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

Well, hello, everybody. Welcome to Deutsche Bank's Industrials Conference. I'm Richa Harnain, I am the Freight Transportation equity analyst here and pleasure having you of you. We're here with J.B. Hunt today. We got a lot to talk about, so maybe we'll just get right into it. We got Brad Delco, Andrew Hall, Stacey Griffin; has Brad Delco, CFO; Stacey Griffin, does pricing and intermodal; and Andrew Hall, who's heads up the Investor Relations effort. So thank you all for being here. We really appreciate it. And yes, like maybe we can just start by getting a mark-to-market and how you're feeling about the state of the cycle. The team sounded quite upbeat when we heard from you about a month ago now. You've entered what has historically been a seasonal allow for demand. And just as you reflect on how the cycle went up to this period and the potential heading into peak, how do you feel? And I know you're going to tell me J.B. Hunt is way better than the cycle. But yes, just maybe frame how the cycle is going, and then we'll talk about how you're outperforming.

Well, first, Richa, thank you for having us. Great set of meetings thus far and great to join you here for our webcast. Excited, Stacey Griffin is joining us, who -- I think this is her second conference ever. And so we felt like intermodal is usually probably a lot topic. And considering, she prices about 1/3 of the industry volume, no better person to come give some perspective on cycle and pricing opportunity to us. as we think about the value proposition of intermodal. Obviously, Darren has been talking a lot to investors and to the market about the value proposition where we think it is. In terms of the cycle, I mean, I don't -- I feel like we just started, right? Go back to fourth quarter. I think some of the things that we shared, we do get forecast from our customers, and -- what we noticed in the fourth quarter was our customers were very much performing in line with their forecast, but what was a surprise to us was covering some of that freight, meaning the supply or available supply of capacity was getting tighter. And so we were attributing most of what we were feeling in the market to supply attrition I think as we moved into the first fourth quarter, there were a couple of anecdotes about forecast being revised higher. And so I think we, at least internally, directionally, we're like, okay, we definitely see supply correction continuing, but we do think that there's some positive elements of demand. Obviously, we've had ISM above 50 now for 5 or 6 consecutive months. The one thing that I think is really missing is housing is anyone that probably moves freight knows that housing starts generally create a lot of demand. I think it also has an impact on supply, right? People would rather be working in construction and being at the same job site every day versus getting a wheel of the truck and driving across the country. And so I think that we are still very much in the early innings of a supply correction, but also I think there's opportunities for demand to get stronger. So I think what you have historically seen and I brought this point up, I think, Richa, on our last earnings call, the sort of our earnings come from intermodal or dedicated call it, 90%. And dedicated, these are 5-year contracts, fixed and variable components to those pay, that's how we get paid. A lot of our CapEx there is success driven, right? We'll get a contract from customers and go deploy capital. We underwrite all those deals to our ROIC targets really like that business, but it doesn't really have the sort of cyclical dynamics that I think most are accustomed to seeing in trucking. And we've proven that we have had double-digit GAAP EBIT margins for 11 consecutive years in that business. Everyone knows that intermodal pricing generally lags truckload pricing by 2 to 3 quarters. And we saw a pretty meaningful inflection financial performance about a year ago, largely driven on things that we could control. And so I think as we sit here to tell what has us excited is when we think about most of our businesses usually lagging kind of what we traditionally see in the transportation market. The fact that we've seen this much of an improvement in our financial performance with still a lot of tailwinds to come on the pricing side, I think, is what has us excited.

Okay. Now let's get into that. Brad, you reminded me what Darren said regarding J.B. Hunt's Intermodal value proposition, right, strongest in more than a decade. Maybe we can dig into that a bit more. Not over a decade ago, do we have record levels of demand for the industry during the COVID-driven boom. So the comment suggests your value proposition is stronger than it was during that cover time period. I guess talk to us about why.

