J.B. Hunt Transport Services, Inc.

Q4 2023 Earnings Conference Call

1/18/2024

spk01: We ask that you limit yourself to one question only with no follow-up. If you would like to ask an additional question, please re-queue. If you would like to withdraw your question, again, press star 1. 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.
spk05: Good afternoon. Before I introduce the speakers, I would like 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 risk and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now, I would like to introduce the speakers on today's call. This afternoon, I'm joined by our CEO, John Roberts, our President, Shelly Simpson, our CFO, John Kulo, Nick Hobbs, our COO and President of Contract Services, Darren Field, President of Intermodal, and Brad Hicks, President of Highway Services and EVP of People. I'd now like to turn the call over to our CEO, Mr. John Roberts, for some opening comments. John?
spk13: 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 will 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've faced as a company as well as an industry in the areas of professional driver and non-driver wages, healthcare benefits, and equipment costs. 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 costs 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 continue to increase as the industry experiences higher verdicts and, as a result, higher litigation settlements. Jury 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 broad or disproportionate share of the escalating insurance and claims costs 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 motor and 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 and 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 a new year has begun and the calendar has flipped 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 through 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 JVT have faced the brunt of the market challenges, we still see great opportunities 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, Shelly Simpson. Shelly?
spk17: Thank you, John, and good afternoon. As we've navigated through 2023, we remain committed to our strategic areas of focus, including investing in our people, technology, and capacity. Our people have and always will come first, and I'm proud of the commitment to our people while continuing to invest in capacity for our network as we prepare to grow with our customers to meet their demands over the years ahead. The experience and talents of our people and our capacity to deliver are connected. and enhanced private technology investments, which combined together are what allow us to deliver exceptional value for our customers. As we have discussed the past couple of quarters, and as John discussed, we remain in a challenging environment. But we continue to see some signs of improvement, especially related to intermodal volumes. Having said that, I think it's important to reiterate that volume is historically a leading indicator, while price is typically a lighting indicator. with uncertainty around the timing of any potential inflection. Going forward, our focus remains on how we deliver value for and grow with our customers over the long term by finding ways to improve efficiency and drive waste out of the supply chain. As we look to 2024 and the uncertain market dynamics, 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. While we are long-term focused, we are not satisfied with the current results in our business, especially the return performance across our business segments. Intermodal is seeing positive volume growth, but the impact of pricing during the last bid season will be with us through at least the first half of this year. Dedicated margins were resilient in 2023, but the impact of truck count losses and lack of fleet growth will make top and bottom line growth more challenging this year. Final Mile is holding up well despite cap-of-demand in our end markets. Our brokerage and power-only businesses are under significant pressure on both volume and price and continue to feel the brunt of the freight market as evidenced by the performance. We are focused on controlling what we can control and remaining flexible to deliver the best value for our customers. This is where our go-to-market strategy and mode in different service offerings can help customers lower costs. We can save customers money by converting over-the-road shipments to intermodal, which is cheaper and less carbon intensive. We can create the most efficient dedicated fleets or leverage our technology through our JB Hunt 360 platform to source the most efficient capacity to drive value and differentiate the end experience for our customer's customer in our final model network. In closing, I want to highlight our areas of strategic focus for 2024. First, we are focused on operational excellence to deliver exceptional value to our customers. While service levels are strong, we believe consistent and quality service will further differentiate us, peers, and support our ability to win market share at acceptable returns. Second, we will continue to scale our long-term investments in our people, technology, and capacity. This isn't something new for us, And our commitment to investment in these three areas further position us for long-term growth with our customers as the market recovers. And third, we want to remain focused on driving long-term compounding returns for our shareholders. We operate in a cyclical market with ups and downs, but over the long term, we believe our mode-indifferent approach offers customers the most options to deliver the greatest value and solve for their needs ultimately supporting our 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 Kulip. John?
spk14: Thank you, Shelly, 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 gap 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 and or yields combined with inflationary cost pressures. Our fourth quarter results include a $53 million charge, or 38 cents 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 gap basis, revenue declined 13%, operating income declined 25%, and 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-time debt to trailing 12-month EBITDA. and maintain flexibility with our credit facility that has ample borrowing capacity if needed. Looking to 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 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.
