J.B. Hunt Transport Services, Inc. ($JBHT)

Okay. We're going to go ahead and get started here with our next presentation. We have J.B. Hunt. So with us today, we've got Brad Delco, CFO; Darren Field, President of Intermodal; and Greer Woodruff, who's EVP of Safety, Sustainability and Maintenance. Got it. All right. Thanks, gentlemen, for joining us here today. Really appreciate it. Maybe we'll just start off a little bit with the short term here. I think, Darren, you made some comments earlier that demand was a little bit better than expected sort of before the winter storms hit. I don't know which storm we're talking about. There's been a few of them. But -- so what -- what was positive about that? And is there potential for that to come back when we get finally into what hopefully is the spring?

Sure. Well, I mean, when we came into January, I think that in general, our customers were experiencing -- or we experienced slightly stronger volumes than what those same customers had communicated to us to expect in mid-December. And so those were good signs. I don't know that I would call that anything other than they were doing some inventory moves. I don't think that has translated to customers saying, "Oh, man, my sales were so much better than what I expected." I do think we've had puts and takes with customers where some have actually increased their forecast for the year. And we've had some customers that have said, no, I was dead on. The good news is I don't have a lot of customers that have taken their forecast down. I would highlight the storm that we referenced really at the end of January, it's -- I don't know what the name of the storm was, but really, when you take out the southern tier of the U.S., Texas, all the way through Georgia even into Florida. That and then dump 20 degrees on top of that for a week, you're going to really break down the transportation supply chain a little bit. And that was, I would say, is the worst event I've experienced in the last decade. It was really material in terms of the impact on our ability to move our equipment. And so it was a significant event. And yes, we have winter every single year. So I don't want to act like winter is a new subject. That particular storm was really unusual.

Usually, we don't have Arkansas kids out of school longer than Connecticut. That certainly happened in this case. We might have talked about that, Brad. I think my kids didn't go to school for an entire week. Yes, we had one day. Well, in that case, though, I mean, how much of an impact are we talking about here, Brad or Darren, can you put some numbers around it? I imagine drayage drivers disrupted network out of balance. Like what sort of magnitude are we talking about above what typically is a normally tougher time to operate?

Yes. I don't know that we -- we talked about that in this kind of setting. I just want to be careful. We follow the rules.

Brian, we typically don't -- I mean we don't want to make excuses. We're focused on creating the most value for our customers, focusing on operational excellence, leveraging our investments, repairing our margins, like our entire management team is hyper focused on doing all the things, executing on our cost-to-serve initiatives. Yes, we've had weather. And to the extent we feel like it's material and we want to call it out in Q1, we will do it. But head has been down, how do we provide excellent service, -- how do we really get momentum going into this bid season where it does feel like the relationship between supply and demand feels a little bit different, what sort of additional opportunities does that create for us. I think that's been the focus versus everyone go make up a number and tell me what you think weather impacted your business by. So we spend more time focusing on the former versus the latter.

Understood. Well, how was rail service then in terms of getting through this dynamic? I mean it's we might hear some numbers from those folks, but like what were you experiencing on the ground and on the street?

Yes. So rail service during my career has never been better really across the board even through this period of time. Look, the railroads are fighting. It's an outdoor sport we all play. They were caught up in some of the same challenges we were, and I would call their recovery. And this would be the entire industry. Every railroad we do business with was exceptional in their recovery from the winter events and feel really confident about both the commitment, the resource planning, the investment in their people and their teams you can really see an industry that is very focused on sustaining resiliency through the current environment that they're in. We ask them every day, are you prepared for an uptick in demand? Are you resourced appropriately? And naturally, they're all very confident in their plans. Look, we're experiencing it. And again, best rail service I've experienced in 30-plus years.

Okay. Well, it does seem like -- I think Brad you alluded to that the market feels like it's changing, and it's not just like, well, we'll see how much and when. It's just like another -- it's getting more clear to shippers, in particular, that is starting to move in that direction. So...

I think it was about 3 months ago, I forget who it was, but a company described the market as being fragile. And I think there were some chuckles and laughs at the use of that word. But in hindsight, we were seeing it, right? We felt like if there was any hiccup in one direction or the other, whether it be storm driven, whether it be demand-driven, whether supply continues to sort of come out of the market, it just didn't feel like there was a lot of elasticity. And we've had a couple of bumps or elements that have disrupted supply or disrupted the supply chain. And then we've seen. Obviously, the market is tracking what's happening with spot rates, and that's a real-time indicator of the relationship between supply and demand. So I will go back and reiterate that we continue to believe that the market is in a fragile state.

