Note: This event is being recorded. I would now like to turn the conference over to Andrew Hall, senior director of finance. Please go ahead.
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 these set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now, I would like to introduce the speakers on today's call.
This afternoon, I'm joined by our president and CEO, Shelley Simpson; our CFO, Brad Delco; Spencer Frazier, EVP of Sales and Marketing; our COO and president of Highway Services and Final Mile, Nick Hobbs; Brad Hicks, president of Dedicated Contract Services; and Darren Field, president of Intermodal. I'd now like to turn the call over to our CEO, Ms. Shelley Simpson, for some opening comments. Shelley?
Thank you, Andrew, and good afternoon, everyone. I want to start by thanking our employees for their continued focus on serving customers safely and consistently. Their efforts are the foundation of the progress we're making across the business every day. As I think about where we are today, it's important to remember that our industry operates in cycles. With the long tenure of our management team, we have been through numerous cycles, and what we've learned over time is that success comes from staying disciplined throughout every phase and strategically positioning ourselves for the opportunities that follow. A few years ago, our team focused the organization on operational excellence. We spent significant time improving execution, strengthening service, driving productivity, and creating a more efficient operation. Those efforts were not always easy, but they were necessary.
As growth opportunities returned, we were positioned to capitalize on that demand and take market share because the foundation had already been built. We offer customers unique value across our suite of services and remain committed to disciplined growth that aligns with the returns we expect to generate. Growth alone is not the objective. Sustainable growth that creates long-term value for our customers, our people, and our shareholders is the objective. As I look across the organization, we are seeing evidence that our strategy is working. We are making early progress on driver hiring, which gives us confidence in our ability to support current and future growth. Our year-to-date safety performance continues to improve on last year's record, reflecting the discipline and culture we've built over many years.
We are seeing the record pipeline in Dedicated begin to translate into new truck growth and are continuing to take market share in our more transactional businesses. Customers continue to lean into J.B. Hunt. Across our organization, we're seeing evidence that customers want deeper relationships and broader engagement within our services. Importantly, we're approaching these opportunities with rigor and discipline. Every growth opportunity is measured against the return profile we expect to create. We are working daily to ensure we maintain the right balance between growth, customer service, operational excellence, and financial discipline. Looking forward, we will continue to improve productivity and lower structural costs where opportunities exist. The largest opportunity ahead of us is ensuring our pricing reflects the value we create.
We are making decisions today that we believe will strengthen margins and returns over the long term, enabling us to create even greater value for customers that will ultimately need to be covered through higher rates. The foundation is strong, the opportunities ahead are meaningful, and we remain focused on converting both into improved margins, stronger returns, and long-term shareholder value. With that, I'll turn the call over to Brad.
Thanks, Shelley, and good afternoon. Let me start with the quarter. On a GAAP basis, total revenue increased 20%, operating income increased 2%, and diluted earnings per share increased 3% versus the prior year period. Sequentially, operating income fell 5% from the second quarter at the better end of the guidance we provided intra-quarter. These results reflect strong demand for our services and disciplined execution. We absorbed near-term cost pressure while investing behind growth. We are protecting our networks, growing with purpose, and positioning the company to generate stronger returns as our pricing catches up with our strong value proposition. At an investor conference in September, we identified three primary cost headwinds this quarter, driver-related investments, volatile fuel prices, and higher claims and medical costs. Driver-related costs include recruiting, onboarding, training, sign-on bonuses, and targeted wage actions.
In total, these cost buckets, driver-related claims, and fuel impacted operating income by over $50 million versus the second quarter of this year, and group medical costs alone accounted for more than $16 million of that increase. These costs are real, but the context matters.
Driver investments support visible demand and prepare our networks for growth. Fuel surcharge programs recover costs over time, although rapid movements create a timing mismatch and dilute margins. Risk and medical costs remain an industry-wide challenge, and an elevated number of train derailments drive up cargo claims expense. We will control what we can through safety, productivity, asset utilization, and disciplined execution. Importantly, we have not given back the structural cost improvements from our Lowering Our Cost to Serve initiative. These pressures are either more cyclical or unpredictable than structural and reinforce the need to price our services for the value, capacity, and reliability we deliver. Turning to capital allocation, our priorities remain consistent and return focused. Net CapEx was $146 million in the quarter, primarily supporting replacement needs.
Based on a robust pipeline of dedicated opportunities, we expect CapEx to trend higher in Q4 but still targeting approximately $700 million for the year. We repurchased approximately $174 million in stock, or over 700,000 shares in the quarter, the majority of which were purchased towards the end of the period. We will invest where returns are compelling, preserve our investment-grade balance sheet, support a growing dividend, and remain opportunistic with repurchases. We will not deploy capital simply to grow. Every dollar must strengthen the business and create long-term shareholder value. Let me close with three points. First, disciplined growth is working. Our service, scale, and execution are earning customer trust and creating share-gain opportunities. Second, margin repair remains a top priority. We have done the hard work on structural cost and will be equally disciplined in securing price that reflects the value we create.
Third, we are supporting long-term growth from a position of strength with experienced people, proven technology, and available pre-funded capacity. We have confidence and focus on converting execution into durable earnings growth and stronger shareholder returns. That concludes my comments. I'll now turn it over to Spencer.
