Hello, and welcome to J.B. Hunt's Third Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Mr. Brad Delco, Senior Vice President of Finance. You may begin.

Good afternoon. Before I introduce the speakers, I would like to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt's current plans and expectations and involve 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 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. First, our thoughts are with those impacted by the recent hurricanes in the Southeast and Florida. Many of our employees were impacted, and I'm proud of how our company has responded to support them and the recovery and relief efforts in these communities. The rebuilding will take time and J.B. Hunt will continue to support these efforts. Turning to the quarter. We continue to navigate a challenging freight environment while remaining focused on what we can control around our costs, providing exceptional service to our customers, preparing for their future transportation needs and maintaining our focus on safety. As discussed last quarter, we have seen a return to more normal seasonal demand patterns as evidenced across our businesses in the third quarter, which the team will highlight in their remarks. I remain confident in our strategy as we execute on our priorities, which as a reminder are; one, to deliver exceptional value to our customers through operational excellence; two, scale our long-term investments in our company foundations, which are people, technology, and capacity; and three, drive long-term value and returns for our shareholders. Our focus remains on how we can deliver value for our customers with excellent service while looking for ways to drive waste out of their supply chain. We do have some more positive signs in the business to support our work in this area, particularly around our volume trends, customer awards, and third-party surveys that highlight J.B. Hunt's performance. I see more evidence today that we can scale our investments in our people, technology, and capacity to capture additional market share at better returns as the freight cycle inflection occurs. I remain confident in our strategy and maintain our focus on generating appropriate returns on capital to deliver value for our shareholders. As we prepare for an eventual churn in the freight market, we have focused our organization on being operationally excellent and delivering unmatched value for our customers. By controlling what we can right now, we position ourselves to grow with our customers, knowing that these key service components are ingrained in our people. At the same time, we know we need to repair our margins to generate acceptable returns to reinvest in the business and our customers are and should be aware of that as well. We take great pride in providing high-quality service in all that we do, which is a testament to the dedication that our people have to serve customers well. Creating value for our customers is core to what we do and helps build long-term strategic relationships. Customer Value Delivery or CVD is a process that we have used for a while in our dedicated business and we continue to roll this out across our entire organization. Part of the value we create is through our safety culture and performance, which is the strength of our business and we have continued to improve upon last year's record performance as Nick will discuss. The team will provide more details on each of our businesses, but in summary, I continue to have strong conviction around our strategy and the growth potential of our company. We have and we will continue to prove our ability to deliver outperformance for our people, our customers and our shareholders. Our confidence comes from our people, our experience, our complementary suite of services, our scale, our strategic investments and our financial strength. All of these uniquely position us for the future as we pursue our vision to create the most efficient transportation network in North America. With that, I'd like to turn the call over to our CFO, John Kuhlow. John?

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

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

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

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

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

Your first question comes from Ken Hoexter with Bank of America. Your line is open.

Wow, I appreciate the transparency. Shelley, I won't ask how many points Texas will win by on November 16th. You mentioned normal intermodal patterns, but considering how much was pulled forward, could you estimate how much the results benefited from that pull forward? Darren, you indicated that business is strong right now, but is this mainly due to the post-hurricanes recovery from the strike, or are we seeing improvements from the peak season? I'm curious if we might experience a slowdown sooner because of those earlier shipments. I know there’s a lot to unpack, but I'm trying to grasp the effects of pre-shipping.

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

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

Your next question comes from the line of Brian Ossenbeck with JPMorgan. Your line is open.

Hi, good afternoon. Thanks for taking the question. So maybe a little bit more on the peak season. You mentioned a little bit of project freight coming back. I think that was Brad on the ICS side. So broadly on rail service, how is it performing out of the West? It seems like you have a pretty good ability to move a tremendous amount of volume, but how has that performed in with the new COO, I guess, consulting for them, Ed Harris for BNSF, do you expect any changes here in the short term or the medium term as he looks to take a closer look at those operations? Thank you.

Okay, Brian, your phone was a bit unclear, but I think I got the main point. Regarding our Western provider, we are actively working at all levels to improve our efficiency and collaboration in problem-solving. I understand that Ed Harris has been assigned as a consultant to BNSF, which has raised some questions. We believe he is primarily focused on their merchandise network. It's important to note that BNSF is the largest intermodal provider and handles the most concentrated intermodal operations, servicing the fewest locations in the industry. This concentration aligns well with principles of Precision Scheduled Railroading (PSR). However, I'm not suggesting that they are a PSR railroad; they simply haven't needed to adopt that approach. BNSF is paying significant attention to intermodal as a growth area. We are confident that there will be no changes impacting our business in the near future. Their strategy to expand intermodal remains intact, and we are encouraged by their comments. In fact, enhancements in their merchandise network could positively affect intermodal service, though we will have to wait and see. This isn't a focus area for us, but we have been assured by BNSF that PSR is not part of their strategy. I’m not sure if Shelley has anything to add on this topic.

