Get started. My name's Garrett Holland, Senior Analyst covering Transportation and Logistics here at Baird. Grateful to have you at our conference again this year, and we're very pleased to have the team from J.B. Hunt joining us from the company. We've got Shelley Simpson, President and CEO, Nick Hobbs, COO and President of Contract Services. We've also got Brad Delco, Vice President of Finance and IR, and Andrew Hall, Senior Director of Finance. We'll turn it over to the team for a few opening remarks, and then we'll dive into Q&A. But with that, I'll turn it over to the team. Thanks for being here.
Great. Thank you, Garrett, and I appreciate the opportunity to come and spend time with you. I thought we'd give you four or five slides just to give you a high-level overview about the organization and then get a chance to talk about just things that are on your mind. So when you think about the company, in total, 63 years in business, about 400 different locations, fairly decentralized in our operations across all of our business units. If you think about the organization, the largest part of the company is in our Intermodal segment, and we are in the number one position leading inside that space. The second largest part of the company is in Dedicated Contract Services. Also leading inside that space are Highway Services area, which is both ICS, our brokerage area, and what we call JBT, which is our truckload space.
It's really an asset- light solve for our customers' needs inside the truckload space using trailing equipment only. And then finally, in Final Mile, that's our end product to the end consumer. So we like to think about handling North America and all parts of a supply chain from really points of origin and manufacturing all the way into the end consumer, including your own personal home. We do that with a lot of assets inside the company, so nearly 23,000 tractors and 170,000 pieces of equipment, but most importantly, powered by our people. And so nearly 34,000 of our team members, about two-thirds of those would be professional drivers, and the rest will be in our maintenance team and also in our office location, and just under $13 billion in 2023. As we come into 2024, our priorities have continued on these three themes.
First, just focusing on operational excellence on behalf of our customers. So how do we deliver exceptional value to our customers, really creating that value that gives us the opportunity as we emerge from the freight recession to be able to really extract the right level of value for the service that we're providing into our customers? We also want to scale our investment. So we've done a good job thinking about our growth opportunity across all five of our segments and really thinking about from a people, technology, and capacity perspective. So we are scaled and ready for growth. We've pre-funded that growth through our capacity adds through this year and really set into next year to be able to scale into those. And then we remain focused on driving long-term compounding returns back to our shareholders.
So for us, from an investment perspective, I talked about having leading positions inside each one of our areas overall, even in Final Mile, and highway, both of those areas really fairly dominant inside those spaces, but also more opportunity to grow. Our network density and scale really is leveraged through our mode-neutral solutions that we give to customers. So we typically talk to a customer about how we can solve for what their biggest challenges are, and then we apply whatever one of our five business units really match towards that. So instead of a product-based sales organization, it's really a solutions-based sales organization. And because we have all components of the portfolio, we can actually put what's most efficient on behalf of our customers to use. We do really do that through our technology platform that we've invested in, which is J.B. Hunt 360.
That's for both internal and our TMS and externalization for carriers and customers that work with us also, and of course, we believe we have best-in-class people, systems, and service overall. That really has yielded great long-term revenue and operating income trends. Outside of being in a freight recession, this for us has been the toughest freight recession and longest in terms of depth and duration. In my 30-year career and Nick, I think in your 40-year career as well, but I think we've done a good job managing through that part of the process. We're looking forward to turning the chapter and hopefully moving into a better position coming into 2025, and then when we think about capital allocation for us, we do a nice job generating a good amount of cash. Our first priority is really to reinvest back into the business for long-term returns.
And so anytime that we could put more capital to use from an equipment perspective on behalf of our customers, that's going to be over a longer-term basis. And then certainly we're going to be thinking about opportunistic buying from a stock perspective and then return back dividends to our shareholders. And so that's really opening statements. Maybe I'll turn it back to you, Garrett.