Thank you, Brad, and thanks to everyone for joining the call. In a dynamic, rapidly changing market, our people remain focused on what we can control, serving customers, improving execution, and helping shippers create reliability across their supply chains. Our teams have earned customer trust by doing what we say we will do, and that trust is reflected in the depth of our relationships and growth of our business. Over the last several quarters, we have spent a significant amount of time discussing the structural changes taking place across the transportation industry. The pace of this change created tender acceptance, cost, and driver availability challenges for our customers. Capacity remains constrained, operating costs continue to move higher, and supply chains are seeking out providers that can deliver reliable capacity at scale. Most importantly, customers have gained a much clearer understanding of these realities.
The conversations we are having today are materially different than those we were having a year ago, six months ago, or even last quarter. During the quarter, demand across our suite of services continues to outpace the broader market. Our customer retention remains strong, and we saw continued growth in our commercial pipelines. Customers are proactively engaging with our commercial teams across all business units as they evaluate efficient network designs, transportation procurement strategies, and long-term capacity planning. As part of those discussions, we are seeing customers become increasingly focused on provider quality, resiliency, and operational execution, rather than viewing transportation strictly through the lens of procurement. While working with customers to create differentiated value, we also believe the industry is entering a new phase of the cycle, one that has moved from repricing transactional capacity to repricing contractual capacity.
You can see from our results, our work started with ICS and repricing our transactional brokerage business in Q2. JBT quickly repriced our portfolio in Q3, and now we are actively repricing our JBI and DCS business. Customers understand it is getting more expensive to support the capacity, the service, and the professional driving jobs that power America's supply chains. They understand that reliability creates value beyond the rate per mile. That is the foundation for our pricing conversations. Simply put, we remain focused on delivering operational excellence and being compensated for the value we create for customers. We are confident in our ability to help customers achieve better outcomes and confident that those outcomes will continue to be reflected in the returns generated across our business. With that, I will turn the call over to Nick.
Thanks, Spencer, and good afternoon. I will provide some updates on our Final Mile and Highway businesses, but I will start with an operations update. A key piece of our work to be operationally excellent involves our commitment to safety. Building on the past three record years, I am proud that our safety performance year-to-date, as measured by DOT preventable accidents per million miles, continues to best last year. Our team has done a great job of onboarding a significant number of new drivers in the past several months while investing in training to ensure future success at J.B. Hunt, which has safety at the core. On the driver front, our driver need to support current and future growth of our business remains elevated. We have opened the same proven playbook we have used in past cycles and implemented various strategies to attract and retain drivers.
We are seeing good results from these actions as our driver hiring success improved throughout the quarter. We continue to believe the industry will need to further invest in professional drivers who operate safely and comply with industry regulations. Shifting to the business. In Final Mile, our demand in our fulfillment business remains strong, and we are expanding with customers in this vertical. In our core end markets of furniture, exercise equipment, and appliances, demand remains stable. Our sales pipeline across Final Mile remains encouraging, and we continue to have conversations with both new and existing customers around new opportunities as we work to offset as much of our previously disclosed $90 million revenue headwind. Going forward, we are expecting a modest peak season in Final Mile, and our focus remains on repairing our margins through disciplined growth so that the returns match the value we create for our customers.
In JBT, we have spent the past couple of years focused on operational excellence, really earning the trust of our customers through our service. This trust has afforded us the opportunity to have discussions with customers to address rates that were no longer able to source capacity in the market. We took an appropriate amount of risk in these discussions, and while we did see some volume churn from customers, we remained disciplined on rate and quickly addressed our profitability woes in the second quarter. These new rates were implemented throughout the third quarter, and we have actually seen some of the volume that churned come back to us in the form of mini bids.
Going forward, we remain focused on providing high levels of service while maintaining our open dialogue with customers to ensure our rates remain aligned with the current market conditions and the value we create for our customers. I will close with ICS. The positive momentum we have in this business continues to build. We have been successful in adjusting our prices to the value we create and to reflect the current market conditions while remaining disciplined. In the quarter, gross margin expanded almost 200 basis points sequentially, supported by our focus on returning the business to our margin targets. The truckload market remains dynamic, but we are confident in our strategy, our team, and our ability to quickly adapt to changes in the market. We continue to see opportunities to further grow market share driven by the strength of our service, our platform, and our customer relationships.
Going forward, our focus has not changed. We expect to leverage our cost through the use of technology and to continue to scale volume through the platform to drive disciplined, profitable growth in the segment. With that, I would now like to turn the call over to Brad.
Thanks, Nick, and good afternoon, everybody. I will provide an update on our dedicated business. Starting with the quarter at a high level, our third quarter results were below our expectations as overall solid demand was more than offset by growth-related expenses and additional inflationary cost pressures. While the results this quarter do not reflect the underlying strength of the business, my confidence in the long-term opportunity and our margin expectations for our dedicated business have not changed. More on this in a minute. During the quarter, we sold approximately 425 trucks of new deals, bringing our year-to-date new sales number to 970 trucks compared to our full-year target for gross sales of 1,000 to 1,200 new trucks. Even with this strong sales performance, our pipeline remains at record levels as customers continue to engage with us about an outsourced fleet solution amid current market dynamics.
In September, our pricing activity was up almost 50% compared to last year, and the amount of business going through an engineered design request is near record levels. This activity continues to be supported by our disciplined pricing approach to targeted returns on our invested capital. In the quarter, we also saw customers look to grow existing fleets with us. Historically, these decisions have been largely demand driven at the customer level. Today, however, much of that growth is being driven by a desire for additional dedicated capacity as third-party capacity has proven less reliable. We have a proven track record of creating value for customers, and we believe our operational excellence, combined with our disciplined approach, allows us to offer solutions that are differentiated in the market.