spk07: Thanks, John, and good afternoon. I'll provide an update on our dedicated and final mile businesses and give an update on our areas of focus across our operations. I'll start with dedicated. During the fourth quarter, I am pleased with the strength and resiliency of our results, despite the approximately 20 million of insurance-related expense incurred in the segment. Even with the challenging freight environment in 2023, Our dedicated business had a record year in both revenue and operating income. Demand for professional outsource private fleet solutions has held up well, and we sold approximately 300 trucks of new deals during the fourth quarter, bringing our full year sales number to approximately 1,150 trucks. Our pipeline remains strong, but we do have some visibility into fleet losses and or downsizes throughout 2024, and are working hard to backfill these by executing on that pipeline. Importantly, we are remaining disciplined in pricing new opportunities to ensure we maintain our required rates of return. While 2023 was a challenging year, from a fleet growth perspective, I want to put some context around the work we have done to improve the overall strength and durability of our business. While we have experienced downsizing in a lot of our fleets, We even lost a handful of accounts over the last year. The percent of portfolio that churned in 2023 was about half of what we saw in 2009 during the Great Recession. Our focus on private fleets and our customer value delivery process, CBD, that was established from our experience during that time set us up for better performance during this downturn. As we look to 2024, our strategic focus includes continuing to scale the business create value for customers, and to leverage our density to help offset inflationary cost pressures, all while executing on behalf of our customers in the safest manner possible. Moving to final mile. We have made good progress on improving the revenue quality of our portfolio, and our strong service metrics highlight the value we create for and on behalf of our customers. Our year-over-year change in profitability continues to outpace the change in revenue despite incurring $3 million in additional insurance-related expense in the quarter. Demand for big and bulky products overall remains muted, particularly in furniture, but we did see a seasonal lift in demand for exercise equipment around the holidays. Our focus in this business remains on providing the highest quality service for the delivery of big and bulky items into the homes of our customers' customers. This service-oriented focus resonates well in the market, and we are seeing new brands engaging in discussions with our team. As we move into 2024, we're focused on growing and scaling the business and building on the solid foundation that we have. We will also remain disciplined on revenue quality while focusing on operational excellence and execution for our customers and their customers in a safe, secure manner. Similar to last quarter's, I'll close with some comments on safety in our equipment. Aligning with our company foundation of taking care of our people, but also the motoring public, we want to continue to invest in employee training and new equipment and technologies to enhance our safety performance. We are over 60% complete with rolling out inward-facing cameras in our fleet with the goal of being 100% complete by the end of the third quarter. As a company, we had our best safety performance in our history in 2023, measured by having our lowest DOT preventable accidents per million miles. As you have heard, the cost of claims continues to move up exponentially, so we continue our efforts to find new, innovative ways to enhance our safety performance and further mitigate risk where possible. Lastly, on equipment, we have cleaned out our older equipment and feel our fleet is refreshed and in good position heading into 2024. You heard John Kulow give you a range on CapEx. which reflects our better position on equipment age. This concludes my remarks, but I would like to now turn it over to Darren.
spk11: 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 the 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 and 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 bids 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. Thank you, Darren, and good afternoon.
spk10: I'll review the performance of our integrated capacity solutions and truckload segments, as well as provide an update on J.B. Hunt 360. Starting with ICS, the overall brokerage environment remains very competitive from both a volume and rate perspective. Segment gross revenue was down 25% year-over-year in the quarter, driven by a 12% decline in volume and a 15% decline in revenue per load. These figures include the contribution from the acquisition of the brokerage assets of BMSF Logistics. The acquisition contributed a little over $90 million of revenue to our performance in the quarter. Similar to prior quarters, overall truckload demand, particularly in the spot market, remains depressed versus the same period last year. While we aren't pleased with the current results in ICS, we are taking steps that will position us for better success in the future. We have focused our efforts on improving the revenue quality of our portfolio and culling some unprofitable freight, which contributed to the lower volume in the quarter. We believe we are out in front of the market with some of our work on rates, but it is too early in the bid season process to fully gauge our performance. We are investing in areas to mitigate strategic theft and enhance capability in our platform while right-sizing resources with our current demand through attrition. Overall, we do believe these changes will position us for better long-term growth and success. Looking at 2024, in ICS, we are focused on quality volume growth that recognizes the value and quality service we provide in the market and right-sizing our cross-structure further to align with activity levels either through