After we define what fragile meant, we could move on from that. But it certainly feels that way. In terms of like the commercial strategy, though, Darren, like how do you position the business because so much is getting done and figured out like right now, it's always path dependent. So I don't want to say it's any too much different now, but it certainly feels like there's a bit of more uncertainty, but also our shippers trying to get ahead of that right now.

Yes. I think that our sales organization is doing a great job of highlighting a combination for our customers of, okay, what is your greatest challenge today? What are you most concerned about? And then often, one of our fastest responses is have you maximized your highway to rail conversion strategy? How can we convert business from the highway back to Intermodal or to Intermodal for the first time hopefully save you a little money at the same time as a way to prepare your budget for maybe a year where truckload capacity and prices could get difficult for you. So how can you hedge against the potential for a cost increase coming at your budget as a shipper by utilizing more Intermodal and capitalizing on the service quality that I believe we have built as a brand. I think the industry is doing better than ever, but I think our brand is really strong, and we're confident in the service quality. So really, the strategy is to highlight the ways that Intermodal can solve for our customers and prepare them for -- give them a little extra capacity so that they can optimize the truckload capacity that they need in whatever way is best for them. So really a lot of focus on that. And now in an environment when fuel prices are increasing, it only enhances that conversation even more. So we're not reacting to the current fuel environment as if it's structural, but certainly, we're going to talk about Intermodal's ability to save dollars against a rising fuel environment...

So in that case, are customers really bringing that up in conversations in terms of fuel savings? Obviously, higher energy prices could have an impact on demand and a bunch of other things. But clearly, it would be a net benefit for conversion. And then maybe you can just remind us on how the surcharges work from your perspective, more of a pass-through really see too much...

Typically, an Intermodal fuel surcharge is roughly half of what a truckload fuel surcharge is. And every week on a Monday, the Department of Energy issues a national average cost of fuel, and that sets our fuel surcharges. This is very industry standard on anything published where you're going to go a full week at a time. And so really, fuel tends to lag by, call it, a week, but it's not -- we feel confident that largely our fuel surcharge programs balance out our experience with cost. We're not -- you can be hurt a little bit on the lag as fuel costs are climbing, and you can be barely helped a little bit on the downward move in fuel prices. But over a long period of time, the carriers aren't winning or necessarily losing on higher cost of fuel. I just think customers aren't yet in the current environment, what we're seeing with fuel over the last 3 weeks, it's a discussion topic, but it's not yet driving strategy discussions. I think the overarching theory is that nobody knows how long this will last. And so there's a lot of caution on that. We just will constantly highlight that Intermodal can be a mitigating factor on rising fuel cost, so...

What's sort of your sense on inventories heading into the spring? We've had the pull-forward conversation for a while now. We've had EPA tariffs get thrown out, but we've got new ones put on. It doesn't seem, at least in our conversations that a lot of additional pull forward is happening, but are there any that you have examples of or inventory is in pretty good shape right now?

I think inventories are comfortable for shippers given the way that the supply chain has functioned and the high quality of service available. So our customers are largely more confident in running with maybe what would be historically slightly lower levels of inventory, but the ability for the supply chain to replenish those inventories has been very good. And so customers seem to be trying to take advantage of that. Look, the interest rates are higher than what they were back when inventories might have been higher. So I think our customers are more sophisticated in the way that they plan that than ever and that the supply chain, they're still confident that they can recover and they're not at all afraid that they're going to have a lost sale over inventory. It will be interesting to see if a fragile supply-demand equation comes into play. And if demand ticks up, does the fragility of the supply create an environment where customers begin to experience a lost sale because they didn't have enough inventory where they needed it, when they need it. And that's probably what we reference when we talk about fragile. It just feels like it wouldn't take a lot of new demand to create an environment where customer inventory wasn't quite what -- where they wanted it, when they wanted it.

Just on the topic of supply, Greer, I want to ask you a couple of questions on just how quickly things are changing and there's the intensity of the focus from administration on new regulations and enforcement. Maybe you can give us some high-level thoughts in terms of like how quickly this can really be impactful? Are we in the early innings of this? Because it's still, I think, only a couple of months ago when we first started really talking about non-domiciled drivers and what that could have, and it's only grown from there. You got an interesting white paper in terms of the amount of capacity that could come out. So maybe you can walk us through what you're seeing and how quickly this could take shape.