During the quarter, we faced inflationary cost pressures from the areas that Brad outlined earlier, as well as absorbing startup costs associated with onboarding new business. As we bring new accounts online, the cost of getting these accounts up and running is elevated in the current environment, particularly due to the expense of recruiting and attracting drivers. Historically, I have talked about taking roughly six months for a new account to get to targeted profitability. While this dynamic creates near-term pressure on results, it also positions us for future earnings growth as these accounts mature. For existing fleets, we continue to assess driver needs and driver pay on an account-by-account basis and are working with customers on the economics associated with these costs. We are making good progress in those discussions, and this will remain an ongoing effort in light of the limited supply of qualified drivers in the market.
Throughout the year, I have discussed my expectation that we would return to fleet growth in the second half, and this quarter provides evidence that we are starting to see the wave of new truck growth materialize. As a reminder, we need to see this wave build for a few months before it translates into improved profitability. Going forward, with multiple quarters of strong truck sales and a pipeline that remains at record levels, I expect the fleet growth to continue. At the same time, we will likely see some modest margin pressure associated with starting up these accounts. Importantly, this is a healthy challenge to have as it is driven by growth. More importantly, it is disciplined growth supported by long-term contracts that meet appropriate return thresholds. My confidence in our dedicated business remains very strong.
We have a proven track record of consistent financial and operational discipline, a large addressable market, and a differentiated value proposition for customers, all of which position us to deliver compounding growth over many years. With that, I'd like to turn it over to Darren.
Thank you, Brad, and thank you, everyone, for joining us this afternoon. I said last quarter that the value proposition for Intermodal is the strongest it has been in more than a decade, and I feel even more confident in that statement today. Our strategy and service levels are driving market share gains, and customers continue to want more of our Intermodal capacity. During the third quarter, demand for our Intermodal service was strong, and we continue to set quarter volume records. For the quarter, volumes were up 8% year-over-year, and on a monthly basis, volumes were up 9% in July, up 8% in August, and up 9% in September. With truckload capacity tight, elevated and volatile fuel prices, and solid Intermodal service, shippers are converting freight to Intermodal at a strong pace, and customer demand is outpacing our available capacity.
During the quarter, transcon volume increased 1%, while our Eastern volume increased 18%. We continue to see significant road-to-rail conversion opportunities in the East and are being disciplined in our volume growth, prioritizing lanes and freight that we believe will be sustainable Intermodal freight over the long term. The rail network continues to experience elevated volume growth, and we remain in active dialogue with all our rail providers on resource planning needs for both current demand and future volume growth. Overall, rail service remains solid but has taken a small step back, in part to the strong domestic Intermodal volume growth, as well as increased international Intermodal volume. Historically, international Intermodal containers have created operational challenges for railroads and have been one of the least efficient portions of their network.
That said, we remain confident and encouraged by our rail partners' commitment to reliable service and our collective ability to support future volume growth. As we enter into October, we are also kicking off the beginning of our 2027 Intermodal bid season. Before I provide some thoughts there, I want to provide some color on how our 2026 bid season ended up. The 2026 bid season was a tale of two halves, and we built momentum on pricing as we moved through, especially the last few months. For the overall network, we realized low single-digit increases in pricing during the last bid season and are seeing positive contribution from these pricing actions in our results. That said, the operating environment today is vastly different than that of just 12 months ago, and the value proposition for our Intermodal services is significantly higher.
Since our last earnings call three months ago, we have seen increased inflationary cost pressures in our business, primarily related to driver availability, which has only amplified the magnitude of the price increases needed during this bid season. While the volume of activity remains relatively small this early in the bid season, I am encouraged by the early results we are seeing on what are some of the oldest rates in the system. After four challenging years during the freight recession and continued inflationary cost pressures across the business, our focus during the 2027 bid season is on repairing our margins to earn an appropriate return on our investments to support our future growth. Today, I am even more confident in our ability to price our services to the value we are creating for our customers than I was a couple of months ago.
Our service and capacity are unmatched and are built on the foundation of operational excellence. With that, I'd like to turn it back over to the operator to open the call for questions.
We will now begin the question -and -answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourselves to one question. If you have additional questions, you may reenter the queue. Our first question today is from David Vernon with Bernstein. Please go ahead.
Hey. Good afternoon. How you doing? Darren, I think you left the nice little transition there in terms of you're optimistic about what you're really seeing on bid season. Any way to quantify maybe what you're seeing right now? Then, I think in a former call, you guys had talked about maybe repricing 10% of the business during this quarter, and then it kind of phases in over the next year. Any help you can give us in terms of shaping that path on when renewals would go into effect with the new pricing that you're seeing now, that'd be helpful. Thank you.
Sure. Thanks for the question, David. We've highlighted for several quarters now, we reprice or implement about 10% of the volume in the fourth quarter, and then 30% of the volume receives new pricing each of the first three quarters of the year. In terms of providing feedback on pricing, we're not going to guide for that. Costs are a challenge for our industry. Bringing on drivers, driver pay, all things insurance-related. We're faced with a number of cost challenges, and we're asking for larger rate increases certainly than what we've shown so far. I'm not going to highlight a forecast or anything. What I'll tell you is it's more than what it has been. I'll just answer it that way.
