J.B. Hunt Transport Services, Inc.

Hello and welcome to J.B. Hunt's third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Mr. Brad Delco, Senior Vice President of Finance. You may begin.

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 President and CEO, Shelly Simpson, our CFO, John Kulo, Spencer Frazier, Executive Vice President of Sales and Marketing, our COO and President of Contract Services, Nick Hobbs, Darren Field, President of Intermodal, and Brad Hicks, President of Highway Services and Executive Vice President of People. I'd now like to turn the call over to our CEO, Ms. Shelly Simpson, for some opening comments. Shelly?

Thank you, Brad, and good afternoon to everyone on the call. First, our thoughts are with those impacted by the recent hurricanes in the Southeast and Florida. Many of our employees were impacted, and I'm proud of how our company has responded to support them and the recovery and relief efforts in these communities. The rebuilding will take time, and J.B. Hunt will continue to support these efforts. Turning to the quarter, we continue to navigate a challenging freight environment while remaining focused on what we can control around our costs, providing exceptional service to our customers, preparing for their future transportation needs, and maintaining our focus on safety. As discussed last quarter, we have seen a return to more normal seasonal demand patterns as evidenced across our businesses in the third quarter, which the team will highlight in their remarks. I remain confident in our strategy as we execute on our priorities, which as a reminder are, one, to deliver exceptional value to our customers through operational excellence, two, Scale our long-term investments in our company foundations, which are people, technology, and capacity. And three, drive long-term value and returns for our shareholders. Our focus remains on how we can deliver value for our customers with excellent service while looking for ways to drive waste out of their supply chain. We do have some more positive sides in the business to support our work in this area, particularly around our volume trends, customer awards, and third-party surveys that highlight J.B. Hunt's performance. I see more evidence today that we can scale our investments in our people, technology, and capacity to capture additional market share at better returns as the freight cycle inflection occurs. I remain confident in our strategy and maintain our focus on generating appropriate returns on capital that deliver value for our shareholders. As we prepare for an eventual turn in the freight market, we have focused our organization on being operationally excellent and delivering unmatched value for our customers. By controlling what we can right now, we position ourselves to grow with our customers, knowing that these key service components are ingrained in our people. At the same time, we know we need to repair our margins to generate acceptable returns to reinvest in the business, and our customers are and should be aware of that as well. We take great pride in providing high-quality service in all that we do, which is a testament to the dedication that our people have to serve customers well. Creating value for our customers is core to what we do and helps build long-term strategic relationships. Customer value delivery, or CVD, is a process that we have used for a while in our dedicated business, and we continue to roll this out across our entire organization. Part of the value we create is through our safety culture and performance, which is a strength of our business, and we have continued to improve upon last year's record performance, as Nick will discuss. The team will provide more details on each of our businesses, but in summary, I continue to have strong conviction around our strategy and the growth potential of our company. We have, and we will continue to prove our ability to deliver outperformance for our people, our customers, and our shareholders. Our confidence comes from our people, our experience, our complimentary suite of services, our scale, our strategic investments, and our financial strength. All of these uniquely position us for the future as we pursue 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 Kulo. John?

Thank you, Shelly, and good afternoon, everyone. Similar to recent quarters, my comments will cover a high-level review of the quarter, an update on our cost control efforts, and an update on our capital allocation plan for the remainder of 2024. As a general overview, while we have seen some slight moderation in inflationary cost pressures, the deflationary rate environment continues to pressure our overall margin performance across the segments. Let me start with a quick review of the third quarter. On a consolidated gap basis compared to the prior year period, revenue declined 3%, operating income declined 7%, and diluted earnings per share decreased 17%. We saw our volumes on a sequential basis outperform normal seasonality, particularly in JBI, but also in our highway services business, which includes both ICS and JVT. That said, overall yield pressure in these areas continue to put pressure on margins and our overall profitability. We continue to focus on productivity, efficiency, and discretionary cost areas to enhance our performance across all of our businesses. We believe this is evidenced and supported by what we believe to be industry-leading margin and return performances in our two largest segments, both intermodal and dedicated. Going forward for the full year, we expect our tax rate to be approximately 24.5%, which should imply a decent step down in our fourth quarter tax rate compared to the prior three quarters. To update on our cost control efforts, we have made significant improvements across the business to right-size our cost structure, mostly evidenced in our highway services businesses as both JVT and ICS improved their operating margins compared to the prior year period. We remain thoughtful in our approach to managing our costs, focusing on controlling what we can in the near term without jeopardizing our ability to support future growth and our aggregate earnings power potential. Our focus on cost has been broad-based and covers the entire span of our company. Wrapping up with an update to our 2024 capital plan, we now expect our net capital expenditures for the year to be approximately $625 million, which is below our previously revised expectation of $650 to $700 million. Our update from the prior quarter largely reflects the sale of all the chassis that we acquired from Walmart, which will not fit the containers we purchased following a retrofitting of those assets. The sale reduces the net purchase price of those assets and gives us even greater confidence in the strategic value of that transaction for our customers and, importantly, our shareholders. Our balance sheet remains strong, and during the quarter, we repurchased approximately 200 million of stock. With limited near-term capital needs with regards to equipment, our current leverage position, market dynamics, and our view on where we are in the cycle, we continue to believe a disciplined approach to share repurchases is a prudent use of capital at this time. This concludes my remarks, and I'll now turn it over to Spencer. Thank you, John, and good afternoon.