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

And then Brian, I think you may have been put on mute. This is Brad, but you asked a question about project-related business. I'll let Brad Hicks respond to that.

Yes, Brian. We had some of that start in the second quarter and we'll certainly have project business that will carry into Q4. Some of that is seasonal work that we do on behalf of our customers. Otherwise, there's small pockets where our customers have needs, where we want to make sure that we're the right partner and service them at a level that we can continue to be that first call when they have those extra needs. I really think that the key element there is just how proud we are of the improvement that we've seen in ICS in particular. The gross margins in the quarter were very healthy and I think that that's representative of the foundational work that we've been focused on all year around quality of revenue and the right type of business, and certainly, our teams have done a great job executing throughout the quarter.

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

Thank you. Good afternoon. Darren, I was hoping you can help understand the sequential increase in revenue per load. I know it wasn't gigantic, but it did go up, your East went up 3% in 3Q versus down 7%. So, conceptually, there should have been a mixed headwind there. You've been telling us all along to kind of bake in that 30% bid season from 1Q, 2Q, and 3Q. So, just felt like with everything that you just posted from a mix perspective that revenue per load would have been down sequentially. So, how did you manage that up? And then I guess, how do we think about your comments about being fully baked into the middle of '25? Does that mean kind of flat from here or is there any improvement potential?

On revenue per load, the mix results for the quarter showed that our length of haul was actually longer in the third quarter compared to the second quarter, and sequential pricing pressure certainly influenced those results. I lost part of your question, but as we've progressed through the year and implemented new pricing, none of us are satisfied with our current returns. We still believe our path to improvement lies in executing well for our customers, ensuring we fulfill our commitments, and delivering value so that when circumstances change, we are ready to discuss our service quality, the cost challenges we face, and recover some of our margins through pricing efforts. This will continue to be our focus, and we will see how it develops as we move into next year.

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

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

Thank you, Jordan. I'll address that. I've been reviewing competition in the Dedicated market as well. Currently, we're focusing on private fleet replacement and we haven't noticed any significant competition in that area. We're pleased with our pipeline and the successes we've achieved while maintaining discipline in our pricing margins, which gives us confidence. Much of the competition seems to be in retail and dry van operations, which are more commoditized. We do have some presence there, but not extensively. Recently, we've been awarded contracts with several private fleets that may not be widely recognized, but we're optimistic about that. While some large private fleets are expanding, we still have a strong outlook for the market valued between $60 billion to $90 billion that we've qualified for, and we're confident in our sales targets. Although we are aware of some competition and have lost some business, overall, I believe our disciplined pricing strategy will lead to continued success.

Jordan, this is Brad Delco. I do want to add, I mean, Nick in his prepared comments talked about the performance of that business. And I think when you look at the performance of the business both in terms of how well revenue in trucks and certainly operating income and margins has held up relative to a lot of the peers set, and I mean, I do think it's a differentiated model that's supported by that performance and hopefully that's recognized by those on the call.

Your next question comes from the line of Daniel Imbro with Stephens, Inc. Your line is open.

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

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

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

Hi, thank you. Good afternoon, everyone. There has been a significant improvement in the broker's ICS gross margin this quarter. What are your thoughts on whether this is due to market conditions or more specific to your company, and how sustainable do you believe it is? Additionally, in the last couple of years during Q4, we've seen substantial insurance accruals as a catch-up. Can you provide some insight on how we should approach that in Q4 this year?

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

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

And Scott, this is John Kuhlow. I actually thought Shelley would address the insurance question. To your point, over the last couple of years, we experienced some significant charges in various quarters related to our insurance. This was primarily due to the dramatic increases in certain settlements and how they interacted with our insurance structure at the time. I believe we've made substantial progress in managing our claims, collaborating with our actuaries and attorneys, and I feel confident about our current position regarding our insurance accruals.

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

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

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

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

Yes, good afternoon. I have a question regarding Intermodal, if that's alright, Brad. You've had a good variety of questions from others. I want to revisit Darren's comment about a normal peak season. When you refer to normal, do you mean the typical seasonal difference between the fourth quarter and the third quarter, or a year-over-year comparison? It seems like there might be some strength in container imports that wouldn't necessarily continue. I'm curious if you could elaborate on that. Another way to approach it could be to look back historically and consider why customers might import more in June, July, and August compared to later months like October and November. Could you provide more insights on how you define normal in terms of Intermodal volumes?

