Ladies and gentlemen, good afternoon and thank you for joining us. My name is Abby and I will be your conference operator today. I would like to welcome everyone to the J.B. Hunt Transport Services Second Quarter 2024 Earnings Call. All lines have been muted to minimize background noise. After the speaker's remarks, we will have a question-and-answer session. I will now hand the conference over to 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 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 key 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 am joined by our President and CEO, Shelley Simpson; our CFO, John Kuhlow; 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. Shelley Simpson, for some opening comments. Shelley?

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

Thank you, Shelley, and good afternoon, everyone. Similar to recent quarters, my comments will cover a high-level review of the quarter and provide an update on our cost control efforts while also balancing our investments to support future growth. I'll close with an update on our capital allocation plan for the remainder of 2024. As a general overview, while we have seen some moderation in inflationary cost pressures, the deflationary rate environment continues to pressure our margin performance. Let me start with a quick review of the second quarter. On a consolidated GAAP basis compared to the prior year period, revenue declined 7%, operating income declined 24%, and diluted earnings per share decreased 27%. A combination of either lower volumes and/or yields, but most notably lower rates, were the main drivers of the lower revenue primarily in our Intermodal and Highway Services businesses, which includes our brokerage business in ICS and our drop trailer business in JBT. Our tax rate in the quarter was slightly elevated at 26.8%. However, we continue to expect our full year tax rate to fall in the range of 24% to 25%. While we have seen improvements across many of our cost categories, the lower revenue continues to put pressure on our margins across our business segments, with the exception of FMS and JBT, which improved operating margins year-over-year. We have been thoughtful and thorough in our approach to managing our costs. Last quarter, we quantified what our commitments to investing in our business through this downturn represented, which was in aggregate $100 million on an annual basis. We continue to focus our cost efforts in areas that would not prohibit our ability to support our future growth or our future earnings power. These costs are primarily related to our investments in two of our company foundations, namely our people and our capacity. As to be expected, the majority of these costs are burdened in our JBI business, and also, but to a lesser extent, our ICS and JBT segments. Importantly, we remain confident in our ability to grow our business to scale into these investments. Wrapping up with an update to our 2024 capital plan, we are updating our guidance for net capital expenditures for the year to be in the range of $650 million to $700 million. This compares to our previous expectation of $800 million to $1 billion. Keep in mind, this does include the previously announced purchase of Walmart's Intermodal assets. This reduced plan largely reflects a moderation of both tractor and trailing fleet additions in addition to real estate projects. While our earnings performance has been under pressure, our leverage at the end of the quarter was 0.9 times EBITDA, below our target of 1 times. We also purchased just over $200 million of stock in the quarter. With our updated and reduced net capital expenditure plan, current market dynamics, and our view of where we are in the cycle, we 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. It's a pleasure to be joining the call. My remarks will focus on our sales and marketing strategy, but will also include some perspectives on the market, as well as feedback we are hearing from our customers. During the second quarter, we saw more normalized seasonal patterns across our business. On the demand side, the second quarter felt more like what we're accustomed to seeing prior to the pandemic disruption. April started a little slower from a demand perspective, primarily due to the timing of Easter, but we did experience what used to be a typical end-of-month and end-of-quarter lift in June. This was evidenced particularly in both JBI and JBT in the quarter, where we've seen strong improvements in bid compliance levels in the mid-80s to 90s levels, which we haven't seen in quite some time. We were able to meet this seasonal demand for our customers with high service levels across our businesses. Our customers have worked through most of their excess inventory and feel appropriately right-sized with current sales activity levels. While we cannot predict when the market will inflect, our customers know we stand ready to meet their growing transportation needs across our entire suite of services. Regarding our suite, our customers buy capacity across our suite of services and have come to expect a consistently high service level experience. In fact, greater than 90% of our Top 100 customers buy more than one service from us, and greater than 75% buy from three or more services. Among our segments, JBI and ICS have the highest overlap among our Top 100 customers. We see the power of the suite in our sales efforts as customers have recently wanted to de-emphasize their use of brokers in favor of assets, and we've converted some nice wins over to JBT as a result. Being mode-indifferent and offering customers the best solution will always guide our go-to-market strategy. As we look at the overall freight market, we still see oversupply across all modes, with shippers having options on both mode and provider to move their freight. Now, while capacity is not a top concern right now, there is an awareness that this will change at some point, but the timing remains unclear. Currently, cost and value are the primary differentiators for customers, and we continue to lean into the value we can deliver to customers with our premium service. As we have said in previous quarters, we don't know when the cycle will shift and aren't going to make a prediction. But we remain committed to investing in our business for the long term and being ready to grow with our customers over many years to solve their transportation needs with the high service levels they've come to expect from J.B. Hunt. I'll wrap up with some of the feedback we're getting regarding peak season. We see the same datasets that most of you track and read the same headlines around what's happening in the ocean freight market. The feedback we hear is an expectation for a peak season this year, but the magnitude or length of peak remains to be seen. That said, some customers have pulled a portion of their peak freight forward a couple of months, given the multiple macro factors that could impact the supply chain later this year. This pull forward has created an early peak on the water, but that hasn't translated into domestic inland moves just yet. We are working with customers on peak season plans to ensure we have resources properly positioned to meet their transportation needs. That concludes my remarks. So, I would now like to turn the call over to Nick.

