Hello, and welcome to the J.B. Hunt Transport, Inc. 2Q '23 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Brad Delco, Senior Vice President of Finance. Please proceed.

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 risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now, I'd like to introduce the speakers on today's call. This afternoon I'm joined by our CEO, John Roberts; our President, Shelley Simpson; our CFO, John Kuhlow; Nick Hobbs, COO and President of Contract Services; Darren Field, President of Intermodal; and Brad Hicks, EVP of People and President of Highway Services. I'd now like to turn the call over to our CEO, Mr. John Roberts, for some opening comments. John?

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

Thank you, John, and good afternoon. I wanted to provide an update on some areas of focus for our organization and how they align with the priorities for 2023 that I've previously shared, which are to: one, remain committed to discipline long-term investments in our people, technology, and capacity; two, deliver exceptional value to our customers; and three, drive long-term compounding returns for our shareholders. As John mentioned, we remain committed to our investments around our company foundation: people, technology, and capacity. As I've stated before, our people intentionally come first. We believe in creating and providing a work environment where our people feel welcomed, valued, respected, safe, and heard. When we take care of our people, who are empowered and trained to take care of our customers, we create raving fans for our services, which in turn supports our growth ambitions. We support this growth with investments in our technology and in our capacity, mainly trucks and trailing equipment. Importantly, our investments in technology and capacity are highly focused on efficiency, productivity, and safety. By remaining committed to our investments, we are prepared to meet the growing needs of our customers with our valued service offering. We have to be able to provide exceptional value to our customers at a competitive price that supports reinvestment in our business. As stated on the last two earnings calls, we are in a freight recession. While the environment remains uncertain, and demand for capacity is still muted, we remain very focused on how we grow with our customers, and we will continue to remain disciplined in our approach. We will do this by prudently managing our business in the near term focusing on controllable costs. We will also continue to focus on our resource and people needs and make sure we are appropriately aligned and cost competitive to support our ability to serve and grow with our customers. We remain committed to putting the company in a better position to accelerate growth and market share gains for the eventual inflection in market dynamics. We will continue to manage and balance this approach as we progress. In closing, by remaining committed to our long-term investments in our people, technology, and capacity, which supports our ability to deliver exceptional value for our customers, I am confident in our ability to deliver long-term sustainable returns for our shareholders. With that, I'd like to turn the call over to our CFO, John Kuhlow. John?

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

Thanks, John, and good afternoon. I'll provide an update on the Dedicated and Final Mile segments, as well as areas of focus across our operations. I'll start with Dedicated. I am pleased with the performance of our Dedicated business this quarter, particularly with the strength of our model. Demand for our professional outsourced private fleet solutions has eased somewhat but remains solid, as shown by our pipeline and our ability to secure new deals. During the quarter, we sold about 370 trucks from new deals, a significant increase from the 200 we sold in the first quarter. We remain cautiously optimistic about reaching our gross sales target of 1,000 to 1,200 trucks for the year. Reiterating the strength of our model, our Dedicated contracts typically last five years and include annual price increases that are linked to inflation-based indices along with both fixed and variable payment terms. This means we are not exposed to spot rates. We believe we stand out in the market by focusing on our proprietary customer value delivery process to create value for our customers, which supports our 98% customer retention rate. Now, regarding Final Mile. As we've noted for several quarters, demand for large and bulky products, such as appliances, furniture, and exercise equipment being delivered to homes, is under some pressure. We see this reflected in our volume and overall pipeline and bidding activity. However, as previously mentioned, we remain committed to offering a differentiated premium service in the market while ensuring we are fairly compensated for it. We are observing evidence of gaining market share as customers appreciate our service, which is supported by our brand. We've also talked about our focus on improving profitability, and I am happy to report some progress this quarter. Finally, I want to share some insights on safety and our equipment. As both Shelley and John mentioned earlier, we are focused on controlling costs where possible. Our emphasis on safety for our employees and the public also aligns with our cost management efforts. Last quarter, we highlighted a key milestone in our safety initiatives with the rollout of inward-facing cameras. We are pleased with the rollout so far and the opportunities it has created to coach and correct certain behaviors, as well as to reward and, in some cases, clear drivers of fault. We anticipate that inward-facing cameras will be installed in 60% of our fleet by the end of the year. Regarding equipment, we have made quicker progress than anticipated in renewing our fleet following the disruptions OEMs faced due to the pandemic. The average age of our equipment continues to improve, which will enhance fuel efficiency, safety, and reduce maintenance costs. We expect to have fully addressed our tractor replacement needs by the end of the third quarter. That wraps up my remarks, and I will now turn it over to Darren.

