J.B. Hunt Transport Services, Inc.

Q1 2024 Earnings Conference Call

4/16/2024

spk22: Good afternoon. Before I introduce the speakers, I would like to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as
spk05: or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt's current plans and expectations and involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding risk factors, please refer to J.B. Hunt's annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now I would like to introduce the speakers on today's call. This afternoon, I'm joined by our CEO, John Roberts, our President, Shelly Simpson, our CFO, John Kula, Nick Hobbs, COO and President of Contract Services, Darren Field, President of Intermodal, and Brad Hicks, President of Highway Services and EVP of People. I'd now like to turn the call over to our CEO, Mr. John Roberts, for some opening comments. John?
spk13: Thank you, Brad, and good afternoon. I will be brief with my comments, but want to hit on a few topics before I turn it over to our team to give you their updates and to address your questions. Last quarter, we said goodbye and good riddance to 2023 and welcomed the new year with some reservations and concerns, but nonetheless confident in the strength of our organization and the journey we are on to build an even bigger and better company. Over the last several years, you have heard us talk about how we manage the business for the long term, remain focused on being financially disciplined, and being for our people who have the knowledge and talents to help us execute for and on behalf of our customers. From that perspective, nothing has changed, and we remain committed to staying the course. Over that same time, we have faced challenges and taken some calculated risks, and made some strategic decisions that I remain confident will positively impact our company and our future growth. To be fair and somewhat critical, the current environment we are in has remained persistently challenging and for longer than we had predicted. But what I remain confident in is the strategic decisions and the direction and course we are on is well charted. Our conservative nature, financial discipline, And coming from a position of strength has afforded us the opportunity to invest throughout this period to better prepare us for the eventual turn. We stand ready. Our company and our teams are working hard. To use a sports analogy, we are putting in the work, exercising the muscles, becoming more lean, challenging the playbooks we know, and better preparing ourselves for our future state. While it's hard to see that in light of what I would characterize as a disappointing financial performance against our standards, I remain appropriately metered with optimism. Elements that support that view should and will be revealed in the following discussion from our leaders. Finally, as recently announced, this will be my last earnings call as Chief Executive Officer. It has been a tremendous honor to serve in this capacity for the last 13 years. Our board of directors has taken a very thoughtful approach to succession planning and has tremendous confidence in my successor and our entire leadership team. So now I'd like to turn the call over to our president and incoming chief executive, Ms. Shelley Simpson.
spk20: Thank you, John, and good afternoon. As John made pretty clear, the market continues to be challenging. We remain focused on what we can control, and how we position our business to deliver exceptional value for our customers and shareholders over the long term. The challenge we face today as an organization is managing the business to best prepare us for future growth while balancing the need to manage and control costs in the near term. To be clear, the strategic opportunities we have across our business segments gives us great confidence in our future success. Last quarter, we introduced our priorities for 2024. Our focus as a management team and an organization is to execute on these priorities, which as a reminder are, one, to deliver exceptional value to our customers through operational excellence. Two, scale our long-term investments in our company foundations, which are people, technology, and capacity. And three, drive long-term compounding returns for our shareholders. Markets are always hard to predict, even more so over the last several years, given the wild swings we have seen on both the supply and demand side of the equation. One thing we know for sure, markets ultimately return to some balance after overcorrecting on one side or the other. We continue to view the market as out of balance, and customers have been and are taking advantage. We've been surprised by the competitiveness in the bid season thus far. We can't predict when the current rate environment will change, and as a result, we remain committed to our efforts to control our costs. Importantly, though, we are doing this without sacrificing the long-term opportunities for our company to grow and generate greater returns for our shareholders. In fact, I would argue we've only enhanced it during the first quarter with some of the investments we've made. most notably our purchase of the Walmart intermodal container fleet. We are also adapting in how we approach our customers and contracts in terms of our commitment. We will always be long-term focused and strategic. That said, we will have to be thoughtful in how we work with our customers. Our management team and business leaders are intensely focused on our cost efforts while maintaining discipline on our long-term growth and return on capital thresholds. In closing, I remain confident in our strategy and approach to manage through this part of the cycle. We continue to make thoughtful and disciplined investments that will only enhance the future performance of our company. While the magnitude of this part of the cycle has certainly been more severe, both in terms of depth and duration, we strongly believe in our ability to outperform the market on service quality, value, and growth. We have and will continue to prove our ability to deliver outperformance for our people, our customers, and our shareholders. Our confidence is in our people, our experience, our complementary businesses, our scale, and our financial strength, which uniquely positions us for our future. As we've said in the past, we remain committed to discipline investments in our people, technology, and capacity. but we will continue to challenge ourselves on our costs. I am confident that we will be better positioned as a result coming out of this part of this cycle as we continue to pursue our vision to create the most efficient transportation network in North America. With that, I'd like to turn the call over to our CFO, John Kulo. John?
