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

Welcome back. Good afternoon. I hope you're enjoying your meal. I want to quickly introduce our keynote speaker for lunch today, Shelley Simpson, who is EVP, Chief Commercial Officer and President of Highway Services at J.B. Hunt. She's been with J.B. Hunt for 25 years, started off as a customer sales rep, worked her way up through the organization. And in 2007, she was named President of ICS, Integrated Capacity Solutions, and essentially built the company or built that division from scratch to over $1 billion broker. Since then, she's been promoted Chief Commercial Officer and spends a lot of her time leading her effort around J.B. Hunt 360. Most of you are familiar with her, a lot of you have heard about her. But I'm going to let her speak more to it and everything that's going on in the digital world of trucking and transportation. And afterwards, we're going to come back up here for a little bit of Q&A. Shelley?

Thanks, David. Hey, good afternoon. So I thought I would spend some time today talking a little bit about the question I get on a regular basis. In April 2017, we launched what we call J.B. Hunt 360. It was really 3 days after we had moved into our third corporate campus built in Lowell, Arkansas, and we were articulating to our whole sales organization the way we were going to go to market. We [ had seen ]our sales conference that year disrupt and we'd started our [ #jbhtdisrupt ]. It was really an idea for our people to think about how they had traditionally done business to start thinking about how we could disrupt ourselves, how we were being disrupted and what we needed to do to adapt personally and further accelerate our organization. It was at that time that we launched our J.B. Hunt 360 platform. And I thought today, I might share with you some of the reasons that a platform in this industry is critical for our long-term success, but also how it will disrupt the business that we all do. We will adapt to what that looks like for each of us individually, and it will further accelerate the supply chain. I'm going to talk today about what an intelligent supply chain really means. Inside our space -- in such a large space, many know of J.B. Hunt. But as large as we are at over $9 billion, we are still such a small portion of the overall market -- very fragmented market inside trucking. I'm going to talk a little bit about how do we think about capacity cost and service and intelligent supply chain. And the very first place for us is really how do we think about the journey to efficiency in a very inefficient market. Our mission in J.B. Hunt 360 is to create the most efficient transportation network in North America. And one of the reasons is there's a high need for that. If you look at 3.5 million drivers here in the U.S., about 2.9 million of those drivers actually have 10 or less trucks. So they don't spend a lot of their capital on technology, they use their funds primarily for phone calls or possibly to look something up from a smartphone perspective. So they don't necessarily look at it as a supercomputer in their pocket. Inside all 3.5 million trucks, nearly 1/3 of all available hours are wasted every single day, whether you are a small, medium or large carrier. So we're not immune to that issue in the industry. So we did a 2014 white paper that really articulated the 660 minutes that were available to haul shipments on a regular basis for a driver. And inside that, we really spelled out where the waste was in that 1/3, nearly 4 hours every single day, not driving down the road. We then attacked that from a people process and technology perspective. And primarily, we noticed that technology was the greatest -- can make the greatest impact in total in creating the most efficient transportation network in North America, and I'm going to walk you through a little bit of why. So if you look at just before deregulation, only 20,000 carriers actually operated inside this space. So at 20,000 carriers, deregulation happened, and it exploded the number of carriers that were then participating inside the U.S. At 10x in 1990, at 216,000 carriers, then the worldwide web was actually introduced at that same period. And you saw things start to change because online load boards then began and started very early into the process. And by the year 2000, we had nearly 100 million Internet users inside this space. So technology was more being used from a visibility perspective, but not wide range across the board. The carrier community more than doubled. And as the carrier community was doubling, then the late 2000s happened and intermodal became an outlet for a very inefficient market. Really trying to find ways to move goods more efficiently, which was started across the country from Los Angeles to Chicago, then became across the entire U.S. At that point, the iPhone introduced, but it really wasn't until, in total, the carrier community grew to right at 1 million and 77% of the population moved into smartphones by 2016. You see inside that space, when smartphones started to adopt, it also started to adopt inside the 3.5 million total drivers. And so you think about the fragmentation that's occurring from a small carrier community, 2.9 million drivers, 10 or less trucks, fragmentation from shippers and nearly 17,000 brokers that live somewhere in the middle. Customers were asking for more, better ways to move goods. And what happened as a result was brokerage started gaining market share significantly as an industry. And so I want you look at this chart for just a bit. And the way to think about this chart