from UBS. Your line is open.

Yeah, I wanted to ask you a bit about just your view on supply chain. You know, 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, you know, see storage revenues increase go down a lot in 23? 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, you know, container storage revenues in intermodal. Thank you.

I'll take that. I mean, do I think that fluidity in the supply chain will get better with weaker demand and allow the system to kind of reset itself? Absolutely. We're experiencing that today. Our customers are better set up for their supply chains, and the port infrastructure is accommodating imports today, and so the system is moving more fluidly. As that relates to storage revenues, you know, the only way to answer that is it depends. As long as our customers are unloading faster, then there will be a decline in those revenue streams. But that frees up capacity to operate more shipments on that container every month, and that's our focus today. That's why you'll continue to hear us talk about real cost can come out of our system that can translate into savings for our customers, which just allows us to provide value faster and grow our intermodal business.

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

Yeah, hi. Morning. I just wanted to give some a little more color on this casualty claim expense, sort of the nature of it. I mean, is this like a one-time cleanup through the various business segments, or is this, how do we think about sort of a run rate on an ongoing basis? Thanks.

Yeah, Jordan, this is John Kula. I'll address that. You know, we've seen, similar to others in the industry, over the last 12 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 five to ten times 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 we 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 have 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 cost for the claims experience is just dramatically going up. And it's a highly unpredictable environment. We are not planning in 23 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 23. And so we are going to be taking on more coverage 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.

We now turn to Brandon Olenski from Barclays. Your line is open.

Hey, good morning, and thanks for the question. Darren, I think you spoke a couple times about earnings growth and 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? Not looking for specific items there either.

Well, I mean, at the end of the day, We understand pricing pressure out there. Customers want to save money. But again, there is real cost to come out of our system, and there's real efficiency for us to gain with growth. And so as we grow our intermodal business, there's the opportunity to continue to do more loads with the assets that we have. It may not translate into the same income per shipment, but if we're executing more shipments as we – move forward and find a way to drive some cost out, then we're going to be able to grow our income really strongly as we grow volume. And that's the mission, is to get out as this bid season goes and as we're out communicating and displaying to our customers that velocity has improved and the intermodal service product has really improved a ton and can get closer in transit to what truck transit is. We feel like we can really grow our business significantly, which will turn into income growth as the year goes on.

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

Hi, good morning. I just want to go back to dedicating. I think this is probably applicable in the final mile as well. On the maintenance cost side, you know, new equipment coming in, maybe less consumer demand needs. Should we think about accelerating down pretty quickly this year, or is it, you know, the customer needs are going to keep some of that aging equipment still in service? Just any thoughts there?

Yeah, 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 OEM's numbers come up. But we will have some trades that we're going to carry with us the most part of the year.

Our next question comes from Ken Hoxter from Bank of America. Your line is open.

Great. Good morning. Shelly, just can we revisit some of the comments there on bid season? I think you noted that bid season was fully loaded by July 1st. 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?

Good morning, Ken. I would say our customers in general are going to be implementing between now and July 1. We still have a smaller portion of our business that we'll implement from July 1 all the way through the end of the year. But the bulk of the business, we tend to look at our business in that July 1 through the next year as to how we think about revenue quality, our growth plans, Although we budget for a full year at the calendar year, we actually review what's happening from a bid season at mid-year. And I would say our customers are largely in line. We do have a few customers that might have changed some of their bid start. But for the most part, they're in line with what we've historically seen. And I'll let Darren or Brad comment if there's anything else there.

Well, I'm going to ask Brad to comment on the spot versus – Ken, I'll make a few comments here.

We're still very early. in bid season, but our strategy is clearly focused on winning contracted business. You know, the spot market and what we've seen in that over the last several months, and we can't necessarily count on when or if that may return or if and when it does. Does it get back to what it used to be? Is it something less? And so we are optimistic about early feedback in bids and what we're seeing there meeting our expectations. in terms of volume growth of contracted business. So on the transactional side, on highway, that's our predominant focus. I think in years past, we will move around the percentages of what's published versus spot, and I would anticipate us being on the highest end of that from a contract standpoint versus spot in highway. Intermodal is certainly a little different. They don't play the spot market nearly as much, and so I'll let maybe Darren comment what he sees.

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 They're a 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.

Our next question comes from Todd Fowler from KeyBank Capital Markets. Your line is open.

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 23? It seems like the volume environment is going to start off weak in the 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.

Hey, Todd, it's Brad Delco. You get the fortunate pleasure of me responding to that question. One, we don't provide guidance, but I think maybe one general statement I would say, and we've talked about this before, we haven't really seen seasonality increase over the better part of the last two or three years, just based on elevated demand levels that we've seen. Clearly, seasonality has come back into play. You saw that in the fourth quarter. In fact, I think Brandon Hicks' comments and Darren's comments suggested that we actually saw atypical seasonality where a fourth quarter was overall, from a demand perspective, weaker than Q3. I'd also just say I think you heard there probably isn't a lot of expectations from The demand environment changing much at least in terms of what visibility we have here in first quarter. What happens after that? We don't have any better crystal ball than anybody else. So I think giving you any more detail on guidance and how the year plays out would probably not be in our best interest.

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

Great, good morning. I wanted to ask, John Kulo mentioned that you guys might be willing to take up leverage for the right opportunities. I just wanted to press a little bit more on that comment and understand if that was a reference to M&A or if it was a reference to something else. And if it was a reference to M&A, what are the types of opportunities that you would be thinking about that would justify that sort of taking up of leverage?

Yeah, there wasn't anything specific 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 comes available, and 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.