The next question is from Jonathan Chappell with Evercore ISI. Please go ahead.
Thank you. Good afternoon. Hey, Brad. Brad Delco, question for you. This over $50 million of expense headwind, I think maybe it would help if we can understand how much of that was really one-time in nature, and therefore, becomes a tailwind from Q3 to Q4. For the rest of it, how do we think about the timing of pricing recouping that, whether that's an Intermodal or Dedicated? Just kind of parsing out over the next couple of quarters how that $50 million chips away back to break even or even a tailwind at some point.
Yeah, great. Hey, Jon. I'll answer what I can on that and try to avoid giving too much forward-looking guidance. I think we did a pretty good job of breaking it out at the conference in terms of where we expected these costs to land for us for the full quarter. I think that for the most part, those costs landed pretty close to where we expected, which would be indicative of us obviously coming in at sort of the better end of the guidance range that we provided you guys. But of the $50 million, let's call it slightly more than half that we think are the cost of us onboarding, training, and putting through some of the sign-on bonuses and driver wages that are required.
Think of these more as kind of the variable cost, but the cost that will, without a doubt, need to go get recouped with pricing. Fuel to me is one of those, man, it was just really showing some odd volatility throughout the quarter. I think right about the time or the week after we made some of our comments, thankfully, fuel sort of tailed off a little bit towards the end of the quarter. So maybe slightly better than what we thought it was going to be. That to me, again, I would assume we will catch up and recoup some of that fuel headwind. The medical claims or the medical costs that, including Actually, let me just say claims in general, cargo, casualty, and medical. Think that ended a little bit worse than what we thought, but mostly on the medical side, particularly in September.
Listen, frequency and severity are things, whether it is casualty claims or medical claims, it is really hard to predict. Man, I would knock on wood, and I would like to say some of those shouldn't repeat, but we never know. My hope is that that does get a little bit better for us going forward. But I think what I want to land on is, hey, some of these costs will be with us in Q4 as well as into next year. But I think more importantly, every day that goes by, I think we make a little bit more progress on the pricing side. I think the relationship between price and cost moving forward should get better, from what we saw in August and September. Hope that addresses as much as I can.
Maybe to touch on [inaudible], I don't want to give quarters or months in terms of how long it takes you to go out and get some recoupment of these costs for Darren. But anything you want to add there?
What I would say, Brad, is that we are really active and very granular down to the account level on what we think our needs are, and we are active talking with our customers. There is nothing in our agreements today that prevent us from having and reviewing the economics of each unique deal to ensure that we can have the reliable capacity to meet their needs. So those conversations are extremely active. We are having success. But yeah, it is going to take some time. There are situations where we have anniversaries right around the corner, and depending on the severity of need at each location, we may elect to wait until those proper anniversary dates. So it is going to take a little bit of time.
We've talked all year about how the pricing would lag, both in Intermodal and in Dedicated to what we've seen in the one-way truckload space, but we're in that moment in time right now.
Hope that helps, Jon.
The next—
Hey, Jonathan—
Excuse me.
I'm sorry. I want to make a point also. Just anytime that we see this pressure happening from a driver environment, typically yields a much better pricing environment for the next bid season. If you just think about the tightening that occurred even here in the third quarter, more than the second quarter, and we're starting our bid season as we speak, our customers understand the value that we create to bring more drivers to them. When we're feeling that driver pressure, they're feeling that pressure as well. It's why you've heard several comments earlier around our confidence and our ability to earn an appropriate return for the value that we create, and that's what we're really focused on.
The next question is from Brian Ossenbeck with J.P. Morgan. Please go ahead.
Hey, Brian.
Hey. Thanks for taking the question. Good afternoon. Just real quick to define, the startup costs that Brad Hicks was talking about, those are assumed separate than the other $50 million. So those are just kind of normal growth costs, if you call it. I just want to confirm on that. Then maybe for Spencer or for Darren, we've seen spreads are pretty much as wide as we've ever seen them versus truck. What do you consider sort of normal, in, I guess, the east and the west or transcon? How much can you lean into that without kind of maybe hurting some of the truckload conversion, which is also the first time we've really seen that come to the market, in this sort of fashion.
So clearly, there's an emphasis on price, but also want to hear a little bit more about how you balance that out, both from a resource perspective and a volume perspective as well. Thanks.
Yeah, I'll let Brad Hicks comment on the startup costs and then pass it over to Darren and Spencer.
Thanks, Brian. Yeah, I think two things. One is they are separate from the quarterly costs that Brad made reference to. We typically always have some degree of implementation expense in any quarter. We have ramped that up as the year progressed, so we had more onboarding occur in Q3 of this year. I think the other thing that I highlighted in my prepared remarks that I want to maybe accentuate, that is costing us more in today's environment than we had historically seen. Because of some of the same effects that Brad referenced. The sign-on bonuses, the cost associated with our recruiting efforts for those driving resources, those are somewhat elevated because of the environment. So to answer your question, there's a little bit of normalcy in our startup, but a little bit of abnormalcy as well.
