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

All right. We're going to get going with our next session with J.B. Hunt. We've got, to my left, Darren Field, President of Intermodal, and to my far left, Andrew Hall, Senior Director of Finance.

We're going to get right into questions. So Darren, maybe just start with the demand update and March volumes were particularly strong, up 8%. Just give us a sense of or directionally, are we seeing that kind of demand strength continue so far into and maybe a little bit about Eastern trends versus trans contracts and all that.

Sure. I think our intermodal demand is -- has been what we would call pretty good. I don't have -- what I don't have is some statement that is the customer, the total supply chain demand cycle is really robust. I think it's just steady. And I think our execution in the way that J.B. Hunt has gone about business over the last 2 or 3 years is earning share. And so we're busy with our customers what's missing is our customers aren't acting concerned or there's no fear or panic stricken shippers saying, how am I going to meet my supply chain needs going into this fall. So we're not feeling like there's this overarching really strong demand environment, but how our volumes are working is -- has been good. I would say that in some ways, it can always be better. But but our years of really, really high-quality execution translated into strong growth in our Eastern network and that continues to be a great opportunity to convert intermodal business, convert highway business to intermodal and help customers save money. And I think that, that strategy and that opportunity will exist for us for years and years to come. And this year, that's going really well.

And so is it fair to read your comments as underlying customer demand is fine and the volume strength is more about either broad intermodal share gain or J.B. Hunt's specific share gains? Is that your view?

Yes. I think our view is that J.B. Hunt's specific share gain is having success, particularly in the Easter network. And I think customers have been for a couple of years in a row, a little bit concerned that the truckload market was going to change on them. Can they hedge against that? Can they onboard a way to rail conversion now and really drive sort of bank savings today for a potential truckload pricing environment that's going to put their budgets under pressure. And I think we're seeing that play out. And now you're seeing the truckload market change around them and it really is just amplifying the way our customers are viewing any opportunity they have to convert to intermodal. They're going to want to do that as early as they can to get security in their capacity plan and their supply chain plan and bank some savings and then on top of that, you have higher fuel costs, which is maybe driving some behavior. I've been surprised it's not a big part of our customer discussion. They're not they're not coming to us with fuel prices being the driver of highway to rail conversion. I think overall, our service and just the base case of the product we offer has produced opportunities for us to grow, and we're really, really proud of the work we've done over the last few years and feel really good moving forward. We got them adding have affiliate will be a lot of intermodal talks, I'm going to weave in a little bit about the rest of the business. So that say dedicated, had Brad Hicks at a conference last week, and he talked about a strengthening pipeline. -- especially over the last couple of months, it's gotten stronger in terms of customer size and also broad scope of industries to serve there. I think a good data point to point out what Dedicated is last year, we added 40 new customer names to our portfolio. And historically, once we get in at 1 site at a customer, prove our value, prove the service we can provide, that leads to additional growth opportunities for us in the future. And so I think we're encouraged about growth opportunity with Dedicated. I will remind everyone that we need to see a couple of quarters of fleet growth and going to get that wave of new trucks started up before you start to see that flow through to operating income within Dedicated, but it's a business that's had double-digit operating margins for 10-plus years. And so I think we have an encouraging opportunity ahead of us there. JBT is another one, 4 straight quarters of double-digit growth. Darren touched on operational excellence, the focus on executing that business. I think we have outgrown the market for 4 straight quarters now and a lot of momentum there, staying with ICS. It's been a challenging few years at ICS, but I think there's real momentum building in that business, 10% volume growth in the first quarter, successful during the bid season so far and something you're going to start to see some improvement in there as well.

That's helpful. So maybe you're going to say don't anchor too much to March up 8%. But fuel -- we saw some of the impact of fuel in March, but now we have a full -- we're going to have a full quarter of it. Truck rates are going up, but they're going up even more now. And based on what we learned last week, they might go up even more, right? And by the way, like March, April, like probably sell relatively tough comps, maybe there was some pull forward ahead of Liberation Day, right, a year ago. And like the comps get easier, like -- it feels like there's potential, right, that we should be talking about double-digit kind of volume growth here. And I don't know that you're ready to give guidance around what volumes are going to be. So maybe to ask it a little bit differently. And if you want to -- do you have the capacity for that? Does the rail network have the capacity for that right now? .

