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

Okay. I want to circle back to some of the earlier commentary just about demand and some of the things that you said, Eric. I think you called out inventory restocking that could last for 3 months or so into 2021. The thing that we hear from investors right now is the freight environment is great. But in truckload, it's as good as it gets. And we're going to see things moderate next year. I just want to get your opinion on the duration of this strength in the freight cycle. It seems like, at least through the first quarter, you're saying it's going to be strong with the restocking, but any thoughts on where we could be headed beyond that. And I understand there's a lot of macro uncertainties, but I just want to get your best guess.

I think, Justin, you know that there with the uncertainty on the macro perspective. I'd say the first half of the year is a little more clear, we would think. But can't stress enough what Darren said about 30 days from now, we may see it a different way. But right now, inventory levels are at an all-time low, so we would expect that to take 3 or 4 months to replenish that next year. If you think about to the buying aspects of this season, there's going to be so many gift cards purchase, there's going to be much more online activity for the holidays, and that will spill into January as people start getting those gift cards which will continue to push the supply chain and pull from inventories and elongate that even further. So as we said here now, we can do the math on drivers and understand it's one thing that our company, I think, definitely leads the industry on is the ability to understand the driver community and what it takes to attract drivers and have a great driving job for drivers to come to. But when you do the math and say, how long is it going to take for us to be able to pull into and get to the driver levels that we need, it's not an overnight deal. It's going to last one into the first and second quarter of next year for us to be able to get adequate capacity for what we'd say we need right now. Demand continues to be really strong inside Dedicated. We would expect the security that Dedicated brings to customers to continue and shippers who want to push there. So drivers, having the ability to come to J.B. Hunt and work inside a Dedicated job is attractive. But the macro driver shortage is real. And so that's not going to be soft in the next 3 or 4 months either. So I can tell you in the first 6 months, I would expect demand to be strong and supply to be continued to be very constrained. Beyond that, it's really going to determine what happens maybe inside Congress. Do we have a split congress and things stay more status quo? Or do we see some dramatic changes in that aspect? And how will that affect the supply chain. So it's hard for me to say beyond, I'd say, midyear what we would expect. But right now, Darren mentioned, our bid cycle inside highway is similar. I'd say we have more that probably implements in the third quarter that intermodal does. But most of ours we'll implement in the second quarter. All that pricing activity and conversation, the majority of that will happen between November and February. So the majority of our conversations will happen in that period of time under this environment with this outlook. And so those rates then will start going in place in April, May, June of next year. And so those will set up some of what will happen in the back of the year for pricing. But that doesn't really speak to what the demand side is going to look like at that time.

That's helpful. I wanted to ask too about the mix of business as we go into next year in Intermodal. Darren, do you have any thoughts around the pace of growth we could see in the Transcon business versus the East. Do you expect the growth to look similar? Do you expect one to look better than the other? What are your thoughts around that?

Well, so I think it's going to be kind of the tail of 2 halves, if you will. I would expect the growth of our Transcon business to be strong in the first half of the year, number one. A lot of the a lot of the inventory restocking is sort of on the water or headed this way, and there's a fair amount of demand that I would expect to continue into the first quarter as we've talked. I think Q2 is such an odd time. Your comps are unusual. There'll be substantial growth in April because last year, April was so weak. And so Q2 is a bit of an odd time to contemplate predominantly because of what last year looked like. So I would expect significant growth during that quarter. As the year goes on and as truckload prices continue to be elevated and costs are a challenge when driver wage remains a challenge, we really believe that intermodal becomes more and more attractive to customers. And our eastern network really has a lot of opportunity to grow and we're energized. We'll be equally energized in both Transcon and Eastern. But frankly, the market in the East is probably a little bit larger opportunity overall, just given how large the market is there. And so I would expect it will continue throughout the year to see real growth in our eastern network. That does not -- I don't want that to translate that we're not working to grow our Transcon, we will be -- we're going to have to wait and see where pricing lands and really contemplate how much equipment to acquire and put into the system, will there be any kind of shift from our customers from West Coast ports to East. We would -- we certainly -- I think J.B. Hunt would say we hope not, but if there is, we want to participate with those customers in any port that they choose. Whether that's through intermodal or through highway services and ICS, certainly, we'll be active with those customers looking to participate in their supply chain.

I'll ask one more on intermodal that I got e-mailed in, and then I may shift gears. But on intermodal margins, long term, the target is 11% to 13%. Obviously, you had the arbitration with BN. That's a headwind. What gives you confidence that, that's the right margin range longer-term on the heels of that? It would imply that there's some positive tailwind that could offset the BN headwind. So could you just talk about that margin range longer-term and the confidence around it?