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

Thank you, Darren, and good afternoon. I'll review the performance of Integrated Capacity Solutions and our Truckload segments, what we collectively call Highway Services. I will also provide an update on J.B. Hunt 360. Starting with ICS, similar to some of the prior comments, overall demand in truckload brokerage was muted versus the prior-year period and what would be expected from a seasonal perspective coming out of Q1. Top-line revenue for the segment was down 43%, driven by volume down 26% and revenue per load down 24%. Overall, our contractual business is holding up better versus our spot business on the volume front as our contractual business was up double digits year-over-year. This highlights the competitiveness in the market, particularly on the spot business, but also how much activity has declined in the spot market year-over-year. Notably, there seem to be some firming or at least a bottoming out on spot rates towards the end of the quarter and we saw that reflected in our gross margin. Wrapping up on ICS, we remain committed to our long-term investments in this area around our J.B. Hunt 360 technology, our capacity, which in this instance is third-party carriers, and our people. We recognize we have too many resources for the level of activity currently in the system and we'll continue to work to make adjustments to our model to set us up better to adapt to the swings in the market moving forward. Now moving to Truckload. As you recall, we moved almost all of our company tractor assets or trucks out of this segment over to Dedicated with our last quarterly report. Remaining is our drop trailer or 360box service offering served primarily by third-party carriers or independent contractors. These non-company-owned asset providers source available drop trailer loads on our J.B. Hunt 360 platform, driving efficiency in the supply chain for our customers and for their own operations. We continue to be pleased and encouraged by the relative strength of our drop trailer demand as customers appreciate the value and flexibility it provides for their operations. Wrapping up on JBT, we are still relatively young in the development of our 360box service offering and continue to make investments to strengthen the product and drive greater efficiencies. We remain encouraged by the market's growing demand for our 360box service and will remain committed to our investments to drive long-term growth in this area. Wrapping up quickly on 360, we remain focused on ways to maximize value for our customers and the carrier community. The level of engagement and interaction in the platform informs us about the market and provides a solid foundation to drive productivity in our operations across the organization and eliminate waste in the overall supply chain. While some of the productivity is masked by the current environment, we remain confident in our ability to drive long-term value for our customers and our company with our investments. As is always the case, we will remain disciplined with our investments focused on driving long-term compounding returns for our shareholders. That concludes my comments. So, I'll turn it back to the operator to start the Q&A portion of the call.

Thank you. Your first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi. Good evening. Just going back to the modal share shift comment that you made in Intermodal, is there a way to better understand? I mean, are you seeing that today? Obviously, there's a discounted truck still with Intermodal in terms of pricing. Rail service is getting better. Is that starting to accelerate in terms of that shift, or is that something that you still see as an opportunity later on? Thanks.

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

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

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

As we entered the year, we relied heavily on customer forecasts, and they turned out to be mostly inaccurate. Currently, we remain somewhat cautious about our expectations for the remainder of the year. We will consistently rely on customer feedback as we collaborate to provide capacity and develop solutions for them. I want to clarify that I am not signaling any significant optimism. Last year's second quarter was our peak volume period, and as we progress, the comparisons will become easier. However, we have the capacity in place, and our customers have confidence in our abilities. They are eager to grow with us when demand picks up, and we will be prepared for that.

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

Yeah. Hi. Afternoon. I know you guys don't give specific margin targets around Intermodal, but I am curious given it was somewhat or a little bit below sort of your long-run target range, what does it take to return you to that 10% to 12% range? Is it simply loads and leveraging that, or are there other things that need to happen? Thanks.