Thanks, Spencer, and good afternoon. I'll provide an update on Dedicated, Final Mile Business, and give an update on our areas of focus across our operations. I'll start with Dedicated. While we are not immune to the impact of the overall market, we believe our results during the quarter continue to highlight the strength and resiliency of our unique Dedicated business model. We believe our differentiation is supported by our focus on providing professional, outsourced private fleet solutions to a broad and diverse group of customers, in addition to our relentless focus on delivering value to our customers. During the second quarter, we sold 325 trucks of new deals. While we have visibility to some losses or downsizing throughout 2024, our sales pipeline remains solid and our team has done well to backfill some of those losses. Despite the challenging market conditions, importantly, we have remained committed to our discipline in the types of deals we underwrite without sacrificing our return thresholds. With a proven track record of high service levels and our ability to create value for our customers, we continue to have success onboarding new business and renewing business with our existing customers. We remain confident in our ability to execute on the transportation needs of our customers and the opportunity to further compound our growth over many years. Going forward, despite our strong new truck sales in the first half of the year, I would expect our fleet count to end the year relatively flat from our Q2 levels, with some additional startup expenses as new trucks are brought into the fleet. Shifting to Final Mile. I continue to be pleased with the progress we have made to improve the overall health of this business. This journey started many years ago as we focused on a differentiated high-quality service to then focusing on revenue quality and remaining cost discipline throughout the process. The market for big and bulky delivery continues to evolve and customers are looking for a high-quality, safe, and secure service provider with national scale. For transparency purposes, our second quarter results did include a net benefit of $1.1 million from two offsetting claims settlements. Demand for big and bulky products remain mixed with stable demand for both appliances and exercise equipment, but continued softness in furniture demand. We remain modestly encouraged by our sales pipeline and continue to see new brands engage in discussions with our team. We continue to strive to provide the highest level as we deliver products into the homes of our customers' customers with a focus 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, we would expect some customer churn as we continue to focus on revenue quality, but for margin performance to follow fairly normal seasonal patterns, excluding the unique item called out in the quarter. Similar to the last quarters, I'll close with some comments on safety. Our company was built on 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. We continue to lead the industry with our fleet that is now over 97% rolled out with inward-facing cameras and we remain on track to be 100% complete by the end of the third quarter. As you may recall, 2023 was our best safety performance on record for DOT preventable accidents per million miles. And I'm pleased to say, with the help of our inward-facing cameras, along with our numerous other innovative safety initiatives, we are seeing further improvements so far this year. This is a testament to the quality of our drivers and the safety culture of our company as the cost of claims continues to move up exponentially, we remain focused on finding new innovative ways to further enhance our safety performance and mitigate risk where possible. This concludes my remarks. So, I would like to now turn it over to Darren.