scaling or attrition. We're also focused on premier execution across the business through reliable, excellent service, high on-time performance, and further strategic theft mitigation. Moving over to JBT or truckload, segment gross revenue was down 19% year-over-year, driven by a 13% decline in revenue per load and a 7% decrease in volumes. Overall, demand for our J.B. Hunt 360 box service offering is outperforming the market as volumes in the quarter were up once again versus the prior year. The flexibility that we can provide customers by combining drop trailer capacity with the ability to source the carrier to move the load on the JB Hunt 360 platform is key and resonates well with our customers. Going into 2024, we are focused on improving the efficiency of our network through increased trailer turns, essentially creating additional capacity in our network without having to add a significant amount of assets. We are also focused on maintaining balance across the trailer network to ensure our assets are in the correct place to meet customer demand and continue to grow while making sure the overall revenue quality of our portfolio remains healthy. I'll close with some comments on 360. Our investments in our company foundations, our people, technology, and capacity remain a focus for us. Technology enables our people, helps drive productivity, and also drives efficiency in how we source and serve customers with our available capacity. Despite the challenging freight environment and depressed demand, we continue to see improved productivity in our people driven by the 360 platform. It is just masked to some degree by the current market conditions. That said, as our cost structure is becoming more aligned with current demand, we continue to believe our technology will drive productivity and efficiency gains as the market recovers, allowing us to meet higher customer demand levels without having to add as many resources while providing high levels of service for our customers. We know that investing in our people, technology, and capacity is key to our success and remain confident that these investments better position us for long-term growth with our customers and allow us to create greater value for our stakeholders. That concludes my comments, so I'll turn it over to Brad Delco to provide instructions before the operator opens the call for Q&A.
spk05: Thanks, Brad. Hey, Krista, let's open the call for just one question without follow-ups given the time. Thank you.
spk01: Your first question comes from the line of Brandon Oglenski from Barclays Capital. Please go ahead. Your line is open.
spk24: Hey, good afternoon, and thanks for taking the question. I guess, Darren or Shelly, you know, you guys mentioned a couple times about how pricing is just a lagged indicator and volume being the lead here. I know your volumes did accelerate in the 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?
spk11: So Brandon, I'll start. This is Darren. Certainly, I'm not going to guide you into 2024. What I will say is pricing will forever be worth more than volume in terms of margin performance and return performance. We are under immense cost pressure, and certainly we believe the value proposition we represent to our customers should equate to a return position that justifies our investments. There's a lot yet to be determined as we go through the bid cycle, and so the answer to your question is, will play itself out in 2024, and we're all going to have to wait and see what the environment is like.
spk01: Your next question comes from the line of Ken Hexter from Bank of America. Please go ahead. Your line is open.
spk12: Good afternoon. Hey, Darren. Just to follow up on kind of the cost pressures, just to understand kind of margin impacts. You know, you talk about pulling containers out as you get growth. Maybe walk us through how we should think about the cost implications of bringing those containers back into business, when that should slow down, when we could see the margin benefit as you slow down bringing those costs out, and then to understand the insurance impact. If that's now an ongoing cost, are you raising that part? I'm trying to understand the cost inflation that we should expect in the business. Thanks.
spk11: Sure. 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 costs 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's 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 dialogue with our customers around these cost challenges we're faced with.
spk14: Hey, and Ken, this is John Kula. I'll just add on the insurance cost pressure that we're seeing. You know, our general approach to risk management is to maintain coverage and insurance policies for our exposures. And as we reset the premiums going into 24, we saw upwards of 50 to 60% increases in those premiums. And so when we talk about the inflationary pressures that we're seeing in 24, it's mostly around our premiums. We've done a great job this year in in working and focusing on safety to try to bring those incidents down. But the claims cost of the individual claims is what's driving a lot of the inflationary pressures.
spk01: Your next question comes from the line of Baskin Majors. Please go ahead. Your line is open.
spk04: So if you add back the charges for insurance and the losses on equipment sales, you actually saw a pretty nice seasonal lift in operating income versus your history for the fourth quarter. And I know you don't want to give guidance, but as we think about just level setting expectations for next year, is a typical 4Q to 1Q seasonal decline a decent place to start? Maybe if you could just sort of talk about puts or takes to that. from that adjusted $270 million or so operating income, adding back those charges in the fourth quarter? Thank you.
spk05: Hey, Baskin. 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 $15 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.
spk01: Your next question comes from the line of Scott Group from Wolf Research. Please go ahead. Your line is open.