We have been incurring higher costs this year due to extra equipment that we are not fully utilizing. Last year, we increased driver wages, and those wages will remain elevated. However, the market has put pressure on pricing, and we are experiencing negative price impacts. Right now, we need to increase our volume to reduce costs from our system and enhance the utilization of our container and drayage fleets, as well as the workforce that supports our business. Improving these areas would help us enhance our margin profile.

Your next question comes from the line of Justin Long with Stephens. Please go ahead.

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

Yeah, I'll talk more about truck count and what we see there. Our pipeline, I would say, is still full. We feel very good about our pipeline. There's a lot of different fleets in there. And so, we really like what we've seen. Our hit rate or close rate is ticked up just slightly. And so, we like where we're going there. So, we feel good about Dedicated. Going to be close to about where the fleet size is at the end of the year. We still got some other trucks to take out from our maintenance and clean up. As I said, we'll be primarily done with that at the end of Q3 with the extra truck and older trucks. So, we'll see some help there on our truck count, but we'll have some deals that will start out there in the year. But I would just say it's kind of very consistent throughout the year on the sales pipeline. I know we closed a few more trucks in Q2, but the demand does seem to be there, but still people are a little reluctant to pull the trigger the way they had previously.

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

Thank you. Good afternoon. Darren, if I can go back to you on the pricing and the bid season. Brad Hicks said that you're starting to see some firming or bottoming out of spot pricing as it relates to ICS. You talked about the destocking maybe coming to an end. When we think about the pricing discussions you had in the bid process in March and April, where there was just a lot of, I think, fear in the market versus where we are now in mid-July, has anything gotten any better as those conversations go as trucking gets a little bit better as rail service gets a little bit better?

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

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

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

Hey, Amit. I'll address the question related to Yellow. One, we're probably not going to comment on that. But based upon the change in certain stock prices today, I guess we wish we were perceived to have some sort of benefit from whatever may be happening in the LTL industry. And then, I'll pass the second part of your question over to Darren.

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

Your next question comes from the line of Scott Group with Wolfe Research. Please go ahead.

Thank you. Good afternoon. Darren, it seems you believe that volume is crucial for improving Intermodal margins and earnings. However, there still appears to be some potential downside risk regarding pricing. Which factor do you think is more impactful in the short term? I'm trying to understand if you anticipate that Intermodal margins and earnings will continue to drop slightly from the second quarter to the third quarter. Additionally, I have a longer-term question for John. You have made numerous investments in 360 despite a challenging market, and now the brokerage division is once again operating at a loss. Are you considering scaling back on those investments? How do you plan to approach this? Thank you.

Well, Scott, let me start first on margin. Price will always improve our margin faster than volume will. That will be the case for my entire career. I think you've heard us talk about the need for volume to see some improvement because that's the most likely influencer fastest. I don't anticipate any sort of pricing market in the near term that's going to help with our margin as quickly as we might see an opportunity to grow our volume. Meanwhile, when we announced a 150,000 container growth target over what is now more like two to four years, we did that with the mindset of growing our volume at a correct return, and that will continue to be our focus.

Let me make a general comment first, and then I'll ask Brad to provide an update on our 360 initiatives. Despite the challenging environment we’re facing, I believe the investment opportunities available to us are among the best we've seen across the organization. Recently, I’ve noticed some positive changes in our capital allocation approach. For example, reallocating power from the JBT business to Dedicated aligns well with our long-term investment strategy. We have a vast addressable market, complemented by high-quality services and a committed team, making it crucial that we maintain our momentum. I know the timing may seem off, but I'm still very confident in our opportunities and our capacity to fulfill what lies ahead. Brad, I’ll hand it off to you.

Yeah. I'll just add from a 360 standpoint, we stay committed to our investment in the platform technology as it relates to all things J.B. Hunt. We don't think about this one window of time that we find ourselves in, which is probably the most remarkably difficult environment many of us have experienced in our careers. Largely, the investment that we've made in tech is behind us as it relates to the platform, but we will continue to invest to add capabilities and features of value for our customers and for our carriers. And so, we remain committed, Scott, to the idea that the platform drives value for J.B. Hunt. And it's difficult to see in the last 90 days, but there's a lot of things that are really difficult to see in the last 90 days. And I think that we'll be better for it as we come out of what we're in. I think, Shelley said last quarter, it's not a matter of if but when. And we believe that when that happens, we're going to be very well positioned and poised to be able to scale for the growth that our customers bring our way.