I'll provide an update on the market, our commercial strategy, and some feedback we are hearing from our customers. In the third quarter, we saw a continuation of more normal seasonal demand patterns, particularly across our intermodal and highway segments. In JVT and ICS, we experienced modestly improving volume trends and some pockets of tightness across the country, which would or should be expected around the month end and quarter end. While in general capacity remains readily available in the market on the highway side of the business, some customers are beginning to use more mini bids to fill some out-of-cycle capacity needs. Additionally, there is interest in having more collaborative, long-term planning discussions around business strategies. Historically, both of these engagements have been indicative that supply and demand are becoming more in balance. When we have conversations with customers around their transportation needs, we highlight the value our scroll of services can present and focus on excellence to ensure all of our customer needs are being met. Our goal is to achieve the top ranking on each of our customer's service provider scorecards. With some customers, we've achieved our goal, while with others, we have some opportunities to improve. Through our mode-neutral sales strategy, We work with our customers to develop the optimal solution for their needs, with our people leveraging our full suite of services and technology to create value. We believe this is a clear differentiator for J.B. Hunt in the market. Our focus is on providing the best customer experience with every interaction we have while living up to our say-do culture. We know that excellent service the first time leads to opportunities for future growth across our customer supply chain, and we are committed to achieving both. I'll close with some feedback we are hearing from customers. First, we are beginning to execute the peak season plans we developed with our customers. While some volumes were pulled forward into Q3, we also incurred more peak season startup costs to pre-position resources to serve our customers' peak demand in Q4. Secondly, each customer regardless of size and industry is unique. Within our diverse portfolio, our customers are somewhat mixed on the outlooks for demand for their products and what their transportation needs will look like in the near to medium term. While that is their view on the market, we believe we are in a strong position to take share based on the value we can create for our customers with our people, technology, and most importantly, our consistent service levels. Lastly, as we sit here today, capacity is not a top concern for customers, but they are aware that current market dynamics will shift, though the timing and rate of change remains uncertain. Customers are also aware that there has been significant cost inflation across our industry and margins are under pressure. With these knowns, we will continue to work with them to help drive efficiencies across their supply chain while balancing our need to repair our margins. We remain committed to investing in our business and growing with our customers over the long term by delivering consistent value at the high service levels they've come to expect from J.B. Hunt. That concludes my remarks, so I'd now like to turn the call over to Nick.

Thanks, Spencer, 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. Our dedicated business model is focused on providing professional outsourced private fleet solutions to our customers performed well during the quarter. We believe the resiliency and performance in this segment stands out in the market and supports our differentiated model and go-to-market strategy. While we have discussed some pressure on the fleet size due to customer downsizing, bankruptcies, and as a result of remaining disciplined on our underwriting return hurdles, we believe the market remains stable with ample opportunities for future growth. During the third quarter, we sold 258 trucks of new deals, with some we expected to sign in Q3, spilling over into Q4 due to timing. Our sales pipeline remains strong, and our team has worked hard to backfill most of those truck losses We have started up a significant number of customer locations and trucks over the past two quarters, which has had an impact on our margins as mature business has been replaced by newer, less mature business. That said, we remain disciplined on new customer wins and are confident that this new business will generate both appropriate margins and, more importantly, returns on capital once they ramp to maturity. Going forward, we expect new account growth sales to remain stable within our long-term stated range of 1,000 to 1,200 trucks on an annualized basis. But keeping in mind, growth in operating income typically lags fleet growth by a few quarters. Shifting to final model, we have made significant progress to improve the overall health of our business, focusing on high-quality service and revenue quality while remaining cost disciplined through the process. we have seen the market for big and bulky delivery evolve with customers looking for high-quality service providers with national scale and strong safety standards. Overall, demand for big and bulky products remains somewhat challenged with continued soft demand for furniture and modestly soft trends in exercise equipment and appliances. While we remain encouraged by our sales pipeline and continue to engage in discussions with new brands, We have seen some customer churn, which impacted top line and bottom line performance in the quarter. Our focus remains on providing the highest service level as we deliver products into the homes of our customer's customer with a priority on being safe and secure. We will remain disciplined with potential new business to ensure appropriate returns for our service while we work to grow the business and improve profitability. Going forward, while we are encouraged by the improvement in our final mile business this year, we remain focused on growing the business profitably with the right customers that recognize the value we provide. Similar to last quarter, I'll close with some comments on safety. Our company is rooted in a foundation of safety for not only our people, but also the motoring public, and we continue to invest in training and equipment to enhance our already strong safety culture. In 2023, we had a record performance in terms of DOT preventable accidents per million miles, and so far year to date, I am pleased to say we have improved further. I am also pleased to announce that we hit our previously stated goal of being 100% rolled out with inward-facing cameras in our trucks by the end of the third quarter. These cameras are just one of many innovative safety initiatives we have rolled out that continues to contribute to our safety culture and performance. As you are aware, the cost of claims have elevated, but we continue to manage and mitigate risk by remaining focused on our safety performance. This concludes my remarks, so I would like to turn the call over to Darren.

