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

Started with the transport track here at the Wells conference. We are very excited to be joined to kick off the morning with J.B. Hunt from J.B. Hunt, we have Spencer Frazier, who is the EVP of Sales and Marketing. We have Bill Dietrich, SVP, Intermodal Operations; and Andrew Hall, Senior Director of Finance. So gentlemen, first off, thanks so much for joining us. Really appreciate it.

Yes. hey, Chris, thank you for having us here. We always like being a part of this event. And just looking forward to sharing some information about the momentum that we really started in Q4 of last year and the strength of really our performance through Q1 and answer any questions that you may have. So looking forward to the discussion.

Absolutely. So that's maybe a great segue to where we want to kind of kick off, which is sort of the current market. So maybe Spencer, I'll turn it over to you, a couple of comments. What do you -- sort of what you're seeing here in the second quarter. Obviously, capacity on the truckload side started tightening in the fall of last year. that's continued as we've moved into this year. I think the month of May might have been sort of the biggest sequential step down we've seen in FMCSA carrier authorization. So it does feel like things are starting to happen and maybe we can sprinkle a little bit of demand on the top as well. So maybe just a broad overview of what you're seeing in the end markets, so we can kind of dig into each 1 of your businesses?

Yes, you bet. Well, I do believe you've all read about it. You've seen it. Our customers are experiencing basically the increased enforcement of government regulations and regulations that were existing and a few new ones. And that started basically with some changes and announcements and audits and research done back last spring. And some of those things were implemented in the summer of last year, really started to take hold and show the impact, I'm going to say, in Q4 of '25, kind of post Thanksgiving. And we started to see it and feel it and that accelerated, to your point, through Q1 and is definitely being felt this quarter. And there are a lot of different aspects to the regulations that are being enforced. We put out a white paper back in October of '25. We updated it in March based on specifically the nondomicile regulation implementation and then we've seen different things specifically with the Montgomery case with the Supreme Court having a unanimous decision supporting really the broker liability changes and so a lot of different things have happened to impact capacity. And within that, our customers -- we talked about this on the earnings call, they really started to understand what was changing in Q1 and this quarter. And I'd say at this particular moment, as we sit here and think about what could happen through the rest of this year and into '27 we're really trying to help our customers educate their internal stakeholders and their organizations about what could be a significant change and the dramatic could be speed, could be amount of change in this up cycle. So the capacity-driven things that are going on in our market are significant. And then also, I think 1 of the things I really like to look at are facts and data and you look at the facts and data from the LMI from related concerns about capacity -- and if you think about our industry, I might give you a couple of words here. Since 2022, we've been in an oversupplied overcapacity what would be called a freight recession. Well, again, that happened for the last 4 years. I think if you look at the MI and the since 2022 and both March and May, respectively, they're now at their highs. And even some of them are all-time highs as indicators of capacity challenges as well as overall potential demand. So I might pivot to that and then Bill, if you've got anything you want to say on capacity, I'd love to hear it too. But from a demand perspective, things that we've seen is the companies that we do business with -- they always find ways to meet their customers where they are. And again, you look at any kind of macro numbers but also specific commentary whether it's a consumer or industrial demand is solid. Customers are resilient. And you can see that while there are potential things that could impact demand over time, I think that's the case all the time. But at this particular moment in time, demand is still pretty solid across our customer portfolio. And we do have winners and losers, again, in every industry, depending on how their value proposition stacks up to meet their customers' needs. And we see that to in our portfolio.

That's a great overview. So maybe let's dig into a few of those things. So I wanted to start on the capacity side kind of that's been the big topic over the course of the last several quarters, as you noted. I think customers you're probably doing a bit of education to some of your customers about this. I think as we are going through the winter time, there's a lot of discussion about weather, I think it's probably pretty clear that it hasn't just been weather that's been driving sort of the tightness in the market. So I guess as you think about some of these initiatives, whether it be the safety and regulatory enforcement that's really kind of coming down in the non-dom CDLs or maybe it's going to be enhanced carrier vetting post Montgomery. Any sort of thoughts you want to throw out there and what you think the capacity reduction might begin to look like on the truckload side. I think some people are beginning to think this is a bit more structural. So kind of curious your take...