Yeah. Then, Brian Ossenbeck, you mentioned it, really that spread between Highway and Intermodal is significant. I'd say it's more than double what the historical norm is of, say, around 15%. That creates an opportunity as long as we have reliable, consistent service and capacity, which we do. We started to see some of that price change in the quarter. We're actively having conversations to close that gap, but it's based on the value that we create. We do know that reliability today is winning over the lowest rate, and we believe that the opportunity for continued conversion on the Highway will happen because the cost of providing Highway transportation capacity is high and continuing to go higher. So our opportunity today is really to catch up and then ultimately outrun that cost change.
We've proven we've been able to do that with our commercial teams, with our ICS results in Q2 and our JBT results in Q3. Anyway, actively trying to close the gap, and we view it as a significant opportunity to get back to our return profile.
The next question is—
Thanks, Ossenbeck.
The next question is from Chris Wetherbee with Wells Fargo. Please go ahead.
Hey, Chris.
Yeah. Hey, thanks. Good afternoon, guys. Hey, Brad. I guess I want to maybe pick up on that answer, Spencer, and think about sort of the speed at which you can kind of go through this. I think there's been a couple of comments on the call about this being the opportunity to kind of get the pricing during bid season and have margin repair via that pricing. Is closing that gap the kind of thing that takes sort of one bid season? Do you think that the gap has gotten so wide that maybe it takes more than that? I just want to get a sense of what you think the opportunity is in terms of timing for closing that gap.
Well, Chris, let me jump in there. This is Darren. In terms of closing the gap against truck, look, we're faced with a pricing cycle and a capacity crunch, if you will, as we go into the next pricing cycle. I don't think anybody at J.B. Hunt believes the truckload rates are not also going to continue to climb. While the gap has widened for now, as we go into this next cycle, I believe and feel very confident that we will be able to achieve rate increases that cover our inflationary expense while also expanding beyond that to help us improve our margins. Now, does that answer, with an expanded margin, fully close the gap as far as it can? I guess I don't really know, and nobody will know until we go through this year.
But as we go through this pricing cycle, we're very confident that we can achieve price increases that will repair our margins. That is a top priority for us as we go into this cycle. And something that Shelley highlighted, I mean, having visibility to these costs that really punched us in the nose in the third quarter
I'm really grateful in a way that we get to see those at this point in the cycle so that we're fully prepared for that as we move into the 2027 bid season.
Hey, Chris. It's Shelley. I want to just make sure I'm clear about our direction moving forward. If you think about what's happened over the last four years and the gap between what our costs were and what pricing really could deliver, the gap was significant. And we've been talking to our customers, but the first part of our strategy was really making sure we were operationally excellent, making sure we were at the front of our customer scorecard, we were leaning in and creating more value. And we have done that, and that has become cultural across all five of our business units. You sense a level of confidence from this management team because we know that our cost base is going up. It has gone up, and we believe that it will continue to go up. To what degree? We don't know.
But what we do know is the level of value that we've created for customers. And so we've been in those conversations. You heard Spencer reiterate that we've already done that with both JBT and ICS, and still more to go. But we are approaching that across all five of our business units. So our objective, whether we can close the gap or not, will remain to be seen. But we have an objective to get ourselves inside our margin targets, and that is what this team is focused on. And we believe that we can grow, and we can get inside our margin targets, and we are moving ourselves towards that and even more increasingly convinced of that today.
The next question is from Scott Group with Wolfe Research. Please go ahead.
Hey, Scott.
Hey. Hey, thanks. Afternoon. I think what I've heard is Q3 was the worst of the cost-price mismatch. Did I hear that right, Darren? Brad, sorry, Brad. Is there any way to think about when does that turn positive? I just wanted that last question, I'm just a little confused about sort of the message. I think what you're saying is you don't know if you fully closed the price gap versus truck in a year. I guess what I'm trying to understand is, do you think we get just one year of price enough to get us back into the margin range that you've laid out for us?
Well, I'll jump in there, Scott. This is Darren. Certainly, do I believe we can achieve our margin target coming out of next year? Certainly, I believe that. There's no reason that this environment would not present us that opportunity to do that. I believe that as we look back at Q3, man, we had a ton of cost just to build up our driver hiring team to really ramp up some personnel expense related to how we hire and attract and retain drivers. Those people, as they came on board, were not fully productive yet. Well, as we sit here today, those employees are more productive now than they were in the third quarter. So we're getting some benefits against that investment from the third quarter right now.
So there are elements of that expense that I do think certainly would be the most severe mismatch against where prices were. We are entering a cycle where we get to talk to more customers in the normal course of their bid season, and so it functions better. All that being said, we are only going to reprice or implement prices on roughly 10% of the Intermodal book of business, plus any growth that we have in the fourth quarter. Then you get to 30% more in the first quarter. So it does take some time into next year before the prices really begin to show up inside the results.
Hey, Scott, this is Brad. I want to kind of piggyback off of what Darren said because I think it is a good point. The price-cost relationship, if we think that the pricing outlook improves from here, then I think that the statement is true, but there is a couple of buts. The one other thing that Darren said that I think is important is as we were sort of growing the driver recruiting team, it took time before that investment started resulting in more drivers to support our growth. For that investment, I would say we are seeing really strong pipeline of drivers coming out of that team. We actually are seeing close to records, but with a team that is 30% below the peak of that same group during COVID. Some of the technology investments we have made there have made that group more productive.