Thank you, Nick, and thank you to everyone for joining us this afternoon on the call. Let me start with the review of Intermodal's performance during the quarter. Overall, we saw the momentum from the second quarter accelerate into the third quarter as our overall volume was up 5% year over year, which modestly outperformed normal seasonality. The volume growth during the third quarter was driven by 7% growth in TransCon, with Southern California outbound volumes up double digits once again this quarter, and 3% growth in the east. By month, our consolidated volumes were up 7% in July, up 4% in August, and up 4% in September. In the east, we continue to compete more directly with one-way truckload, but as evidenced by our overall volume improvement this quarter, we are beginning to win back small amounts of freight from customers due to our strong service levels and ability to meet their capacity needs. As we look to our bid warehouse, we continue to see a large amount of freight that we believe should be converted from over the road to intermodal as it is more economical and environmentally friendly. We stand ready and have the capacity and people in place to meet and exceed our customer service needs both now and in the years ahead. During the quarter, we did see margin pressure year over year, and despite a modest improvement in margins sequentially, we did incur additional expenses in the third quarter. You've heard me say that right now volume means more to us than it has ever before, and that remains true. However, pricing has been and is still the biggest lever to improve margins. While we did see sequential volume growth, we absorbed additional expense during the quarter to keep our network fluid in light of the imbalances caused by the strength in our network, specifically out of Southern California. We are encouraged by the improvement we are seeing in customer's bid compliance, which will provide us better opportunities in the future to fill in lane imbalances and drive greater efficiencies in the network. Going forward, and as a reminder, we implemented the remaining pricing from our 2024 bid season during the third quarter. And given the nature of our pricing cycle, we will be living with a large portion of current pricing through the first half of 2025. We just kicked off our 2025 bid season, and we do like our position given our service levels and ability to handle customer surge demand that we have been experiencing. We continue to see truckload pricing that we believe is unsustainable over the long term, particularly in the eastern network. We have recently seen some shippers look to convert small amounts of freight from truck to rail in the east, which we are encouraged by, and highlights our service and value proposition that we and our rail providers are able to provide. With regard to our rail service providers, we have been pleased with the service levels from each of them, their commitment to the intermodal offering and growing the overall market. That said, we and our railroad providers know the true test of our collective service will come once freight volumes increase with higher overall demand on our networks. We have been in constant dialogue with them that this peak could serve as one of many prove-it moments to show customers that we collectively can handle significant growth while maintaining proper service. Maintaining service during periods of stronger demand, like we are experiencing today, supports the case for intermodal growth and additional conversion from over-the-road freight. Our conviction in the strength of our intermodal franchise hasn't wavered. Our customers trust us, our service levels are exceptional, and our optimism on the future growth of our intermodal business hasn't changed. That concludes my prepared remarks, and I'll turn it over to Brad Hicks.

Thank you, Darren, and good afternoon, everyone. I'll review the performance of our integrated capacity solutions and truckload segments. I will also provide an update on some of our work in J.B. Hunt 360. Starting with ICS, The overall brokerage environment remains competitive with pressure on both volume and rate. That said, I am encouraged by some of the progress we have made to stabilize trends in the business. Segment gross revenue declined 7% year-over-year in the third quarter, driven by a 10% decline in volume, partially offset by a 3% increase in revenue per load. Sequentially, ICS volume increased 2% as our efforts to diversify and strengthen our customer base are starting to yield results. While we continue to focus on quality revenue and growing with the right customers, we have also made strides to right-size the cost structure of our business, especially in our legacy ICS business. Segment gross margins were high at 17.9% for the quarter, highlighting our disciplined bid strategy, effective sourcing, and was also aided by some project-related work. We continue to make progress on our costs and better aligning our resources with our current business levels. In the quarter, we did incur some additional expense related to the integration of the brokerage assets of BNSF Logistics, which had an approximately $2 million negative impact on our operating expenses in the quarter as compared to the second quarter. Going forward, we will remain focused on further diversifying our customer base continuing to right-size our cost structure and leveraging our technology to scale growth. We will need to scale the business with more volume on the platform to return the business to acceptable levels of profitability. Moving over to JVT or truckload, segment gross revenue was down 12% year-over-year, driven by a 6% decrease in volume and a 6% decrease in revenue per load. Our focus remains on attracting the right freight that best fits our network while ensuring that our capacity is positioned in the right markets to meet customer needs. We've seen customer bid compliance improve throughout the year, which allows us to better plan our capacity, which provides efficiency across our network and has contributed to the improved profitability in our JVT business. Our service levels have been very strong and at the highest level since the shift to our power-only model. JD Hunt 360 box in 2019. Our high service levels combined with the flexibility of the drop trailer network position us well for future growth with new and existing customers. Going forward, we continue to expect to see some pressure on volumes. That said, I am confident in the network discipline that we have and the growth opportunities in front of us as we head into the 2025 bid season. I'll close with some comments on 360. Technology is foundational to our company and is the piece that connects and empowers our people to the available capacity we have to serve our customers. A lot of the significant investments into the foundations of our platform have been complete. That said, we continue to leverage this foundation into new market opportunities. For example, rolling out the platform to the agents we acquired from the brokerage assets of BNSF Logistics and also to the SMB and LTL markets. while also improving cargo security in our business. We continue to believe our technology investments will drive greater productivity and efficiency gains across the scroll and better position us for long-term growth with our customers. This concludes my comments, so I'll turn the call back to the operator to provide instructions for the Q&A portion of the call.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and then re-cue if needed. Your first question comes from the line of Ken Hodster with Bank of America. Your line is open.