No, that's great. I think it's a helpful overview as we start the conversation. If anyone in the audience has any questions this afternoon, feel free to submit them through the portal or raise your hand, and we'll be sure to weave you into the discussion. Yeah, the worst freight recession in 30 and 40 years, it's quite the statement, and it's been a tough few years. Is your confidence growing that the worst is behind us at least? Or are you seeing any market indications as we think about quarter-to-date trends that we're turning the page?
Every day I wake up is a better day because of getting closer to coming out of the freight recession. That's always a good day for us. I would say if you think about how the freight recession started, it really truly was a freight recession. A lack of available freight really from the switchover from COVID and just new products and inventory changeover from a customer perspective and also just inventory coming down, that really has changed and there's an oversupply of capacity. I do think that that has come down from about +30% to now down to about +10%. In general, as we do the math, we see that really changing coming into 2025. However, we've not been good at predicting the entire COVID up or down.
And so, I might kind of give a caveat that we're not the best at predicting when that's going to happen. I would tell you it's gone on much longer than we anticipated. However, I think there are some positive things that we've seen, maybe a couple of things inside Nick's area and Dedicated Contract Services. We continue to have a very strong pipeline and sales productivity overall, making this year our third or fourth best year from a sales perspective ever. So, I would say demand for our services are really good, and that's been a real resilient part of our business. But I would also say in the Eastern network in Intermodal, which largely competes with the truckload marketplace, you started to see us grow again here in the third quarter. I think that's a positive sign to what's happening in the market.
You're constantly looking for what those changes can be and what those can look like. But I would say part of that change, I think, is what's happening in the truckload market, but I think part of that change is the service that has been consistent now in the Eastern network and also what we're doing on the West Coast as well.
That's great perspective. And yeah, the sooner the better as it relates to the cyclical tailwind. But I think as we saw in Q3, there's improving execution and you're focused on some of the company-specific levers to drive profitability. What remains there as we wait for that inflection?
I talked about earlier, we've invested in long-term opportunity for us in our people, our technology, and capacity. That's going to be really important for us as we lean into 2025 and think about the capacity that we've added. If you think about it from an Intermodal perspective, we still have plenty of equipment to really source for our customers and help them as they grow. I don't see us having a need for us to add capital in that part of our business. From a container and chassis perspective, hopefully we have a huge need to grow inside Dedicated Contract Services because that part of our business is really written at each customer, written to a return on invested capital profile and written into a longer-term agreement on behalf of our customers.
So anything that we do there, I think, is going to be better for us. But it is people and it is capacity, both of those things that we're growing through overall. And if you just think about what's happened from a pricing perspective, certainly price has been downward pressure over this freight recession. So that's something certainly we believe has recovery available to us in the future.
And we'll pick up on a number of those topics. But I want to ask you about the election. It's a question we're asking all the companies at the conference, obviously early days. But help us understand the net impacts across taxes, tariffs, regulation. Early days, but how do you read it?
What election? Here's how we read it. I think a lot of people have asked us, "Hey, what are customers saying?" as if our customers called us immediately Wednesday morning and started asking us everything that was going to happen. I think everybody's trying to digest. What does that mean? How does that change? Will tariffs really change? Will they be implemented quickly? Will that happen over a period of time? We'll spend time talking with our customers as to what that means. Does it change what happens in regulations? I mean, certainly we've talked about that we think there needs to be more balance and more continuity between some of the states and federal regulations. So we think that could be a positive for us. But I think certainly the market feels like transports are in a better position going into this part of the election.
And so I would say it's too early to tell from a customer viewpoint of what's going to happen from tariffs. But here's what I would say. I think that takes time. If manufacturing moves here to the U.S., that's not going to automatically happen overnight, but it will happen over a period of time. I've been with the company 30 years. I've seen when our freight flows changed when we did move to China. And so I remember when the West Coast used to be the backhaul of the market or not enough outbound from the West Coast, and that turned over a period of time. That same thing could happen. I think for us, it's just being able to be nimble and adjust to what our customers' needs are.