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

Thank you, Darren, and good afternoon everyone. I'll review the performance of our Integrated Capacity Solutions and Truckload segments while also providing 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. Segment gross revenue declined 21% year-over-year in the second quarter, driven by a 25% decline in volume, partially offset by a 5% increase in revenue per load. As you have heard, we did see some seasonality in the business with some relative tightness in the market around road checks and in the later part of June. That said, our gross margins for the quarter were 14.8%, the highest we've seen since the fourth quarter of 2022, which is noteworthy, given 61% of our volumes are under contract. We continue to focus on quality revenue and growing with the right customers as our yield performance indicates. Admittedly, we are incurring some challenges integrating the previously announced acquisition of BNSF Logistics, but remain encouraged and optimistic about the potential of the agent model on our platform. These challenges are masking some of the underlying progress we are seeing in our legacy ICS business. Going forward, we will remain focused on further right-sizing our cost structure, but ultimately, we need to push more volume through our platform in order to see material improvements in our results. Moving over to JBT or Truckload, segment gross revenue was down 12% year-over-year, driven by a 9% decrease in volume and a 4% decrease in revenue per load. This season was competitive and we opted to remain disciplined on price, which resulted in some lost volume. That said, we are focused on attracting the right freight that best fits our network with the right customers that see the value of our service and network of trailing capacity. While we currently have excess trailing capacity in our network, we are working on ensuring discipline around our network to ensure that we have the right capacity in the right markets where our customers have needs and where they are growing. We hear from customers that they appreciate our high service levels and the flexibility that our drop trailer offering provides to their supply chain. Our model allows us to be more variable with our costs depending on the market, which we believe ultimately presents us with opportunities to scale this cost-competitive service offering for customers while ensuring we generate an appropriate return on capital. Going forward, our focus is on improving our trailer utilization rate while ensuring our capacity remains balanced across the network. I'll close with some comments on J.B. Hunt 360. Technology enables our people, helps drive productivity, and also drives efficiency in how we source and serve customers with our available capacity. Technology is foundational to our company, but it's also created opportunities for strategic theft groups to impact our operations. We continue to deploy enhancements to our system to increase the security of our platform and have become much more stringent on carrier vetting to mitigate cargo theft risk, which continues to be very prevalent in the industry, and in particular for our customers who are feeling the impact. Long-term, technology investments will continue to drive productivity and efficiency gains across the board and better position us for long-term growth with our customers. That concludes my comments. So, I'll turn it back to the operator who will open the call for questions.

Thank you. We will now start the question-and-answer session. Our first question comes from Jon Chappell with Evercore ISI. Your line is open.

Thank you. Good afternoon. Darren, you mentioned a pickup near the end of June on some of the volumes. I'm just wondering, does that have to do with some of the themes that Spencer spoke about regarding maybe moving up peak season a little bit, or is there something else going on, particularly in the Transcon in Southern California, that gives you a little bit more optimism about the cycle?

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

Yeah, and hey, John, this is Spencer. I'd just like to add a little bit to that. When I talk about normal seasonal trends, I think that's something that we really need to think about across our customer base. Normal seasonal trends end of month, end of quarter, in Q2 really are related to back to school, things that are prepping for that season, for other events that take place here in July with different promotional things. So, I'm encouraged from our customer base that really normal seasonality started to show up for us. And I think that's something that we're going to be looking forward to as we move on. I think that in the prior years, we struggled really with seeing seasonal trends in a normal way. There was just still so much disruption. So, appreciate the question, just wanted to add those comments.

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

Yeah. Hi, afternoon. So just, I know you've talked about this a bunch before, the Intermodal margin recovery story. I know you have the excess capacity now. But is it mostly a function of getting sequential revenue per load to move up? And do you feel, given now that the contract season is largely done for the next several quarters, at least looking ahead, do you feel you've reached a point of stability on that revenue per load? Thanks.

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

And your next question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.

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

A key factor affecting the unusual seasonal sequential change in profitability is related to pricing implementation. The introduction of the bid cycle has posed challenges for earnings improvement. We frequently note that volume serves as our primary indicator, whereas pricing tends to follow volume. As we navigate the remainder of the year and seek growth opportunities, we believe that pricing enhancements will improve in line with volume over the long term.

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

Thank you for the opportunity to speak this afternoon. I understand that you prefer not to provide detailed quarterly guidance, but it would be beneficial to clarify expectations at some point. As we evaluate the full effects of these bids, Darren, should we anticipate one more quarter of a sequential decline in revenue per load and margin? That's the near-term outlook. Looking further ahead, historically, you have managed to gain market share during previous downturns, which has positioned you well for future earnings growth. However, we are not seeing that trend currently, and I'm curious about your insights on why that might be. Additionally, what implications do you foresee for the upcoming upcycle?