spk25: Hey, thanks. Good afternoon. So, Darren, I heard you talk about taking share from trucks. Didn't hear you talk 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, I mean, I hear you're not saying much, so 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 before truckload pricing starts to go up.
spk11: Okay. Well, thanks for the two questions, Scott. So, when it comes to volume and looking to regain share from the highway, certainly that feels like some of the lowest fruit for us, given the loss of share over I'm going to call it several years back into PSR time window, even through certainly the pandemic. I think Intermodal lost some share due to weakness in velocity. And as we gained velocity in 2023, we feel like we can better compete for our customers on consistency and the transit model that the customers need. So that's why we largely highlight highway conversion. Growth of import traffic through the West Coast ports is an absolute benefit to JB Hunt. Certainly, I think we highlighted in the earnings release that we grew TransCon 13% in the fourth quarter. So that, I would think, highlights at least some advantage of that effort from growth of imports. As it relates to decoupling highway pricing to intermodal pricing, I think that between our trans-con networks and our eastern networks, there is already some decoupling, not 100%. Certainly, the influence of the intermodal market out west is a bigger factor in pricing there than highway rates. But in the eastern network, I can't imagine a world where intermodal pricing would ever decouple from highway pricing in the eastern network. will be tied together.
spk01: Your next question comes from the line of John Chappelle from Evercore ISI. Please go ahead. Your line is open.
spk20: Thank you. Good afternoon. Darren, I'm going to stick with you. You mentioned that the fourth quarter volume number surprised everybody, yourselves, your rail partners, sounds like even your shippers. Maybe the most surprising part is the fact that December accelerated more, up 8%. which kind of goes contrary to what we've heard from all the others in the segment. What kind of happened in December that you think was kind of unique to J.B. Hunt? You know, on that last question, was it more kind of your new services, your new services at the end, or just an easier comp, just trying to figure out why the acceleration when it sounded like December was soft for everyone else?
spk11: yeah okay appreciate the question i think that um certainly the new services we're excited about i don't want to you know 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 a 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, you know, 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 than 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, you know, our capacity, what I call the coiled spring for many quarters, saw for us this fourth quarter in 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.
spk01: Your next question comes from the line of Justin Long from Stevens, Incorporated. Please go ahead. Your line is open.
spk21: Thanks. And maybe I'll pivot and ask a dedicated question for Nick. I know there are a 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, startup costs, or anything else?
spk07: Yeah, I would say just as I was thinking about and reflecting back on this year that I think we performed much better than we did in 08 and 09. I talked about that, just the structure of our deals. CBD, and we lost 18% of our fleet in 09, and we're going to lose 9%, or we did lose 9%. And so I think through that, we've got a better base of business, better diversified. So I feel we've come out of that pretty good and sets up well. I would say, though, that when I think about our sales, I'm just going to give you our standard line of we're going to sell 1,000 to 1,200 trucks just like we did last year, and it really A tough year. We're going to plan on doing that again. And as I said, we've got some visibility to some fleet losses coming up. And so there's a lot of moving parts in there. But when I look at the market and what we're after, the private fleet market, it's really pretty stable. Some of these losses have been in our more what I would call our business that we've had legacy business for quite some time. And so I think our base will get more solid as we move forward with more private fleets.
spk01: Your next question comes from the line of Amit Mehotra from Deutsche Bank. Please go ahead. Your line is open.
spk03: Thanks, operator. Hey, everybody. Darren, I just want to understand that volume momentum question. You're talking about volume momentum. Obviously, intermodal loads were up, you know, 3% sequentially, 3Q to 4Q. Usually they go down, you know, four Q to one Q, but obviously there is momentum. You're adding the quantum service. Do we think that that momentum can continue where you can build volume sequentially as we move through this year? And I'm really talking about the first quarter because obviously it's a seasonally tough quarter. And then just related to that, you know, I assume your customers are talking about expectations for March and the spring selling season. There's a lot of disruption in the Red Sea and maybe, you know, customers are rethinking their supply chains. Panama Canal, Suez Canal are down basically. So just talk to us about that momentum building as you move over the next three months from where you are today. And then what are your customers telling you from expectations on March and the disruption that's happening right now in the Red Sea? Thanks.
spk08: That was impressive, Amit. I think that...