Yes. Yes. I might say a few things, and then Bill, if you got some comments on it. I think structural is the right word. It is different this time. There have been capacity challenges in our industry in the past -- those things were typically met by rapid increases in supply. And I think this time, when you think about the regulatory impact of really stopping the importation, illegal and fraudulent drivers in our industry, all in the vein of improving safety. That is a structural change. And the ability for our industry to respond to that in the old way is just not going to be there. Now within that, we had some estimates that there could be an impact of 200,000 to 400,000 drivers. I think the nondomicile FMCSA's internal impact -- they thought 200,000 drivers could be impacted. We've seen tens of thousands of drivers come out of the system so far and believe that we're just in kind of, I would say, the early innings, maybe the second inning, which could be a long inning of change from a driver perspective. And then just 1 benefit from that. Obviously, safety on Americas highways is number one. But additionally, this industry, like any other, will respond and find a way to do that. Well, the way to do that is going to be creating good pain American jobs. And I think that lines up with other things, specifically that this administration wants to do. And the challenge will be is how quickly and how significant the cost impact of driving that change will be because one more comment specifically around cost, if you look at our industry since 2022 and really look at our cost categories ATR, the American Transportation Research Institute does a great job with their annual study, and they study costs for carriers to operate, and every cost category has basically been up 30% to 50% over the past 5 years. So the industry has a catch-up period from a cost perspective to go through. And then secondarily, whatever this impact is from a driver perspective going forward is that we're going to have to invest in. So I don't know, Bill, do you have any thoughts on the capacity side?

I mean I would just add from my perspective in operations, I've certainly felt that capacity crunch and is slowly ramped up recruiting drivers for intermodal has been more difficult throughout the year. And really the past 6 to 8 weeks, it's been even a little bit of an inflection point. Dispensers points around some capacity coming out immediately, whether that's from enforcement of cabotage or the nondomicile CDL piece. To me, that's part of it, but also new entrants. I think these enforcements of regulations are throttling supply as much. So you kind of have a double-edged sort you're pulling stuff out, but then a large majority, I think a large percentage, I don't know what percentage that is of new entrants tended to be maybe for in born or maybe English isn't your first language able enforcement of English language proficiency. Do you want to be a truck driver and be concerned about being harassed when you're pulled over. Can you speak XYZ. So I think there's definitely more barriers to entry and pushing people to do other jobs than truck driving. So at some point, the correction is going to be very difficult, more difficult in the past.

So that makes sense and lays the groundwork really nice for the next part of the conversation, which I think is the natural one, which is starting to see spot rates really inflect much more meaningfully on the truckload side over the course of the last several weeks, but it's really been going to your point, I think, since the fourth quarter post Thanksgiving time frame. We've seen the step function moves. And importantly, we seem to be holding these higher rates. You spent a lot of time talking to customers. So like you said, educating customers about what's happening here. How is the contract negotiation process kind of going we're getting towards the tail end of bid season. Most implementation for you guys is going to be sort of 3Q and beyond. -- what sort of is the dynamic. I think you gave us an update last time on some of the highway businesses were kind of double-digit kind of contract increases. I know intermodal is going to be less than that, but maybe if you could kind of help us understand what you guys are seeing.

Yes. If you think about our bid season right, it is kind of winding down in this quarter and then getting ready to ramp back up here starting in July. It kind of goes July to June is the typical cycle. And within that, I would say going through the fourth quarter and through Q1, we saw a normal approach from our customers pretty much staying on time, also the same types of discussions not really anticipating or preparing for much change. But when those bids implemented, this is probably the biggest indicator of change in the market and customer behavior is the amount of mini bids or rebidding that takes place post bid implementation. And the only reason that happens is because routing guides once implemented, start to crumble. They're falling apart. And that's what has happened at an accelerated pace. And I would say, Chris, really probably from March through today. And then if you think about what's changed in the mini bid, it might not even be called a mini bid anymore. It's almost a rebid of the entire network, a bid where there might be some routing guide fallout historically would be maybe a couple of lanes here and there, nothing of magnitude maybe a few hundred loads, maybe 1,000 on an annual basis. We're seeing almost full network rebids, rebids that have tens of thousands of loads in them. And with us sitting here today, if you look back at last week, I think tender rejections on Sonar were almost 18% that hasn't happened since really probably '21, if ever, -- so significant change. Our customers are feeling it. We're trying to work with them through the discussions, post implementation through the mini bid process and then again, also setting up into the next bid cycle.

Okay. So it does seem like there is more of a real-time reaction function because we are seeing route guides fall apart. And so there is this more sort of incremental activity occurring. .

That's exactly right.

That's helpful. And I guess as you start to think about that, any context on maybe how we think about what that means from a rate perspective, whether it be broadly across highway services or in the intermodal side, we know that that's going to lag. I think there's traditionally a couple of quarter lag between what we're seeing on TL and then flowing through to intermodal. But how are you sort of breaking down those different parts of the business?