Yes. I think this is this interesting time on the supply because what we're seeing with the administration is that they're really enforcing rules that already have existed that just have been poorly enforced in the past. So we're not having to go through this 60- or 90-day kind of rule-making process. They were able to come in very quickly and identify rules that they could enforce now. And so I think we've seen it be applied pretty quickly with English language proficiency first being brought up and enforced starting in April of last year. I think the administrator yesterday said about 17,000 drivers had been placed out of service so far. So that's in 10 or 11 months. It looks like that's probably about 20,000 a year is what we had estimated, and it looks like that's pretty well on track for that. And then if you look at the non-domicile issue, which I believe started in about September, the estimate is, and I think a pretty safe estimate is there's about 194,000 drivers with non-domicile CDLs that will not be renewed. A lot of those have come out already because their employment authorization documentation did not match the expiration of their CDL. Their CDL expiration date went beyond their authorization to work in the United States. And so state DMVs have been requiring them to come in and produce that paperwork, and they've not been renewing. So I think it's fair to say that about 214,000 is a good floor of what we could expect to go out over the next 2 to 3 years. That's about 5% of the CDL holders. And then if you take into consideration the cabotage enforcement and perhaps others that have been operating maybe even without a CDL, I think you could see an upside of maybe 12% that could go. And we've already seen the cabotage. We've seen a lot of the drivers south of the border that were operating in the United States, hauling domestic freight. A lot of them have already returned back into Mexico, and we're seeing a loosened capacity in Mexico as a result of them returning. So I would estimate we'll probably see 5% to 12% of CDL holders exit from last April through about a 3- to 4-year cycle.

And Greer, what about the CDL mills?

Yes. That was mentioned as well as truck driving schools are self-certified right now. And there's been audits being done of those schools so far, 7,000 of the 16,000 registered programs have been removed from the registry and can no longer provide entry-level driver training. So I believe we'll probably see some new rules emerge related to what's required to be a training school and to have good quality training where we could find safe drivers, new entrants into the industry receiving a CDL. So that's being tightened up now, and I think we'll probably see some more tightening of that and some higher standards expected.

I would assume similar for ELDs and the enforcement self certification on that.

Yes. I would say I don't know how much ELDs really affect capacity. There could be a short-term impact if a device no longer is certified and a carrier is operating with those devices and they have to park their truck while they remove that device and install another one that does meet the requirements. But there is an effect there, and they are now screening any new ELDs that want to be certified. They are establishing some screening processes for that. And then they're going to have to determine how they're going to handle those that are already in the registry that haven't been vetted as thoroughly as they would expect them. But I think we'll see kind of some of these things that have been the honor system, self-certifications are going to have more stringent vetting and oversight over those in the future.

Have you seen a lot of support for the Dalilah Law as is talked about in the state of the union. It seems like some of those things would be overlapping, but some would also be perhaps more onerous or a little more conservative if they were to be put in place. Is that sort of additive to what we're talking about here in terms of the regulations.

I think there's a little bit of additive. A lot of that law would codify things that are currently happening, but there will be some things that will be added to that. I would expect that we may see that show up within the Surface Transportation Reauthorization bill, which is under development now. More than likely, it's going to -- the transportation bill will be a continuing resolution as we get closer to midterms, and that's something that will be taken up after the midterms later this year or early next year. But I would expect that will probably show up in that bigger transportation bill.

One more for you, Greer. I don't know how closely you're following the brokerage liability, but clearly, a case before the Supreme Court in terms of how that could be extended into the brokerage arm. What do you see that impacting -- if it's extended and brokers are found more liable like a carrier, how could that impact the industry and rates and just how you perceive risk in this market?

That's -- man, that's a big unknown, really. I think it's obviously if C.H. Robinson doesn't prevail, that could really change the whole risk profile of the brokerage business and brokers are going to have to figure out how they're going to ensure that the motor carrier, in many cases, the driver because such a large population is an independent driver with his own authority, how do we screen those drivers. And the truth is a lot of those drivers have not had an inspection in the last 24 months. If you look at carriers that have 1 to 11 trucks, which is a very large percent of the population, 63% of them had no roadside inspection in 2025. So what data is available to look at to determine whether or not they're safe kind of pushes you into probably having to look at motor vehicle records and things like that of an individual. And so that complicates, I think, that brokerage risk profile and somebody is going to have to try to figure that out.

Okay. Well, we'll see what happens in the middle of the year then, I guess, but when that's supposed to be ruled upon. Brad, just another question on ICS, though. If spot rates obviously elevated, margin squeeze is kind of typical for this business, but there seems like there's some more spot volume that could be offsetting here in the first quarter. So should this be a similar sort of margin profile quarter-to-quarter, maybe a little bit worse? Like how are you thinking about ICS here in this environment?