spk11: 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 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'm 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
spk15: information about what to expect your next question comes from the line of chris weatherby from citigroup please go ahead your line is open hey thanks um i guess i wanted to ask about cost inflation and maybe tie it into the insurance and so i'm just trying to understand we've had two years with fourth quarter um hits from the insurance side and I guess I'm trying to figure out what that means for the go-forward period. So does the charge that you take in this fourth quarter mean that there is some degree of incremental accruals that are required for 2024? And then maybe if we could just tie that into broader cost inflation, if you look at the portfolio of the businesses, what do we think cost inflation is kind of running as we're getting into 2024?
spk14: Yeah, well, Chris, I'll take that again. This is John Kulow. With respect to the insurance, We did have a charge last year in the fourth quarter. This really relates to continuing to see what we refer to as unprecedented settlements in our prior year claims. We had a situation where we ran out of our coverage limits in those periods, and so we're effectively self-insured. Each quarter we go through and we assess our reserves, and working with our actuaries, We needed to determine that we need to take up our reserves. Can't say that this will never happen again, but we do believe that the charge that we took for our reserves, that makes them properly valued now. As I mentioned before, we do, our approach is to maintain coverage for all of our businesses, and we are taking that up, and we did a little bit in 23 and taking that up in 24 and going forward. Just to give um you know with with respect to the current environment how we're seeing these settlements claims so or how we see these claims settled so that's really where we're seeing the most pressure we are again continuing to look at our reserves on a quarterly basis but i feel like most of the inflation that we're seeing is through the cost premiums that we have from our underwriters
spk01: Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead. Your line is open.
spk00: Hi, good evening. Just want to go back, Nick, to the dedicated, the fleet downsizing. I know it was less than sort of the 2009, but what's your visibility on being able to reallocate that capacity fairly quickly? And then you also talked along about the pipeline of opportunities. You know, anything specific about the verticals of those opportunities? that may be more defensible, or is it people just sort of preparing for whatever inflection might come here? Just any thoughts, I think.
spk07: Yeah, first of all, I would say on our ability to replace them, clearly the way our business works is we usually have waves when we get startups, so we incur the cost. And so with us losing some of our trucks in 23, we don't have the momentum we normally have going into 24. 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, um, that's the reason that we're, um, talking about 24, the way we are now, as far as any vertical, we look through our book, I would say, um, you know, the furniture side, we hold a little bit of that and dedicated it's it's impacted some, but I would say the one that's probably been the strongest been the grocery side of things have just been consistent.
spk05: uh throughout um and then uh the others it's it's kind of uh just as the economy's going they're kind of going nothing really sticks out anywhere else and alice brad delco i'm sorry i just want to add touch to that on your question about kind of the churn that nick shared before you know we share each quarter the success that team has selling new fleets and so Nick kind of shared a churn number of 9% on the base of the fleet in 2023. The team was very successful in backfilling some of those losses by selling that equipment into new deals. And so I think that what Nick's messaging is effectively, hey, we have some foresight into some downsizing of some fleets in 2024. And I think in his prepared remarks, he said, hey, the strategic focus is going to be out there selling to backfill some of those losses.
spk01: Your next question comes from the line of Ravi Shankar from Morgan Stanley. Please go ahead. Your line is open.
spk02: Thanks. Good afternoon, everyone. Just regarding this insurance situation, obviously it seems a little bit frustrating given how much it's outside of your control. Is legislation in Congress the only answer to this? Do you think some of the technology you're putting in place is going to have a tangible impact on reducing some of these claims? And is there anything you guys can do as a large carrier to maybe avoid some of the disproportionate impact on large carriers versus small ones?
spk07: Yeah, I'll jump in, and this is Nick. Clearly, we think we had a 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 inward facing cameras. We're about 65% complete on that rollout. We will have all those other trucks retro by the end of Q3. So we clearly think that will help us with our accidents. And then if you think we're also got 65% of our fleet that's got side guard assist that helps us on the right side. Those we can't retro, so it's going to take us another couple of years. 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. 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. 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.
spk14: Robbie, I'd just add it. It is frustrating, but we are focused on the areas that we can control. And as Nick said, we're working to do everything we can to improve our safety, to make sure that the incidents themselves are down. And then there needs to be something done with respect to these settlement charges.
spk01: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead. Your line is open.