I'd say the only thing I've seen is, as I was sitting here thinking about that, we had one question on ESG, and normally at these conferences, it's every session is on ESG, so we had one the entire time about ESG, and it was more about CARB compliance. So that is what's changed so far from this group.
Interesting. I like the perspective. I guess maybe digging into the Intermodal trends that you're seeing, very strong demand off the West Coast, but as you noted, some encouraging signs out East. Is this a J.B. Hunt-specific peak? Are you seeing broader demand? Just your read on what shippers are doing and the sustainability of that volume growth?
I can speak for J.B. Hunt. I really can't speak for the rest of what other customers are doing with other people, but I would say this. We've talked about going through peak, and we're executing on our peak plan here in the fourth quarter, very much like what we talked about in our third quarter earnings call. I don't think we've had any surprises there from a demand perspective. I will say service has been very good on the Eastern network, very pleased with what's happening there. We've had some challenges on the West Coast, and in particular, just the strength of what's happened in the West Coast. I think the BNSF is doing a good job trying to react to that. We certainly are reacting to that.
I think one thing that's very important, if you think about the potential for Intermodal, over the last, I'm going to call it from 2013 or 2014, all the way through COVID, service and reliability from an Intermodal perspective was really tough. Railroads were going through PSR, lanes were shutting down. Our end customer and what they needed wasn't necessarily at the forefront from a railroad perspective. So it was a tough environment for customers. That is stuck in the mind of our customers, and recently, in the last, let's say, 18 months, maybe two years, railroads have really been thinking about and talking about how domestic Intermodal is a big part of their growth story. I think that's really good. But there is what we call. Darren Field, who runs Intermodal, calls it our prove-it moment.
When you think about proving it, that means when the railroads get full with business, is Intermodal still prioritized and still good reliability, service overall from a value perspective? Is it there? We had a really successful peak season last fourth quarter when our customers had a surprise peak. Here we are in this fourth quarter executing on behalf of our customers. Part of that, Garrett, goes with us having to do some unusual things from a cost perspective. We're burdening costs that we didn't expect here in the fourth quarter to really help our customers see a more seamless Intermodal experience. Some of that is a result of short-term things that are happening in the market that we think long-term the BNSF will have a good plan around and some of the things that we'll be working on there.
But there's some things happening on the West Coast we're shielding our customers from to make sure that we're proving it in the moment here coming into our second year of peak that allows us to think about, okay, coming into bid season, which is starting now, how do we think about that? We know that growth is available in Intermodal and the market share that's available there is 7-11 million shipments. We have long talked about that. That's on the nation's highways that we believe can move Intermodal. But now you see this, I would say, coming together between the Class I railroads and J.B. Hunt saying, "Okay, we want to go grow our Intermodal footprint coming off the highway." I think that's going to be really important.
So as we move into next year, we've talked about our returns are not at the level that we expect of ourselves. And so how do we talk to our customers about growth and what growth looks like while also repairing our margin? And so you can see those conversations starting to occur with our customers. And we're just now starting those conversations. We'll see how we work through this.
Yeah, you're incurring costs. It sounds like rail service. Interested in your views on how you would grade that out. But how do you get compensated for that premium service product? And what does that mean for your expectations as you start those conversations in bid season?
One of the things that I talked about was we're going to be operationally excellent so we deliver value for our customers. That's something in our control during this freight recession. We have done an outstanding job of that, particularly in Intermodal, but I would say across all of our businesses. Nick has really led us in Customer Value Delivery. That's what we call it. How do we make sure that not only are we creating value, but customers recognize that and acknowledge that back to us, and so we not only have seen that in working with our customers, but we also saw that in Journal of Commerce actually did their third release of Intermodal performance and how are the best Intermodal performers, who are those? And we were the largest asset-based performer by a long shot.