is really, if you're an asset-based sales organization, what happened to your business versus, in this chart, if you were a sales organization that had access to plenty of capacity solving for customers' needs. And what you will find, really since 2008, nearly doubling up until 2017, the percentage of shipments that were transacted by a company that had a brokerage-based solution. And then 2017 happened, and we introduced digital disruptions. You think of companies like J.B. Hunt or J.B. Hunt 360, but you also think of some of the other digital names are in this space. What happened over the next one year, from a digital disruption, really paints the picture as to what will happen over the course of the next 5 to 6 years. You see at 20% market share gains there by 2017, and just one more year, the brokerage share of market from a sales perspective actually grew 4 more percent from 2017 to 2018. So from 20% to 24%. Let me walk you through those 2 years. See, when there's major disruption in the supply chain, supply and demand become out of balance very quickly, customers are constantly looking to move their goods and still satisfy their customers from a cost service and capacity. And when you have the ability to access 3.5 million trucks, your ability to give customers better cost servicing capacity goes up. So during the capacity crunch, between 2016 and 2017, if you were an asset-based sales organization, you grew around mid-single digits in total, compared to a brokerage-based sales organization growing at 16%. Fast forward to the next year, and if you're an asset-based sales organization, you nearly had flat growth. Just less than 1%, about 0.6% growth. But if you were a brokerage-based sales organization, you grew at 20%. So the course of 2 years, after digital disruption came on board, the availability and the access to really solve our customers' needs grew even more. And so if you were to take the last 2 years, what's happened inside this space, and you were to move that forward out to 2024, you would see that a brokerage-based sales organization will own 44% of the market share inside the truckload for higher space and LTL. And that's because the ability to match cost servicing capacity in real-time is much greater when you can take the best of what you have from an asset perspective and blend other people's assets to create the most efficient way to move goods in the U.S. So today, you think about the $1 trillion market and how we're thinking about addressing that market from an inefficiency perspective inside J.B. Hunt 360, we actually think that market is fairly sizable. Just over $400 billion inside this space. And you can look at each component to that and how we think that we can impact that in total. The 2 largest pieces to the market is actually in the truckload drop market, and that's where shipments require more than one trailer per tractor to execute those loads for customers. And then you have the truckload live environment, which is predominantly where brokerage business lives. That's going to be 1 truck and 1 trailer conducting business on behalf of customers. But when you think about creating the most efficient transportation network in North America, you actually have to think more broad or broader than just the TL market. You have to think about what's happening inside LTL, how to package those into multi-stack truckloads, [ mode convert ] into Intermodal. What's happening inside the Intermodal space; how we disrupt what's happening inside Final Mile; and finally, how we make our dedicated fleets more efficiently inside our own network. So there are 3 expectations that we as consumers will drive -- will change the way we think about the future of transportation. And it's really us that's making that move. Our expectation internally becomes the expectation at each one of our businesses in total. The first one you think about is inside access with nearly $1.7 trillion spent with the top 100 online marketplaces, and more than half of those have launched within the last 7 years. I think about personally, for myself, each 1 of these 3, I actually have had to use either by choice or by force. In any of those scenarios, they actually became very good experiences for me in total. My first one was Airbnb when we missed our cruise ship over in Europe and I needed to go to a location I was unfamiliar with, couldn't speak their language, and I was fairly scared about the experience until I went to Airbnb. And so what others said about the location. It's very easy for me to connect because I had access to what other people thought about that location, how much it could cost me in the part of the location or city that it would be in. The second one, obviously, is with eBay, when I purchased a car. Through eBay, a used vehicle, much to my surprise, much cheaper and much happier than what I expected. And third, and probably what's been integrated into my personal life, is Stitch Fix, which is a monthly subscription into clothings. It started just out of convenience for myself, and it now has turned into an important component of the way I think about my wardrobe because they have started to use data science in the way that I purchase to actually get my sizes and measurements even better than when I go shopping myself. See, because of access to the clothing that I want, when I want, how I want to buy it, it's changed the way I actually shop. From not just going online, but then creating that personal experience for me as well. And when we think about access, we think about capacity and what's happening in the transportation space, and almost 90% of capacity