There’s a lot to unpack in your question, Scott. The bid cycle has been consistent with previous years. We implement about 30% of this pricing cycle during the second quarter, so you can expect that by the end of the second quarter, everything will be fully in place. Over time, we did face some negative pricing pressure, but I don’t anticipate any major declines. We are working to ensure everything is properly implemented by the second quarter, which means the third quarter should give you a clearer picture of our pricing cycle. In terms of gaining market share, we are performing well in the Transcon marketplace, and our volume growth has been significant. However, in the east, we are encountering some challenges due to truckload pricing. As we move into the second half of the year, we are optimistic about our conversations with customers regarding our value proposition and concerns about highway capacity, and we will keep striving for growth. That’s all I can say on your questions for now.

And your next question comes from the line of Daniel Imbro with Stephens. Your line is open.

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

Yeah, well, first, thanks, Daniel, for the question. First, from startup cost, I would say we're just starting to see some of those startup costs come in. We had a pretty good chunk that's starting this month in July. And so you're going to see that a little bit in Q3. But that's a good thing for us. From a competitive standpoint, I would just say from our model and what we go after, we've been very disciplined in that. And so we've seen some competitiveness in retail in what I would call the basic retail replenishment is where we see most of our stiff competition, a little bit more aggressive pricing from some of the one-way truck models are quasi-dedicated in that segment. But in the other, I would just tell you our pipeline, as I said, is very solid. And you've seen the numbers that we've sold. So we think we still have a very good footing on what we're going to sell. We're just facing a little bit of pressure in some of those retail areas.

Daniel, this is Brad Delco. I want to add a bit more to clarify some points from Nick's prepared comments. He mentioned that he expects the ending fleet count for the year to be similar to what we observed in Q2. However, we anticipate some fleet losses for the rest of the year, specifically from trucks that are reaching their mature state. At the same time, we have new startups happening in Q3 and Q4, and those startups may face some margin challenges. We aimed to provide more clarity on this, and our prepared remarks were meant to offer you some forward guidance on this expectation moving forward.

And your next question comes from Ken Hoexter with Bank of America. Your line is open.

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

I expect to outperform the domestic market in Southern California eastbound volume and don't believe we're losing market share to any other domestic intermodal channels. Looking back at the period from 2020 to 2023, we observed an increase in the share of transload or domestic volume as a percentage of imported goods through the Southern California or West Coast gateways, but this has declined in 2024. It's unclear what has happened with that cargo, but I don't think it has moved via domestic intermodal. I believe the share of intact international intermodal has slightly increased, possibly due to a shift from the East Coast to the West Coast, where it remains intact even while routing through the West Coast. We're in constant communication with our customers to better understand the mix of transload versus intact international. It raises questions about whether some of that import cargo is being stored for later shipping, but I don't have a definitive answer, although I'm confident that we are maintaining and growing our share of eastbound domestic intermodal volumes from the West Coast. As for why imports are strong and we're not fully capitalizing on that, I cannot say for certain. However, our Southern California volumes have increased by double digits. While I didn't specify the exact percentage, we are optimistic about our eastbound California business pipeline and will continue to pursue growth in this area as well as in other markets.

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

Great. Good afternoon, everyone. Just shifting gears a little bit to talk about ICS, can you just unpack the kind of volume shift year-over-year, volume is down 25%, a little bit more kind of to give us a better understanding of what is going on there. I think you alluded to the BNSF business that you bought kind of being not quite what you expected. Can you elaborate on that a little bit more as well? Thank you.

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

And your next question comes from the line of Jason Seidel with TD Cowen. Your line is open.

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

The acquisition of the Walmart equipment isn't fully reflected in our results yet. We currently have more J.B. Hunt equipment, whether from Walmart or our own fleet, than we're fully utilizing. This gives us significant growth capacity. In past quarterly calls, I mentioned that we were capable of handling as much as 20% more than we are now, and that still holds true. Therefore, on the margin side, we have considerable leverage to gain by increasing volume and utilizing that equipment. However, we are also facing negative pricing pressure at the moment, which is a challenge for our margin performance. Compared to our industry, I believe we're performing relatively well, but we still have a lot of work ahead to achieve the returns we expect for our shareholders.

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

Good afternoon. I wanted to ask about our expectations for year-over-year volume growth in Intermodal for the second half. You did see some improvement in volumes in the third quarter, and even more so in the fourth quarter last year. Should we anticipate weaker year-over-year performance as the comparisons become more challenging, or do you see potential momentum, such as additional Walmart loads, that might help keep the year-over-year numbers stable? Thank you.