Yes. When we go back to fourth quarter, we were talking about kind of what we saw play out. We did see the market tighten. It wasn't necessarily a function of demand exceeding what we were expecting, more a surprise as to how tight the market was really supply driven. However, that didn't really translate into a lot of spot opportunities. And I think we commented on the call really until late in the fourth quarter. I believe in the first quarter, we have seen more spot opportunities. Obviously, that helps to alleviate some of the pressure you're seeing on your contractual business. But I would say I believe that contractual margins actually have compressed further in Q1. And so you're really sort of fighting with that spot to even overcome that additional pressure you're seeing on your contractual business. So still time to go here in March, but I don't know that we've necessarily seen the relationship between supply and demand get any looser. And so I think that team has done a really good job executing on diversifying our business, really getting into more difficult types of freight, things that are a little bit more specialized. Obviously, we're executing pretty well on our cost initiatives in that area. You can see our costs are really sort of back to where we were in 2018. I think we talked about that on our last call. And so setting the business up really, so when we do start seeing incremental gross margin dollars, how do we get as many of those -- how much -- how do we get as much of that dollar to really flow through and down to the EBIT line. And I think that remains the focus of that team.

So Darren, in this sort of environment where things are changing quickly, but clearly, the SKU seems to be more favorable on the positive side for rates now. Is this a type of market that intermodal contracts can go up as much as truckload? Are they going to lag in magnitude? They usually lag in terms of timing, but maybe we can dissect the 2 lags here and what we should expect in terms of when the market does turn, how that would be tracking relative to truck?

Well, I think it's clear all parties, the railroads, the Intermodal providers, the draymen, all different entities that are engaged in the Intermodal supply chain, everyone would like a stronger revenue quality. So there's no lack of desire to accomplish that. I think that historically speaking, Intermodal has lagged truckload and brokerage pricing. I don't know to what degree, but it typically lags. Now in the current environment we're in, you kind of -- I don't know if it's related to sort of a different mindset about Intermodal across the industry at the railroads, but the competitive environment so that I don't lose any share is, look, it's pretty -- it's significant. And I think that this idea that in the environment we're in today, there's potential merger out there trying to go on. So how do the players all react in this current set of conditions is a little unusual. And so we'll see what that means. But I know this. There's not a single entity out there that has a margin that makes them happy. So I'd like to believe that everybody is encouraged to try to recover revenue that everybody needs to repair margins and that's -- there's no lack of desire for that. But you are certainly seeing a competitive environment out there that's everybody wants to grow and everybody wants to repair margins at the same time.

Is that because we were in sort of the -- I guess, the backhaul environment for a little while for...

The early part of the bid cycle is largely backhaul driven. There's a lot of westbound business that bids in the early part of the cycle. So that's certainly a factor. And none of us can afford for -- none of us will repair our margins with pricing on the backhauls. That's not where that work gets done. You have to do that work in the head hauls and -- and certainly, as the pricing cycle goes on, we're all going to be anxious to watch what happens. We think the quality of our service has been proven out for our customers, and we know that the capacity we offer is valuable, and we're going to really test our customers to help us identify ways to either take cost out or improve the quality of the revenue that we have coming in.

So one of the...

Both parts are important. When we enter into a discussion with the customer around pricing, if that customer can bring forward margin repair initiatives from cost takeout, we're engaged in that. So I know the pricing often it can be a scorecard metric because it's real visible, but there's lots -- there's more than one way to repair margins.

So maybe you can elaborate a little bit on that from a cost takeout perspective. So if I'm a shipper, am I giving you better volume, different volume in different areas? Like what are some of the dynamics that play out?

Yes. I mean, really, it comes down to -- it can be better volume. It can be more. Certainly, more volume is -- helps. We are all about growth in what we do, and we have capacity to bring on growth. So there's fixed costs that get covered with that. At the same time, customers can give us flexibility on the service front. That can be a pickup flexibility or a delivery flexibility. And what that means is, hey, if this load needs to deliver today by 5:00 p.m., and I don't have a pickup within 5 miles of that delivery this afternoon, but I do tomorrow, can I delay the delivery until tomorrow and where I can tour it and I just create a much more efficient drayage answer on that particular shipment. This is happening thousands of times a day in our network where we're evaluating, okay, what's the drayage system perspective on empty miles? What costs will I incur in order to meet this level of service. And so then the customer can challenge themselves around that same inventory question. Am I waiting on this product? Is it going to get unloaded tonight? Will it go into use in my supply chain somewhere else tomorrow? Or can I just wait and receive it tomorrow. And so there's a lot of work in that area. I'm oversimplifying it for the context here, but that's a big part of the work that we did really last year, and I'm really encouraged by the way our customers have reacted to that conversation. I think that it was important to get out of this a winner and a loser all the time on pricing and how do we find a way to help each other eliminate cost for both of us. And I think that, that's been very successful for us, and we're encouraged by where we're at.