spk15: Thank you, Shelly, and good afternoon, everyone. My comments will cover a high-level review of the quarter, provide some additional color on our costs and the impact on margins, as well as provide an update on our capital plan for 2024. As a general overview, we continue to face inflationary cost pressures, despite also facing deflationary pricing pressure. Our financial performance is not where we want it to be, particularly in intermodal and our highway services. We recognize that some of this is driven by market dynamics, while some is related to our decision to remain committed to our investments to drive future growth. As Shelley alluded to, we remain committed to our efforts to control our costs while trying to maintain the right balance of resources to support our future growth. I'll start with a high-level review of the first quarter. On a consolidated gap basis compared to last year, revenue declined 9%, operating income declined 30%, and diluted earnings per share decreased 35%. The declines were primarily driven by a combination of lower yields and freight volumes, combined with inflationary cost pressures. Our tax rate in the quarter was 28.7% versus 24.7% in the prior year. The increase was related to discrete items and other adjustments, and we continue to expect our annual effective rate to be between 24 and 25%. As previously mentioned, in addition to the market dynamics, our commitment to our investments in our people, technology, and capacity are putting additional pressure on our cost structure and, as a result, our margin performance. We have visibility to these costs and their impact on the performance of each business segment. On a consolidated basis, these costs aggregate to approximately $100 million, related primarily to having too many resources with our people and capacity for our current business levels that we plan on scaling into over time. That said, we remain committed to our cost initiatives have identified additional areas of opportunity to address which should not impede our ability to support meaningful growth of our business we are confident in our ability to scale and leverage our investments but right now our focus is on how we best control our costs in the near term without diminishing the long-term earnings potential we have built in the business switching gears to our capital plan We are focused on maintaining a strong balance sheet to provide us with ample liquidity to deploy capital as needed to drive long-term value for our shareholders. We have navigated this challenging freight environment while remaining conservatively leveraged at or below our target of one-time debt to trailing 12 months EBITDA. We did retire $250 million of our senior notes that matured in the quarter with availability under our credit facility. For net capital expenditures, we previously stated an expectation to spend between $800 million to $1 billion for 2024, and we have no change to that range despite some recent announcements to further expand our capacity in our intermodal segment. And finally, we'll remain opportunistic with share repurchases. This concludes my remarks, and I'll now turn it over to Nick.
spk04: Thanks, John, and good afternoon. I'll provide an update on our dedicated and final mile businesses and give an update of our area of focus across our operations. I'll start with dedicated. During the first quarter, I'm pleased with the strength and resiliency of our results. Despite the challenging freight environment, demand for professional outsourced private fleet solutions has held up well, despite the feeling we are swimming against the current. We sold approximately 690 new trucks during the quarter. very strong start towards our annual gross sales target of 1,000 to 1,200 new trucks for the year. While our sales pipeline remains strong, as we said last quarter, we do have some visibility into fleet losses or downsizes throughout 2024. This strong start in sales gives us some confidence in backfilling these losses over the course of the year. We are seeing some signs of stabilization in terms of our fleet sizes across our accounts, although our customers continue to feel pressure in their businesses. While moderating, we continue to see some fleet downsizing due to business activity, but also some bankruptcies here recently. We continue to remain disciplined on the types of deals we underwrite without sacrificing our return targets, and pleased with the activity and recent sales we've been able to close in our pipelines. We remain focused on delivering value to our customers in this environment and maintaining the business knowing it will support our future growth. Going forward, we remain confident in our differentiated model that has proven its resiliency in this tough market and our ability to compound our growth over many years and further penetrate our large addressable market. Moving to final mile. We have made good progress improving our business from revenue quality, strong service metrics, and more stabilized profitability levels. All while continuing to create value for and on behalf of our customers. We continue to see the market evolve and customers want high quality service on a national scale to meet their big and bulky final mile delivery needs. Our first quarter results did include a benefit of 3.1 million from a favorable settlement of a prior year claim. Overall demand for big and bulky products remains mixed with soft demand in the furniture industry and stable demand in both appliances and exercise equipment. Overall, we are modestly encouraged by our sales pipeline, and we continue to see new brands engage in discussions with our team. Our focus in this business continues to be providing the highest service level with a strong focus on being safe and secure as we deliver products into the homes of our customers' customers. We will remain disciplined with new business to ensure appropriate returns for our service while staying focused on growing the business and improving profitability. Similar to last quarter's, I'll close with some comments on safety. Aligning with our company foundation of taking care of our people but also the motoring public, we continue to invest in employee training and new equipment and technologies to enhance our safety performance. We are over 85% complete with rolling out inward facing cameras to our trucks with the goal of being 100% complete by the end of the third quarter. We have seen a meaningful reduction in on-road collisions per million miles in trucks that have cameras installed. Additionally, we have reduced DOT preventable accidents per million miles approximately 25% in the quarter as compared to the prior year period. As our focus on safety remains at the forefront of our operation, As the cost of claims continue to move up exponentially, we continue our efforts to find new innovative ways to enhance our safety performance and further mitigate risk where possible. This concludes my remarks, so I would like to now turn it over to Darren.