spk19: Yeah, hi. Maybe sort of switch it up a little bit on the brokerage side of the equation. Obviously, still a lot of pressure there profit-wise. I mean, what do you think needs to happen to get back in black? Is it purely a cycle thing, price and volume, or is there some things you need to do structurally to – You know, whether it be cost or technology, I know you'd made a lot of investments in the past, but maybe talk a little bit to truck brokerage and your thinking on return to profitability.
spk10: Yeah, Jordan, thank you. It's Brad Hicks. You know, incredibly difficult brokerage environment, as we will know throughout the entire year. We did spend a tremendous amount of time focused on our costs as we saw volume decline and revenue quality back up significantly. Made it extremely difficult through the bid season to really pick your spots in an ever so declining rate environment. And, you know, I do feel like, you know, the last quarter, quarter and a half, we've been just kind of trotting along that bottom. As Darren mentioned in his opening question around, you know, we're taking this wait and see approach through bid season, but we do feel like things need to inflect. You know, the one thing I would mention that if you really look at the growth that we experienced through the pandemic, We were 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 23 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.
spk01: Your next question comes from the line of Jason Seidel from TD Cowen. Please go ahead. Your line is open.
spk22: 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 you know, more mixed changes coming with the move back to the West Coast ports. How should we look at that as a close to the model for 24?
spk11: Well, certainly, I mean, the pricing environment just has too many unknowns today, really, to highlight anything there, Jason. What I would say is certainly... The longer length of haul loads that the West Coast represents can represent higher revenue per load, but that doesn't necessarily mean that there's pricing increases there. And so I'm not going to be able to fill out sort of the mix for you. I mean, we don't even know what that mix will be just yet. Certainly there is an opportunity for growth on the West Coast that we're hearing about as more and more customers are talking about a shift of their imports to the West Coast.
spk01: Your next question comes from the line of Tom Wadowitz from UBS Financial. Please go ahead. Your line is open.
spk09: Yes, good afternoon. I wanted to ask you a little bit about intermodal margin in the fourth quarter. If we take out the insurance, you saw about 80 basis points of sequential improvement. in intermodal margin. And I just wanted to see if you could give a sense of what drove that. Was that less repositioning expense? Was that something helpful on the revenue side? It didn't sound like there was a change on price. And then I guess related to that, when you have a longer length of haul and some favorable mix, does that affect you like price? Does that help the margin a bit? So really just a couple of things on intermodal margin. Thank you.
spk11: Well, I think that certainly, you know, the fixed cost 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 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 the fourth quarter was able to show that.
spk01: Your next question comes from the line of Brian Ossenbeck from JP Morgan. Please go ahead. Your line is open.
spk06: 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, you know, some of that momentum and that surprise upside in the fourth quarter. Is that really carried into the conversations that 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 capacity, spot rate improvement. What do you expect here standing at the first part of the year looking for the rest of it? Thank you.
spk11: Okay. This is Darren. I'll start and then hand it off to Brad. I think that from a pricing conversation perspective, It's really the wide variety of results there in terms of I think there is universal acknowledgement for our service performance, and we feel good about that. There is universal hesitancy to offer rate increases, and competition is real. There is competition out there, and that will always be a factor. Our customers are under-trimmed. Tremendous pressure not to have their costs go up, and so that's going to be a factor. But at the same time, we really were not far enough into these conversations to be able to make heads or tails of it. There's a lot of work to be done. I think that I'm proud of the way that customers are responding to the quality of our service, and we're going to lean in on that.
spk10: Yeah, Brian, I would just add, this is Brad Hicks. You know, similar to where Darren sits, really way too early in the bid cycle to see what's ahead of us there. But at least, you know, 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 costs of not just our own fleet, but fleets in general, and where rates plummeted in the truckload space, which are down more than 2x what they were in terms of a percent reduction than we see in intermodal over the last 12 or 14 months. Something's going to have to give there. We obviously paid real close attention on what's going on with truckload capacity, and we do start to see exits in the marketplace there. 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're 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.
spk01: Your next question comes from the line of Bruce Chen from Stifel. Please go ahead.