I think we are getting a return on that investment, particularly on recruiting drivers. It is helping support the needs that both Brad and Darren have, and so I think that relationship improves on top of the price-cost mix. My only caveat to that, obviously, first quarter is always the who knows what with weather. Volumes typically are softer in a Q1, so there may be deleveraging across the system and network on overhead cost. But one other thing I wanted to share that it was a good stat as we reviewed the quarter. As we look at our salary office personnel, our headcount was down about 4.5% year-over-year in the fourth quarter. Sorry, in the third quarter. But our driver count is up 3.5%. I think that sort of shows you the investments we are making are really where demand is requiring us to make the investments.
I think we get obviously more volume and more return out of some of these investments. So I feel good. I do not want to give guidance to that, but I feel good about where we are today and the trajectory of where the business is heading.
The next question is from Bascome Majors with Stephens. Please go ahead.
Hey Bascome.
Hey, Brad. Darren and Shelley, I wanted to follow up kind of the comments that you both made here. You've talked about the 30% and change price cap to contractual truckload and intermodal, and obviously prioritizing getting the price that you've earned to restore margin. But Shelley, you also made some comments about, we also plan to continue to grow in our business, and I think that included intermodal. I think it would be helpful, Darren or Shelley or whoever wants to, could you guys frame where you feel your customers are on what they've converted and what they have left to potentially convert? Within the context of the kind of volume that you think can stick and really drive that durable, profitable growth you're seeking to achieve here. Thank you.
Thanks, Bascome. Let me just start with the high level with the company, and then I'll let Darren kind of lean in from there. When I say we're going to grow, we are a disciplined growth company. Each one of our five business units has significant growth ahead of them because of the addressable market, the operational excellence we're doing for our customers, and our customers are leaning more into us across all of our services. I have confidence that we're going to grow through this next bid season. Part of that confidence comes from the really tough conversations that we've had with our customers in both JBT and in ICS. Also, Brad Hicks is having that as we speak inside Dedicated and some of the early conversations we're having inside Intermodal.
When I think about that across the board, although we're a, call it $13 billion, $14 billion organization in revenue, the addressable market is $600 billion. We've set ourselves up strategically to align directly with our customers at the time that they need us the most. So we're the best service provider when growth will be critical and important to them. If you think about that from an intermodal perspective, I think that only yields to us doing even more business, especially with the current setup. Maybe I'll turn it to you, Darren, to give more color.
Sure. Look, I think, when we hear gaps of 30% to the over-the-road pricing, fuel inclusive, there is a lot in that. 18% growth in our Eastern network is a key stat as well out of the quarter. Look, I do not want anybody to think that all 18% of that growth came in at a 30% discount to the highway rates. That is new business is coming on and continues to convert off the highway at smaller discounts to that. Now, if we start asking for prices that create less than a 15% discount, you are going to slow conversion down. I do. I want to acknowledge that there is a point at which you will not convert highway business, but the amount of room we have inside that pricing gap gives us a pretty good bandwidth.
Every single customer, I am going to have Spencer comment, too, from a sales perspective, but all of our customers continue to tell us their top priority is to find a road to rail conversion for Intermodal deep into next year. I think it is also important to say there is a lot of volume available to us that we can recognize as soon as the gap from Intermodal to Highway closes, may go back to Highway. Part of our disciplined approach is we are not chasing that. We are not chasing the business that is going to leave Intermodal. We are very focused on making sure that this growth sticks with us.
As we are providing value to our customers, we will get to that consistency in the service we have been providing, this is four years of investment in operational excellence, and I really do believe it is paying off today, and it is going to continue to pay off as we go into the next round. Spencer, you may have something.
Yeah. Just a couple of quick comments. I might just follow up on where you just left off. If you do not know that we are ranked or rated America's number one Intermodal provider for the seventh consecutive JOC survey that started in 2023. That goes back, Darren, to your operational excellence commitment, and we know that that creates value. It gives us opportunity to improve and increase our current share of Intermodal business and pick up where other carriers are failing. Our mini bid activity in the quarter was significant, and that really was not significant due to network changes that customers had or increased business or things like that. It was where they needed reliable capacity. Our mini bids create opportunities for us to move faster and improve our position, not just in share, but also in price quicker. So operational excellence matters.
Darren, you mentioned in your comments that our customer demand is outpacing our available supply, and that's another proof point. Of our opportunity to move the ball down the field quicker with Intermodal.
Bascome, I want to add one more thing, because you asked specifically about, is the growth available for Intermodal? For more than a decade, we've seen in our big data warehouse that there's 7 to 11 million shipments available to convert off the highway into Intermodal. Only through the last three to four years has there been a level of consistency that continued to build where that can be a reliable part of our customer supply chain. Now those active conversations that we're having with customers is about converting to Intermodal for the long term, and that's why we believe there will be secular growth that continues to occur, along with us having the ability to recoup our cost in the pricing that we give to our customers based on the value that we're creating.
The next question is from Richa Harnain with Deutsche Bank. Please go ahead.
Hey Richa.
Hi. Thanks for the time, guys. Darren, this is a nice segue. I think you repeated a quote, but you said that customer demand is outpacing capacity. I'm just trying to reconcile that with the fact that Intermodal volume growth did slow despite an easier comp. I would guess that was more about capacity and driving that slowdown versus anything else. If that's the case, I just wanted to understand, are your recruiting and capacity investments beginning to alleviate those bottlenecks? In the previous answer, you said that your recruitment efforts really ramped up in Q3 and those new employees weren't the most productive. I just want to, again, better understand if we're through the most intensive phase of those investments or do costs still have room to move higher, but you just feel better about your ability to recover them through pricing?