spk11: Thank you, Nick, and thank you to everyone for joining us this afternoon on the call. I'll review the performance of the intermodal business during the quarter, give an update on the market and service performance, and highlight the continued opportunity we have to deliver value for our customers and all of our stakeholders. I'll start with intermodal's performance. Overall, demand for our intermodal service was weaker than our expectations. While imports into the West Coast have improved and inventories per our customers are in a more balanced position, we have yet to see that translate into any meaningful pickup in demand for our valued service product. Volumes in the quarter were flat year over year, and by month were down 2% in January, up 3% in February, and down 1% in March. While we are seeing growth in business in some lanes, particularly outbound Southern California, we are seeing pressure from truck pricing in the east. We have been surprised by how much competition we are seeing in bids but are remaining disciplined with our valued service offering. In February, we announced we entered into a multi-year intermodal service agreement with Walmart in an arrangement that includes the purchase of Walmart's intermodal assets. This will increase our available container capacity as we execute toward our stated target of 150,000 containers. While this capacity is not needed at the moment, we saw this as a unique opportunity to make an investment that we feel confident will be beneficial to the organization over time. After not having enough capacity to meet our customers' demand in 2021 and 22, we have consistently been growing our capacity to ensure we are out in front to meet our customers' growth needs while also providing a high-quality service product that is reliable. We are pleased with our rail provider service levels, their approach and commitment to growing intermodal. We are in constant communication with the railroads on ways we can work together to drive growth. While we believe that weak truckload pricing due to overcapacity is influencing customer decision-making, We continue to see a large amount of freight that should be converted from over the road to intermodal, and we have the capacity and people in place to grow with our customers and recapture share from the highway. As we have previously discussed, we continue to work with our rail providers to launch new services based on feedback from our customers. Our announcements last year launching Quantum with BNSF in our New Mexico service in collaboration with BNSF and FerroMax, are two examples. Both service products are performing well, but we are still early and see opportunities to grow with both services moving forward. Finally, on costs. As we have said previously, we have the resources and capacity to handle significantly more volume than what we are currently handling, to the tune of at least 20%. This has been a drag on our margin performance and more than anticipated given both the depth and duration of the current market dynamics. We continue to challenge ourselves on our costs while trying to balance the future needs of the business to support meaningful growth. In closing, we continue to strongly believe in the strength of our intermodal franchise. Our customers trust us and we continue to find new and innovative ways to better serve their transportation needs. We aren't pleased with current results and have the people, technology, and capacity in place that will allow us to scale into these investments. We remain excited to work with our customers to meet their growing demand with an efficient, cost competitive, and more environmentally friendly solution. That concludes my prepared remarks, and I'll turn it over to Brad Hicks.
spk10: Thank you, Darren, and good afternoon, everyone. I'll review the performance of our integrated capacity solutions and truckload segments. I will also provide an update on some of our work in JV Hunt 360. Starting with ICS, and similar to the past few quarters, the overall brokerage environment remains competitive from both a volume and rate perspective. Segment gross revenue declined 26% year-over-year in the first quarter, driven by a 22% decrease in volume and a 5% reduction in revenue per load. These figures include the contribution from BNSF Logistics, which contributed a little over $70 million of revenue to our results in the quarter. As we expected, we've had some challenges with the integration of the business, but are encouraged and remain optimistic about our opportunity to penetrate the small and medium sized shippers through this channel. One additional challenge we faced in the quarter is the proliferation of strategic cargo theft that we have discussed previously, which I'll touch on later in my comments. We continue to make progress on adjusting our resources to our current business levels while driving greater accountability in the business. As everyone is aware, spot rates have and continue to be under a lot of pressure. While some of the weather-driven tightness in January pressured gross margins, looser capacity in February and March helped us recover to some degree. Closing out on ITS, We aren't pleased with the current results, but we continue to make adjustments to improve profitability while focusing on ways to enhance productivity to allow us to scale disproportionately to our costs when the market turns. Moving over to truckload. Segment gross revenue was down 13% year over year, driven by a 9% decline in revenue per load and a 5% decrease in volumes. Overall, demand for our J.B. Hunt 360 box service offering is outperforming the overall market as volumes in the quarter were up once again versus the prior year. That said, we would characterize demand for drop trailing capacity as soft as a reflection of our current trailer utilization and what we are seeing in bids. Similar to what you heard in intermodal, we have greater resources in trailing capacity than what the current demand environment requires. We view our trailing capacity specifically as being greater than 20% underutilized. We have been encouraged by how well demand has held up for our drop trailer solutions, J.D. Hunt 360 box, but we have certainly seen pressure on rates. Thankfully, this model allows us to be more variable with our costs, and we think ultimately will present opportunities for us to scale a cost-competitive solution for our customers while generating an appropriate return on our capital. I'll close with some comments on 360. Technology enables our people, helps drive productivity, and also drives efficiency in how we source and serve customers with our available capacity. While technology is a foundational pillar for us, it has opened new avenues for bad actors to engage in sophisticated strategic theft, giving these organized groups access to thousands of loads through our platform. To combat the increase in strategic theft, we are making some adjustments to harden the security of our system and have new initiatives that will deliver in the future to further enhance the security of our platform. As you have and are likely to notice, we are shifting some processes to be more manual in nature until these new security features are implemented. Long-term, we continue to believe our technology investments will drive productivity and efficiency gains and remain confident that these investments better position us for long-term growth with our customers and allow us to create greater value for our stakeholders. That concludes my comments, so I'll now turn it over to Brad Delco to provide instructions before the operator opens the call for Q&A.
spk09: Hey, Lisa, in light of the time, could we have the analyst ask one question and one question only?
spk22: Yes, absolutely. If you would like to ask a question during this time, simply press star 1 on your telephone keypad, and if you would like to withdraw your question, that is star 1 again. Again, we do ask that you please limit yourself to one question only, and if you would like to reenter the queue, please do so. We will now take our first question from Jason Seidel with TD Cowen.
spk02: Thank you, Operator. Good afternoon, everyone. I wanted to talk a little bit about the pricing market. You mentioned how it was a bit challenged on the intermodal side. What percent of the book is already done now, and then what percent reprices into queue?