Wow, great. I appreciate being up front. And I guess, Shelley, you would cut me off if I asked on November 16th how many points Texas will win by. So I will not ask that. You noted normal intermodal patterns. But I guess looking at how much was pulled forward, can you estimate how much the results were aided by the pull forward? And, Darren, you noted business is strong now, I guess, given the post-hurricanes catch-up from strike, or is this just the peak season improvement? I'm wondering if we see the slowdown faster because of those earlier shipments. I know a lot in there, but I'm trying to understand the impact of the pre-shipping.

Sure. So Ken, appreciate the question. I'm sure Spencer might have some thoughts as well. Look, you know, as we went into peak season planning, we communicated with all of our customers and looked for as much of their advice as we could get and prepared our plans. We certainly know that there were customers that were shifting business back to the West Coast from the East because it fit their network well. We had customers Shifting freight from the east back to the west because of fears of a potential labor strike on the east coast we had customers talking about a pull forward just from a Preparedness and an overall capacity standpoint and we had many many customers that said normal peak So I think that the results are really in terms of a mixed bag in terms of how much was pulled forward We don't really know I don't want to tell you that none of it was. Some of it was certainly pulled forward. We do have a lot of customers that continue to expect a normal peak as we go through the fourth quarter. So we do anticipate continued demand for our services, and we'll all kind of have to wait and see if it's a faster pull down. But at this point, I think we're expecting things to behave what we consider normal. Spencer, I don't know if you have some thoughts you'd like to share there.

Yeah, Darren, thanks for that. And Ken, I appreciate your question. A couple things just regarding the port strike in the east. As Darren mentioned, our customers really deployed a handful of different strategies. Some of that was a little bit of a shift to the west. Some of it maybe pulled some inventory in ahead of that strike. And others had a wait-and-see approach. And when we sit here right now, I'd say, We've got a couple weeks for those East Coast ports to really normalize their flows. But something to consider is this deadline just got extended to January 15th. And so the plays that they ran leading up to this event are now probably going to be rerun as we look forward into January. And then also I'd say a couple other things just around peak and peak demand. I want to give our customers a lot of credit for the work that they've done as their demand has normalized, as well as their inventories have normalized, with their forecast, the capacity needs from J.B. Hunt. They've done a better job of that. I think Brad and Darren both mentioned that our bid compliance numbers have improved. We're happy to see that. And then also as we think about peak going forward, You know, we're still in active conversations to make sure we continue to position our people to successfully execute PEEP along with our capacity over the next several weeks so our customers can have a great finish to the year.

Your next question comes from the line of Brian Ossenbeck with J.P. Morgan. Your line is open.

Hey, good afternoon. Thanks for taking the question. Maybe a little bit more on the peak season. You mentioned a little bit of project freight coming back. I think that was Brad on the ICS side. So that and just broadly on the rail service, how is it performing out of the West? It seems like you have a pretty good ability to move the tremendous amount of volume, but how has that performed with the new COO, I guess, consulting for them at Harris or BNSF? I didn't expect any changes here in the short term or the medium term as he looks to take a closer look at those operations. Thank you.

Okay. Brian, your phone kind of broke up there, but I think I know the gist of it. Just for our Western provider, we continue to be engaged at all levels of our organization in terms of how can we be more efficient and stronger together when we solve problems together. I'm aware that Ed Harris being assigned as a consultant to BNSF has created a handful of questions. It's our understanding that he's really focused on the merchandise network. You know, I would say this. BNSF is the largest intermodal provider and moves the densest intermodal business, serving the fewest nodes in the intermodal industry. That density is very much in line with all things PSR. Now I'm not saying they're a PSR railroad. It's just, they didn't have to do that. There's a lot of attention to intermodal at BNSF in terms of their growth channel. And we're convinced that there is no changes coming to our business in the coming months or years. There's no deviation from their strategy to grow intermodal. We're very encouraged by their commentary. If anything, improvement in their merchandise network could positively influence intermodal service. We'll wait and see. That's not an area of their business that we stay focused on, but we're assured by the BNSF that PSR is not a strategy at BNSF. I don't know if Shelly wanted to make a comment on that or not.