Our next question comes from Bascom Majors from Susquehanna. Your line is open.

As you went through the competitive bids with Schneider leaving your rail partner and moving over to the UP, 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.

So I don't know that we have enough details yet to really have a strong position on that. We universally hear from our customers that they want to maintain a significant share on BNSF. They have confidence in our ability to talk them through the service improvements and our ability to provide the capacity that Schneider has taken with them. So I think there's There's no doubt out of our customer base that we have the capacity to backfill anything Schneider was operating on BNSF. It's also not the top of mind topic. When we're talking to our customers, the first subject is not, hey, can you take on Schneider's business? Our process is to go into a customer and talk about their network and look for solutions with intermodal where it's the right solution regardless of who the competitor might be handling that business. So we're just out trying to solve for our customers and we think they have real confidence in us. I think that the Schneider exit means a ton in the way we talk to BNSF, how we collaborate together, how we're talking about operations in the terminals, how we're going to market together. So the Schneider exit from BNSF to me is significantly valuable in the way we're communicating with BNSF. And I'd like to believe our customers will get a benefit out of that.

Our next question comes from Jason Seidel from Cohen. Your line is open.

Thank you, Robert. Good morning, everyone. One quick one from me. You talked a little bit about expectations for growing intermodal this year. I guess, how do you think about uh, contract rates on the truckload side and, you know, where they might put some pressure on that. They've held up largely, but we're starting to hear from some private carriers that expectations are anywhere between, let's call it three and eight percent down.

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 what 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 I don't think it will 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.

Our next question comes from Bruce Chan from Stiefel. Your line is open.

Hey, good morning, everyone. I 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 in 22, and I just wanted to get Maybe a little bit more color on whether that was tied directly to volumes in that business, 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.

Thank you, Bruce. You know, part of that was by design. It was just making the point that it was a step up from prior year as we look to continue to finish out some of the tech investments that we've made both at ICS and for JBT and Highway. Really focused on our ability to get productivity gains both from our people and also better transparency and visibility of our platform for both our carriers and our shippers. And so, you know, do we feel like there's upside as we continue to move forward? Absolutely. We've started to realize the benefit of those tech investments, as we've talked about for the last few quarters. But there's still work to be done. Even inside of 23, we expect further build-out of those technologies that will help us on productivity and overall execution of the business. All focused on, really, when you think about the platform, you know, it has enabled us. to really think about how we would blend what's historically been our live freight business, which is ICS, versus our drop freight business and JBT. And through that blending, we're able to make better decisions that drive efficiencies, help improve service, that ultimately can be a benefit to our customers through a lower cost. So that's what our focus is going into 23, and we expect to make continuous improvements throughout.

Our final question today comes from Jeff Kaufman from Vertical Research. Your line is open. Thank you very much.

Thanks for squeezing me in. Shelby, I want to go back to a comment you were talking about how the weakness is mostly related to a big inventory correction by customers and likely to get better starting in 2Q. I guess really How do we know there's not something more nefarious going on beneath these weak inventory driven numbers in terms of the economy weakening or consumer weakening? And then, you know, in terms of the inventory reductions, I know a lot of customers had built these inventory buffers last year because of the supply chain issues as we went from kind of JIT to just in case. Is your sense that the customers are bringing inventories back to where they used to be, or is there still going to be a buffer when this inventory adjustment is said and done? I apologize we're at two prongs on this, but it's all related.

Thank you, Jack. I might just 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 Um, and, and what they're telling us is it's largely an inventory, uh, correction happening. I will say, I think they're evaluating part of the flip that Brad Hicks talked about last quarter was really around, um, the capacity side, but also the flips 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, 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 a good conversation around that. And I apologize, Jeff. It's Jeff, not Jack.

This concludes our Q&A. I'll now hand over to Shelly Simpson, President, for any final remarks.

Great. Thank you so much. And I'll also hand it back to John here at the end. But I think you heard us, you know, 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. I talked 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 land 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 JB 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 the 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?

Good, Shelly. Thank you. Great, great comment there. I want to go back to the noisy fourth and just say that this claims event has gotten all of our attention. It's a A little bit like a poo sandwich. We wanted to understand our current position and lean into 23. I'm confident in John's approach here with the changes that he is making and plan to continue to stay very close to that and keep an eye on it to be sure we're tracking and adjust maybe more fluidly, if that's a good way to think about even this part of the business, because none of us like that. that kind of surprise or noise. I want to mention that the OEM position that we're in right now, I'm super confident in. I have worked with Nick and the OEMs to help better position the company as a very strategic buyer. We are a very different type of Class 8 and Class 6 buyer. And our upper management and our providers are really understanding that. I think that's got a really good long-term impact positioning value for us. I would also say that very, very closely aligned with our rail providers, like I've never seen. And I have either in this job or my prior job have been able to really see how those relationships work. And being close to them, I'm very confident. Questions about our equipment additions and those ideas in the near term are appropriate, but I liked what Darren said. This is a long March and we are positioned and as good as I've ever seen us. And so we will be taking advantage of those corrections. And I think we're going to just kind of coin the term leaning forward into 23, 24, 25. My closing word is the same as Shelly's. I'm really, really proud of all of our people, but I'm also particularly proud of our leadership. It has not been easy, and no one thinks it has, and no one has claimed that in any part of the industry. But I am particularly proud of what happened in 2020, what happened in 2021, and what has happened so far as we close out 2022. That gives me great confidence when we look forward as to our ability to go capitalize on the opportunities here. So we appreciate you being on the call, and we'll talk to you next quarter.

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