Well, sure. I mean I think when we think about our value competition or value, we're thinking about how we compete in the market, and we really compete on cost, capacity and service. And so when I think of where we are today, you have high fuel prices, you have truckload policing that is -- has moved higher and is moving higher, and you have good rail service. And so I think when you combine all three of those elements, to me, that's why I think the value proposition is the strongest we've seen. Service has been great from railroads. And when you have great service, and you can offer a discount on prices and being more fuel efficient in doing that. I think that's sort of the trifecta, Stacey, anything you'd add there?

Well, maybe I'll give Stacey a more pointed question, bringing your secret weapon, right? Given that value proposition then, incredibly interesting time, I bet to be pricing this product. I would love to be a fly on the wall in your department. But just -- maybe talk through what's different now about your pricing strategy versus maybe the last peak and what you make of the pricing outlook going forward?

Discontent is interesting. It's actually really exciting. We've certainly seen a marked uptick in the demand for JB Hunt's Intermodal product, feedback to the side that happened in highway spot rates and then followed by a contract rate. And that's really generated increased demand for internal services. And so -- the value proposition is huge. And quite frankly, we don't think we were able to fully reflect the value proposition of intermodal in the last 12 months. The environment we've been operating in typically didn't support it. but we have a clear line of sight on meaningful opportunities to get paid appropriately as we move into 2027. Now recognizing there's that lag a quarter lag. So we see the opportunity that we did not see inside of the kind of freight recession years that we have been in for the last few years. we talk about and I think they are sort of shared this previously. In the 2026 season, the first part of the bid season, the transport pricing were business respond as we expected to. So it was more competitive than we expected. While we were both positive and we were positive price and volume, it wasn't significant inside of the transplant. So I'm expecting more opportunities and better opportunities as we go forward.

Has that transcon competitiveness has that leveled off?

Our 2026 business is essentially done, as we go forward in the next few months, where we're really going to see how everyone is responding in this practically very different market than what we were in this time last year. So it's too soon to tell.

Okay. And just thinking big picture about the pricing opportunity. I think intermodal historical gap between that and truckload is like 15% Today, I think in certain markets you're running as high as 35%. Does that mean you trying to do at 15% to 20% type long-term pricing opportunity as you narrow back to normalized levels? Or is that not the right way to think about it?

First, I bear in a piece of that is fuel. Because that's an always. So fuel's going to move one way or the other. It the day of the week, if that back will move. But once you feel about out I would say that we don't have payback gap in any decliner. That's just not practical, it would make sense. We have drivers to inside of intermodal. In fact we require at least 2 for each load because they're doing the pickup on the delivery. But I do think we'll have different magnitude in terms of the pricing cycle because of what's happening in that space. We've got to be able to cover that inflationary cost pressure. And we have to be able to support the rail environment. One thing to keep in mind when what an intermodal provider takes a ride to a customer, we're really taking a rate that's going to be shared with our J.B. Hunt and win at least form two railroads. So there's a lot that we're addressing is side of the right conversation.

Yes. And I would just to clarify, Richa, we typically see a 10% to 15% gap between intermodal and truck in the Eastern network. And we typically see about a 25% gap in TransCon. So maybe just for the audience to make sure that's clear frontline. So -- but clearly, I think the gap, as Stacey alluded to, is wider than that, and that's based on where we are today, I think our expectation is we've really yet to see all the anecdotal numbers we heard on more recent earnings calls from truckload guys as to where their contract truckload prices are resetting. We haven't necessarily seen that in their results or performance yet, right? And so I think truckload rates may continue to move up, which means that, that gap they'll be -- it will create more opportunity for Stacey and her team to make sure that we're getting the right value for what service we're providing.

Does that also mean the lag could be a little longer? Like we're starting kind of later in terms of when we're seeing it in actual results, so it should flow through into your results maybe later? Or are you optimistic that 2027 bid season will bring those kinds of opportunities.

Well, I think Stacey kind of tried to touch on that. I mean, I think the real big move we saw between supply and demand really was triggered in May around RoadCheck. And I think that's when we saw a 20% or 30% intra-month move in spot rates. And at that point, you're sort of at the tail end of our bid season. And so I don't know, as Stacey sort alluded to that we were able to take let's not take advantage, but let the market recognize where prices were going to land. And so I think as her and her team start back up in October, working on next year's bid season, there will be a lot more opportunities. I love what you said at some of our meetings today about the -- what is your summer been like? What are we calling it?