No, I think Darren said it well. I would just say You know, for us, we're very focused on expanding the intermodal market together. So both J.B. Hunt and VN are thinking about how do we launch for customers around intermodal and expanding emerging markets like things you've done with Quantum and what we're doing with Mexico. We're continuing those conversations. I would say anything that happens from a merchandising perspective would roll over into J.B. Hunt and should benefit us as well.

then uh brian you may have been put on mute this is brad uh but you asked a question about project related business i'll let i'll let brad hicks respond to that yeah brian uh we had some of that start and we'll certainly have project a business that'll carry in the q4 uh some of that is seasonal work that we do on behalf of our customers uh otherwise there's you know small pockets where our customers have needs uh where we want to make sure that we're the the right partner and service them at a level that we can continue to be that first call when they have those extra needs. I really think that the key element there is just how proud we are of the improvement that we've seen in ICS in particular. The gross margins in the quarter were very healthy, and I think that that's representative of the foundational work that we've been focused on all year around quality of revenue and the right type of business. And certainly our teams have done a great job executing throughout the quarter.

Your next question comes from the line of John Chappell with Evercore ISI. Your line is open.

Thank you. Good afternoon. Darren, I was hoping you can help understand the sequential increase in revenue per load. I know it wasn't gigantic, but It did go up. Your east went up 3% in 3Q versus down 7%. So conceptually, there should have been a mixed headwind there. You've been telling us all along to kind of bake in that 30% bid season from 1Q, 2Q, and 3Q. So just felt like with everything that you just posted from a mixed perspective, that revenue payload would have been down sequentially. So how did you manage that up? And then I guess, how do we think about your comments about being fully baked into the middle of

uh 25 is that that means kind of flat from here is there um any improvement potential okay well on the on the revenue for load i mean the mix the mix uh results in the quarter were our length of haul was actually longer in the third quarter than it was in the second quarter and there was sequential pricing pressure certainly that uh that played a role in in those results you know um I lost a little piece of your question there. I just know that, you know, as we've gone through the year and implemented new pricing, none of us are satisfied with where we're at in terms of the returns on our business. We still believe that the pathway to health for us is to execute on behalf of our customers, make sure that we're doing what we say we're going to do, The world changes. We're prepared and in a good position to talk about the quality of our service, the challenges we have from a cost standpoint, and recover some of our margin through pricing efforts. That will continue to be our focus, and we'll wait and see how that plays out as we move into next year.

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

Yeah, hi. Question on dedicated. Can you maybe give an update a bit on the overall general competitive environment for new business? And also, you know, we've been hearing some thoughts that private fleets, you know, shippers themselves have been adding their own trucks over the last year or two, and, you know, maybe that's impacting some of the over-the-road guys. I'm just curious if you've heard that, and if so, does that make it tougher maybe to to sign in and close some of the deals on the dedicated front. Thanks.

All right. Thanks, Jordan. I'll talk about that a little bit. I have been reading a lot about competition in the dedicated market as well, but what we're seeing in the marketplace and where we're focused on really private fleet replacement, we're not seeing any unusual competition out there, I would say, in what we're really targeting. We love our pipeline. We love The success we've had, we're remaining disciplined in our pricing margins, and so we feel very good about that. I see a lot of the competition and hear about a lot of it is more in the retail, drive-in, kind of drop and hook, more commoditized. And we have a little bit in there, but not a lot. Just looking at the names that we've been awarded in the last week, you probably wouldn't recognize three or four of the names in there, the private fleets that we're taking over. feel good about that now from private fleets i would say yes some of the large private fleets are growing and that's fine but if i look at the market 60 to 80 to 90 billion that we have qualified we still feel very good about where we're going and our sales targets so i read a lot about the competition um and we see some we've lost some business with our trucks. But overall, I feel very good that with our disciplined pricing approach, we can still be very, very successful.

Jordan, this is Brad Delco. I do want to add, I mean, Nick, in his prepared comments, you talked about the performance of that business. And I think when you look at the performance of the business, both in terms of how well revenue in trucks and certainly operating income and margins has held up relative to to a lot of the peers said i mean i do think it's a differentiated model that's supported by the performance and hopefully that's recognized uh by uh by those on the call your next question comes from the line of daniel imbrow with stevens inc your line is open yep hey good evening everybody thanks for taking our questions

Darren, on the intermodal margin side, those held in, I think, nicely and better than expected given the pricing pressure this year. Can you maybe just talk to the puts and takes of the sequential step up in margin? And then from a pricing standpoint, maybe Sensor can add color too, but you're going into this upcoming bid season with more excess capacity than historically. So maybe in a year that didn't go as well this year, strategically, how are you thinking about driving volume growth versus holding the line on price and just the strategy going into that bid season given the excess capacity we're in now?