Well, number one, we were there for a long time. Certainly, the last 3 or 4 years has been a series of challenges for us, whether it was related to arbitration events or is related to just real cost challenges that came at us faster than pricing. Certainly, in 2017, we saw significant costs, and the driver market got very difficult. And we responded in 2018 with significant pricing that did improve our position. We feel strongly that the products we offer, the capacity that we offer and the way that we provide the capacity in the services can generate pricing that would constitute that kind of margin level. So that's why we haven't been willing to change that. At the same time, more than anything we've said the return profile of our investments drives our decision-making more so than the margin. If we can continue to generate, and I fully expect we will, strong returns in the equipment we buy for intermodal, and we're doing so at a margin that might not be in the 11% to 13%, we're going to continue to do that. Would that mean that at that point, we may say, maybe we need to contemplate that to the market. Justin, I guess, we might, but we're not there yet. We're working every day to drive cost out of the system, improve velocity of our assets and then ask our customers to cover costs that are market-based that the industry is experiencing. And then even in the mix of our business, if we'll be a little more surgical in how we grow and where we absolutely can hit that number. And so we're very focused on that. We're looking for a little bit of stability in our market. We've been through a series of kind of unusual changes. Do I think that 2021 is going to bring stability, well, doesn't appear to be that kind of year. But certainly, it's an opportunity to continue to prove out our value to our customers, but also talk to them with about those costs and the challenges we face. And we think that at the end of the day, that results in a march towards that kind of margin range.

And do you think the returns that you expect or require can be achieved at a margin that's below that range? Or do you need to see a margin in that 11% to 13% in order to get to the right return?

So I -- we have pockets of business where it's not required. We have pockets of business where it's absolutely required. So to answer that question is a little bit difficult in that if we grow in segments of our business faster than others, absolutely would expect margin expansion in order to justify the investment in the assets. Now if you grow in other pockets, you probably can accept a weaker margin and certainly justify investment in those assets. We're challenging ourselves every day in that area, Justin, and but from a -- we run a very large network because of how large that network is and the asset intensity, we're going to continue to work towards achieving that margin target. We know we have work to do. We know that investors are maybe a little frustrated with us over the last -- particularly the last 6 months. And we have to deliver a strategy and a plan to be moving in that direction. I think we said we're not going to wake up in one quarter sequentially and see some massive move. I wouldn't anticipate that. But I absolutely expect 2021 to be a year when we can see the progress we're making towards achieving improvement in our margin.

And John, maybe one for you, just thinking about this discussion on returns. When you look holistically at the business today and think about the different dynamics going into 2021. When you think about Intermodal versus Dedicated, is there 1 of those 2 markets where you feel like you can get a better return headed into next year? And then also, to Darren's point, do you think there needs to be more of a focus on return targets versus margin targets in terms of what you communicate to the Street. Is there any thought around that?

Well, that's actually a great question. We have that internal discussion often providing as much information as we can to the market without overcommitting. And so that we're continually looking at. Is it helpful to provide some more guidance around ROA, ROIC margins. So that's an internal question. I think as far as the opportunity to improve margin, we don't necessarily look at it from that standpoint, specifically, I would say that dedicated, you've seen the results. And that has the last couple of quarters, picked up outside of our guidance. And so just naturally, we would expect that we would see more margin improvement in Intermodal, and that's where we're focused. It's not to say that we don't care about the margins in Dedicated. But as Darren mentioned, there's a lot of cost pressure on that system and on that network, and we need to talk to customers about that. And there's also a lot of investment going on in the company. And so, for example, or what we would traditionally see a higher ROIC on our brokerage segment. Right now, the investments that we have there are putting pressure on both sides of that formula. And so -- but we look at it from a long-term standpoint. We still believe in the long-term guidance on our margins, and that is what we manage to from a long-term standpoint. But there are going to be pockets in there where we have to do some investments, and we have to catch up. So I would say, overall, holistically on the company, we are not changing our internal ROIC targets as well as our margin right now.

Okay. Great. Brad, maybe I'll get you involved in the discussion as well on the Dedicated side. Obviously, the sales activity has really picked up. We heard about that in the third quarter from Nick. I wanted to ask kind of bigger picture around the framework for dedicated going forward. Historically, I've always thought that if dedicated is growing substantially, the margins will compress because you have start-up costs associated with that. And when dedicated growth is slower, the margins expand, like we saw earlier this year. Is that still the right formula going forward? Or now that you've built scale in the dedicated business, can we see an acceleration in dedicated top line growth and margin expansion at the same time.