So I really think that, one, the comparison period from a year ago is a little bit jaded in that. You're right. May and June a year ago were particularly poor on import volumes. And so could there be if double-digit volume growth came at the -- at our intermodal network absolutely, I feel like capacity is available and ready to handle that. We've commented for many quarters in a row. We really the rail service that all of our rail providers are providing to us is excellent, and we feel very confident in our rail providers commitment to the resources they need to be prepared. What our responsibility to them is, is to not allow them to be surprised. So work with our customers on forecasting, make sure that we have good implementation of new awards planned and communicate with the railroads ahead of volume so that nobody is surprised because in this environment, the great work we've done on our service execution over the last 3 years, the last thing we can afford to do as channel providers between us and our rail partners is just -- we have to execute at a time when our customers are expecting us to be able to grow, and I feel very good that we're capable of doing that. I do think, look, we're not going to anchor on March as being anything other than it was a great month, and we highlighted that on the call. As we get into our second quarter call in July, I'll look forward to sharing more about the second quarter. But certainly, we feel great about demand for our product, and what's going on at J.B. Hunt right now really feels like we've hit a gear with customers, particularly in the eastern part of the country.

So maybe just 1 follow-up on that on the volume side. So like Q1 local East up 7, TransCon flat. Do you think -- does that sort of spread continue? Do they both start to grow -- how do you...

I think the Eastern network has sort of foundational growth from this higher truckload price as well as just the excellence in service and a lot of great work we were growing our Eastern network in 2025 also. So really, that's been several quarters in a row and feel like, absolutely, there's no reason to believe that, that would change. The transcon business being flat in the first quarter. Certainly, the comparison period from last year was really strong as there was some preshipping before tariffs implemented. And so there had been some rerouting of business in earlier periods to the West Coast to avoid the potential for an East Coast labor strike. So there's just a lot of noise in those numbers. But the opposite is true in the second quarter, in May and June, import volumes through the really pretty poor. So does that set up for some growth in the transcon and certainly in the second quarter, I mean, it would feel like there's an opportunity to see some growth there.

That makes sense. And I'm probably getting way ahead of myself, but like any conversations at all like about peak season yet and early peaks or late peaks or I think .

That's what's been maybe the most and it's why you occasionally here, and it seems to be interpreted as caution from J.B. Hunt. I'm really not trying to be cautious on the demand environment. It's more -- we don't have a lot of dialogue from customers that are concerned about what they're going to do to cover their peak season needs. And I would feel more confident and even more bullish if customers were beginning to have dialogue with us asking about what capacity programs that we need to put in place today to prepare for a robust peak season. And we're not having that. We're also not having customers tell us that they don't expect to have a successful Christmas shopping season. So there's not negative, but there's not a run of customers asking for a peak season plan. And that I don't know that, that's unusual for the last couple of years. There really hasn't been a lot of that dialogue because our capacity and the industry's capacity has really been able to accommodate peak season without a lot of stress. And so I'm anxious to see how that goes as we move into this year.