Okay, well, on the sequential margin, you know, at the end of the day, volume, we've said before, volume has meant more to us today than ever before. It still isn't more valuable than the role that pricing would play. When pricing can turn, you can see that impact margin quicker certainly you know velocity on our system can play a role when we pick up volume there's efficiencies we gain inside of our drainage operation or there's certainly a lot of opportunity to grow you know a load out of southern california is not the same as a load going back to southern california so The mix of the traffic that operates in the third quarter versus the second quarter is very different. And the result of the margin is what it is. As we go into the next year, you know, like I said earlier in the call, I mean, we're not satisfied with our returns. We believe that carriers are operating at rates below their cost. We think they're unsustainable. We're surprised by the longevity and how long it has lasted. Uh, we also have been wrong in the past when we believed that the pricing market was about to turn and we could get rates up. And I would even say at this point last year, I probably, I'm not sure I said it, but I probably did believe that a year ago today and I would have been wrong. And so as we go into the bid season, we're focused on delivering value to our customers. talking about the capacity answers that we have, also talking about the cost challenges we face, talking about how we're prepared to serve their needs in a host of ways, and that's at the enterprise level. And so as we go into this bid cycle, we're going to continue that process because the experience in this room has taught us that that's the best approach.

Yeah, and Darren, I'll add, Daniel, you kind of wanted to know a little bit about where we're at with customers and our conversations. And I would say this, you know, they're in their bid and budgeting process right now. And in that, they're challenged to operate their supply chain and find ways to do that in the most efficient way possible. And, you know, they also know, as Darren just said, you know, the costs in our industries have been rising dramatically and the margins are not sufficient. But when we have those conversations with our customers really are very transparent in the cost to serve them while working with them to design optimal solutions across their network. And ultimately we're leaning on the consistently high service levels that drive value and find a match for that value for both companies. And ultimately that's going to set them up, set our teams up for success and hopefully improve our returns in the process.

Your next question comes from the line of Scott Group with Wolf Research. Your line is open.

Hey, thanks. Afternoon, guys. So pretty dramatic improvement in the broker ICS gross margin in the quarter. Any thoughts? Is that the market? Is that, in your mind, more specific to you? And how sustainable is that And then just separately, I think the last couple of years in Q4, we've had some pretty big insurance accruals just catch up. Any color on how to think about that in Q4 this year?

Hey, Scott. I'll start with your first question, and then I'll maybe throw it to John Kulo for the second part there. The gross margin percent that we see in Q3, I think, is unique to JV Hunt and the focus and the work that we've been trying to accomplish. Now, you know, we'll see when some others release, but certainly against what we were seeing in earlier quarters of the year, that feels like it's unique to us. And I really do think it's a testament to the type of freight that we're going after, the customers, and the value that we're providing to our customers. as well as the execution of our business in terms of our purchasing and leveraging our technology through JD Hunt 360. And I think that those all come together for us in a unique way in Q3. Now, you know, we have seen more recently disruption with the back-to-back hurricanes in the southeast and Florida, as Shelly mentioned at the opening presentation. And so we see little things happening there that can have the potential to put pressure on us. But we also saw that a little bit leading into 4th of July and then it loosened back up for us in terms of the book of freight that we have. So I do feel like we're capitalizing and trying to maximize what that could be for us. And I'm really proud of the great work that the team has done.

Hey, Scott, it's Shelly. I might just add we don't model and aren't modeling for a 17-plus percent margin that's historically very high for the market. So I would say, you know, anything in the average of 14 to 15 would be more norm. And so, you know, there have been some things that ICS has done and some key customers that they're working closely with, and I think that's yielded some improvement here in third quarter, and we'll see what happens here moving forward.

Hey Scott, this is John Cullough, and actually I thought maybe Shelley was going to take the insurance question. Yeah, so to your point, we did over the last couple of years, we had some more significant charges in various quarters for our insurance. That was a little bit more of circumstances around the dramatic increases in where some of these settlements were going. and as it was layered against our insurance structure at the time. And so I do feel like we've made a lot of good progress in going through our claims, working with our actuaries and our attorneys, and feel like we're in a good spot with respect to our insurance accruals.

Your next question comes from the line of Robbie Shanker with Morgan Stanley. Your line is open.

Thanks for the evening, everyone. I just want to follow up on the BNSF commentary. I think you said that you don't expect anything to materially change. So are you saying that you don't think they're going to do PSR at all? And if they did, does that change your go-to-market strategy with them anyway? Thanks.

Well, first of all, Ravi, yes. You heard us loud and clear. I don't believe BNSF is implementing PSR. They have certainly engaged with us for decades now in how can we be more efficient and more effective together. Now that we are largely the only channel at BNSF, I would say that that dialogue has ramped up to another gear. And together, we work together on how can we drive efficiency for each other, but most importantly, BNSF listens to us talk about what our BCOs need and want from the market. And we feel like that is very different than what we have experienced from railroads implementing PSR. Certainly the way that they listen to what BCOs want and need has us very encouraged. And we're certain at all levels at BNSF we have their commitment that PSR is not part of their strategy. Growing their intermodal business is part of their strategy. All that being said, their margin isn't what they want it to be. Our margin isn't what we want it to be. So together, we have to deliver excellence in our service execution, and we have to go repair each other's margins together in the market. And we stand ready to do that with our customers just as soon as that is possible.

