J.B. Hunt Transport Services, Inc. (JBHT) Earnings Call Transcript & Summary

Good morning, everyone. I'm Brandon Oglenski, airline and transport analyst. Again, welcome to Barclays' 43rd Annual Industrial Select Conference. Very excited here on the freight track to have J.B. Hunt up next. I appreciate you guys coming down to warm Miami. But as we're going to do throughout all these fireside chats, I know this is only the second one, but if it's your first, there's a little keypad thing in front of you there. We're going to do some audience response questions. So if we could queue up question one. Do you currently own J.B. Hunt? Yes, overweight, market weight, underweight or no? We can go ahead and vote, please. And Brad, I'm sorry, we didn't get you a keypad up here. Okay. Question number two. What is your general bias towards J.B. Hunt right now, positive, negative or neutral? We can vote. And then question number. If we can get question #3. In your opinion, through-cycle EPS growth for J.B. Hunt will be above peers, in line with peers or below peers. And gentlemen, while we await that, I'm just very happy you guys are here. We're joined today by Brad Delco, Chief Financial Officer; Brad Hicks, President of Dedicated and Contract Services; and Andrew here, Head of IR. So gentlemen, thank you very much for coming down. I think you guys obviously had a pretty solid fourth quarter to end the year. You guys got some costs out. Margins are finally moving in the right direction. And I think I might have even heard a hint of optimism when the first -- on the fourth quarter call talking about demand maybe being a little bit better in the first quarter.

So can we just talk to what we're seeing in markets right now, if you don't mind?

Well, certainly, thanks for having us, Brandon. I appreciate you having us and being here. I think that as we discussed on our earnings call that the fourth quarter played out as we expected. We work closely with our customers. We see that their forecasts were more accurate than they had been over the last several years. And so they've continued to refine and invest in their accuracy. And -- but we saw it play out as expected, which was healthy for us. It wasn't above. It didn't surprise us or anything. But what we did comment on our earnings call was that thus far in Q1, we'd also continued to see strength from a demand standpoint. Now I'll caveat that. That was right before the big winter storm that hit most of the United States minus the West. And so we've all been digging through that. And so I do think that it's hard to tell sitting here in the middle of February when we know we've had some weather events. But we did see better-than-expected strength coming out of the first of the year. We're probably going to have to wait until mid-March, late March to really know. I think shippers are of the mindset that now -- yes, there was a little tightness. We see what spot markets are doing. We see what falloffs are doing, routing guide data. But a lot of that is disruption because of the storm. And so the farther we can get from the storms, if we continue to see that strength, then it's going to feel a little bit different than it's felt the last few years.

And I may double-click on that a little bit, and this will go all the way back to our third quarter earnings call. And I remember Spencer Frazier on that call said, "Hey, from our vantage point, our communications with our customers, like no one's canceled Christmas, and we expect to see a modest peak season." I think Brad Hicks did a good job of describing it. Peak season played out exactly like we expected to from a demand perspective, meaning there was no positive surprise on the demand side. What was a surprise to us, though, was really the relationship between supply and demand, particularly from that Thanksgiving to the end of year time period. And so the market was tight. Obviously, now that the fourth quarter is in the rearview mirror, where we would really see that is in our brokerage margins, both in ICS, but we also procure third-party capacity in our trucking business, right? We don't own or we don't have company drivers or company trucks in our JBT business. It's purely drop trailer network. And so those 2 businesses saw margin squeeze because of the tighter capacity. To me, that only supports this idea or notion that we have seen a pretty considerable amount of supply attrition in the market. Now that we've, I think, rolled into the first quarter, and we very rarely do comment on trends we're seeing intra-quarter. But out of the gate, yes, demand seemed to be a little bit more positive than what we were expecting early January. Brad did a good job of, hey, winter storms have hit us. Everyone's looked at the data, spot rates are still elevated. Tender rejections are still high. The market does seem dislocated. How much of that is weather-driven versus how much of that is this continuation of the supply attrition, coupled with maybe a little bit better demand? Maybe too early to tell. Obviously, we'll have more time in the quarter before we give you guys another update, April 15, tax day.