And then so maybe now let's turn a little bit to the pricing environment. So I mean, we all see trucking spot rates up over 30% right now. You even said on your ICS, you're now getting double-digit type increases. J.B. Hunt Intermodal yields ex fuel were down 2% in Q1, and I guess there's definitely some mix sort of within that. I mean, I guess, at the end of the day, there's always a lag between certainly trucking spot rates and then trucking contract rates and trucking contract rates and intermodal rates always. Do you have a view that it's -- we're just in the middle of that lag right now, and this is very normal. Is there a view that the lag is going to be longer than normal, more pronounced than normal. I don't have a view that the lag would be longer or more pronounced. I think that we're right in the middle of of what I would consider normal historically. It's just -- it's been so long since the industry was able to achieve pricing improvements. We're all a little bit impatient, and I want to see that happen right now. And I can assure you, we'd like to see that as much as any investor would like to see. I think to me, Scott, we watch I don't pay that much attention to truckload spot. I mean that might be the first signal, but we're going to watch the contract rates. And today, our Eastern network. When we look at where we're pricing our contract intermodal price, inclusive of the fuel surcharge, the discount to truck has grown from 15% to 20% in the last call it, 6 to 8 weeks. And that is the surest sign that I have that there's an opportunity to raise prices on that business. I think you do have to be in the 15% discount range in the East, to really have sticky conversion from highway to intermodal and keep that business. But it just signals that there's certainly pricing opportunities to improve there. The Western part of the pricing world behaves very differently. It's less yoked to the truckload market, and we don't have as much of an influencer, your competitive forces out West are really you're competing against all water costs. You're competing against intact, international, intermodal and just a little bit of truckload capacity. So that's a different world out there. But certainly in the East, feel like the pricing opportunity is right in front of us. And I would expect the cycle to behave just like it always has. There's going to be a lag in intermodal. I don't know that we can close that 20% discount gap back to 15 certainly in just this cycle, but I would anticipate certainly our intermodal pricing opportunity to to start to improve as we go through the rest of this cycle. And I think the next pricing cycle in 2027 is surely set for both volume and pricing improvements. And just so like -- so you want to be at a 15% delta, you think you're at 20% now. And that's even -- I'm guessing like I like to be at a 0% delta, but the market is not going to allow that -- the market says you should be around 15%, you're closer to 20. That 20% is even before we've really seen truckload contract rates go up much yet. I mean they're starting to, but like if you're looking at real-time data, like they haven't gone up a whole lot yet.

Well, I think that even that expansion from 15% to 20% is in is a view into truckload prices beginning to influence that. And certainly, it presents itself with our own data today that really supports stronger pricing from intermodal.

It tracts me like I try to pitch , this is a great setup for intermodal, rising truck rates, rising fuel, really good rail service, and this is like the perfect time to do Intermodal. Could you argue though just like thinking out loud, like the fact that rail service and broad intermodal service is good and you have boxes and you have the capacity to grow. Is that a limiting factor to how much price you can get, the fact that like you don't have tender ejections or whatever going from 5% to 15% or whatever the right metric is for intermod .

I think that's where disciplined growth comes in and our approach to our own inflationary cost pressures, look, a market like this, when you start to see truckload rates climb, we're already beginning to see our own driver need begin to grow in our dedicated and intermodal business and some pressure from other carriers, recruiting our employees. I believe we're beginning to see signs that driver wages are going to go up, that's just in front of the industry. And so certainly, the opportunity to go get pricing improvements, but also grow share from the highway because intermodal can provide capacity that a difficult driver hiring market doesn't have as many trucks in order to accommodate. So really, there's a great opportunity to use this stronger service and use real pricing discipline in a way to drive -- still drive growth even though we do have enough capacity to onboard certainly business. .

And then how about the competitive dynamic as it relates to the merger. Is that, in your mind, having impact on bid discussions on which I do I want to use right now? Is it impacting the pricing environment or I think it's more of a discussion .

I think it's pretty muted. I don't have a lot of customers that are talking about that. I don't believe their decisioning today at all based on the potential for a merger. I think that customers are waiting for -- certainly for J.B. Hunt to have more to say about that merger. And look, we've been pretty intentional and not talking a lot about that. You're not going to bat me into it here today. What I would just say is -- we're very confident in the programs we operate. Our customers want to hear from us more than they want to dictate to us what that will mean. And so we're we're anxiously awaiting the application, whether or not it's approved or not is the next phase of the whole program, and we'll watch that. And then as the year goes on, we'll will begin to develop more thoughts about how we want to talk about that. .

Just before we come back, just 1 more like a follow-up on pricing. I just wanted to ask, like you didn't mention it yet today, but the last earnings call, the last bunch of calls, I hear more about like headhaul lanes and backhaul lanes. And I guess I don't necessarily recall like so much in prior cycles discussion around that. Like is this -- I just want to say, again, is this just very normal that like head haul lanes pricing goes up first and backhaul always lags? Or is this sort of a new phenomenon.