Well, appreciate the question, Richa. Certainly in the third quarter, our volumes, there was more available to us than what we were able to execute. You heard us highlight challenges on the driver market, and I don't remember a time when our own drayage capacity became a little bit of a bottleneck for us. We probably faced some of that as the third quarter moved on. That was a little bit of a surprising position to be in. That's not something we're used to, and thus, we highlighted cost challenges as a result of that. I don't want the 8% volume growth in the third quarter to represent that that's all we can do.
Certainly as the quarter went on, we had a lot of success at hiring drivers, but we had some moments during the quarter where we had to slow down load bookings, and we had to make sure we were able to honor our commitments. It's a very important part of our operational excellence process with our customers. They believe in it. It gives us long-term growth strategy. As we move forward, I think that the ability for pricing to cover those costs is certainly very important. But I have no lack of confidence that our customers, they're not surprised by our discussions around our costs. I think as this year went on, early on in the year, there was some concern and a lot of pushback from customers on price increases. But as the year has gone on, those conversations have become more realistic. It's not easy.
No customer is handing us money. We have to go in and work with them and be clear as to these costs that we're facing. I think that the realities of the market are helping our customers acknowledge that that's where we're at. As we move forward, I have no doubt that we can get prices that return us to the margin profile that we all expect to be at.
The next question is from Jordan Alliger with Goldman Sachs. Please go ahead.
Yeah. Hi. I just wanted to come back to Dedicated, and you might have touched on some of this, but I'm just curious. Are you actively reopening contracts in Dedicated that perhaps you signed six months ago, and as you've started to start them up, realized costs might be accelerated faster? Have you been able to go into even some of those more recent contracts to rejigger them before they actually get going further? Can you maybe talk to, of the $50 million or so of cost headwind, what proportion would you say was tied into Dedicated? Just trying to get a sense for the timing of margin repair and Dedicated as we move ahead. Thanks.
I'll start, Jordan. It's Brad Hicks, and maybe let Brad Delco respond to the second part of your question. Yes, the answer is yes. What I said earlier is there's nothing in any of our agreements that prevents or precludes us from reviewing and having conversation with our customer to ensure that we have the right economics in place to meet and exceed their expectations from a reliable capacity and value creation. We do have examples. We have examples of business that we implemented in early August that we've already readdressed because our starting driver targeted wage was inadequate in certain geographies.
When we have open trucks and we are slow to hire at the onboarding and the startup of that business, it makes it real easy for us to at least work close with our customer with proper alignment on the strategy that we are going to deploy. In some instances, that is funding and supporting the funding of sign-on bonuses. In some instances, it is a dramatic W-2 adjustment. We are evaluating the entire book of business. We are choosing our spots relative to which customers we are going to now with the greatest needs versus those that maybe are smaller in terms of what the gap is. But we will look to address all of our needs throughout the next few quarters.
Hey, Jordan, this is Brad. With regards to the first part of your question, I would say, we have the most number of drivers in Dedicated. We have the largest number of employees in Dedicated. So when we think about really the cost on hiring, recruiting, training drivers, you can kind of get to the conclusion that more than half of it was DCS. Then two, in terms of medical costs and how we allocate those across the business, given it is the largest segment, they also saw the largest increase or missed a budget or forecast on some of the group medical costs that we saw. But I think that is probably the extent of the detail I am willing to provide on that.
The next question is from Ken Hoexter with Bank of America. Please go ahead.
Hey, [inaudible]. Good afternoon.
Hey, Ken.
Good afternoon. Brad, is there a, I guess, a lot of discussion on pricing. Is there a level of pricing you need on the system average, maybe in Intermodal, to get to those margin targets you've been doing, what, 2% ex fuel, 11% all in? Does ex fuel have to get to double digit in this cycle? Just trying to understand the level you need. Then can you talk about capacity? I think it was mentioned before, the percent of boxes still in storage, and maybe thoughts on CapEx to get there. Then just a clarification, Nick, you noted risk at ICS. Were you talking about carriers post Montgomery? I just want to understand the statement of risk at ICS. Thanks.
There were 17 questions there, so I'm trying to process which one was first. I lost track. Buddy, go first.
Well, he's asking what level of pricing is required to achieve the margin.
Yeah. Well, Darren should answer this, but two call-outs. Revenue per load, ex fuel up 2% with 18% Eastern network growth and 1% transcon. You could view that as negative mix, and that would suggest to you that we did get something stronger than 2% on the network, looking at it on maybe like a same store sales basis or something. Darren, I think when we were at a conference, you said that CFOs shouldn't answer questions about how much price we need. That's why you guys don't let me meet with customers.
But we do have—
I will now pass it over to you and let you answer.
It's very important that Brad Delco remembers we don't have a business if we don't have customers. Look, I know why you're asking the question, Ken. At the end of the day, our pricing has to outpace our inflationary cost, or we have to find methods of taking cost out. I think as we went through 2025, we were very effective in our Lowering Our Cost to Serve initiatives, and we saw success. We've been able to sustain that. The low hanging fruit, if you will, or maybe that's the wrong term. Just big initiatives to get cost out are going to be very difficult in this environment, given just inflationary headwinds. So it is more about price at this point.