is now digital and mobile. So in a transient work environment, where truck drivers are often not at home, being mobile is very important to us. 87% of those drivers say they use their smartphone every single day to conduct their work. So what happens when we change our expectation as consumers around access and we create a digital environment from a smartphone perspective? It automatically starts to connect the way carriers move inside this space. So part of our 360 Platform is called Carrier 360. And in that platform, we introduced that April of 2017, and what had taken us 8 years to onboard 30,000 carriers as a traditional broker took us 18 months to onboard carriers into that digital mobile platform experience. What we realized was carriers want a more efficient way to move goods as well. It wasn't just our shippers or asset brokers. We realized that carriers want a connecting point that is much simpler. And if you watch this map for just a second, you'll realize that shipments can occur 24 hours a day, every minute of the day. And so the connectivity for a carrier no longer having to find out who has the load, what time to call them. And if you could actually negotiate it at the right time, you'll see the map grows over a period of time. But you can even see the activity performing at 1 a.m., 2 a.m. and 3 a.m. in the morning, where we might all be asleep in a traditional environment, they're awake and driving from an access. So gaining immediate access to shipments in total for the carrier community. We don't just watch what happens from [ views ] because last year, we had 28 million carrier searches into the platform. I think of that as 28 million [ customers ] walked through our retail store and tried to make purchases inside our platform. But we also look at what is our abandon rate? What does the cart looks like? How often they actually look for the item? Do they put item in the cart and do they actually purchase it at the end? See, every component of that process has an opportunity to get better. It allows us to see what the patterns are of the carriers. It allows us to become smarter about what a carrier could need. And much like the Stitch Fix example that I said, they've actually tailored my size to be better than when I shop for myself, very much like what we're thinking about from a carrier perspective. So that when they are asleep and they wake up the next morning, we actually have loads recommended just for them that's based on their patterns and the recognition that we see from walking into the store, going all the way to going through our final checkout. Access for us also says, we believe that the 2 networks that exist today, a live network and a drop network, creates an inefficient market. And what has happened over the -- a long period of time is that we've operated almost in 2 separate networks. And if you look at these 2 networks, in total, you can see that there is a really nice overlap between the 2. And if you actually think about putting a drop network and a live network together, you can start to see that you can drive empty miles out and create more regular patterns and create more efficiency in total. It's one of the reasons that we introduced in 360 what is called 360box, which is really allowing a trailing fleet to operate inside a live marketplace with carrier capacity. We think that can change the game from an efficiency perspective. But that's not just access into one network. We also look at this -- remember, I said 3.5 million drivers and every single one of those drivers in total waste 1/3 of their time. We see that even inside our asset-based organization. And so for our fleet that adopted 360 first, inside JBT, we actually were able to see their activity in the platform that they didn't have access to before. So this is actually our JBT fleet operating inside 360, making them more efficient, exactly what I talked about earlier, creating a lower cost to serve our customers and, in turn, being able to take that back to a customer and offer them a better solution. It's not just happening inside JBT, although that started first. We also see this inside our dedicated fleet. What you'll see is only part of the map has started inside dedicated and that's because we're not fully adopted inside DCS yet. So as we build fleets for customers, you look at what the average fleet empty mile percentage is, it's somewhere around 1/3 in total as an aggregate. Inside our Dedicated Contract Services, we have opportunities as well. And you see right here in the platform where they're starting to fill in the backhaul, being able to give back to our customers a part and a share of that savings. But we still have plenty of opportunity because you can see the West Coast, we have large fleets on the West Coast, and none of that's lit up yet. And you can see the southeast, we should be on-boarding for our organization in the next month or so. So for us, we should have our lowest cost to serve for customers, more efficient network equals lower cost to serve, equals being more competitive with our customers, being able to have a better win rate and growing as an organization in total. And we finally see the same thing that happens inside Intermodal. What's great about Intermodal, we do a large percentage of the freight. We actually haul the [ drape ] components of that with our own fleet, where we also do business with contract carriers. We now have brought those contract carriers into the platform, so we can understand their power-only capacity and needs in the system. And you can see we're starting to make those same connections. The West Coast has