When I mentioned normal, I was referring to the sequential changes from Q2 to Q3 to Q4 and our discussions with customers regarding their expectations and forecasts, as well as how accurately they can predict their needs. All these factors have returned to what we see as normal pre-pandemic levels. We are not hearing from customers that they will have significantly weaker demand in the fourth quarter compared to what they indicated just a month ago. There is none of that happening at this time. I won’t elaborate on how many customers adjusted their forecasts—some did move their timelines forward—but I don’t think it’s a major market story for us. It has been a consideration, and I acknowledge that. However, we anticipate strong demand in Southern California for our volumes in the fourth quarter. The import volumes and the way imports flowed into the West Coast ports over the summer did not translate into an Intermodal market. There are warehouses filled with inventory prepared for peak-season shipping on the West Coast. Therefore, we feel that this situation aligns with what I consider normal. I may not define it in the way you expect, but that’s how I see it today.

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

Yes, hi, thanks. Good afternoon. Darren, you mentioned a few points that I found interesting. The first was regarding some Eastern loads potentially shifting from truck competition. I wanted to get your perspective on what you're observing there and the factors you believe are influencing this in light of the ongoing pricing environment. Additionally, concerning costs, I believe there are some repositioning costs tied to the strong growth from the West Coast. Do you think this will continue for a prolonged period, or will it change once the inventory on the sidelines decreases? I'm curious about your thoughts on the sustainability of those costs.

Okay, those are great questions, Chris. Let me first address the issue of empty containers. I'm not sure if it's appropriate to call it durable or predict whether it will last. The situation in Southern California involves both inbound and outbound logistics. We are seeing increased demand for Eastbound shipments from the West Coast, but not necessarily for Westbound shipments. If the need to support capacity in Southern California remains at the current ratio we are experiencing, that will certainly need to be reflected in the economics with our customers. I don't think this will come as a complete surprise to them, but it is an important consideration as we move ahead. In 2024, the growth opportunity we noticed on the West Coast appears stronger than on the East Coast, which brings more attention to the need for supply and capacity out West to meet that demand. Regarding the East Coast, we've observed some shippers gradually transitioning smaller business volumes to us. We are encouraged by the fact that we've been seeing new startups weekly in that region, comprising many customers across relatively small business segments. These volumes can range from 100 to 1,000 loads per year. While these are not significant quantities, customers are approaching us because they are able to shift more freight back to intermodal transportation, possibly as a sustainability initiative or in anticipation of a tightening truckload market. This change also acknowledges the improved service performance we've maintained for over a year in the East. We are very encouraged by the recognition from customers that our service quality has secured intermodal a new place in their logistics planning. This development is beginning to materialize, and we felt it was important to highlight it, as we have sustained these opportunities with numerous customers throughout the third quarter and aim to build on that as we progress. Spencer, would you like to add anything on this matter?

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

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

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

Hi, thanks for including me. For Brad or Shelley, you've mentioned working on improving intermodal margins. Could you elaborate on your relationship with BNSF? I'm curious about the strategic aspects of that partnership and if there are opportunities to enhance it to achieve better returns and move closer to your margin goals.

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

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

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

There's understandably been a lot of focus on the opportunity to restore margin and returns via pricing over the next couple of years. But if we look at three, five years beyond, where do you guys see the biggest opportunities to grow operating income more secularly in the business and at attractive, risk-adjusted returns? And from where you sit today, does that look any different than what we'd say you did over the last five years to 10 years? Thank you.

Yes. Thank you, Bascome. I'll take that. And I would say if you look at all five of our business units, the market size and market opportunity, we think is well-positioned for each one of those five. I don't see our profile changing significantly if you exclude the last two years. Our merger profile, the last two years have been outside of our ranges for the majority of our segments. So if you look over the last five to 10 years, I would see those margin profiles and what we've given guidance on for margin targets really being in line. Our two largest segments, both intermodal and dedicated, although they are very large, the market size opportunity is even larger. So our ability to take both of those segments into high growth categories will just continue our operating income performance inside those. And as highway, both JBT and ICS and final mile continue to move forward. It's going to be difficult for them to catch the size of both intermodal and dedicated. So I think you'll see them continue profit improvement and also revenue growth overall. But I don't see our mix changing significantly.

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

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

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