And so I would tell you that I think is a lot of hard work by our people. It's also the railroads doing a good job with us. I think that value that we're creating, we had a wide gap between our performance and where everybody else was. That gives us confidence to say, "Okay, our customers understand that we're not pleased with our performance from a margin perspective." I think that gives us more confidence to be able to have those conversations with them. And where capacity is at. I would say those two things combined. So capacity now starting to rationalize and get it in a better place. So truckload capacity becoming to a better place, the combination of that with rail service and what value we've created, the combination of those two things are really letting us think about what we can do into 2025.
Yeah, much better context for conversations with customers and maybe turning to the Dedicated business. Performance there, more battleship-like through a very challenging stretch. Nick, how did you accomplish that? And how can you apply some of those principles from the Customer Value Delivery to other parts of the portfolio?
Yeah, so it's been a really good model for us. We've faced a little bit of headwinds this time, but if you look historically, we have consistent growth in that area. And really, it's about taking care of our customers. So we go out and we look at really what does the customer want and try to design that. We don't have a set thing, "Here's what we need to go sell you. We understand your business and design it to that." And then we're flexible as their business grows and ebbs and flows. And so we've really done a good process, CVD, Customer Value D elivery, and that allows us to really drive efficiency there. So it's allowed us to be very consistent, not lose a lot of business on the bottom side. So it's helped us continually grow and get acceptable margins.
That business has indexes built into it. It allows us to typically keep up with inflation. As I'm moving over and going to start taking care of the highway side of things, I hope to bring some of those same standards over there on the brokerage side and really focus on niches where we can really go provide good service for customers in the brokerage area and look for small, mid-sized customers that we can really target and be consistent because in Dedicated, where we play is not really where we compete with our publicly traded competitors. We go after private fleets. If I kind of take that over, how can we go after those mid-size, mid-sized customers and really take good care of them? They appreciate the value.
They appreciate what we can do and bring them purchasing power from the carrier standpoint.
Very helpful, and help us understand how you read the competitive landscape within Dedicated, obviously excess capacity in the truckload market. He's looking for a home and some more stable contract business. Do you see a leveling in the competitive playing field, or it's still pretty intense out there?
Yeah, well, first, I think you have to divide what is Dedicated and what's quasi-Dedicated. And so there's a portion of it that's more on the capacity side of Dedicated. And so that's competitive closer to the one-way market. That's probably 25% of our business. That's kind of where we started. But over time, we've migrated away. And so really on this side, mostly it is a competitive nature of us against the private fleet and what they think they can do it themselves from recruiting drivers, insurance risk, cost of capital. But what we bring is engineering and technology to make it much more efficient and much more flexible. So that's the reason whether the cycle, there's a lot of truckloads or there's not much, you can still see us continually grow.
As Shelley said earlier in Dedicated, we're going to have our fourth best sales year in this freight recession. So it doesn't really change us. We still have $90 billion of market to go after. So we change our sales pitch just a little bit and start talking about cost of capital, what's your insurance cost doing, what's your work comp, how can we help you drive efficiency out? So it's really competing with their cost and we can usually win that battle.
No, that's very interesting. Are you starting to see these Dedicated fleets grow organically? I know you're doing a nice job on the ads, but isn't that a tell that we're getting closer to the turn?
Yeah, I would just say when you look at our business from the losses that we had in Q1 to Q2 down to Q3, we're back down in Q4, probably going to be back what our previous probably 10 or 15 years had been on losses. So I think from our standpoint, we think that we're on the bottom. And hopefully from what we've seen last year, we started forecasting where we have some visibility of some fleet losses coming. So we don't have that. We have visibility and we don't see any of those losses coming. So we think we're about to come back out of it.
That's great. And I know you're working on ICS to restore performance. What are the key steps? It sounds like you're shifting the focus from a client segment standpoint, but how do you get back to profitability? What's the timeline for it?
Yeah, well, Shelley asked me that timeline all the time. So I haven't given her one. So I don't think I want to give one here. But anyway, I think we've got to scale out of it, is what we've done. We've lost a lot of revenue. And so we got to methodically build a solid base that stays there year after year for the most part. It shouldn't be in a bid season. It needs to be us going and solving our customers' solutions where they're at. So I would say the key is scale. We've got a lot of costs we got to overcome in technology. We held on to some people through COVID and we've gone down, but we did not have layoffs.