The summer in many mini bids because we've had such tremendous opportunity come at it -- for the pricing team, this is similar or all. And because of what's happened in that highway space, our customers' uncertainty around cost capacity. We've had lots of opportunities coming to us to price business, we've not seen before reprice business that we saw earlier in the year, find solutions for our customers to move freight as a moving over the highway into intermodal. So it's been a very active summer and penetrate opportunity for us. And Brad talked about clearly just to clients is in front of that of us. The way our bid season works is in Q4, we repriced about 10% of growth. And then we repriced about 30% in each of the following 3 quarters. So when we -- at the end of our will reprice around 40% of our business, and that will be under this new kind of understanding of the structural changes that have happened in terms of driver supply. With an entire industry understanding of kind of a permanent of that. And then we still don't know exactly where that's for to go. So we see a lot of opportunity there. as we move forward. But it will slowly through the end of the year and then it will start showing up once we get into.

On the many mini bids, is that for more immediate sort of transactions? Or is that something that we'll really see around the peak season in Q4?

It's for better. And we've seen a large uptick in new customer nights. So that's not all is exciting. It's certainly very exciting for our sales organization. So new customer names, maybe customers who have not explored intermodal before. A lot of that is Eastern network. But certainly, a lot of the same name. And we were looking at that freight that's the last to convert to intermodal. -- that they're looking at now. It's a long length of haul, but maybe it's going to our customer's customer and having consistent on-time delivery is critical. So they've historically moved at highway. And now they're looking at an intermodal option. And in the TransCon space, JBI has a quantum solution with BNSF that is targeting that customer delivery freight were consented around service and delivery is the most important. Not about me, it's about consistency. If it's 7 days, it's 7 days, every single time, they deliver it on time. So much greater interest inside of that new customers. We're seeing projects and we're looking at seeing customers specifically look for. This is what I have moving over these next few months, what solution can you give. So we're seeing those capacity concerns for immediate needs, for peak -- traditional peak season needs, but then just looking for that long-term conversion as well.

The service talked about many years about that migration or service tranship it happens? Or is it price for some people who look for that.

The underlying rail service is good, and it has been good for about 2, 3 years -- if you'd asked that question 3 years ago, it was definitely a different answer. It was a source of great frustration for intermodal carriers, for the railroads and certain of our customers. And what we've heard from our customers is, I need intermodal rail service to be good, not just when volumes are low across the industry, right, but advice starting up that service has to be safe. And that's what they're experiencing right now, which is really helping our customers have that modal conversion conversation inside of their organization.

Yes. I want to give Darren a lot of credit because he was sitting in a lot of these investor meetings 3 years ago, and it was -- you would always joke and say I had the same conversations with folks to railroad, which is, of course, we all like rail service was good last week, where is the volumes weak, that's just not how that works, right? Like you have to -- it takes time. You they want to dip the toe in the water, right, before they jump in. And so here we are now 3-plus years of really consistent rail service. Yes, I think we're coming off of run the worst freight recessions we've ever seen. And in 2025, J.B. Hunt did an all-time record amount of intermodal volume. And then in the most recent second quarter, we grew Easter volumes Andrew against a plus 15% comp. And so I really feel like the highway to rail conversion story is playing out. I think there's lots of growth. We've talked about 7 million to 11 million loads of opportunity out there. This is what Stacey and her team look at and price each and every year. This is volume that we see, we think could and should go from highway to railroad and the overwhelming majority of that freight that we see is in the East. And so you're sort of seeing that now play out with -- I think we have consecutive quarters of double-digit volume growth in our Eastern network. And so hopefully, both CSX and [indiscernible] see and appreciate the opportunity in the business that we're creating and serving together.

And I definitely -- I think I want to be mindful of like walking before we run. But just in light of that service improvement being offered by you and your rail partners -- we talk about getting back to historical ranges of like the gap between Intermodal and truckload, 10% to 15% in the East and 25% TransCon. Can't it be better than that if the service product is better than it was in prior upcycles.