not rolled out in Intermodal yet, and you see opportunity even in the southeast as well. So you can see the efficiency starting to happen. This isn't just for J.B. Hunt, it actually can be for any fleet that's actually executing inside a platform that has millions of shipments to choose from. But we also see a more efficient way to move goods for our customers. And for us, we're not just in the trucking business. So we are the largest multimodal digital freight platform, and we want to make sure that we can bring that back to our customers. And so as we view what happened in the platform in 2019, you will see that there were a lot of shipments that moved over the nation's highways in our own platform that actually should have moved into the more efficient way to move goods, which was through Intermodal. Nearly 100,000 shipments moved inside the platform that were identified as being a great potential from cost, service and capacity into Intermodal. Now that doesn't mean that we can move every shipment into Intermodal, but where we can get with customers and we can start talking to them on the front end of being more dynamic in the way they select mode, in the way they select carriers versus a very static route that they use today, a very static bid process, we can then more properly align capacity servicing costs to what our customers' needs actually are. See, we're very archaic from a shipping perspective because shippers traditionally have hosted static bids that take months to prepare, put out and then process. While there is a dynamic environment happening from a carrier perspective, a platform can more closely align those 2 components together. So it's not just access that we think about from a consumer behavior changing what's happening in the future of transportation, but it's also what's happening from a visibility perspective. 80% of consumers are more likely to purchase a product from a brand that provides a personalized experience. And I believe that's true for all of us. As I was sitting with my family on Super Bowl Sunday, there was a good debate in my house which pizza we should order. And if we should even order pizza or if I should just try to throw something together. I said, "We're going to use Domino's because it has a tracker." Pizza is okay, but I really wanted the tracker. And we're replacing that sign, how long it would be after our scheduled time. So I'd ordered it at 1:00 p.m., I've set it for a 6:05 delivery. See how specific it was? 6:05. And we were taking bets at about 5:00 on how late the pizza would be. And I said, "Well, if it was within an hour of 6:05, I would consider that a success in my household on Super Bowl Sunday, one of their highest days of the year." And I, of course, pulled the tracking up -- up around 5:30 because I thought, "Well, I want to see how they interact." There's something I could learn through Domino's and how we can relate that to 360. And to my surprise, at 5:35, I got notification that they were preparing my order. At that moment, I did what most of us here would say, "Well, that's an automated message, and so I'm sure that's not actually being prepared," until I saw that Ben was putting my pizza together. At that very moment, I realized Ben was my guy and Ben could make the lives of the Simpson family very happy if he could be on time. It continued to move through the process, much to my surprise, by about 10 till 6, it actually was sitting in the status of quality assurance. Which I thought was fascinating. They were checking the quality, which -- I worked at Pizza Hut through high school, I know what that meant. And at about 5 till 6, I got notification that it was out for delivery. And my immediate thought was, "I sure hope that we're the stacked pizza on top of the 20 deliveries that are going to show up." At 6:02, my dog started barking, I went to Ring, I looked in and here comes the pizza guy up my door. I opened the door, like happy as could be, and I said, "Oh my gosh, I'm so happy to see you." He said, "I know, I'm 3 minutes early." And I thought -- that changed my experience, changed my experience for a long time. I think that our carriers expect the exact same experience as to what's happening for them. And let me tell you a little bit of why. In visibility and in a digital freight platform, data itself could become the most valuable asset because it's what we do with the data that allows us to create a more efficient transportation network. And since we have started J.B. Hunt 360, we've collected 5 billion data points to then apply science to and to start to understand what problems we want to solve at an individual customer and an individual carrier perspective. And so we're just getting started. And as the platform continues to grow, that data set grows larger and larger. Imagine what we can do with the data if we know on the front end how to solve for it versus running a report on the back end and then trying to convince a fragmented shipping community, carrier community, how they should do business differently. Very difficult to do in that scenario -- in a platform, you can be on the front end and help customers solve before they even know it's a problem. And what we find is, for carriers, when they have visibility to the freight they want, then our shippers save money. On average in the platform in 2019, we had an average of 9% savings for customers that were executing through the platform. And that number was not just a 2019 phenomenon. We actually saw it in the tightest environment of 2018 as well. And see, many people think it's about bidding the carriers to a level and competing for price. And that's actually not the most beneficial component to a platform. The most beneficial component to a platform is finding the right truck on the right load at the right time. That waste that I've talked about is what creates the savings in total for shippers, and there is enough savings that you give that driver more time to drive, putting more money in their pocket, shippers gain savings and we get some in the middle. See, all 3 parties win in a digital freight platform. But the third component of consumer expectations that will change the way we think about our future transportation is around transparency. 