Yes. I think to your point, obviously, we can see everything that's happening real time in the spot market. and what's changed there. And again, that impacts the broker world more significantly first, both on the rate side and also the cost of capacity. And then second, really having the rebid opportunities to change pricing from a contract perspective. Typically, highway comes next. And that's happening at the moment. And then intermodal has the opportunity there as well. And so really, our discussions are more forward-looking, talking about and trying to anticipate what the cost of capacity is going to be to make sure that it's relevant to service our customers' freight and also then the rates across all of our services and what we need to execute. But go back to what I said from an industry perspective, this industry is behind. It's been 4 years in a cost inflationary environment and a rate deflationary environment. The industry is still not healthy. It hasn't generated the returns it's needed to reinvest, and that has a catch-up aspect that's going on right now. So the magnitude of what could happen from a catch-up perspective, but also going forward on what we need to execute is still in flight and in motion. So it could be significant as we said.

Okay. So let's talk a little bit about the volume side of it. So I think it's very interesting for J.B. Hunt specifically coming into 2026 as we're seeing some of this inflection on the capacity side and maybe some incremental demand that volume is running at sort of peak-ish levels. I think record levels is probably the better way to phrase it for the intermodal business. Margins are starting off on the lower side. You've done some self-help around that. But maybe starting on the volume side, I would guess the selling proposition of intermodal in this environment is getting a bit easier, but it's coming off of already a very record levels. So I guess maybe kind of walk us through a little bit of what the volume outlook might be here. We're obviously seeing the IANA numbers look reasonably constructive on the domestic side in particular, but I think there's been some discussion about peak season. So maybe talk a little bit about volume on intermodal.

Okay. Well, I'll just say volume across the board, I'll go in intermodal, but volume across the board for all of our services is strong. And again, when you think about the momentum that we had coming through Q4 and into Q1. The reasons for that is because I believe we're taking market share because our value proposition focused on operational excellence is creating something unique for our customers. across all of our services. And that's something that we are very focused to continue doing. And then as you also said, Chris, focused on lowering our cost to serve, and making sure that we continue on this march of a structural cost takeout. And right now, I believe we're on around $130 million run rate. And that's something that we're making sure that we have discipline in our execution as well as in our pricing, and that execution focused on service creates value. So that's number one, that drives volume. And we think volume that's increasing in a faster rate than the overall market. And then specific to intermodal, when you think about where we're at with intermodal, our industry had prior to, I'm going to say, about 3 years ago, had a decade of inconsistency and inconsistency of service. And that creates question marks in our customers about deciding can intermodal be a reliable part of my supply chain strategy. Well, we and our railroad partners heard that. And I would say now we're on a multiyear run, a very consistent, reliable service. And then really, the proof point going forward, customers always said, okay, well, what about if it gets busy. Well, to your point, last fall was busy. Also this spring was busy. In March, we had a record week in Intermodal. I think our volumes for the month were up 7%. And so Intermodal is busy and intermodal is performing. And so based on great execution and then Bill's team as well, making sure that we treat each customer and each load to the service parameters that it needs to, to hit that mark for our customers, gives them confidence. So confidence in operational excellence. And then you've got this capacity issue that now says, okay, our customers are going to struggle to meet their budgets. Intermodal is the right lever to pull for them to possibly get back in line on their budget line items for transportation expense, but the confidence in execution makes it then a more durable, long-term change. And that change just one more comment. It's not just as easy as saying, okay, I'm going to pull a highway box out of a customer's location and put an intermodal box in. There are things inside their routing guide, inside their supply chains, adjusting transit, making sure that their internal stakeholders are aware so when they make that change, it's not just for an on-off switch. So something that we believe we're expanding the market with more highway conversions, specifically in the East. As well as having Transcon network efficiency, we're driving growth there.

That's a great segue. I wanted to ask you sort of about the East versus West dynamic. We typically think about the East as being a bit more truck competitive. So when we see what's happening in the truck market and what's happening with fuel typically, seems like it would provide a bigger opportunity for your network in the East versus the transcon, where it's a little bit better penetrated, a little bit more of a mature business, I guess, is the right way to think about it. So maybe some comments about how you're thinking about the growth opportunities and maybe the pricing opportunities east versus west.