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

Your next question comes from the line of Chris Wetherbee with Citigroup. Please go ahead.

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

So, on the pricing front, typical calendar year, and I would say this year is no different. We repriced 30% in the first quarter or implement 30% in the first quarter, 30% in the second, 30% in the third, and 10% in the fourth. I guess, the 10% in the fourth quarter would most likely be the next pricing cycle. So, as we get through this quarter, we'll really finish up implementation. I think that just as a general, we had some customers move a little faster this year. So, it's been earlier than what has been the historical norm. So, there's not that much new price left to implement as we move through the third quarter. And as far as the equipment goes, I think John Roberts highlighted it really well. We continue to see this enormous opportunity to grow our business with value to our customers. That being said, we're not going to ignore the fact that we ran into a slower time, and we did back off where we could. I don't want that to represent to our customers, most importantly, any hesitancy to bring on that equipment. We will continue our pipeline of equipment, but we're going to be prudent with our capital. We're going to be prudent with our expenses to the extent we can. And then, we'll speed it up just as fast as we can. There was a time three or four years ago we actually stopped it, and that taught us a big lesson and we don't want to do that unless forced to. But at this point, we believe in our long-term growth opportunity, and we're going to continue to bring on equipment. But we're going to be as smart about that as we can, and I think the quarter showed that we can slow that down at the right time when demand kind of fades for a little bit.

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

Hey, thanks for taking the question. Darren, just one quick one for you in terms of the West Coast labor resolution. The ports have come to agreements, still up for ratification. Any change on the margin since that's been done over the last month in terms of the info or at least the interest level coming through that gateway? And then, Shelley, if you can just give us your updated or maybe, Brad, your updated view on Truckload capacity in the market, especially the small carrier? There's a lot been written about the health of the small carrier, but I think you've given some commentary about they're going to run into a bit more of a cash crunch here in the back half of the year. The spot rate is kind of bouncing around the bottom. Hopefully, just wanted to hear your updated thoughts and if you're seeing anything on the platform as well. Thanks.

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

From a Truckload capacity perspective, we continue to see high levels of net revocations throughout the second quarter. Historically, carriers have managed to sustain themselves within a 12 to 15 month period during past cycles, and we believe we are currently in the ninth to eleventh month range, depending on the starting point you consider. We are noticing a decrease in orders for new tractors, despite some carryover for replacements from the peak of COVID. There is also pressure from the carrier community pushing back on PTE ranges. This leads us to believe that the bottom we mentioned in our prepared remarks has been reached. We're uncertain about how volume will perform in the latter half of the year, and any increase from this point could significantly benefit us, although we are not expecting a typical peak at this moment; we do anticipate some improvement. However, the elevated revenues that carriers experienced during the pandemic make it difficult to assess how much they were able to save, which could extend their capacity longer than our historical patterns suggest. It's still a wait-and-see situation, but we are seeing more signs of closures or losses in the marketplace today.

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

You've been adding trucks in Dedicated, but losing some on a same fleet basis due to market pressures. How far along do you think we are in that cycle where gross additions might begin to resemble net additions? Additionally, how significant is the competition from existing private fleets among your Dedicated customers, or is this more a response to cyclical volume changes from those customers? Thank you.

Thanks, Bascome. What we're observing is significant pressure on our customers. I can't predict when the economy will improve or when demand will surge. If conditions remain sluggish, this pressure will persist, and our cost, redesigning routes, and fleet optimization initiatives will continue until volumes increase. Our volume has been stable as we focus on outbound deliveries from the distribution centers to stores and homes. I can't pinpoint when the turnaround will happen, but we will keep driving down costs in line with our volumes. I should clarify that we are not experiencing significant pressure from our competition. The main issue we face is internal cost pressure related to our existing fleets. That sums up our current situation.

Your next question comes from the line of David Zazula with Barclays. Please go ahead.