93% of consumers say online reviews impact their purchasing decisions and we see the exact same thing of what's happening in our platform. People want to know what they can expect. I don't know if any of you've been to Miami Beach before, but I can guarantee it's my first trip here. And I didn't think about going out to eat before I checked with the online reviews of where I would be going or where I would be staying because that would be foolish. And if I care just enough about a onetime trip, what do you think a carrier thinks about their living? About how they make goods and what goods look like? See, the more transparency we give to carriers, the less uncertainty that happens for a carrier in the market. There is a few data points for you to look at. Transparency will reduce uncertainty. And so these 2 components in our platform, something that we call FAK, very common in the transportation industry. When a customer says they have freight of all kinds as the commodity, that transmits to us electronically from a customer, it erodes confidence from the carriers and it results in 7% higher rates in FAK and 50% less system activity in the platform. I would say, transparency now to customers. When I tell them, hey, we need to actually know what we're going to ship so that we can let the carriers know what they're going to haul so you can eliminate a 7% increase in price. But the second one, and this comes across from our customers again electronically when you don't have weight. It's the second highest question we receive from carriers. Load detail is weight. 90% of the freight was tendered to us with 0 pounds, meaning we are just shipping air, I presume, and that resulted in 10% higher rate and 50% less activity. So that says they want to know more, they need to understand. And if they don't understand, they are going to give you a higher price as a result. See, we can take an initiative on this data. We can do something different with the data now that we have it in the platform. How about over 650,000 reviews? It's what I believe the largest reviewed platform from the carrier community at over 60,000 locations. Nearly half of the reviews mentioned wait time in their comments. 5-star facilities, they have the shortest wait time. And the longest loading time in the platform actually reduces the delivery experience for a customer by 4 points. So the delivery -- on-time delivery erodes by 4 percentage points. And when we could go talk to customers about the details of their freight, and we could tell them that we can save, on average, 7% to 15% based on these characteristics, like if you give me more lead time, I can save you 2.5% because carriers want to understand what freight is available when they want to see it. And so wait time changes what happens as the outcome to the level of activity they receive at the price that they want. It changes the way our customers view things. It's not just talking to customers about I can be more efficient, it actually gives them platform data to help them understand how they can drive more efficiency in their supply chain. And finally, for us, we don't think that technology will replace people. We think people, technology and data, all 3 will enable the access transparency and visibility that I have given you. And it is our largest focus inside J.B. Hunt, and that's what we call our experience. We are on a mission to create the most efficient transportation network in North America. However, to do that, we have to create an experience that both our customers and our carriers rave about. They don't just tell coworkers. They go home and they talk to their family and their friends about the different delivery experience that they receive through access, transparency and data, very similar to the story I told you about Domino's. See, that's the focus that we have. It's the investment that we have in J.B. Hunt 360 in scaling our business. Investing on the people side for both customers and carriers to create raving fans and building the technology that our customers need, our carriers need and ultimately create a more efficient way to do business. That's our focus. And for us, it allows us to get past thinking about not only how we disrupt the way we go to market. We've already made the adoption that's needed inside our company. And now our theme is around how we accelerate on behalf of our customers, carriers and our shareholders. For us to change as an organization, the industry has to change. It won't just be us by ourselves that moves into a more efficient way to move goods. It's a larger effort that has to happen. We won't be the only winner. There'll be multiple winners inside this space. But I would suggest to you that, that market share gain that you saw, the 44%, there's going to be 3 or 4 winners sitting at the top that allow carriers to have much easier access, transparency and visibility to ultimately benefit our shippers in cost servicing capacity and J.B. Hunt as a result. With that, we'll take questions.