As we progressed through the second quarter, we felt a sense of momentum. Our customers recognize that last year's volume catches were unexpected, and they understand that such surprises aren't ideal for an efficient transportation network. We are actively engaging with all our customers, and we have the capacity to meet their needs. Our goal is to find ways to grow our business both sequentially and year-over-year. While we'll have to see how things unfold, we certainly sensed some momentum as the second quarter advanced.

Yeah, Darren, I'll share a few things. Tom, thanks for the question. We appreciate every customer that we have and all the conversations we have. One of the things as we look forward, they are talking about their peak season plans. But when we ask for our customers' forecasts, that's an area they still struggle with. They've struggled in the past, they struggle today, and we really lean into our team, leveraging our data, sharing our expectations, and really collaborating with our customers from here to try to understand what they need and how we can set our ops teams up to serve them well. If we look at the end of the month and the end of the quarter, I don't think that two weeks is going to make a trend, or two months. What we need to do is get actual data from our customers and their expectations on what they anticipate their demand is going to be, and then really set ourselves up to serve them well, and that's really what we're focused on right now and looking forward to working with them to do that.

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

Following up on your comments about peak season, in the fourth quarter, we usually see some sequential profit improvement, with a significant holiday boost in Final Mile, along with some gains in Intermodal, ICS, and Truckload, while Dedicated may show more mixed results. Can you discuss the fundamental conditions that distinguish a normal peak season at Hunt from one that disappoints in terms of profitability? Also, when do you generally have conversations with customers that provide insight into how that peak season will unfold? Thank you.

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

And your next question comes from the line of Brandon Oglenski with Barclays. Your line is open.

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

Yeah, thank you, Brandon. Appreciate the comments. Certainly, our last two years have been the most difficult time in my 30-year career. It's been the most difficult time in predicting and understanding where our customers are headed and how we need to think about that from a quarter to quarter basis. But we are very focused on long-term. One thing we did learn from the pandemic was we weren't prepared and ready for our customers, and that was to the detriment of our long-term success. We have made strategic decisions to invest in our people, our technology, and our capacity to be prepared and ready. I believe our customers know that and think that. I will tell you some of the things that you've heard from the businesses today and even in our past, we are preparing ourselves with best-in-class service. That, for us, means we want to separate the service levels we're giving our customers so they know they can expect that from J.B. Hunt on a consistent basis, and then creating more value for our customers. We do look at it long-term and we also recognize that we have to deliver long-term returns for our shareholders. We think this is the best strategy that sets us up for that long-term. I think in our conversations with customers today, we're encouraged with some of the comments that they're making towards us in the areas that we're heavily focused on. And so I would tell you ICS, we're not pleased with our performance in ICS, we're not pleased with our performance, I would say to our expectations, but our relative performance has been pretty good. That doesn't mean that we're happy. But when I look at where we're at relative to the competition and how we are doing from a market share gain, a profitability perspective, our return profile, those three areas, we're making progress, and that's what we're going to continue to focus on. I will say this, as we move here into the second quarter and moving here into third quarter, one thing we do know is, we're at least closer to calling some kind of inflection. Not that we're calling it today, but I will say there are signs that tell us that things are moderating or getting better. We are skittish. I've been conditioned now over the last two years to be very cautious on the things that we say. And I think you're hearing a tone that says, listen, we have better signals. It doesn't mean that they're great. And we need more information from our customers to get us better. Today is the time for us to make sure that we're close to our customers, that we're prepared and ready. But I will tell you, we are not changing our targets. We have a long-term goal across all of our businesses to make sure we deliver appropriate returns to our shareholders. That will be our focus. We think we're taking the best strategic decision and move to make sure that we accomplish that.

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

Thank you very much, and congratulations, Shelley. I guess I just want to think about this bigger picture because this downturn, I think, surprised everybody in terms of the magnitude and the duration. And here we are still seeing pricing trends coming in weaker than expected. Even though volume feels a little bit more seasonal, there's no real view of any catalyst for acceleration. I guess looking back on this, what do you think we got wrong about the magnitude of this turn? And, what do you think it takes to catalyze us back forward on the volume and pricing side?