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

Yeah, David, thanks for the question. We really coming out of Q1. We saw the downward pressure on volumes and we saw that replay itself, if you will, in Q2. So it's really that radical decline. We have reduced headcount, as you can see. And then really what we're focused on is how we can successfully grow back into the remaining resources that we have more so than continuing to diminish our capability because we know that when this does turn, we want to be ready and prepared for that. And so, spending a lot of time making sure we are ready for that, tightening up where we can. But by and large, I think the vast majority of the right-sizing is behind us at this point.

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

Thanks. Good afternoon. I have a couple of questions. First, following up on the previous question about inventory, are you hearing that shippers have finished destocking but are hesitant to restock due to the current macro conditions? Secondly, could you elaborate on power-only demand? You mentioned it earlier, but now that we have gone through a significant downcycle along with the pandemic upcycle, can we clearly identify what the normalized level of power-only demand is for the industry? Was the increase during the pandemic just a temporary surge, or do you see it as a long-term growth opportunity for the industry?

Starting with the inventory question, as we entered 2022, customers had placed large orders and accumulated significant inventory as sales began to fall. When sales declined, they were left with excess inventory, which took time to deplete. We have not heard from any customer that indicates they do not want to keep a level of inventory that matches their sales. They are working to align their inventory with sales. I don't know of any customer that wants to lose a sale due to lack of inventory; they clearly want to avoid that. They are simply being more cautious in their ordering process now, and the supply chain improvements have enabled customers to receive their orders more quickly than during the pandemic. All these factors are influencing the situation. However, I am not aware of any customer that intentionally wants to reduce inventory if it would jeopardize their sales.

And I think for part two, I may not have heard the question entirely, but I think the question was around what do we see for the future of our power-only with 360box. What I would just say there is that we continue to have very strong demand. We had double-digit growth in the network again in the second quarter. And so, in spite of the environment that we're in, to have double-digit growth in a truckload capacity, we're very encouraged by that. I do think that we learned a lot about the radical up and the radical down in the last 36 months, and we're hopeful that we can best align our strategy for those types of swings in the future. I'm hoping that we don't have that level of volatility in the future. But in the event that we do, I think that we're poised to take advantage of the critical learnings that we did experience, again, both on the radical up and more so on the radical decline that we've seen over the last six to nine months. But the customer's appreciation of what box can do for them and the value that creates around flexibility in their system has been very welcoming from a customer base standpoint. So, we remain excited about that.

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

Thank you, operator. Good afternoon, gentlemen. I wanted to focus a little bit on the Intermodal side. Clearly, you mentioned that the comps do get easier and they get a lot easier in September. Should we expect an inflection on the volume side to maybe some positive numbers? And then, how should we think about your length of haul, given the fact that the West Coast port problems have been pushed behind us?

Well, Jason, regarding the guidance, I want to highlight that we remain optimistic about the conversations we’re having with our customers. We are ready for growth, especially on the West Coast as imports improve. We are still uncertain about the holiday shipping season, as there are not many predictions available right now. The mix did impact our performance in the first quarter, and we discussed that, which is evident in our growth results. Moving forward, it really depends on our customers' sales and activities, and unfortunately, I can't provide a definitive answer since we are all awaiting the same information.

Your next question comes from the line of David Vernon with Bernstein. Please go ahead.

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

We started providing the monthly year-over-year volume change during the pandemic, and that's primarily what we will continue to share in the monthly updates. I can't offer guidance beyond that at this time.

Well, David, let me answer it this way. I mean, Darren provided information about the cadence of how contracts were implemented over the course of a year. As we enter Q3, a larger portion of our book of business will effectively be repriced. And so, as the year progresses, more and more of our overall portfolio or book of business is repriced at rates that are more commensurate to the environment we're in. And so it seems like that should give you an answer or at least some color to provide you direction of what you're trying to get at.

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

Thank you very much. A lot of my questions have been answered. Darren, if I could just throw this out, thank you for the monthly breakdown of carload progression during the quarter. I wanted to take a look at the East versus the West, because the growth rate in the East pulled back from kind of positive 1% last quarter to down 6%. In the West, it was relatively stable, even a little bit better, and I know I'm talking year-on-year comps. You said the West Coast volume hadn't come on yet. Can you talk about what went on in the East? Was a lot of this related to the rail conjunctions related to accidents in Ohio? Was there some kind of shift in that eastern Intermodal market? Could you give us a little more color on that?