I do think that we continue to get confidence that what we see on the regulatory environment is truly having an impact. You think about ELP, non-Dom, cabotage, all those things, the compliance to that and actually enforcement. To Brad's point, there's no doubt that, that's contributing. Now how fast is it going to go and how steep are those steps going to be? That's hard to tell or predict, but it's definitely being felt. We see that in driver hiring. There are certain geographies that have gotten more difficult and without much on the demand side, right? And so clearly, we're seeing some capacity exit the market.

Okay. And not to make this really short-term focus, but last week, a lot of volatility in the market, especially with freight brokerage stocks supposedly getting disrupted. How do you guys see AI impacting the competitive landscape? Or is it?

I mean I would say, I mean, we're early in our journey here, but go back to -- Andrew, help me, second quarter when we announced our lowering the cost to serve initiative. As we sort of laid out, that was a cross-functional exercise where our executives looked at 14 different areas of our company, and we set out to eliminate $100 million of structural cost from our business. I think we've been very successful thus far on that journey. But what we also announced at that time was we were simultaneously running a track of business transformation. And this is where we had engineering and technology folks in our org, engineers going into the business, going into those same 14 areas, thinking about how can we reinvent the process, how can we look at our processes and drive out waste. And the difference between our cost-to-serve initiative versus business transformation is we do have to scope the work. We do need to think about how we're going to go attack that. We have a multipronged strategy here. We're either going to build it, we're going to buy it or we're going to partner with somebody to do it. And we've put out some announcements with UP.Labs in terms of entities, businesses that we're creating that we think can help us and our industry solve some of the toughest problems for our company as well as for our industry using AI. So I think AI will have a large impact on driving efficiency and productivity. Do I think it's going to completely disintermediate various transportation providers? I'm probably not on that end of the spectrum. But I do know that our customers ask us to do a lot of work for them. Some of that work is very monotonous but repetitive, and we absolutely can deploy different technologies to help create efficiencies and automate that. And so we could also make better decisions about how we utilize our assets. That's some of our work we're doing with UP.Labs, how do we improve our billing and our entire process from quote to cash. That's some of the work we're partnering with UP.Labs. And so I think there are areas across all businesses where we think AI or automation can help. And I think transportation is no different.

We have 2 top priorities that we often talk about. One is operational excellence and the other is disciplined growth. And so if you think about operational excellence, you can unpack that and we could spend hours talking about all of the areas, but how do we leverage this technology to just drive efficiencies? How do we leverage that technology on our equipment so that it helps us be safer. And so that's really how we're thinking about AI is how can we continue to be operationally excellent. And that means that we have to be the most efficient that we can possibly be. And that should translate back to value creation for our customers. So I thought I'd add that. Or we could karaoke with Andrew based on last year.

We'll be doing karaoke later. Can we -- I know we want to talk about dedicated for sure, but on the intermodal side because there's so much going on with potential M&A between UP and Norfolk and already volumes are shifting between the roads. So how is M&A going to play out for you guys from a service and a commercial perspective?

Yes. I mean I think we've stated publicly, it's -- one, it's not very clear, but we don't know why there's an expectation that anything has to change. We have a very unique relationship with our Western rail provider. I think that's well known. We've worked very closely with BNSF going back to late '80s or early '90s. And we have utilized multiple railroads in the East, CSX and Norfolk Southern. And we don't know why that would have to change if a merger is completed. And so that's kind of been our message since day 1. Has there been some shift to freight? There has. There's been one that has been more public, and then there's been others that haven't been public. And we've shifted freight from one railroad to the other and from the other railroad back to the other. And so that's just part of doing business. You make decisions that you think serve your customers best. We do that each and every day in intermodal. We want them to have a seamless experience. And so yes, some of that stuff plays out. But at the end of the day, I think our customers trust J.B. Hunt to provide them industry-leading intermodal service and what different origin destination pairs and railroads we use to create that service, I don't know why that will have to change going forward.

And how is rail service right now?

Rail service has been good consistently now. We're probably -- I wish Darren was here to keep me honest. Definitely more than 2 years, we're probably going on 3 years of excellent rail service. And I think you're seeing that. I've called this out in a couple of meetings, and I think it's worth repeating for the online audience as well as those here, if you look at a 2-year stack of our Eastern volume growth throughout 2025, we are -- Andrew, help me here, plus 6%, plus 8%, plus 9%, plus 11%. That's pretty meaningful growth considering truck rates are at very depressed levels, and I think fuel prices are relatively low. It should be no secret that generally higher truck rates and higher fuel prices only enhance the value proposition of Intermodal. And I would say we don't have either of those tailwinds right now, and we're seeing that type of growth in a market where we compete more directly with trucks. And so very pleased. I think we're all very pleased with the service we're getting from the railroads at this point.