Your next question comes from the line of Tom Wadowitz with UBS. Your line is open.

Yeah, good afternoon. I'm going to ask a question on intermodal. Hope that's okay with you, Brad. You've had a pretty good mix of questions on others, but let's see. If I can go back to... the comment, Darren, on normal peak season, when you say normal, is that normal seasonal, you know, kind of 4Q versus 3Q? Is it normal year over year? Like, I don't, I guess, you know, it still seems like they're probably looking at the container imports would have been some strength that wouldn't continue. So I don't know if there's a way to put a little more on that. Maybe another way to look at it would be, you know, if you go back over time and say, hey, sometimes there are reasons why customers ship more in terms of imports in, you know, June, July, August versus a bit later, October, November. So I just wonder if you could kind of look back on historical and maybe offer a little more on how you think about normal in terms of interval volumes.

Well, when I said normal, I would say that the sequential changes that we go from Q2 to Q3 to Q4 and the way our dialogue has gone with our customers in terms of what they're expectations are, what their forecasts are, and the accuracy in which they forecast their needs. All of those have returned to what we would call normal pre-pandemic levels. We don't have customers telling us, hey, we're going to have a much weaker demand during the fourth quarter than what we told you just a month ago. None of that is going on today. Again, I'm not going to break down for you how many customers told us they did move, pull some forward. Some did. But I don't think it's this overwhelming market story for us. It certainly has been a factor. I don't want to ignore it. But at the same time, we expect our volumes in the fourth quarter to continue to be strong demand from Southern California. The import volumes and the way that imports float into the – the West Coast ports throughout the summer that didn't translate to intermodal market. There are warehouses with inventory in them built for peak season shipping on the West Coast. And so we do feel like this is what I would consider normal. I don't know that I've defined it the way you want me to, but that's the way I'm going to define it today.

Your next question comes from the line of Chris Weatherby with Wells Fargo. Your line is open.

Hey, thanks. Good afternoon. So I guess, Darren, you had noted a couple of things that I thought were interesting. The first was the comment about some eastern loads potentially moving over from truck competition. So I guess I wanted to get a sense of maybe what you were seeing there and what you think were the driving factors given the pricing environment that's been persistent for a while there. You know, I guess in the second piece of it, I guess when you think about cost as well, I think there's some repositioning or some positioning cost related to the strong growth off of the West Coast. Is that something that we think sticks around for an extended period or maybe until the boxes on the sidelines start to get drawn down, you know, more? I'm just kind of curious how you think about the durability of that type of cost.

Okay. All good questions, Chris. Certainly, let me touch on the empties first. I don't know how to call it durable, whether it's going to stick or not. The balance of Southern California is inbound and outbound. There certainly is an uptick in demand for the eastbound volume coming off the west coast, whereas there's not necessarily an uptick in demand for westbound flows. the need to support capacity in Southern California sustained at the kind of new ratio today that we're experiencing now, then certainly that has to find its way into the economics with the customers. And I don't think that will completely surprise our customers, but it certainly is a factor as we move forward. I think that in 2024, it's a little more visible because the growth opportunity that we saw off the West Coast was stronger than it was in the East, so it's sort of getting a little bit extra spotlight on the demand for supply and capacity out West in order to source that capacity. Now, in the East, I did say that we had some shippers moving small business to us. What we're encouraged by is every single week we've had new startups in the East, and these are – Lots of customers, relatively small business segments. So this can be 100 loads a year. It can be 1,000 loads a year. These aren't big, big chunks. But customers are coming to us talking about they're able to shift more back to intermodal, whether it be a sustainability effort on their part. Maybe it's an effort because they want to get out in front of what they believe will be a tightening in the truckload market. It's also an acknowledgement of the better service performance that we have sustained for well over a year now in the East. And I think that we're very encouraged by acknowledgement from the customers that the service quality has earned Intermodal a new right at the table at many of those shippers. And that's beginning to play out. And we certainly thought it was worthwhile to call out because it is We sustained this opportunity with many, many customers for, you know, throughout the third quarter and look to gain momentum on that as we move forward. I don't know, Spencer, if you want to comment on that part of it.

Well, I think you're 100% right, Darren, in thinking about how service connects to growth. And then also with the comment on, you know, what are customers thinking about for 2025? We get a couple of questions consistently from our customers and that they are number one, when is this market going to change? None of us have a crystal ball. They don't either. The other question is what do the best transportation and supply chain customers do with their kind of mix and strategies? And I would say whenever things start to change, historically customers have leaned into highway to intermodal conversion. They've leaned into adding dedicated capacity or exploring the dedicated options for their private fleet. They've also leaned into really doing more with the best service providers in their live and drop networks that create efficiency and value for them. And so those are the conversations that we're starting to have, some of the things that we're starting to see. And it's really why we focus in on operational excellence across our entire business. So we can be in a position to serve our customers well as things change.