I mean, in theory, yes, but I think we would really need to see very consistent service. But again, at the end of the day, as Stacey alluded to, speed is 1 factor. I think consistency of service is really what customers are looking for. And as long as we can be consistent and at a discount to truck because it will be slower, then I think it's a really strong value proposition. .

Okay. Maybe we can switch gears and talk about some of the bottlenecks for the industry. You discussed the tightness around drivers. -- particularly drayage drivers in the market at large. That was my last call. We believe a lot of your competition relies more on that type of third-party list versus you? Is that creating an opportunity for share shift?

Yes. Absolutely not. And it's not just the opportunity for Shares. Our drayage operations and the efficiency we drive with that really does give us a competitive advantage. We outsource in J.B. Hunt about 10% to 15% of our range. And we've done that intentionally. We could make that number of like work. But then we would be building the church reach sent. It's not the most efficient way to do it. And when there's piece, we want to have -- be able to tap in to those outsourced in errors as well. So it's important that we have them as part of our structure. But that really gives us an advantage certainly of our service is very meaningful. But we have a driver hiring sheet, which allows us to tackle the challenges that are existing right now in the industry in a meaningful way with how we recruit debt for our drivers and the bites we make is to rechange which is kind of where it's part.

Yes, Richa, I'll share this, but for Thompson was, I think, a 52-year employee of J.B. Hunt. He was our CFO, CEO, Chairman, now honorary founding director back when I was in your seat and covering the stock. Kirk would just make things very simple. And he said, let's just be honest, Brad, there's only 2 types of freight markets, 1 with too few freight and 1 with 2 few drivers, which 1 would you rather be in. And so right now, we're in a market where there is a driver shortage. And so yes, every single transportation company is facing driver wage inflation and driver pressure. And so you're ramping up your hiring team, ramping up your people teams, because he who has the driver wins. And so J.B. Hunt has very attractive jobs. If you actually -- I don't -- we say this in most meaning that more than half of our trucks or day cabs, which means people will come to our terminal, park their car, dumping the truck, work a shift, come back to the terminal, getting their car and go home. And so our dedicated average length of dedicated, we have 12,600 trucks. I think our average length of haul, Andrew is like 180 miles. And so I think the our diving jobs are typically viewed very favorably in the industry. And so I think that's been an advantage for us in recruiting and keeping the best drivers on the road.

Along with that adage -- yes, you go for it.

Richa, go ahead. .

Some of the intermodal margin, like long-term...

Margin target range is 10% to 12%.

Said that, obviously well for these regulatory actions have been ruled upon or inactive. I do think it's better to set up with that to be playing better 10 to 12. And there was a in 2 years the right people .

I was about to say that. 2 years ago, people said there's no way we'll ever get to those margin targets and now people are like, why can't we go higher? First of all, if you anyone knows me, they know how much passion I have and how much I love talking about margins or not. We think and what really informs our decisions as to what we're targeting in our cost structure as well as where we feel like our margin should be based upon our businesses is truly based on returns on capital. And so based upon what capital we think is required that we have to continue to invest in our chassis, our trucks, our terminals, our maintenance infrastructure. a 10 to 12 margin, we believe, is a very fair and appropriate return on the capital we take, particularly for risk, right? We are all in the business of managing risk, clearly, putting 80,000 pounds on a highway has proven to be a very risky business. And so we have to be compensated appropriately for that risk.

I think that's a really good answer. Then your growth could be better.

Then our growth should be better. Yes. So we would love to be in our 10% to 12% margin range. And if we can still execute and believe we will stay very focused on executing on our lower cost-to-serve initiative, we should be able to grow faster. And so clearly, those opportunities being presented to the team with, again, setting record volume coming out of a freight recession. .

Just to tie up my next question into that margin framework. Back to the driver point, inflation, like do you think that driver pay increases that we're having to implement albeit in selective markets still nothing broad-based for what you have said. Do you think it's similar to what we saw during COVID? Is it more manageable .