And I guess from a volume and price perspective, how is bid season playing out right now because we're further into it than we were on the conference call.

Still early. But I mean, I would say, I know we've talked about the supply dynamic. I know we've talked about maybe demand being a little bit touch better. We have had a lot of disruption from winter weather. We've had a lot of customer meetings over the last several weeks. And I would say it should be no surprise that no customers raising their hands saying, can't wait to pay you more, and we think what we're seeing in the market is structural. They'll believe that, hey, this is more weather-induced. And so the market is going to dictate where pricing settles, but too early for us to give an update just yet. I think as we get later in bid season, we usually give you guys an update sometime over the summer in terms of how we think bid season has ended up.

Okay. I appreciate that. And then Brad, on the dedicated side, I know growth has been difficult there as well, especially last year, I think the fleet was, what, flat or maybe even down a little bit. What's the outlook for 2026 in that business?

Yes. I guess probably we signaled about 2.5 years ago that we had some visibility to known losses. And those losses were certainly larger than what our historical loss rate was, which is part of the reason we signaled that. And we talked last year about we concluded that. It did leak into the third quarter a little bit. And so our goal is to get back to net tractor growth. We talked about that at 800 to 1,000 tractors per year of net growth. And if you think about our historical retention performance that we communicate, typically go back a couple of years, 98% or better. We saw that go all the way down to 89%, I think, in the third quarter of '24. We climbed that back out up throughout '25. We ended '25 right around 94%, and we believe that we'll get back to that 98%. And so we sold just over 1,200 tractors of new business last year, which is on the lower side of our expectation. That did not meet our expectation. However, given the backdrop of the market, I was proud of the team and still being able to deliver that. And so the farther we get away from those larger losses that we had visibility to, we're going to get back to that net tractor growth. Now what we did signal in the fourth quarter earnings call is that, that will likely translate to pretty moderate income growth for Dedicated in 2026. Our model really is about getting that new business, onboarding that new business. And typically, we lose money in the first 3 months, so we're negative. The next 3 months, we get back to breakeven essentially. And then we're on model for what that desired opportunity is. What that means is anything that we onboard really after June of this year is a net drag to the year. But what it does do is it sets us up nicely heading into '27. And so as we progress through, I think the measuring -- the metric that I would want you to focus on is what is our tractor count doing, less on the income side for '26, more on what is the tracker count doing. And if we accomplish our goals, we'll have that wave of new business that comes in, in '27, and that's when we'll have an income step. more material. It's not to say that we can't -- we're not focused on improving our margins as they are. But the base business we have has a targeted performance run rate. And that can be slightly moved. But in terms of bigger steps on our income growth, it's going to require us to get back to that track record. I'm optimistic we had our best year -- sorry, our best quarter of sales in the fourth quarter -- of all 4 quarters of last year. And so that gives us a little momentum heading into '26 and feel good about where our pipeline sits. We have a lot of business that we believe that we'll close and look to onboard in Q2 as we sit here today that will give us greater confidence heading into the back half of the year. So feel good about where we sit in dedicated. Really proud of our margin performance. I know we're not quite at our targeted margins of 12% to 14%. But if you really think about all the inflation that we've had to deal with, most notably in our insurance I think it's up 5x in the last 5, 6 years on premiums. And yes, we have indices that give us rate increases. The pace and rate of change on some of our costs have been more accelerated than what those rate increases get us. And so we'll dig out of that over time and have high confidence that we'll get back to our range.

And Brad, you talked about 1,200 trucks sold last year. I think within that, you had a record number of new customers you sold as well.