Yes. Well, I'd say from a pricing opportunity, the gap between highway and intermodal has increased. And again, our goal is to try to make sure that we're investing in Bill's team and our equipment and also then working to close that gap. And so in the East is where it's the most significant and it could be 25% to 30% depending on whosever estimate you want to look at. And there's opportunity to probably get that back to a historical norm of maybe 15%, maybe 10% with the reliability that we've got. And then inside the Easter network, we had our strongest growth there in Q1 and I believe it was 8%, and our transcon was relatively flat. Well, inside of that, you might ask why. Well, again, that's where most of the freight, the intermodal lost to the highway in the past is now being on back or converted back. And then it also matches up with our customers' supply chain strategies. They've got a multiport and also regional distribution strategies. They are always trying to get closer to their customer. And in the East is where that's going to happen, where that competitiveness and even then the length of haul that our customers look at, hey, can this convert to intermodal. It was it 1,000 miles? Is it 800? Is it 750 at a customer conversation last week that's looking at 650. So that's an opportunity, again, to expand the intermodal market and provide a great service for our customer.

And we've typically thought about 550 is roughly the breakpoint 500, 550.

Yes, that would be pretty tight. But I mean, again, getting down to that kind of short call intermodal, you just never know what is going to be needed in this particular change.

So there's opportunity on price. We've volume opportunity and share dynamics there. You guys -- you noted that the $130 million of run rate on the cost side that you guys started the process on last year to get where you need to go. I guess as you think about '26 and maybe '27 because it feels like this might be a multiyear opportunity of catching up. How do you think about sort of the cost opportunity? Maybe if you think about you have volume, you have price and you have cost there's different levers to pull on the margins. Maybe if you can prioritize and give a little bit of color on those.

Well, I'll say a few things, Andrew, you might come in. I know -- we've often talked about specifically with Intermodal getting back to our margin targets -- and we're still working on that. Historically, I know we've shared that we'd like to get -- I think we can get 1 point from volume, maybe 1 point from price, 1 point from efficiency. So that cost takeout that you talked about is having a significant impact -- and really, I know the way that Bill is running his business with his team is finding great ways to do that, leveraging technology as well as thinking about how we serve each customer uniquely. But you can also look at the rest of our businesses. Our dedicated business has had probably, I think, one of the most impressive runs double-digit returns. I believe it's over 10 years. And that portfolio continues to get stronger. Our pipeline is significant. We've got a goal of growing 800 to 1,000 trucks again this year. That pipeline is increasing. And again, one other thing related to this capacity change and also the regulatory rulings on or the Supreme Court ruling on carrier vetting, that's going to help our dedicated business as well expand and really make sure, again, whoever you're working with, whether it's your internal private fleet, operations or external, you've got the safest people managing and mitigating risk and also creating value. So that gives us a lot of kind of encouragement about where we're at in that pipeline and continuing to grow that business at the return profile it is. So I don't know, did you have any other thoughts on.

Yes, I would just say you hit on it, Spencer, but go back to midyear last year. Darren laid out we were roughly a 7% margin intermodal. He laid out a pathway to the bottom end of the 10% to 12%, so point from cost, point from price point for volume. I would say on the cost side, We're executing $100 million was the target for cost to serve. We're on a $130 million run rate. I think you could say we're -- we've got the point from cost in intermodal. So I think we've done a lot of work there. Bill's team has led a lot of productivity improvements with our assets and how we utilize our trucks and our drayage fleet. Volume, I think you've seen us outperform what I would consider normal seasonality in the past few quarters intermodal -- so making progress toward that point from volume. To me, the area we still have work to do is on the price side. And Spencer has talked about the dynamics there. Will we get a point from price in 1 bid season? I don't know. It might take a couple of bit season to fully realize that point from price. But I think we're in good momentum across the board on all 3 of those aspects to get back to that low end of that 10% to 12% range. Okay. That's helpful. And I do -- we got 10 minutes here.

And certainly, if anybody in the audience wants to ask a question, feel free to go ahead. either we can get you a mic, or I can repeat it, but feel free. SP29085718 How the robo trucks I'm just curious if it comes on.

So autonomous truck question. So how do you think about the impact of that? Yes. I think it's probably a long runway where autonomous trucks can help us, I think, that especially on an intermodal section, I think that we're already doing drayage for the rail. There could be a future where certain lanes, you can may be in the south where you could use an autonomous truck. They have a long way to go around what is the cost structure when you deploy that vehicle? And can you make the economics work for your business Currently, they're all tested well in the South. They're not prepared for weather. So there's a long runway in my mind before you can find on the road solution that uses autonomous trucks. I think yard work or maybe the rail terminals will get there to where on a private property, you can take advantage of that. But in our space, not so much in long term is even the highway infrastructure if you were to ever think about being competitive of other shipments, it's you need a lot more trucks if you were to try to compete with intermodal in that space or anything -- but I think there are aspects of autonomous trucks that could help the current driver situation, make the in-cab experience for a driver, more friendly, less intimidating. So maybe you could use the features of autonomous trucks in the future to attract new entrants. I think that's optimism that I see from that front that could help our industry.