Yes. There's a lot to unpack there. So historically, I do think start-up costs, I remember being on the outside, thinking about that in a negative light, I think start-up cost internally is actually viewed very positively because you make the investment, you fine-tune that book of business or that location and then you see margins expand and you see the returns on what has been built out, they call it the wave. So you make the investment and you see the wave. I think there were a lot of things that benefited dedicated margins in 2020. One of the big ones being the lack of start-up costs. And so I think the good news from my perspective and folks here is you sort of saw what it looked like to have over 500 locations running sort of at a mature state. Now not mature in the sense that there's not additional growth because, obviously, there is. But of those 500 different -- 500-plus locations, clearly, you see what the margins could look like. Lower fuel prices, right? Fuel is generally a pass-through in trucking. And so lower fuel prices means you're removing, call it, 0 or 100 -- 100 or business that's accretive to margin percent, doesn't impact margin dollars. Lower travel and entertainment expense, that was a help on the expense side. I think it did create some concerns for us that we communicated on the second quarter call about what pipeline and new opportunities look like in the top of the funnel, that's that quickly reversed itself in Q3. So to answer the question maybe specifically, I think you are going to see, based upon what Nick and his team have communicated about the pipeline, a return to growth in the normal range of, call it, 800 to 1,000 truck sales a year. That's a gross number what that nets to depends on churn. But the book of business is substantially bigger than it used to be. And so I think it's fair to assume that the dilutive effect of startup shouldn't be as great as it once was. So but I still think that to the extent we do see accelerated growth, that will impact margins. And that's why we've maintained our 11% to 13% long-term target margin range for Dedicated.

Helpful. And maybe, Eric, going back to you on ICS, I would love to get some color on what you're seeing from a margin perspective. Here recently, it sounds like we kind of had the trough and in July, maybe August and things sequentially have improved. Is that a theme that's continuing? And then just longer term, I know you've given the guidance for ICS to be profitable in the back half of next year. But longer term, what are your thoughts around the margin profile of that business? Have they changed at all?

Let me start there. I'd say, no, it hasn't changed, at least long term, we still expect the 4 to 6. And the back half of next year is still the outlook that we have. In today's market, I would say, the spot environment continues to run like it historically has -- from a gross margin percent perspective in that same range it's always ran in, which is typically a 14 to 16. I will tell you that, that's been challenged at times this year just because of the erraticness of the market even from a day-to-day or looking a couple of days out those costs can change and be so significantly different as we were making our way through July and August and September. So even some of those spot margins weren't as stable as you historically expect them to be, but I'd say we've seen stability there. The contract rates are still the ones that were prior to a pandemic. So the published rates in the contract market, those rates are the ones that do need a lot more work. Now some of that work, the small percentage of that work has been done as customers have worked with providers and taking some of that business and done many bids which is really taking a small subset of their network and putting that out to bid. And that's predicated more by the changes of their network. So as buying styles have changed, people aren't going to movies or they're not going on vacations. They're staying at home and gardening more or whatever it is that they're doing, their buying styles have changed, their networks have changed. So volumes have doubled in some lanes and completely went away at other lanes. And so we work with customers to really react to that. So inside doing that, some of the contract pricing, you have the ability to adjust as you're having those conversations. But the majority of that contract pricing is what we're having conversations on right now that will be repriced between now and February or March. And so we do expect to see those get more in line with today's market which will help the help. Now where you typically see that brokerage offset the spot market really kind of being the pivot there. We have seen that where in 2019, there really wasn't a spot market. And so there wasn't the offset to the publisher side of that through probably February of this year before you started seeing the COVID impact.

Okay. That's great and helpful. And I think we have time for one more question before we wrap up. I wanted to ask about buybacks and how you're thinking about the pace of buybacks going forward now that we're through the election. We have some incremental news on the vaccines. And then maybe just on the election -- and this can be open to anyone. Any initial thoughts on how that outcome could impact your business in the next year?

Well, I'll start, and then we can let anyone else talk about the election and how that's going. I think as far as buybacks go, we did pause, as we mentioned that in the second and third quarter earnings calls. We did pause that for a little bit to try to maintain liquidity and manage our cash just because there was so much uncertainty. I still feel like there is, whether it's the third, fourth, fifth wave of the virus, I still feel like there is some uncertainty, especially right now with respect to shutdowns. I know there's new news on vaccines that's going to take a while. And so we're still cautious from that standpoint. But we're reverting back more towards our -- what I would consider as our kind of normal cash management at this point. And again, we still look at it from an opportunity on buybacks. And so we've maintain that focus. And I -- again, if there's more uncertainty that comes out, we may pause that. But for right now, we're reverting back to kind of a more normal stance. As far as the election, it's still -- and our -- the impact on J.B. Hunt, it's still a little too early to kind of digest how any policy changes may impact us. So we're continuing to watch that, and we'll do so. But right now, it's a little too soon.

All right. Well, with that, I'll keep us on time and conclude things. But thank you all for taking the time to participate in the conference this year. Always great to get your insights, and we'll talk again soon. Thanks, everyone, for joining.

Thank you.

Thanks, Justin.

Take care.