spk11: Yeah, so Jason, this is Darren. We've said before we price about 30% in each of the first three quarters and about 10% in the fourth quarter. And so that's the pricing cycle that began in October of 23 is something less than half complete, but around 40%.
spk22: We'll take our next question from Ken Hexter with Bank of America.
spk07: Hey, great. Good afternoon. John, best of luck in your next steps. And Shelly, congrats. So just want to talk about, I guess, costs. If I think about the 20% excess capacity here, John, you mentioned kind of the $100 million target. Maybe talk about your thoughts on do you get rid of capacity at this point to work with the industry to shrink that? Do you and maybe walk us through the process of getting that $100 million of costs out if the down cycle is lasting longer. Thanks.
spk15: Yeah. So, Ken, as we kind of said in the opening remarks, we've been talking for a while now about our investments in our people and our equipment. And we thought it would be helpful to provide some additional transparency on the impact of these investments. And so we've quantified as best we can for that for you. We do have good insight into our productivity and utilization metrics, and that's informed us of this cost measure. And so if we were focused on the short term, there could be a different play to call here. But we have a very long-term view on the company and our investments. And we believe in our strategic decisions and around our very valuable resources. So, you know, if there is a, you know, a major economic environmental change, we may consider. But right now, we're focused on growing into this capacity and holding on to our commitments to our people for the long term.
spk22: We'll take our next question from Brian Ossenbeck with JP Morgan.
spk08: Hey, thanks for taking the question. Darren, just thoughts on the volume trends. You know, I've seen a lot of international intermodal volume going inland intact and clearly a big disconnect with your volume and your primary rail partner in the West when you look at TransCon versus their total volume. So I wanted to get your thoughts on that. Is that a precursor for, you know, more transloading, more domestic coming in ports that have been pretty strongly
spk11: now or do you think there's some sort of shift and this is going to be a bit of an overhang for a while and perhaps losing some share to the international international track thanks yeah so on on certainly the west coast imported volume that that we've seen has to some degree disconnected but of course a year ago the comparison for imports a year ago was so poor that I don't think it was very difficult for those comparisons to look so strong. The other thing I just want to highlight, while our volumes were flat for the quarter for the entire network, our Southern California eastbound volume did grow in the quarter by double digits. And so we did experience some volume growth in segments of our business. Now, obviously, that means we didn't grow and actually lost volume in other areas and I think in the earnings release, we talked about being negative 7% in the Eastern Network. That's been a dogfight with truckload capacity pricing being really, really competitive. And as we move further into the year, we continue to look for ways to drive cost out, present value to our customers, and be prepared for growth in the future.
spk22: We'll take our next question from Robbie Shanker with Morgan Stanley.
spk19: Thanks, everyone. Just on the intermodal pricing, to follow up here, I know you guys pointed to the truck market obviously being looser, but is it just truck, or are you also seeing price competition from some of your INC peers? And also, are you confident that this is just a function of the cycle where it is right now, or do you feel like Because of that excess capacity, it may be a little more sustained even if volumes start to come back. Thank you.
spk11: I think we've said that we're probably out of the business of trying to predict the future because it's been really, really difficult for over four years now. Certainly, pricing in intermodal, whether it be from truckload capacity or other intermodal competitors, it has been competitive. History would tell us that it is where we are in the cycle right now and that there will come a time when pricing and volume will return. I think that Shelley's prepared comments really highlighted that we're in a spot where it's out of balance and certainly customers have taken advantage of that and the future really gives us an opportunity to seek both growth and pricing improvements.
spk22: And we'll take our next question from Justin Long with Stevens.
spk00: Thanks. And John and Shelley, congrats to you both on the announcement. Maybe to pivot for a moment to DCS, Nick, I wanted to ask you about the commentary from the prior call that it could be hard to grow dedicated revenue and profitability this year. But when I look at the truck sales in the first quarter, they were pretty strong. And it sounds like you're a bit more confident that you can backfill some of the attrition you see ahead. So when you put it all together, do you feel like dedicated can hold relatively flat in 2024? And maybe you could just comment more broadly on the competitive environment and dedicated as well.
spk04: Sure. So yeah, we had a very good sales quarter. 690 trucks is a good quarter for us. So we're off to a good start. Our pipeline is Looking good from a competitive standpoint, I would say who we see that we're competing with a lot of the private fleets. It's not a lot of our publicly traded companies. And so we feel good in that competitive market. And so we feel good about where that's going. And I would say, you know, just look at this order. We've had some losses from bankruptcies. We lost our 10th largest customer. um to that and so with all that said with our sales pipeline we think we'll be able to hold flat uh as we've kind of given guidance that we do i think towards the year so uh feel good about that before we're at and uh the sales pipeline continues to be strong hey justin this is brad just uh i mean consistent with what nick said but i think our direct comments last time were hey in light of our visibility to some fleet losses uh it would be difficult to grow
spk05: But I think most of the market has interpreted that as relatively flat. I don't know that we want to be on record providing guidance for that. But I would say the pluses or minuses, since we've previously stated that, I think clearly the sales performance in DCS coming out of Q1 is a lot stronger than we anticipated. We talked last year about the pipeline being very strong and some bigger deals being in there. Obviously, some of those landed. But I would also say, so that's the positive side. On the negative side, and this was in Nick's comments, we have seen a pickup in some bankruptcies. And so that's maybe a little bit of a negative to offset some of the positive on the new sales performance that we've seen to start the year.
spk09: So just wanted to add that in.