Yes. I would here I think there's an opportunity to use some of that technology that's in an autonomous truck, put it in the cabs with our drivers today to make our drivers even more safe. We're on 3 years of record safety currently. But if we can take some of that technology and supplement that in our cabs with our drivers to further increase our safety performance, I think it's something we'd be interested in exploring and see a better use case in the near term than a full autonomous truck.

I wanted to touch on dedicated as well. So you noted some of the dynamics around Montgomery being a positive for dedicated. It also seems that when we get into these types of markets [Technical Difficulty] Process is in place many years ago. And I'll also say 1 of the key catalysts, which is another big challenge in our industry is cargo theft. And so having to put in preventative measures to protect our customers' cargo, really helped us get ahead of having the need to make any other changes. So we feel real confident about the processes we have to make sure we've got good able save capacity in our ICS business.

Chris, I would just add to that. I think we were -- I think we consider ourselves above industry norm in terms of a carrier betting standpoint. We don't use conditional carriers, and we don't tender loads to them. then a carrier has to have been in service for at least a year before we'll use the tender love there. So I think that is part of our standard today, and I think that's a little bit above kind of where the overall industry is from a betting standpoint.

Yes. That makes sense. We've done some work around this discussion and you talked to some of the private brokers out there that'll sort of suggest that maybe 50% of their volume is going down into like sort of the 20% bottom pool of the carrier world. I'm not sure if that's something that you guys think is right. I guess it would suggest that if there are some vetting standard changes it could have an outsized impact on the spot market kind of goes back to the beginning of the conversation we were having about structural changes in the market. I don't know if you have an opinion about sort of how to think about that. I'm not suggesting you guys necessarily are playing on that end of the pool, but I'm kind of curious your thoughts.

Well, maybe I'll have to let them kind of answer for kind of however, they've been doing business and how it's set up, but I'll share one bit of information with you as we look through and changed our processes and really kind of implemented the standards that Andrew just talked about. We've reduced our active carrier accessible carrier capacity by almost 50%. Now that was many years ago and specifically associated with making sure that we had a carrier who is who they said they are and a driver who is -- who they say they are. And we eliminated 50% of our accessible capacity for our brokerage unit. Now what did that do? Well, it absolutely compressed margins in the moment. But was it the right thing to do to protect our customers' freight Absolutely. So anyway, that's just an indication kind of the steps that we've taken and the potential impact.

Yes, being ahead of the market probably there. Okay. And then I guess, in terms of just market dynamics within ICS, we've heard of and seen more spot activity. Obviously, you're going through the contracting bid season. I don't know if you -- what your thoughts are around gross margin progression, but it feels like maybe we're past the worst, but I don't know, maybe the spike in spot rates means we're not past the worst. I don't know if you have any thoughts around gross margins in ICS.

Well, I would just say, when you think about being past the worst, -- you mentioned just a little bit ago that you saw May change again and have another step change -- so that date that there's still a lot of challenges out there from a capacity and cost of capacity. And also you see spot prices continuing to accelerate. So the one thing that I don't know that we know and where our customers know is are we going to have kind of a leveling? Or is this going to continue to accelerate? And time will tell on that aspect. But definitely seeing pressure in the cost of capacity continuing -- and that's why we have conversations with our customers to make sure that they're working with us. So then their price point is relevant to that cost.

That makes sense. I guess as we sort of wrap up here, I think the balance sheet and CapEx is pulled back. You guys have capacity. Maybe 1 of the last questions I have is about capacity because that has been sort of 1 of the discussions in the market. boxes stacked. Obviously, we're at record volume. There's an opportunity probably to pull some more of those boxes off. But how do you think about the relationship of box capacity to how you approach the pricing discussions with your customers? Is that the right piece of capacity we should be focused on? Or is it something different?

Well, I would say something we've shared many times. We're proud of the strategies that we put in place regarding capital and prefunding our growth. And so -- we are built for this moment in time for our customers and our customers know that. So they have confidence in that continued conversion from highway to intermodal. And I think as we look forward definitely looking at where our capacity is, box turns and all that kind of stuff, but specifically stay focused on the highway side. And our customers know that we can continue to grow into their business needs. As an industry, I think Intermodal still has plenty of boxes right now, but an opportunity to fill those up is happening.

Chris, I would just add that you're right, we have -- we've prefunded our capacity in intermodal. We're not pricing to fill boxes. We're being disciplined with our approach during bid season and making sure that the way we price our freight generates the return and margin profile we expect.

Makes sense. Okay. We're out of time. I can probably ask you 6 or 7 more questions, but I appreciate you coming here and spending some time with us. Always very helpful. So thanks very much.

Thanks very much.