We did. We sold 41 new names into our portfolio. And what's critical about that is we also sell with existing customers. So that's most of our growth story historically in dedicated has been organic growth with existing customers. But when we bring that new name in and we get that new first account, maybe it's a 5-truck deal, maybe it's a 20-tuck deal. It doesn't really matter. But what it does matter is that's our first entry point with that client. And they usually have a broader ecosystem, some of them national in scope. And so to the extent that we can prove our value in location 1, usually, that opens up new opportunities to not only grow at that existing site, but grow other sites with that customer. And that's really been our story. We have several customers that we have 20 and 30 locations with. They all started with one. And if we didn't do a great job and weren't excellent at that first one, we might not have got the opportunity to get to 2, 3, 5, 20, 25, 30. And that's what gets me excited about bringing in 41 new names even in the really tough market that we see.

And I guess along those lines, I mean, it seems like a lot of your public trucking competitors have shifted more heavily into "dedicated services". or contracts, however they want to state it. But your business is a little bit different than what you target in the market, right?

Yes. So we predominantly focus on private fleet conversion. I think there's -- dedicated can mean a lot of things. But for us, it's essentially being a private fleet for that customer and that shipper on-site premise with fixed resources that are assigned to that account. Some of our secret sauce, quite frankly, has been our size and our growth. It gives us really the ability to be creative on behalf of our customers and how we can ebb and flow dedicated capacity when they surge or when they're lighter on any given day or week, we can source that capacity to other dedicated customers. Dedicated, there's a high expectation. Our on-time performance is like 99.5% or better. And so having that dedicated experienced driver, especially a lot of times, there's post-delivery services, meaning it's not just bumping the dock, the drivers are a part of the unload process, part of the load process. And so those are things that are sometimes a little bit different than our competition. We're not afraid of any type of specialized or technical equipment. We're not afraid of any type of technical service that the driver has to be skilled for. And so we've had great success there.

Has your retention rate come up from that low point about 1.5 years ago?

Yes. So hit that bottom, recent bottom at 89%. And as of the end of fourth quarter, we were sitting about 94%. So not quite back to our 98% yet, but do believe that our operating plan this year will get us back in that range.

Okay. I think we see one question here. But if anyone has a question, just raise your hand, we'll get you a mic. David.

Brad, just on the customer defections, could you maybe give a little color on how much your assessment is going to competitors versus in-sourcing the fleet versus accessing the truckload market additionally? And then your assessment on how the additional tightness in the market might drive maybe customers to come back to you?

Yes. There's really kind of 3 layers there, right? First is the true private fleet. Second is where a shipper has already outsourced their private fleet and has a dedicated fleet and perhaps those come up for bid on contract terms. Typically, we have contracts that are 3 to 5 years, in some cases, even longer. And so at certain points and intervals, even our existing business comes up for renewal. We work really hard with our customers and really believe our customer value delivery process, CVD, we call it. If we're proving value, then in many instances, we can talk with and work with our customers to renew and extend our agreements without it going to bid. There are times that the customer does take the business to bid, and we've got to fight for it just like in the transactional world when they do one-way truckload bids or intermodal bids. And we've seen that throughout the cycle. And certainly, the longer the cycle is, the more customers are likely willing to want to at least test the market. But when you think about the -- again, the technical services, Dedicated doesn't want to just switch providers willy-nilly. They want to be very measured and calculated on that. Just as when they make that first decision to outsource their private fleet. That is an extremely emotional and sensitive decision. That's their fleet, that's their employees. They believe that in many cases that, that's an extension of their enterprise. And usually, that's the last employee that they had that touches their end consumer. And so they don't make that outsourced decision lightly. And I would tell you that when it comes to renewing existing business with J.B. Hunt or with any dedicated provider, they take that very seriously as well. But there's a little bit of churn that happens in the market. Certainly, when times are most difficult in the environment we've been in, in the cycle, it's more prevalent than not. And then the third bucket is really fleet creation. And I do think that, that's where we're kind of at that cusp where this is where shippers want to talk about establishing dedicated capacity fleets for this environment to fend off what they anticipate is likely to happen in the one-way market. We try our best to not really play in that in dedicated. We've got 2 business units, really 3 that do a fabulous job of creating service offerings there in our brokerage, our Truckload segment as well as even Intermodal can be part of those solutions at times. We think they're best suited for that type of work. We want to really make sure that we're partnering with -- I mean, we're buying 5-year assets. And so to do that on the idea that it could be an extremely short-term business need, that's not very prudent with our capital and our ROIC expectations. And so we're going to let some of our non-asset businesses try and support those capacity type fleets. We do see many of our competitors, I call that higher ground, right? That's higher ground than the fight of the one-way market in today's -- in the last 3 years. And certainly, people nip at our heels, so to speak, on trying to find that higher ground. But at the end of the day, if we're operationally excellent and do a great job for our customer, we believe that we'll have high success in not only retaining. And then the last thing I'll mention is that we've talked about the losses of business. And sometimes we lose business by losing a full customer, but we also have times when our customers' business is also just a little bit softer. And so maybe what used to be a 20- tractor fleet has found its way and settled down to a 16-truck fleet. We've seen a lot of that over the last 3 years. We've seen it in other cycles as well. But what typically happens is, at some point, it rebounds and it recovers. And so we believe we have a lot of pent-up capability of growth on organic growth by just going back from a 16 to a 20 tractor fleet as our customers' business becomes more healthy. In the last big freight recession we saw in '08, '09, that absolutely played out. And we didn't just get back to the 20 tractor fleet with that customer. It actually -- we saw, in many cases, we went north of that. And so you marry that with our new sales cycle of new business and new entrants as we get deeper into this upturn, we're likely to have some really, really good years ahead.