Thank you for the question, Jeff. I think one key thing we underestimated, similar to what we didn't grasp during the pandemic, was the extent of the changes we would face. Reflecting on our experience from 2009 during the Great Recession, we were prepared and understood what was happening. Back then, as prices dropped, so did our costs. Currently, we find ourselves in a situation of rising costs while facing downward price pressure, which is something I haven't encountered before in my history with the organization. It's surprising that both of these scenarios have occurred simultaneously. Typically, we rely on historical data to prepare ourselves, and this disconnect was greater than we anticipated. Additionally, regarding capacity, we've observed that carriers have been losing money for over two years, which is unusual based on our historical patterns. Normally, this would lead to reduced capacity in the market, prompting a recovery. However, that hasn't happened, and it's been a major misconception during this freight recession. We can't accurately predict when capacity will exit the market, but we know it needs to happen or demand will need to significantly increase. In my view, it's more likely that capacity will leave the market faster than demand will rise. Those are the main points I wanted to highlight. I will check with the team to see if they have any additional insights. If we had understood these factors better, we might have been able to anticipate and strategize accordingly.

And your final question comes from the line of David Vernon with Bernstein. Your line is open.

Good afternoon, everyone, and thank you for being here. I have a question regarding the Intermodal service. Can you provide some insights on how the Quantum product, which was announced recently, is performing? Additionally, with the transition of Mexican traffic from KCS to FXE, could you give us an update on how that process is going? Has there been any effect on customer attrition in the North South trade? Thank you.

Sure. So, Quantum, we're absolutely thrilled with the service performance. I think we're actually outpacing even expectations of our customers. Now, that being said, the complexity of the networks and the decision point for a shipper to convert Highway business that we would call cannot fail, the kind of Highway business that's not just inventory replenishment, it's a business-to-business transaction kind of move, has probably been a little more complicated and a little slower than what we have anticipated. So, while our volume benefits from the Quantum program have not yet been achieved, we're absolutely encouraged by what we're experiencing with the service, the feedback from the customers that are utilizing that service, and we're growing it every day. It hasn't grown as fast as we probably would have anticipated, but we've got a very long runway of opportunity to grow with the Quantum product, and we're thrilled with that. As it relates to the announcement about the transition to Ferromex from CPKC at the beginning of the year, I think the transition was successful. Again, customers are clearly concerned about a transition like that. And maybe not everybody on day one converted with us at the pace that we would have probably liked to have seen that happen. As the year has gone on, we have had a lot of success at going and recovering business that maybe didn't transition with us. And hey, our volume swing on the Ferromex was a material change in their network. And the BNSF's ability to serve Eagle Pass has been excellent. So we feel good about all three parties involved in that program. But certainly the customer education around customs and all things related to the new terminals that we operate at with Ferromex was an education, and that has taken a little longer and probably didn't result in quite as much transition to our network immediately, but again as the years gone on, I feel good about where we're at today and there's more work to be done to grow our presence in Mexico as the year moves on.

Thank you, and thanks for joining our call. You've heard us talk about our challenges in the business, and although we're pleased with the relative performance, we're not pleased with our own expectations. We've seen pressure from our customers, our costs in all of our businesses. Pricing's largely been reset through this season for our transactional businesses in Intermodal, ICS, and JBT, and that pricing will largely be in place until we complete this season midway through 2025. And during this freight recession, we've invested in our foundations of our people and our technology and our capacity, and that's really been preparing for a long-term opportunity to grow with our customers, and we're encouraged in a few areas. Our DCS and Final Mile businesses have fared very well in this recession. I am pleased with the margin of performance and the resiliency of our DCS business and the improvement in our Final Mile business on both profit and returns. Our customer demand is returning back to something more seasonal that we can be better at predicting to pre-pandemic levels, and that gives us more confidence as we're looking at bid compliance better between 80% and 90% in both Intermodal and JBT. And that means our customers are doing a better job predicting their consistent volumes. We're also encouraged with our pipeline and the conversations we're having with customers around our growth plan and our peak planning. And finally, very pleased with our people. There's 33,000 of our people working hard every day to deliver on the expectations of our customers and our shareholders. We're going to continue to focus on controlling our costs. We will provide best-in-class service. We're going to maintain our excellence in safety, and we'll create value for customers. And that's what sets us up for growth. That scales our investments, and it allows us to create long-term value for our people and our shareholders. Thank you for your comments and your interest in the call. We look forward to speaking with you next quarter.

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