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

So I think that -- I get asked this question a lot, are you more interested in price or volume. And the reality is it's a balance. We are a growth expectation company. We believe the intermodal solution is the best solution for literally millions of loads that have yet to convert to intermodal. So we think that there is a long runway to growth available to intermodal. Now does that mean you just are going to slash prices in order to go in that? No, we think we have to protect returns on the investment and the capital investment into the assets. And so there's a real balance to doing that, and that has been the strategy and will continue to be the strategy for as long as I'm at J.B. Hunt, certainly.

Well, it's a little bit different, though, from last cycles where we saw pricing get weaker. I think you guys got more aggressive in volume in the past. Is that true?

There have been periods in the past where, combined with various railroad relationships, there was a strategy to go gain some share. So I don't know that we have ever done that just on our own. I mean, we have had railroad encouragement and strategy to develop density in specific corridors that can provide value to the service offering that we and the railroads put together, together.

And long-term margin targets in the business, 11%, 13%, is that still relevant as well?

Yes, absolutely. It's still relevant, and we haven't changed our long-term target. I think that the one thing I always want to highlight in this area is we do think about our business on the return on our investment more than we do the margin. And we have business out there that runs at a 10% margin that performs very well on the return from the capital investment. And we have business out there that has a 15% margin that we think needs an improvement on the capital investment. The margin becomes an output of the pricing decisions, the layering of new volume onto our network. But certainly, it would be our goal to grow the margin into that long-term target. But if the kinds of opportunities present themselves to us to expand our return on our capital while sitting at a 10% margin, we will be very happy with that opportunity, too. But I don't want anybody to misunderstand me. We are working every day, and it's our expectation to move back into the 11% to 13% margin.

Well, I'll monopolize this. So if there's a question in the audience, just raise your hand and we'll get you a mic. But John Roberts and Dave Mee have been coming to this conference for a number of years and every year, I'm asking the same questions, so I'd love to hear your answer, Darren. But isn't there a risk that, as the rails have definitely improved their margin profile and their return structure, historically, returns for the rails have been lower than your business, and my fear was always that, well, the railroads will just come say, "We want that return and you guys should be happy with a little bit lower return," how do you balance that relationship?

Well, there's a trick to that, and I don't have the answer to it. The reality is what we have that the railroads want access to is that sales and marketing and the customer reach and the ability to go teach our customers how to use intermodal. And so collectively, between the railroad demand for improvements in their returns, our own desire to have quality returns for our investment and then our ability to reach out and access to the customers that the railroads need, they need access to those customers and want the benefits of it. So it will forever be a balancing act. Do I think that the railroads are going to stop working to expand their returns? Certainly not. They -- it's their job to do that. It's our job to represent value to the customers and to the railroad in our ability to teach that customer how to use intermodal to the best of -- to the best value for that customer. I think Dave hit on something there where, if intermodal is not the best solution for the customer, we're working to still serve that customer through the alternative methods, whether that's trucking, brokerage. And the power that exists in educating the railroads on how that works is significant. There will always be pressure on the railroad wanting more money. We know that. But at the same time, we think that as we market to customers and learn how they buy and provide the services, that represents tremendous value to the railroads, too. So we're going to have to work together. And I'd like to believe that there's enough out there for both of us to be satisfied.

Well, what about other intermodal carriers, big acquisition of Swift not that long ago? Does that pose a competitive threat if folks get better at educating their customer base as well?

Well, certainly, we respect the competitive environment. There are a host of competitors out there that are very good at what they do, and that won't change. I like our position in that the way that we have relationships structured with the railroads, I don't feel like we have significant threat. The reality is having other channels out there educating and helping bring customers onto the railroad, it almost feels like that's an opportunity for us as much as it is a competitive threat, so I don't find myself concerned. I think the more people teaching customers how to use intermodal and provide value for it, then J.B. Hunt will certainly get benefit from the growth of the industry as much as anything.

Well, Brad, I want to ask a near-term question too, just about freight markets and what we're seeing with the impact from China. Are we seeing inventory depletion now just given that there's prolonged manufacturing shutdowns? Is this something you guys are hearing from your customer base?