spk17: Okay.
spk22: And we'll take our next question from Tom Wadowitz with UBS.
spk03: Yeah, good afternoon. I wanted to ask you a little bit more about the Walmart contract. I think the way you talked about it in the prepared remarks was along the lines of adding containers. My understanding was that you were also adding new freight along with those containers. So I wonder if you could just give us a thought on kind of, you know, how well utilized were the containers that you're bringing on and how should we think about the pace of that Is that something that kind of ramps across a couple quarters? And I would think that'd be big enough to see in your volume numbers. But just really wanted to see if you could give us a bit more perspective to understand that. And also, you know, I'd be remiss if I didn't say something. Just, you know, congratulations, John. And, you know, Shelly, congratulations to you as well. Thank you.
spk11: So on the Walmart agreement, you know, it's a confidential agreement between us and Walmart. So I'm going to be pretty limited in what I would say there. Certainly the opportunity to grow towards our 150,000 container target with capacity that existed in the market was a unique opportunity for us that has been in a dialogue for some time. Certainly that didn't get created in the first quarter. That's certainly when it got announced. And we're really encouraged by what it will mean for the long-term future value we can build from that program. There are mutual commitments, obviously, of capacity and volumes inside that agreement. Beyond that, I'm probably not going to be able to comment on the volume. What I would say from a timing perspective, I think we've shared that... It'll onboard to our fleet over the course of a year. That doesn't mean much of it will be in storage and will go potentially unutilized until we can grow into the capacity. Certainly, I think the, what was the last part of the question? Drawing a blank here.
spk05: Tom, can you repeat the last part of the question?
spk03: Yeah, I think just trying to figure out is this something that we would see affect the volume numbers as it builds through the year. I think, you know, that's been our expectation that you would be big enough to actually see it in the volume numbers, but wanted to see if you could offer a thought on that too.
spk11: Yeah, I probably really can't comment on the volume related to it. Certainly, we're looking to grow with all of our customers.
spk05: Yeah, and then while we're on this topic, I do want to link maybe, Tom, that question with the earlier question to John Kulo about how we're approaching capacity and our investments. And this, to me, is an example. You know, you've seen us really temper down the pace at which we are adding containers. You know, we recognize that the market wasn't developing or evolving as quickly. Obviously, the We've mentioned that the depth and duration of this current part of the cycle has lasted longer than we anticipated. And I think some of that recognition was you seeing us pull back on the pace at which we were taking those deliveries of additional containers. And so what I thought was a good attribute of this transaction, which was opportunistic, was we certainly have accelerated our pace at getting to 150,000 containers, which we announced back in 2022, but without adding additional capacity to the industry. And so just, I think it's a good highlight here and just wanted to reiterate that for the audience.
spk22: We'll take our next question from Bascom Majors with Susquehanna.
spk24: So if you look back to 2017 in the big picture context, that was a challenging year for aeronautical. But if you compare that to the current trailing 4Q, you know, volumes compounded, you know, half a percent or so, yield is driven, you know, high single-digit revenue growth, and profit compounded for intermodal about 4%, and that's after adding back the insurance cards last quarter. And I realize this, you know, just raw look at the numbers, a lot of this is due to the railroad-driven circumstances outside of Hunt's control, but If this backdrop of less structural growth and more cyclical volatility continues to be the norm into next year and beyond, how do you manage your operations and capital allocation priorities differently over the long term? Thanks.
spk11: Well, I'll jump in from an intermodal perspective, and then we may have others that want to comment. Going through 2021 and 22, when we really could not provide enough capacity for our customers, I think really did teach us an important lesson, as well as commitments between us and our rail providers to grow with each other. I mean, those are genuine commitments. The announcement back in 22 jointly with BNSF to grow the fleet was a joint commitment to expand capacity for the intermodal market and both companies are honoring that commitment and making sure that our customers are aware that we're there and ready to support them when they need to grow. Now, clearly, if the magnitude of the cycles really inflects much greater, that can mean that the down cycle can be a little more painful. And then it's hard to be out in front enough to cover the upcycle. And so we will certainly adapt as best we can. We'll continue to work with our customers to ask for better forecasts and how can we get better identification of the opportunity. But we know this, when we're there to support our customers' growth demand, it's certainly bears fruit for our shareholders over the long term as those customers just gain more and more confidence in our ability to serve their needs.
spk05: I might just add, in terms of the capital allocation, and John Kulo, you can add to this as well, you know, think about our different businesses, you know, dedicated is a success-based capital pull-down, if you will. So when we sell new dedicated deals, it requires us to invest capital. And we will continue to do that because of the discipline of how each of those deals are underwritten to specified return targets. If you think about intermodal, primarily most of those assets, at least on the trailing side or the containers, they're 20 plus year assets. We've obviously are way out in front of what investments are needed to support our growth there. And so then it's a matter of what's the right replacement cycle for our instructor equipment and what's the right balance of what we're utilizing maybe the 360 platform for in sourcing third-party capacity, whether it's an intermodal dray or other parts of our network. And then finally, where we would see capital is growing 360 box and the trailing equipment. So I think there's a lot of flexibility in terms of how we deploy capital. And this is an example of a year. You look in the first quarter, EBITDA certainly down year over year, but the debt to EBITDA on a trailing 12-month basis is actually down from where we were at the end of Q4, and our cash balance is up slightly. So generated very strong cash flow in the first quarter, and so our capital priorities won't change. Number one will be to invest in our business. Number two, support our dividend, maintain an investment-grade credit rating. Number four would be to opportunistically buy back stock. And every once in a while, you know, we do see inorganic growth opportunities, but that's not really at the core of who we are. And so that will kind of continue to be our discipline going forward.