I believe the volumes in the East during the quarter were not significantly affected by the incident in Ohio, which occurred back in early February. The volumes in the eastern network during the first quarter were positive and remain so. A year ago, we saw a lot of strength in our eastern network business, and we continue to offer pricing and service solutions to our customers in those areas. Additionally, the Highway pricing is more competitive in the East compared to the West, which has an impact on our eastern network. As the quarter progressed, we observed substantial improvements in our service performance from our rail providers, which was not as strong during the first quarter. We experienced excellent service in the second quarter, and we need to continue working with our customers to showcase this quality of service and seize opportunities for growth as the year continues.

And your final question comes from the line of Tom Wadewitz with UBS Financial. Please go ahead.

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

So first of all, on the comp period, I didn't intend for it to sound like June was an easier comp. June was actually our most difficult comparison month from '22. So, certainly, June had some positive signs in it. Again, we're still in a wait-and-see mode for the rest of the year.

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

Yeah. I might just say you've heard Darren make lots of comments around what's happening between he and Brad from a cycle perspective. I think it's difficult for us to say what's going to happen from a price perspective coming into this next bid season. I will say the majority of our pricing has been completed on the transactional side. Certainly, Dedicated doesn't have that impact as they're in longer-term agreements, and a majority of their business into some kind of industry from a price discussion. So I couldn't really say that, but I will say, certainly, cost to operate are higher, this go around than it would have been in 2018 or even going through the pandemic, inflation is across the board. And so I think that's why you heard Brad make comments around what's happening from carriers and price in general. I will say, although our second quarter, you did see the continued pressure from a freight recession, there were a lot of great things that happened, and we're really proud of the work. I want to make sure that I call out the strength and resiliency across our complementary business model, in particular, I believe Brad said Dedicated showed strong results and had a record in the quarter for operating income. I think that's important especially considering where we're at. But I also might make notice of Final Mile, who also continued improvement in profitability as they continue to work with customers and making sure we were paid appropriately for the hard work that we do and the value we create for them. We are encouraged with growth opportunities that we do see continuing in both our brokerage and power-only 360box offerings and Highway Services, and we're going to leverage our technology to continue to deliver on behalf of our customers. And we do think our Intermodal business is outperforming the industry. We continue to have meaningful and unique growth opportunities to capitalize on that ahead, and that's how we're going to focus moving into the second half of the year. You've heard us talk a lot about our growth and growth prospects, it isn't a matter of if but when. We will remain committed to our long-term investments in our people, technology and capacity and make sure that we're paid appropriately while understanding where we are in the short term. We will stay focused with our people because that's who delivers the great value for our customers. There are over 35,000 of us working hard every day, in particular, drivers on the road, and they're going to make sure we do a great job on behalf of our customers. And finally, that will drive long-term compounding returns for our shareholders. So, there's still something Darren said and take it out of Intermodal and take it into the organization because we are in a position that we know it's not a matter of if but when we are in a cold spring position on behalf of our customers across our entire organization. With that, I'll turn it over to John for closing remarks.

Thanks, Shelley. Great thoughts there. I've noted, as we discussed here, as we usually do in this call, we spend most of our time on the kind of current state, near term, appropriately. That's what you need to help continue to evaluate what you see here. I want to mention that we do manage and run our segments with intense focus on detail. It's one of the qualities that I think can set us apart when we do it right. And that's a daily, weekly, monthly evaluation of the critical elements of the business. And so when we look at the macro, when we talk about big compliance and other elements that are vital, it's also important to know that it's a very almost surgical approach that we take. I think we see short-term focused decisions yielding short-term results. And, accordingly, we just are more focused on positioning for that future opportunity than dealing with the current conditions, knowing that that future opportunity will need us to be ready. It does remain a when, not if question. And I can tell you that while I appreciate our composure on our long-term vision, we have great operational teams working to manage through the freight recession. And we are optimistic about the potential for growth once demand returns. Thank you for joining us today.

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