Thank you. All right. Got Brad Delco joining from J.B. Hunt as well. Some of you may remember him as one of my fierce competitors for many years over at Stephens. But he's now on the good side of things, at least with me. Loved the Domino's example, Shelley. I've been using Domino's for a while. It's not the best pizza, but it's the best of the online ordering, quick delivery experience pizzas. If you want the best pizza in Miami, by the way, Stanzione 87 in Brickell is the best pizza in Miami. On the Beach, the best one is Lucali over in Sunset Harbour. So I'll leave it at that. Pretty good at plants. So if you want a vegan pizza, we can do that too. If I'd known you were going to the store, I would have had Domino's brought in here like 12:47 and scheduled it ahead of time.

Great.

Maybe next time. Anyway, I do want to talk about J.B. Hunt 360 because it gets a lot of press, but people aren't sure exactly what it is sometimes. And you mentioned at the end of your presentation, changing the experience. So if you could talk about what customer experiences from the carrier side and the shipper side with 360 versus what their normal experience would be doing something the normal way?

Yes. So I would say one of the things -- I don't know that I've done the best job storytelling, is that 360 is not just brokerage. For us, it's a much faster way to connect our customers' needs with the capacity that they need at the most efficient way to move goods. And that's very different than thinking about automation of brokerage or it doesn't get to the bigger picture issue. For us, we're very focused on changing the lives of 3.5 million drivers. That ultimately will allow them to have more money in their pocket. It helps our customers and it helps us as a result. So it's a win across the board. I've talked about our people and the investment that we're making on people. We actually have people assigned in our overhead space just to focus on the experience for both carriers and for customers inside the platform. On the customer side, they connect with us however they want to connect. So some customers we've already been connected, and we're already fully digital with those customers, they can automatically connect into the marketplace from there. Some customers still want the old traditional phone or email. But now some, through Shipper 360, are accessing us online. They've never had the ability to really see a multimodal platform delivering right price, right capacity at the right time. And so that's been a change for our shippers.

So it's a web-based solution? Or is it integrated into the TMS?

Both. Both.

Okay.

So we don't believe we have to develop everything. We're actually connected with who we think the best of the best are in the industry. Where we don't feel like it's important for us to differentiate ourselves specifically in that one section. Where we can actually get a market together, we will do that. So we're integrated inside TMS systems, that makes it easier for customers. So JDA, for example, if a customer wants to access Shipper 360 or the carrier community, very easy for them inside JDA to place 360 now as a real-time marketplace for them. So that's an example of how customers can connect with us.

So if I'm a shipper and I've got my typical TMS, I've got my truckload, I've got my Intermodal, I've got my LTL, everything going out and I would look at the loads for the day in my TMS, is there an alternative view that 360 gives me? Look at that in a different way and make different decisions?

So think of it like this. For our customers, they conduct a bid. And bids we still strongly believe in because carriers have networks and they need to be able to count on those networks for them to be more efficient. But for customers, oftentimes they put a large bucket of their freight, even freight that may or may not ship, inside a bid and they get a static price to that shipment. Customers bid compliance last year was fairly low. Only about 70% of what a customer said they would give us as a carrier did they actually give us. And it's not because customers don't want to do a good job, it's because they struggle with forecasting and predicting. So at the same token, when they aren't giving the freight, the carriers' networks aren't working correctly. And so the carriers aren't necessarily there for the incremental freight. That's why you have this mismatch and a lack of efficiency in the market in total. So for a customer really establishing what we will call a primary carrier, so a carrier that you know should pick up the load, the carrier is committed to it and the customer is committed to it, that should be freight that they know executes on a regular basis. That's a great match in a bid process. When you fall off the routing guide, that's what it's called in our space, so when you move down to the second or the third carrier, the uncertainty comes into play. Price goes up, service goes down, it's more unpredictable. And it's because you have a static price in a dynamic carrier market. So if you can match those 2 things up for a shipper below the primary routing guide and move into a marketplace like 360, it allows them to match capacity price and service in real time, giving them better on-time performance, better cost and better capacity.

Okay. So essentially, it morphs the routing guide from carrier A, B, C, D, E, F, G to carrier A and then marketplace for kind of your best backup alternatives. Is that what I'm hearing?