I'll take that one. In terms of, I think, what we plan on sharing, on our fourth quarter conference call, we did talk about the market being a little bit tighter than you would seasonally or normally expect in early January. I think it's pretty well known. The market has loosened up, at least on the truck market, since then into late January and probably thus far in early February. I don't have as much visibility. I know we've been asked in earlier meetings about visibility into carriers -- or sorry, shippers' inventory levels. Darren might share that there are conversations being had about maybe some preparation, what capacity might look like later if there's air pocket here in the near term and inventories do need to be replenished later, but nothing real specific that I'm aware of.

Yes. We're not getting feedback from customer. I mean, the volumes that we've experienced in the business that we consider from imports has been what we would have expected it to be. The customers are beginning to say, "Hey, the imports are going to slow down for a little while, so there may be a depression for a period of time." What that means is there will be potentially excess demand as it rebounds. And so how can we begin to plan together how to create the capacity in order to accommodate that kind of demand? And there are a host of the largest shippers out there asking questions about what are the capabilities later in the summer in order to accommodate a surge in demand. I don't think anybody is predicting the surge in demand to be above what would be a normal October, November kind of retail peak season. So we're talking to those customers about our capabilities to serve this demand like that, but nobody is yet saying they're certain that's what will happen. So it's -- there's a lot of planning discussions, but I don't know that there's any real specific action that's been taken as of this point.

Okay. David?

As rail service has improved significantly, at least by our numbers, over the past couple of years, have you seen a change in the dynamic between trucking rates that have come down and maybe rebounded a little bit this year and the demand for intermodal service?

Sure. So I think that the improvement in service, while -- has been very clear and we're enjoying benefits from that in the asset utilization that we get. We haven't sustained it long enough yet as an industry to get real traction out of the customers. Every customer will acknowledge, "Hey, rail service has improved." But I think we're all still saying, "Let's sustain it through a cycle of more intense capacity demand." Can you sustain the improved service when truckload capacity begins to tighten? And at that point, the customers may say, "Okay. I'm a believer in this new operating plan philosophy." Right now, volumes have been not strong for the rail industry, so having improved service, while every railroad has implemented new transportation plans and operating plans, and I believe those plans have contributed to improved service, you can't help but assume lack of volume is also contributing to improved service. So I'm not ready to say customers are opening their eyes and saying, "Wow, rail service is perfect. I'm ready to give all my freight." They're saying, "Hey, I need you to prove it a little longer than just the months that we have experienced so far." And I've been vocal with the railroads to say we're going to have to sustain this level of service for a meaningful period of time in order to get the full benefits out of the customer base for the service success.

I mean, I know you guys can't talk much about it, and for those who don't know it, you guys have a evergreen contract with Burlington Northern in -- on the West Coast for the intermodal business. But I think that did cost you a little bit more money recently, if I'm not mistaken.

It did.

Has that in any way impacted growth in that market or the way you look at it?

It certainly is impacting -- it's impacted us in that our underlying rail costs have increased and that certainly is a challenge. At the same time, the demand for growth out West, we believe, will continue to run at least at kind of GDP plus 1% or 2%. And we think that we'll have the best solution in the system for that. We also think that if our cost structure out West has changed, we still think we have the best position out there. And so if our costs are up, we'd like to believe the industry's costs are up. I would certainly expect that. So does it change our philosophy? No. I think we still go out and price to our customers based on the return profile that, that customer's mix of traffic presents to us. And we'd like to believe that we can continue to generate really strong returns with that business.

So the answer here is we just have to wait for the cycle to get better to see greater earnings expansion in the business.

Certainly, the only way to expand -- if you're asking about margin expansion, I just think that -- I don't know how to take any more cost out right now without -- layering on some growth will give us some benefits of utilization of the assets. Certainly, as we grow 360 Marketplace, it's giving us an opportunity to find truckload shipments that can fill empty segments in our drayage system. That can be worth really significant value to J.B. Hunt. But in terms of having pricing power, pricing power will always drive the margin better than anything else. And so at this point, it doesn't feel like there's -- that it's a particularly strong pricing market at the moment. But this year, with potential sort of differences in the demand cycles can be very different this year, we'll have to wait and see. I'm not ready to say that we don't have an opportunity to improve pricing in 2020 based on kind of an odd demand cycle that may occur this year.