And so now, particularly on the sales side, we need to sell and outgrow that fixed cost and really leverage our scale, but leverage it with the right customers in the right segments of business from whether it's flatbed, temp, tanker, whatever it may be, where it's going to stay a little longer.
No, that's helpful. I guess turning to the JBT business, talk about what you've seen from the stickiness as it relates to power-only, the growth potential and the importance of this offering in the portfolio.
Yeah, I would say very pleased with how it's performed really through this cycle. If you look at it, it's asset-light, it's trailers. And so I look at it as kind of you've got Intermodal that's got fixed lanes that we can't compete with Intermodal. But on the trailer side, we have some lanes and we just balance those lanes with trailers, with independent contractors, and with some capacity fleets that help us. And so I think we found a good niche there. We can fill in some lanes. We need consistent lanes, fill that in, get much more efficient. And then we probably can grow 20% without adding more trailers. We got plenty of trailers in there. So I think we can scale up to that. And so I'm excited about that. That's a good solution for customers that need dropped trailers.
We're on the ICS brokerage side as LTL. It could be some trailers, but primarily it's LTL. So we kind of fit both sides right there, whatever the customer needs.
And the Final Mile business, smaller, but a better performer through this downturn. I guess how is that focus on revenue quality? How does that endure? Are you seeing anything for demand for furniture, exercise equipment, the like?
Yeah, we need everybody to go buy some furniture and exercise equipment. The demand hadn't been there. It needs to be a little stronger, but I would just say we're really safe and secure is what we do. Everybody says they do background checks, but we do a very thorough background check. We've got some outside help that really helps us with vetting those. You have to have a Social Security number, not an ITIN number, and so we're very methodical on backgrounds, and so with that quality and with that service, we made a pivot about a year ago. We've proven our service. Now we need to get paid for it, and you've seen that in our results, and so even in the down cycle, our margins have been pretty good in there. So it's typically an asset-light model, and we think we can scale that.
We think there's other opportunities, but we do need that market to come back. A couple of things that we've added there is LTL and Managed Logistics is also on Final Mile, been there about a year. And we're really excited about what we're doing on the LTL side of things to really help us focus on small, mid-sized customers that we can bring in there. And then Managed Logistics is more the mid-sized customers helping them. So we've got a really good pipeline there. So I think you've got a lot of diversity in Final Mile of products that we feel very good about and getting returns. So very asset-light.
Shelley, you made some comments about market capacity. I think that's been one of the real challenges of the cycle, just waiting for it to finally exit. How many is this? Are we just quarters away from that 10% remaining? Do you see a market closer to balance today? And where do you see excess capacity across your business? There was a previous reference to $100 million or so of excess capacity costs. For a 25 plan, do you maintain some flexibility to take that down? Or how do you carry that capacity into an inflection?
Yeah, so I'll start with the carrier side. So earlier I said that if you just take the math of our excess capacity in the market from a truckload perspective and play that out, that's sometime third quarter of next year just mathematically. So again, we've not been great at predicting, but if you can use that as a good proxy, I think that's something I would say from an overall. I mentioned earlier that you saw some Eastern network growth inside Intermodal. And I think that's been good from a customer viewpoint. I think it also tells us what customers are thinking about capacity in total of maybe some pockets that are happening overall.
If you think about where our costs are at in particular, I'm going to focus in on Intermodal because if you think about the investments we've made, we've made a lot of investments with our march towards 150,000 containers really by 2027, and so we're at 121,000 today. We have too many containers to the level of demand that we have today, and so part of our cost base sitting in there is we have depreciation on current equipment. We also have storage fees on that equipment in total, and so I think those two things are important, but equally important is really what's happening to our network balance, and so if you think about what happened through COVID, I said that we didn't do a good job predicting. Our customers couldn't either.