spk22: We'll take our next question from Scott Group with Wolf Research.
spk06: Hey, thanks, afternoon, and best of luck to you, John. Congrats, Shelly. I had a near-term and then a bigger picture question. So just to help set near-term expectations, should we expect intermodal rev per load and intermodal margin to improve sequentially from Q1 to Q2? And then just bigger picture, you guys just keep talking about the depth and duration of the cycle longer or worse than you thought. I guess, what's the catalyst for this to change, right? It's not, you know, the overall economy is fine. It's not like we're in a recession and there's some V demand recovery coming. So what actually in your mind is going to change? Is it possible, I guess, just like, you know, it feels terrible versus 21 and 22, but maybe those were just unprecedented years that we just need to ignore. I don't know.
spk11: Scott, I'll quickly jump in on your first question around Q2 versus Q1. You know, we're a non-guidance organization, and we're trying hard not to be predictive. You know, certainly, history would tell us that volumes in Q2, on average, are better than Q1. That doesn't mean I'm telling you that Q2 would be better, but history would suggest that's been the case. And so beyond that, we don't have enough visibility into pricing at this stage to make any prediction as to what would happen with that.
spk20: Hey, Scott. I'll take the second part of the question. If you think about the last four years, I said this in my opening comments, the highs and lows have been more dramatic than by any time period in my 30-year career. And so our ability to predict has been very difficult. We have seen periods of positives that then quickly fall off. And so I think you see a management team here knowing what our customers are asking us for in our future, but being cautious about any positive signs that we could be seeing as we've seen some of those retreats several times over the last couple of years. And if you think about what's happening in the market, there's an oversupply of capacity, and that's not exiting quick enough. That's an important component for all of our businesses across all five of our segments. I also think what's happening from our customers' feedback and what feedback they're giving us on confidence for us to be able to grow even in the middle of a freight recession. So how can we think about that differently? That's why we are so focused on delivering great service and more value for our customers. And also the confidence our customers build over time and our ability, JB Hunt and the railroads, to deliver really great service for a longer period of time. I think our customers over the last several years have struggled with gaining the right level of consistency at service from intermodal collectively from the railroads and J.B. Hunt. And that's something that's going to take us time to win back their confidence. So I would say those are all the things that we're watching and talking to our customers about. I will say this, and we also said this in our opening comments, that our customers are giving us good feedback. It has been a difficult more competitive bid season than what we expected, but we're managing through that. We're working with our customers, and we're really trying to think about what's best long-term for both them and us.
spk22: We'll take our next question from Jordan Alliger with Goldman Sachs.
spk01: Can you help me understand a little bit how the operating leverage is going to work in intermodal? I think you mentioned about 20% over-resourced. So when the cycle does turn up and we get that inflection in volume and price, You know, how quickly can that get absorbed? How quickly do you think margins can get back to the targeted range you guys have talked about? Thanks.
spk11: Well, you know, certainly pricing is always the fastest cure for a margin challenge. That's going to contribute quicker than just raw volume. But volume today, with 20% excess volume, excess capacity has never been more valuable to our system in terms of the role it can play on expanding the margins. It feels like how quickly can we grow into 20%? Well, it's been certainly more than a decade since we grew 20% in any one year. We're still very confident in the overall market of truckload business where intermodal can and should be the right answer for. But I don't want to tell you that we're going to grow 20% in a year's time. I don't know that that's in the cards. We'll have to wait and see. Our system is built for it and could accommodate it, but that's not necessarily what we'll see. So from a timing perspective, to get back into the margin target, I mean, certainly we need to see when does that inflection happen and what You know, what is the pace of sort of pricing opportunity? How fast does capacity exit? What's the sort of the sharpness in the curve of the demand environment? And if I gave you a prediction on that, I'm sure I would be wrong.
spk22: We'll take our next question from Amit Motrotra with Deutsche Bank.
spk12: Thanks. Darren, I just want to go back to maybe a couple questions ago when you talked about 2Q volumes being typically better than 1Q. I mean, are we seeing any evidence of that? Did you see any of it at the end of March? Are you seeing any of it in April? Because 4Q to 1Q, obviously, it's down typically 5 to 6, and you guys were down 9 to 10. And so I'm just trying to understand if you're actually seeing it on the ground. And then obviously, Norfolk Southern, there's a lot going on in Norfolk. They announced that they're basically exiting 15% of their or removing service on 15% of their intermodal lanes. Does that have an impact? And usually you guys have weighed in on, you know, dynamics happening in the rail space. And obviously there's a lot going on at Norfolk and would love to get your opinion on it, given the strong partnership you have there out east.
spk05: Hey, I'll start just first on your question about Q2 and forward guidance. I mean, we're just, not in the history, don't provide, you know, intra-quarter updates on volume, and we're not going to do that here. So I'll turn it over to Darren if he wants to comment on the second part of your question, but we'll be limited on what we'll say there too.
spk11: Well, the announcement by Norfolk Southern on the intermodal changes was almost completely international, intermodal related, so it hasn't been an impact at J.B. Hunt in any way whatsoever in terms of What's going on there? I just, we're not involved in that. And I don't, I don't think it's appropriate for me to comment on that.