Brandon, let me just clean up a couple of things. You can tell we got Brad Hicks really wound up. So he's very...

I'm excited, man. I'm excited.

Very passionate about the business. So David, to your question, if you thought about what drove some of the drop in our retention, I'd say more recently, bankruptcies one, that customer downsizing, number two, I would say customer changing how they want to source or manage their supply chain three. And then if I were to say a customer defection, I would put that a distant fourth. Is that fair?

Yes. That was you answering his question?

That was me answering his question, but I loved all that passion about how great our dedicated business is.

We've lost some business to competitors throughout the last couple of years. Usually, it comes down to rate. And usually, it gets to a point where I mentioned one of our top priorities is operational excellence, but also disciplined growth. And at points in time, it just gets to a point where we can't make sense of that. And again, we're proud of the returns we have. And you look at some of our competitors and their returns and to make decisions to operate even less -- with less margin, just can't make sense all the time when you talk about how much we have to reinvest in our equipment.

All right. Appreciate that. Maybe that's a good point for question #4 for the audience. Just a few minutes left here. In your opinion, what should J.B. Hunt do with excess cash, bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown or internal investment? We can vote.

What do you think it's going to be?

6.

I'm going to say, 2 or 4.

Or 6.

Okay. And then question #5, please. In your opinion, what multiple of 2026 earnings should J.B. Hunt trade?

It's an easy one. 7.

We can vote, please.

6, 7.

I have 4 kids. I mean, [indiscernible] that every day.

Okay. And then question #6. What do you see as the most significant share price headwind for J.B. Hunt, core growth, margin performance, capital deployment or execution and strategy? We can go ahead and vote, please.

Brad, I have 2 teenage daughters. So we're -- yes.

Gentlemen, we only have 2 minutes left, but 2 more questions I want to get in there because I think CapEx has come down a lot this year, probably just reflective of the broader market that we've seen for a number of years. But specifically as well, you guys have had a lot of success on controlling costs. So I don't know what's the most exciting thing about J.B. Hunt here? Is it the cost story, the margin improvement and maybe being a little bit more nimble on capital?

Well, I think it's all of the above. I mean when I think about how we set up our business to excel in the next cycle, I mean, we bought back $923 million of stock, retired 6.5% of the company. So clearly, as we're creating value, that value will accrete to fewer shareholders or they'll get a larger piece of the pie. I think what we've done on the cost side really sets us up well to show -- I know what a lot of people ask us about is what our incremental margins look like in terms of what we think can flow through to the bottom line. And then number three, we've talked about it consistently, we have prefunded so much of our growth. We have a long way of runway in terms of capacity to grow into an intermodal. Most of our capital needs will be driven by Brad's success selling. And then we'll have to go out and procure equipment to meet his customer needs, which I would love deploying capital with that success base, knowing I'm underwriting all these deals to an ROIC target and have 5-year contracts there. So I think how we're set up operationally, how we've had discipline on the cost side, but also have shown discipline on how we deploy our capital means that we should be able to see higher highs and higher lows through cycles, and that's what we're set up to do.

All right. Well, gentlemen, I think we're just out of time. So thank you very much for coming down. Appreciate it.

Thanks, Brandon. Appreciate it.

Thank you all.