Well, David, can we talk about dedicated?

Sure.

That's been a great business for you guys. You've grown it significantly. Expanded final mile as well as some M&A. And I think XPO is up next. They just said that some things are for sale along those lines. Can you just tell us more, at a high level, the strategy with the dedicated business? That's obviously a little bit more asset-intensive than what we've been discussing.

It is.

But very successful in the growth profile.

And we're going to show -- and starting in the first quarter this year and we'll show comparative results for what we're going to refer to as our private fleet outsourcing or traditional dedicated and final mile separately because the return profiles are so different. The private fleet outsourcing, the traditional dedicated, which has grown rapidly for us, it's the -- we think it's the largest private fleet outsourcing company in North America is a -- it's basically, we do exactly what we say. We take over a customer's private fleet, and it's typically done on a cost-plus basis. So we end up in a margin profile that's targeted for -- it's actually a return profile, again, back to what Darren refers to -- or referred to. We have a return profile that is in the upper -- mid- to upper teens from that perspective, and that yields a 11% to 13% long-term margin play. So when you go to the customer and talk about cost plus, the plus is 11% to 13% is where that is. But that, in turn, comes from the fact that behind the scenes, we've done a return profile for the asset intensity of each customer. Some customers need everything, soup to nuts. They need trucks. They need trailers. They need drivers. They need systems. They need whatever it is that we can offer them. Some customers don't. Some customers say, "We have the trucks. We want you to drive our trucks and just provide the trailers." Some customers just want people. And we're able to tailor that and take over and take over some of their risk, take over some of their capital allocation. A lot of times, it's driver recruiting. They'll have an older driver force and they'll lose a driver and they don't know how to go out and find a replacement just because it's not focused. They're not -- that's not their core business, and we can step in and provide them for that. And then we can take it to the next step because of our density in certain markets, whereas you may have a private fleet that you've been running 10 or 15 trucks on, well, I happen to be running a private fleet with your neighbor who's 2 miles down the road and he's running 10 or 15 trucks. You run in the morning and he runs at night. Wow, maybe we should put the 2 of you together, and we get very good leverage out of that. And that's been hugely successful from that perspective. We're also combining with intermodal. We also go in and talk about private fleets and how intermodal can combine with that, especially if they're an intermodal customer. So anyway, that's where that is. And yes, that's a -- it's a pool system. We target 800 to 1,000 trucks every year, mostly based on people that require that. Final mile, we stick with the big and bulky. We do not want package delivery. We are -- we don't want to get into that slugfest at all, but we are doing more and more home deliveries. The faster-growing portion of that is non-asset, but we do still offer an asset into employee type of model. And frankly, we've got at least one new contract that I'm aware of this last year where the customer absolutely wants our trucks, our employees. So I see we're running out of time, so I'm trying to speed up. But those are 2 different functions, and we anticipate growing both of those organically, primarily, through the private fleet. And we have not rolled out acquisition on the final mile just because of the fragmentation in the business.

Can we queue question 4 then? In your opinion, what should J.B. Hunt do with excess cash, M&A, larger M&A, share repurchases, dividends, debt paydown, internal investment? [Voting]

And you guys have been acquisitive in the final mile?

We have. They've not been large, but we have been, yes.

Okay. Question #5 is that -- #5 please? In your opinion, what multiple should J.B. Hunt trade? [Voting]

I think if you get back to intermodal growth, that multiple will come with it.

Sure, totally agree.

And then question #6. What do you see as the most significant share price headwind for J.B. Hunt, core growth, margin performance, capital deployment or execution and strategy? [Voting]

All right. Good. Well, gentlemen, thank you very much for being here in Miami.

Thanks for having us.

Unfortunately, we're out of time, but a great time.

Thanks for having us.

Thank you.

Thank you, Brandon.