I would say the backhaul pricing world is behaving like it always has. It's ultra competitive. It's very difficult. We probably -- it's really valuable business to anybody that works in our industry would love to have a business that position their equipment into headhaul markets like Southern California, for example. So that part of it is very normal. I think what I would consider a little bit more competitive is the pricing packages that we've seen off the West Coast in the headhauls has surprised us at the competitiveness. And it feels like there have been some incentive programs included that are a little bit different than what we've ever seen before. And so I would call that being the thing that's a little unusual. And we've seen where customers are telling us that UP has offered some incentive programs for volume regardless of which channel brings them the load. So that's kind of new, at least. If it isn't new, it's the first time our customers are highlighting it as a reason that they don't like the prices we've offered. Okay.

And there's a question in the back. .

Yes. Maybe more of a point of clarification, but I think when you talked about truckload rates and the impact on driver wages, I can see how that would translate through to dedicated, but it sounded like you said Intermodal also experiences quite a bit of inflationary pressure from that. Is it the same labor pool? I would have thought there would be more segmentation, but maybe just sort of a clarification. .

Qualified CDL holders are certainly needed in both dedicated and intermodal in a lot of cases. The jobs are -- have some similarity. I don't want to act like they're identical. They're not the -- but look, almost half of our drivers today are in day cabs. So they come to work in their personal vehicle just like any of us would and they work their shift and then they go home. And so and that's for dedicated and intermodal combined and attracting those drivers is in some ways similar. If anything, the dedicated jobs sometimes have characteristics that are even more difficult. So I would say there's even more wage pressure at dedicated, but in general, a CDL holder a driver today. It's getting harder and harder to hire them really all over the country, and we're beginning to see that we need to implement sign-on bonuses and that just is a signal that there's inflationary pressure coming at all aspects of the driver market no matter what kind of job it is, CDL holders are going to become very hard to find and the market's going to have to adjust and adapt and certainly include some of the pricing improvements will find their way down to -- certainly to the driver.

So maybe -- maybe I'll do a couple of follow-ups on that question. So what is your exposure to like that cohort of drivers, nondomiciled whatever you want to call it, that you think is at risk? And then I don't know, maybe, Andrew, if you want to take like the broader Montgomery question of what do you -- how much incremental capacity you think this takes out of the market. What does this mean for ICS? What does it mean for the other businesses at harm? .

Well, I'll quickly on the non-dom drivers. I think that J.B. Hunt, I don't remember exactly how we shared. We have over 22,000 drivers in total. And I think we had around 300 that fell into the non-dom category. And so it's not a significant headwind for us. But certainly, those drivers have been good drivers for us. So we're -- we certainly understand regulatory change, and we're going to follow the regulations just like anybody would expect of us. But I don't anticipate that to be a really big headwind certainly for us. I think the biggest factor in the -- certainly, the non-dom impact to, call it, maybe as many as 200,000 drivers was certainly as an industry. I think that's significant, and that's finding its way into the market. And then just the role that capacity that originated in Canada or Mexico that might have executed domestic U.S. shipments and the term the term as cabotage, and that's really taken some capacity out of the market as well. It's just putting pressure on transportation supply in the U.S. for other drivers, and now you're beginning to find that bubble up into our ability to hire more drivers. There have been a number of schools closed. And so the industry is probably not producing newly trained drivers quite as fast. And so there's a lot of potential headwinds coming at the industry on the driver front.

Yes. So Megomery case, I know we got a lot of headlines when they got announced last week. I'll tell you, we came to work Friday and nothing changed for us in ICS in terms of how we vet carriers are on board carriers. I think our carrier requirements are based on what we know today above kind of industry average. Carrier has to have been in service for a year before they -- we will use them. We don't use our tender loads to conditional carriers. I think the struggle is 90% of the carrier base doesn't have a safety rating from the FMCSA. And so it's tough to know exactly. But based on what we know today, we think our practices are above industry average. What happens immediately. I think it's unclear if there's an immediate impact. I think over time, the how shippers react to this? Will they tender more freight to asset carriers or to large brokers at scale and that have financial security and have more insurance that could change the industry insurance companies require brokers to have carry a higher line of insurance unknown. So I think over time, medium to long term, this is probably a positive for the industry in terms of rates going up because insurance has costs are going up. But in terms of immediate impact, I don't know that there's much that we see right now that's going to change the the way we do business right now.