spk05: And then the final thing I'd make, and again, just to sort of point out, I mean, you, you did mention volumes down potentially by around nine and a half percent. That, that certainly is worse than normal seasonality. I would point out though, you know, if you wanted to look at that same analysis, historically, we see Q3, Q4 volumes relatively at parity. And we saw and we talked about seeing a stronger peak season than what was expected, and I think what was sort of experienced by the overall market. And so if you compared where our Q1 volumes came in relative to Q3, again, assuming that normally Q3 and Q4 are relatively flat, the volumes were down 7%, which is a little bit closer to normal seasonality.
spk23: we'll take our next question from john chappell with overcore isi thank you good afternoon um darren i was going to ask you basically what brad just talked about the fourth quarter you set a peak season that no one was expecting your volumes were better than typically in the third quarter pricing was even up sequentially if we look at just revenue per load and then the first quarter you know pretty substantial step back so i'm just trying to understand what changed in that six month period why was 4q better 1Q worse, the trucking market seemed to stink all the way through. So was that a front-end loading by customers? Was that something indicative of the economy of rail service? How can we add kind of like the green shoot period in 4Q and then another step back in 1Q?
spk11: Yeah, I think you're asking the same questions that we ask to our customers throughout both events. I mean, the fourth quarter uptick in demand for us was a surprise, and our system was able to accommodate capacity to execute on it. Equally, coming out of the fourth quarter, we were surprised by the magnitude of the decline in the first quarter. And certainly, I don't have a great answer in terms of what the catalyst was. I think the mixed of our particular customer base certainly drove the opportunity in the fourth quarter, and it may certainly be returning kind of as Brad highlighted. Maybe what we experienced in the first quarter was actually a little bit of a return back to normal off of a higher fourth quarter, and we've got to wait and see where the year takes us at this point.
spk22: We'll take our next question from Brandon Ogwenski with Barclays.
spk18: Hey, good evening, and thanks for taking the question, and congrats to John and Shelly as well. Can you guys talk to maybe ICS profitability, because I think sequentially it did worsen in the first quarter, and just being disciplined around customers and focused on returning profitability for the brokerage business? Thank you.
spk10: Yeah, thanks, Brandon. It's Brad Hicks. Certainly been extremely competitive for several quarters now as we think about the brokerage market. In particular, the spot market and what we've seen there. We did see a modest tick up in January, only to see that kind of level back down to the trough that it's been really for probably the last four plus quarters in terms of what rate and quality of revenue has done. We're certainly focused on trying to grow where we can grow and grow with customers that we believe that we can create value for. such that that's stickier in the forward view. As I mentioned in previous quarters, those that we supported at their time of greatest need have seemingly gone the way of finding the lowest cost solution that they could possibly find, and that certainly harmed our business, our volumes, but do feel like our gross margin recovered throughout the quarter. We saw it hit severely during the winter storms in January, which was abnormal for us, but we were able to recover and deliver a gross margin of a little over 14. I think it was 14.3. So we were encouraged by that, and we're certainly focused on volume.
spk22: We'll take our next question from David Vernon with Bernstein.
spk16: Hey, good afternoon, and thanks for taking the question. So you mentioned in the press release the disciplined approach to the market for the value of services in the intermodal segment. I'm just wondering if you can give us some expectations around kind of how you're approaching the market the rest of the year, anything you've learned out of bid season that would speak to kind of what the volume outlook might be, you know, for full-year intermodal growth in the segment.
spk09: Yeah.
spk11: So, you know, I think that the pricing that we, issued early in the mid-season we did um we we had some some surprises with the results and it was really competitive and and we were surprised by um the magnitude of some of the truckload opportunity uh truckload rates from truckload competitive uh uh competitors out there and that certainly um has has helped us to identify can we Can we offer shorter-term programs to our customers as we move forward? Are there opportunities with our rail providers to participate with us in a way that we can be more competitive? And we're seeking all of those opportunities, one opportunity at a time, one customer at a time, and we'll continue to do that and see where we land as we move throughout the year.
spk22: Thank you. We'll take our next question from Jeff Kaufman with Vertical Research Partners.
spk14: Thank you very much. And John, congratulations. And Shelly, big fan, congratulations as well to you. My one question is the following. You mentioned growing out the franchise, the focus on the longer term. I was a little surprised to see trailer count down so much sequentially from fourth quarter. Are we basically saying the trailer pool experiment is done and we're going back to something more normal, or is there anything driving that that would be something worth noting?
spk21: Okay, Jeff, I think you're talking about the end of period versus the average.
spk14: Yep.
spk21: Is that right?
spk14: Well, it's down about 1,700 units. So I was just kind of curious why it was down so much given the trailer pool growth that we'd seen in that division for the last number of quarters.
spk10: Yeah, I'm showing what we reported at end of period for Q1 for our truckload segment at a little over 13,000 trailers, which is just down 100 from same period in 2023.
spk14: Apologies. I was looking versus fourth quarter. But I can come back to you offline. I was just a little bit.
spk05: Yeah, Jeff, let's cover that offline. I think we did have some trailers that were transferred over to DCS. So if you notice, the DCS trailer count is higher. And that's a lot related to some of the business that was transferred at the start of 2023. If you recall, we moved some business out of JVT.