And so if you think about a bid process, I have a long history working bids and pricing. That was my first management job 28 years ago. And usually a customer will send in a bid and it'll be hundreds of lanes and they'll tell you per lane how many shipments they're going to move. And if they tell you they're going to have 100 shipments, over COVID, that's looked more like about 60 shipments. So 60 out of 100, if you take that and replicate that by the number of lanes and the number of customers, it's very hard to run an efficient asset network. And so that's what's happened inside Intermodal. So if you think about we've got volumes that are strong, we also have empty costs that are very strong.
And so our ability to fill those empty lanes in with loaded miles or loaded boxes is really important to the network. That's part of our cost as well. And so as we come into this bid season, our customers have done a better job. They're actually more predictable. That's a good thing for an asset network operation. So our customers have gone from about 60%, I would say, effective to now in the 80s. So that's much better. That should allow us to maintain the current network, to grow into the network and start to fill some of those empty legs. So if you think about the $100 million that we talked about, those three buckets are big parts of the bucket and maybe to a smaller extent as some of the people cost, but to a lot lesser extent on the people side.
And Garrett, just to add something so I can chime in here. The $100 million we talked about early this year, and the majority of that was outside of FMS and DCS. So that was in highway and it was in Intermodal. And so it was in the capacity, whether it's too many trailers in JBT or it was containers or chassis in Intermodal. And then there was a people component. Now keep in mind since first quarter of this year, particularly coming out of third quarter and now that we're in peak season, the amount of excess equipment has been absorbed by a lot greater demand in the market.
So I would say if we're not going to update the $100 million number, but it would be far less today based upon how much of that equipment is currently being utilized in the market as well as we've seen attrition in some of our office personnel since that period of time. I mean, third quarter earnings call, we talked about having to add over 750 drivers in a three-month period to be able to flex up to serve peak demand. And so you could see us sort of growing and getting to a point where we're scaling into some of those, but obviously we're still a little bit long in the tooth with some of our equipment as well as some of our resources in the office.
Very helpful. So help us understand the earnings leverage of the J.B. Hunt model.
You said volume means more to the network today than it ever has before. Obviously, pricing is the biggest lever. But as you think across, obviously JBI and Dedicated, but also the other businesses, where do you see or what degree of earnings leverage should investors expect as we hopefully move into a market recovery?
Looks like everyone's looking at me for that one. I mean, I think I see opportunities across all five of our business segments, and Shelley alluded to that. We have margin targets set for each of our business segments. We're obviously underperforming in four of our five business segments. Now, is that unique to J.B. Hunt? No, I think the entire transportation market is underperforming to their expectations and of course their shareholders' expectations. But I think the operating leverage in Intermodal will certainly come from a combination of volume and price.
Price will always mean more to us than volume. Darren Field, our President of Intermodal, has talked about volume meaning more now today than ever before, largely because of how underutilized some of our assets and equipment are. In Dedicated, I think about or reminding the room, a little over a year ago, we said we had visibility to fleet losses and that we would have success hopefully selling into some of those losses. Now we've seen our Dedicated fleet shrink a little bit this year, but we've been very successful. Nick alluded to this being one of our strongest Dedicated sales years in our history, which has helped us sort of overcome some of those losses. So think about we're losing accounts at mature margin and adding startup accounts that are at immature margins.
And so as we see the maturation of that portfolio, that will be beneficial to margins. And we could see the vintages, if you will, of our Dedicated assets and our base business and know that it's performing in line with our return targets and in line with our margin targets. And then in highway, obviously, there's work to do to restore margins and restore profitability. So I see a lot of opportunity for us to scale into those investments and return us to acceptable margins and returns. So a lot of opportunity. We have pre-funded a lot of our growth and we have a lot to scale into and grow into.
That's great perspective with that. We're out of time. Special thanks to J.B. Hunt for being here. Thank you, Shelley, Nick, Brad. Really appreciate it.