spk16: Your line is open. 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 culling that you're talking about? And then maybe just thinking through profitability in this segment, do you expect the acquisition and integration cost to kind of moderate this quarter? Are we still working through some of those? you repeat the very first part of your question if you don't mind no not at all uh just you know looking at that move down in the contractual business percentage so i think it was you know 59 percent um is that you know seasonal spot opportunity was that bnsf mix or was that you know some of the calling that you've been doing great okay thank you well first let me uh correct when i ended the last question i said if not when is when not if uh sorry i i was getting
spk10: Ahead of myself there. But, you know, we saw that come in right around 59% contract, a little bit lower than what we had been. Certainly the mix of business that we saw come through and the over-the-road assets of the BMSF acquisition, that did play a factor. You know, I think that as we move forward, as you look at our history, largely we like to be in that 50-50. There's times where that swings higher on contract or published. We got overweighted during the pandemic, if you recall, on spot where we were greater than 50% spot. So, you know, the sweet spot would be for us to live in that 50 to 60. So I'd like to think that that's going to maintain. But we're also going to need to see the spot market overall demand and spot market pick up. It still is relatively soft in that category. Compliance is very high amongst shipper tenders in terms of carriers and accepting tender acceptance. And so, you know, we're going to pay real close attention as we move deeper in the year. Do believe that you're likely to see when we do see the flip, you will start to see spot opportunities grow and we'll be poised to take advantage of that.
spk01: Your next question comes from the line of David Vernon from Bernstein. Please go ahead. Your line is open.
spk23: Hey, good afternoon. Quick clarification and then a question on the insurance stuff. So Shelly, I think you talked about growing dedicated EBIT maybe being challenging. Were you referring to like the gap EBIT number or the adjusted EBIT number? And then the real question I have for you is, you know, John, I appreciate your comments on insurance being a recurring thing. But John Kulo, if we would look at what we did in terms of the 53 going into reserves, however you change the premiums and the limits on the policies, if 2023 happened exactly as it happened this year in terms of incidents and payouts, Flash forward to 2024, if that just repeats, in 2024, are we taking another charge or are we not taking another charge? Thanks.
spk07: So were you talking about the gap? Could you repeat that first question again for dedicated for Nick?
spk23: The first question on dedicated was, you know, I think Shelly mentioned that it's going to be challenging to grow dedicated from an EBIT perspective in this market. Was she referring to the gap number or the non-gap number?
spk05: Yeah, I think, David, I don't want to answer that question because it sounds like if we answer that, it provides a little bit too much in 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.
spk14: And David, just a final point on insurance. If 24 plays out like 23, as I mentioned, we look at our reserves quarterly. We feel like the reserves are properly valued. These values were placed on prior period claims, so it is not our expectation that we have these charges going forward.
spk01: Thank you. And we have no further questions in our queue at this time. I will now turn the conference over to John Roberts, Chief Executive Officer, for closing remarks.
spk13: Great. Thank you and appreciate the interest and the call today. I would reiterate goodbye and good riddance to 2023. With a couple of exceptions, we think about the performance in our dedicated and final mile business. Again, revealing what we believe is a very complementary portfolio of services built very intentionally. I'd look at our performance and safety. We feel like there's a disconnect between our actual work and performance and investment and the results we're getting in the claims markets and the insurance markets. I think I look at like JBI Intermodal has kind of been in the gym all year. and we're carrying some extra positioning, but we got a glimpse of that, Darren, in the fourth quarter of what that can lead us to. I don't remember who said it, but I'm an 80s rock fan, and I heard Back in Black, and I really like that because that'll be something I can use around here through the rest of our work. I would say that while 2023 was a tough year, And in fact, we talk about our tenure a lot, but we've discussed here, none of us have really seen much in the light of 2023 in many years. We're looking at decades of leadership here. And so I think while it was one of the toughest, I see it as also a very strengthening year. We had to lean in harder to get ready for 24. We had to ask ourselves a different type of question than we normally do. And through that work in prepping for 24 and dealing with 23, I do believe we're better prepared as we come out of, and I guess I'll say when, not if, but when we come out of this freight recession, I totally and completely believe we are ready to respond to the needs of our customers. We are have extraordinarily strong alignment and commitment to our top priorities, our people, our technology, and our capacity. And I would just say let's watch for improvements while we continue to take care of our people who take care of our customers. And when that presents, I think we'll be very ready to serve and take advantage of that change in climate. So good riddance. Thanks for the memories, and I'll turn it over to Shelly to wrap this up.
spk17: 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 in solving their 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, in 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 compounding returns for our shareholders. So those three key priorities as we march into 2024 lets us have a happy dance that 23 is over and we're moving into 24 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 priorities. 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 the fruit of their labor will prove it for our customers, for our people, and for our shareholders. For that, I thank you for your time and your interest. Cheers to 24.
spk01: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
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