It's pretty interesting in terms of how it's been a zero-sum game for as long as I remember. Are these productivity initiatives, efficiency, are these in the things that you guys are delivering on the $100 million? Or is this separate?

Yes. No, it's largely -- it's all inside our cost -- lowering our cost to serve initiatives. And largely what became more visible in the third and fourth quarter last year is really that work. And as last -- as we came out of the '24 peak season cycle, it created a new environment for us to discuss this topic with customers. And I think the reaction really did change a year ago. We were able to implement technology last summer that gave our full team better visibility of how and when they had that flexibility option that they could use. And so it was really in the third quarter when it became far more visible because that work went on through the first half of last year and continues today. So the rail network service levels have really -- they've been faster in the past, but they've not been more consistent and more reliable and the ability to plan around the transit times. And so that's given our customers more confidence to give us some flexibility back is how I would describe that.

Okay. Well, the productivity gains have been substantial, say, at least in the last couple of quarters. So Brad, maybe you can remind us like what were the major building blocks to get to the first $100 million? And as this is a continual process for the next $100 million, are they different? Are they more the same? Like how should we be thinking about that?

First off, have we announced the next $100 million yet? Or is that just a little add and slip on your part?

Maybe a little bit.

So I mean, Darren described an example in his org, but you think about same really intense focus on our cost on the corporate overhead side, but also direct overhead in each of the businesses. And really just the constant challenge of, hey, let's remain focused on our cost metrics. What is the right cost metric? How do we improve upon those? We know that we're going to be facing inflationary costs each and every year. How do we combat that inflationary cost with some level of productivity so that when we do go to customers when we are in an environment where, hey, we can at least get pricing in line with inflation, heck it could be nice to get inflation plus pricing like some others in the industry, how do we really drive a quicker repair of our margins. I mean that's one of our major priorities, right? We got to repair our margins, make sure we're creating value for our shareholders. So -- as we've talked about numerous times, there's over 100 different line items. Andrew Hall, who leads our IR efforts and FP&A efforts is really granular with teams in terms of how we're tracking that progress. We've committed to keep our investors updated each and every quarter. We'll have another update for you guys, obviously, after Q1. But in terms of what we're seeing, and Darren, you can speak for your business because I know each and every time we review our financials, your team is talking about how much leverage they're seeing in corporate overheads. And so I know that area has really performed extremely well. There's been a tremendous amount of discipline. And so this is setting us up well. We think, obviously, to compete in the market to accelerate our growth. That was the whole purpose behind our cost to serve initiative. Regards to the next leg of the story, and I think what you were maybe alluding to, Brian, is this business transformation process. So go back last year at the same time, we had really rolled up our sleeves and dug into the different areas of our business and looking at removing structural costs. We had engineers in our business looking at our processes and asking the question, how can we accelerate, expedite, drive better efficiencies through some introduction of technology to speed the process or drive that productivity. We're in the early innings of that now. We're obviously -- what's different about that process is we are scoping these projects. There is a cost element to them. We're looking at what sort of return we would expect from these initiatives. We'll prioritize those projects. And so that's something we're hoping to deliver on and see more tangible evidence of later this year and probably into next year. But I would say, I mean, in terms of an update, I think our company has seen and has momentum, and I think there's a lot of really great work that's been going on. And our goal has been not to get up on stage and throw out a number and tell you guys what we've been doing on the cost side. It's -- we want to make sure you see it in how we're reporting. And oh, by the way, we have really not been in a super positive pricing environment. So seeing the turn in our business in Q3 and Q4, where margins were expanding, while let's just say pricing was basically flat while also incurring a lot of inflationary cost pressures, and we've talked about insurance and wages and all the other line items. We have done way more on productivity, efficiency, cost takeout than probably what we've given ourselves credit for.

Well, just to wrap up on the transformation, is that really focused on technology, the incubations, the up labs, like those sorts of things.

Well, when you think about our company foundations, right, it's people, technology and capacity. We will always say our people come first. I mean, J.B. Hunt, 64 years. We have a very strong culture that really has survived from the founding, Mr., Mrs. Hunt. Technology is in the center. So we think about technology as being an enabler to allow our people and our capacity to be used more efficiently. And obviously, our capacity, our containers, our trailers, our trucks. And so those are the foundations of our business. Certainly, yes, technology is going to be an enabler for us in order to better utilize the resources of both our people and our capacity.

Okay. Well, we are out of time. Thanks very much, guys, for the update today. Really appreciate it.

Thanks, Brian. Had great time.

Thank you.