spk10: into vcs and some of the ownership of that trailer stayed in uh stayed in jbt for the year and we transferred those over yeah and let me just add for my opening comments that we do have excess capacity and so we're making good company-wide decisions around where we can utilize those in the short term but but in no way are we abandoning our 360 box strategy as i mentioned we actually had volume growth inside of the network that that box strategy supports, and we remain very encouraged about that service offering.
spk14: As to context, I was looking for it. Thank you.
spk22: We have a follow-up question from Tom Wadowitz with UBS.
spk17: Let's let this be the last question, if that's possible.
spk22: Absolutely. And our last question will come from Tom Wadowitz with UBS.
spk03: Yeah, great. Thanks for giving me a chance for the follow-up question. There was some discussion on bad debt expense. It sounded like it was meaningful. I think you referred to, like, the 10th largest customer in dedicated. And so I'm guessing that was maybe an effect, a meaningful effect on the margin in 1Q. Can you give us any quantification how big that was, you know, year-over-year or absolute, just so we could kind of think about, you know, potentially parsing that out or just understanding that impact? Thanks.
spk15: Yeah. So, Tom, this is John Kulo. Our bad debt expense on a consolidated basis, quarter over quarter, was $4.6 million. We had a reversal in the prior year, first quarter of around $1 million, and we charged $3.6 million in the first quarter of this year.
spk09: And, Tom, most of that would have been in?
spk22: Thank you. And that does conclude the question and answer session. I'd now like to turn the call back to Shelly Simpson for any additional or closing remarks.
spk20: Thank you. And thank you, everyone, for joining the call. You know, here we are in going on two years of a really difficult freight market. And the hardest freight market, I think, in my 30-year career, and I think certainly for the entire leadership team. And it's hard to see what's really happening good when you see financial performance struggling as a result, but we did have some really great things I want to make sure to call out for our people. Number one, our people continue to deliver great safety performance as we reduced accidents per million miles DOT preventable by 25%, and that is something important and at the forefront of how we think about operations. We also deliver for our customers on great on-time service, and that's their expectation, that we continue to deliver value, and that's where we're going to be focused. We've talked a lot about what we can control, and although we're not pleased with our performance, we are focused on controlling our costs without jeopardizing our long-term opportunity. We're listening to our customers, and they're counting on us. They want us to deliver the right value for them, and we have to make sure that's the right value for us. We remain committed. to being long-term in our focus, but being disciplined in our investments. And we want to stay balanced between the needs of our customers and delivering the greatest return for our shareholders. But I want to make sure that I end on this. You know, we talk about being for our people. And if you think about where we're at as an organization, you know, we've been led by four different leaders previous to me, and Joan Roberts has had the privilege of leading our company for the last 13 years. John is one that won't normally turn the spotlight back on him, so since I'm sitting in the seat now, I get an opportunity to do that. In our 13 years, John actually entered the organization in that time period into the Fortune 500. We've seen our company grow substantially over the course of a period, and we've also seen our shareholders benefit greatly. As I step into these shoes, they are big shoes to fill, but I will tell you, We have great leaders that not only sit at the table with me, but all throughout our organization. Our tenure in the company is something that's remarkable and something that I think has been tried and true to what makes our culture successful. But I would be remiss if we weren't to say one of our greatest advocates for our people is our still CEO, John Roberts. And I want to make sure I give him an opportunity to address based on being our CEO and spending time doing that. And just want to say thanks on behalf of John, not only our leadership team, but for the 35,000 people that have stood with you for the last 13 years. Thanks for everything you've done, and I'll turn the call over to you.
spk13: Well, I appreciate that, Shelly. You know I don't like a lot of attention. I'll tell you that it's been the greatest honor of my professional career to get to be a part of and lead this team through some incredible growth years through uh some learning years um through some evolution and i could not even with this quarter and even the last few as you mentioned the last couple of years i could not be more proud of this group of people all 35 000 of them for everything that has happened under the banner of our scroll and the way that we always put our people and our customers first, knowing that we have a duty to return compounding growth and reliable, credible information so that Our shareholders, our owners can make good decisions. And I think that that's something we want to protect and we want to be candid and transparent. We are, I can say with no hesitation at all, and I've been up here the last couple of weeks hanging around and kind of watching for the things that I look for when I want to see my team win the Masters, win the Super Bowl, win the NCAA Tournament. And I see it, I see it all. I've seen it really for the last couple of years, but right now the fire's hot and our people are responding to that. Our leadership is guiding the way they're supposed to guide. Our priorities are right. And I get to hand this institution, this brand to a very, very capable person in Shelly. And importantly, she and I both agree, neither one of us can do anything without our team and specifically our leadership team. We have the highest level of responsibility to be sure that we get it right. And when we don't get it right, get it right. Redirect, evolve, make sure we keep our focus on the right things. It's an honor. I am humbled. I'm amazed. I am thrilled. I am sad. I am all of the above. The best news is that I still have a seat at this table. I look forward to being chairman of this company and working in a different capacity, but hope to continue to leverage my 35 years of experience and 25, 13 of which was forged running dedicated contract services where I learned some So many things in the last 13 plus being our CEO. Just thank you for your trust. I feel like we've had a great relationship with you folks, and it's been a lot of fun. It's been a lot more fun than it hasn't. It's just not a lot of fun right now. So we've got to go to work. So thanks for calling in, and we'll be back with you next quarter with Shelly at the house.
spk22: Thank you. And that does conclude today's presentation. Thank you for your participation today.
Disclaimer

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