I don't have an answer for you in terms of when you see a different revenue per load price change, all of a sudden, that means that we fix our margin. Just what I'm trying to represent is it's absolutely the best environment for us to go deliver improvements in our margins, given how well we've done for our customers, how well we've executed on peak season for our customers, and how well our organization does in this kind of environment to join forces, get the drivers we need, build our capacity answers, and solve problems for our customers. This is the time that we need to prove that, and we'll let our results be the proof that we know what we're doing.
Ken, this is Nick. The risk I think that you're talking about that I said in my statement was to truck. We put business at risk, so we took some bold moves on rates, and that's both in ICS and truck. We lost some business, but ultimately, a lot of it come back to us at the price that we needed. It was just a risk of putting that at business for price.
Yeah. I think I want to add two things there because I do remember us previewing that with our investors last quarter on this call to say, Hey, we know we need to take some risks. We lost money in JBT last quarter, and that team did a tremendous job turning around the business very quickly, and it's because of operational excellence and the ability to go to customers. We have the playbook, and we have a blueprint, and we typically see rate move first in brokerage, then in truck. Obviously, intermodal closely follows with dedicated. Everything to me seems to be playing out just like a normal cycle, and just want to reiterate that. Number two, I know margins are important, and clearly, that is a top priority for us as we go into 2027.
But there was a question, or part of your question, Ken, about containers and capacity. We have capacity to grow into, and the capital we've deployed, we've talked about pre-funding our growth. On a trailing 12-month basis, I believe our operating income is up 16% or 17%. Most of that was done without really the benefit of price. What's also important is if you look at our invested capital, at least our average invested capital balance, third quarter of 2026 versus 2025, it's down about $400 million. So we've seen about a 200 basis point improvement in our return on invested capital, which is still our North Star. Now, we will improve our returns on capital by improving margins, but we will also be disciplined on how we deploy our capital.
We certainly have been very active in returning a lot of value to our shareholders through share repurchases and dividends, and that will likely continue. With that, I'll turn it back to — one more question. Okay.
That next question is from Tom Wadewitz with UBS. Please go ahead.
Yeah, good afternoon. Thanks for the question. Wanted to ask about the Intermodal dynamic in the West. You did see that kind of lower 1% growth. I think you had referred maybe earlier this year to competitive dynamic in the West that was kind of constraining things. I just wonder if that's a factor in the relatively low transcon Intermodal volume growth. Do you think that's going to change? Would it be reasonable to expect an acceleration in that volume as we look forward? Then just real quick for Spencer, what do you think on peak? Your services are doing great, but any kind of broader comment on customer views on normal peak, strong peak from a broader truck perspective? Thank you.
Yeah, Tom, Darren here. The transcon growth at 1%, I would agree, we would have maybe thought that that would have been a little better than what it has. I think that we have been very disciplined over a number of years. We don't want to grow too fast in the head haul and just eat up the benefit to that growth with the cost of repositioning empties. That market has had some of its own challenges. Also, the Highway capacity that has been so challenged in the East. There's an awful lot of additional customer asks for Intermodal capacity in the East. Out West, I'm not sure I'd tell you that the demand for what we're doing from our customers has the same robustness, if you will. It's just not quite as strong, and you're not really faced with a lot of highway conversion.
That's not really what the competitive forces are in the West. It's typically more Intermodal, or you're competing against all water, or you're competing against in-tact international. Those are really the elements. I think that as we do every year, we ask for prices early in the bid season, and we lost some business out West. That's when we referred to competitive forces surprising us. That would have been two or even three quarters ago. I don't think that in today's environment, I think everybody is faced with cost challenges, and I would fully expect prices on the Western business to also improve. Certainly as capacity tightens up, our ability to reposition empty equipment in order to create the capacity remains really strong, and so we're ready to solve for our customers out there. We haven't seen quite as many opportunities for growth there. Spencer?
Yeah, Tom, I'll just wrap up by saying, the demand for all of our services across the country is really strong right now. When you think about your peak question, I would say kind of the normal shape, there is a little bit of a slower start. However, we do have peak volumes coming to us, not just off the West Coast, but also off the East Coast, and significant opportunities to pick up share where maybe others don't have capacity today. That can be West Coast, cross-border Mexico, and across our Eastern network. Second, I'll just add, I want to go back to JBT. I'm extremely proud of the work that that team did and creating value for our customers. Nick talked about risk, putting business at risk, but a lot of that business really boomeranged back to us.
Our customers have to check the market when we do that. We understand. It came back to us at different times, which really allowed us to even say and reinforce our value proposition in that segment. That's really what we're going to continue to do across the board in all of our businesses. We're going to make sure that we are creating the right value for our customers and making the most of every opportunity that fits our networks and where we can provide great service and capacity.
This concludes our question -and -answer session. I would like to turn the conference back over to Shelley Simpson for any closing remarks.
Well, thank you for joining our call. I want to close with just repeating and reiterating our priorities outlined out at the beginning of the year, but I actually want to do it in a little different order. First, our priority from now moving into next year is repairing our margins to create long-term shareholder returns. We feel confident we can do that because we have created disciplined growth through our operational excellence. So we're sitting in a position with our customers that's at the highest place that we've been from a sentiment perspective, and growth creates value when it generates attractive returns, and we remain focused on improving profitability while positioning the business for long-term success. We believe the actions we're taking today will strengthen our earnings power, it's going to expand our returns, and it will create long-term value for our shareholders.
Look forward to speaking with you next time.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.