I'm going to add one other thing. I think it is important through the pandemic, both on the up and the down through this freight recession, our customers were challenged with telling us what shipments we would actually haul. So their ability to forecast has been super difficult over the last four years. We're on our second quarter where bid compliance is in a reasonable level, in the mid-80s. now in intermodal and JVT. Those are two networks that really need more stability to build out and create more efficiency in a network. So as we come into this bid season, our network is out of balance because of our customers now coming back to balance. So we're coming into this bid season knowing and being able to predict better, both our customers and us, what those network balance needs are inside intermodal, inside JVT. So you're going to see us start to fill in those gaps, so the empties and All the things we're having to do to service our customers that are currently short-term cost, we will be able to solve for those over this next bid season, not necessarily solving in one bid season, but you'll see that start to be solved for over the next couple of bid seasons. That's a positive sign for our business moving into 25.

Your next question comes from the line of David Zazula with Barclays. Your line is open.

Hey, thanks for squeezing me in. For Brad or Shelly, you guys have talked about doing some things to repair intermodal margins. I'm wondering if you could talk, I mean, you have talked about your relationship with ENSF. I wonder if you could talk about the strategic nature of that relationship, maybe if it's a little bit more dynamic and some things you can do with that relationship to try to encourage better returns for you that can hopefully get you back towards those margin targets.

Okay, David, this is Darren, and I'll try to comment on that. I think from a strategic standpoint with BNSF, the areas that we're focused on together to drive efficiency for each other come from growing. Growth in our intermodal business today is a contributor to improving our margins, certainly now. Is there something we're going to do that creates some new model or new method of execution? No, I don't think we're going to change the way we We function in terms of we've got a Dramon that goes in or a truck that goes up and picks a load up. We've got a lot of assets that we own in order to accommodate this growth and we'll be very focused on growing together. And then how can we get utilization out of the assets for both the NSF and J.B. Hunt? So from a margin repair standpoint, The focus that we have today is to grow our business, look for efficiency in our network, how can we fill up more empties, which would certainly drive some benefits to our margin. And then, again, there needs to be some core pricing work done in order to get to our goals, certainly. So that's how we'll focus. I don't think that any one project with BNSF is going to unlock margin with BNSF. J.B. Hunt necessarily.

Hey, Sarah, we have time for one more question.

Question comes from the line of Busco Majors with Susquehanna. Your line is open.

There's understandably been a lot of focus on the opportunity to restore margin and returns via pricing over the next couple of years. But if we look at three, five years beyond that, where do you guys see the biggest opportunities to grow operating income more secularly in the business and at attractive risk-adjusted returns and you know from where you sit today does that look any different than what we say you did over the last five to ten thank you yep thank you bascom i'll take that and i would say if you look at all five of our business units the market size and market opportunity we think is well positioned for each one of those five

I don't see our profile changing significantly if you exclude the last two years. Our merger profile the last two years has been outside of our ranges for the majority of our segments. So if you look over the last five to ten years, I would see those margin profiles and what we've given guidance on for margin targets really being in line. Our two largest segments, both intermodal and dedicated, although they are very large, the market size opportunity is even larger. So our ability to take both of those segments into high growth categories we'll just continue our operating income performance inside those and as highway both jbt and ics and final mile continue to move forward it's going to be difficult for them to catch the size of both intermodal and dedicated so i think you'll see them continue uh profit improvement and also revenue growth overall but i don't see our mix changing significantly

This concludes the question and answer session. I'll turn the call to CEO Shelly Simpson for closing remarks.

Great. Thank you. And I'd like to thank everybody for spending time with us here on the call. And you've heard a lot of discussion from us. We've spent a lot of time on intermodal. You know, we've been working really hard on controlling our costs and things that we can control. You've heard us talk about providing excellent service to our customers. Very important for us right now that we make sure our customers know we want to be number one. In their minds, when they think of a go-to of who they want to use, we want them to think of J.B. Hunt and Cross, our suite of services. We are focused on controlling our costs where we can, but we are preparing for future transportation needs. So think about the investments that we've made in our people, technology capacity, being ready for our customers, and then we will continue maintaining our focus on safety. So we've been working hard. I am proud of several things that have happened this quarter, like our safety performance continuing to improve, our growth in intermodal volume really proving out that we can take share off the highway into intermodal over the long term. Our six quarters have dedicated selling 250 trucks or more. Our final mile business continuing to repair margin. ICS had good improvement but not there yet. but improvement on cost and quality revenue and furthering diversifying their customer base. JVT's five-year high on service in total. And so I'm very proud of all of the work of our 33,000 people. I'm confident and I remain confident about our opportunities, but although we've done a lot of great work, there's still so much that we have to do. We are still battling our way through this part of the freight cycle, and I think that's really important. So we're going to maintain our focus on excellence for our customers, driving value, and we're going to battle through the last part of this freight recession. There's still too much capacity in the market. We need that market to really move into more equilibrium. We're looking forward to seeing how that plays out into 2025, but our focus will remain on those four pieces I've spoken about. Thank you again for your time. We look forward to talking with you next quarter.

This concludes today's conference call. Thank you for joining. You may now disconnect.