And like putting your intermodal hat on, does it get you like, hey, another reason why truck rates are going up even more -- I'm like even more excited about intermodal now?

Well, certainly, any opportunity that we have to be a supply chain answer for a customer needing truckload capacity. We get excited about that. I think we're cautious on how quickly this will translate into something real in the market? And when does a customer begin to decision differently on what -- who are they're going to use to source their capacity. But certainly, are any kind of tailwind we can find, we're going to certainly appreciate that.

Do I have a ton of time, so maybe just quickly, we were talking earlier what now feels like very old news and maybe not even any news at all, Amazon -- what's your quick view on what, if anything, has changed here? .

Amazon entered the intermodal industry during COVID. They bought containers. They've been a supply chain services provider for a number of years. I was I don't want to comment on their announcement other than I was surprised that it got all this press and that they've been doing that for a number of years. It didn't -- we've been -- we have competed with them as a service provider in a number of instances, and feel very confident that the quality of our service, the quality of our capacity, the consistency in which we operate our business, we're going to outperform any competitor there is out there regardless of what color your container is or whomever. So we feel really confident in our position regardless of what they do.

And then just a longer-term thought question, what do you say to someone that says, "I get it, Intermodal makes sense, but what about autonomous trucks?"

Autonomous trucks can complement intermodal. I don't view it as a potential risk. It feels like if the idea is, let me buy a bunch of trucks that drive themselves and burn fuel all the way from California into the -- it just doesn't feel like the kind of thing that would be wise. And certainly, the railroads will react, and we'll have something to say about the competitive risk that autonomous trucks might have, again, 1 end of every intermodal load is a rail yard. And so you can map that facility out and there's a way to make autonomous trucks at some point be supportive of growing intermodal business, but we're going to be cautious because we just -- nobody can actually tell us what an autonomous truck is going to cost to serve the business. We want to understand at some point, what's it going to cost, what are the capabilities? And then does it take people there to hook up containers, hook up air hose, -- is there still going to be a lot of coordination involved with making that whole process work. .

Andrew, just a quick dedicated one. You made a couple of comments earlier, but like -- where are we in terms of -- when do you -- ultimately, when does dedicated start growing again?

Yes. I think we've that's 1 business where we're going to give you guidance, I think we have the most visibility to. And so I think Brad Hicks has said, we expect to return to growth this year. 800 to 1,000 net truck sales is our target every year. We had a strong start to the year, 285 in the first quarter, I believe. And so that's a good start, 385 to end last year. So it's a couple of good quarters of sales. I would expect that you should start to see the fleet return to growth again this year, which would lead to, I think we've said modest operating income growth for the full year. .

And then, Darren, I don't -- I really don't want to disappoint you. So I will end on a margin question, because I know you've been missing it, all right? We're getting margin improvement in Intermodal even before price has turned -- does that give you more confidence in sort of getting back to the 10% to 12%? Does it -- should we start to think, hey, there's potential to do better than that 10% to 12% you used to have an 11% to 13%, it -- how should we think about what the momentum in margin you're already seeing even before we get price, what does that mean?

I think it might have been a year ago, I said, ultimately, we need 3 points of margin improvement. A point needs to come from volume. The point needs to come from cost and a point needs to come from price. And I think we've come a long way on the volume and cost side and price is yet to contribute. Certainly, we're in the early stages of seeing pricing begin to be an opportunity to help us improve our margins. Look, I'm going to just say we need to get back inside our long-term targets of a $10 to $12 million Certainly, in the past, we've been at 11 to 13 back when we lived in that range. Revenue per load was significantly less. And certainly, that's what I think our ROIC kind of targets required today, a 10 to 12 will produce an income line that will produce an ROIC that would be very reinvestable would make our investors really proud of the business and gets to a point where you're really able to grow and sustain it. I think that when you get in that upper end of that boundary, there's other constituents, whether it's customers or railroads are all going to say, hey, that might be a little bit too much for you. And so there's an element of pressure on the top end of that margin range but certainly for now, our mission is to, as quickly as we can get back to at least 10%.

Darren, Andrew, we got it out there. This is great. Thank you guys so much.