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

Hey, thanks, and good afternoon, everybody. It's Chris Wetherbee here again, getting started with the next session here on the transport track, which is busy today on Tuesday. So I apologize if we're running a couple of minutes late, but we wanted to get started. We're super excited to be joined by the folks from J.B. Hunt. So with us on the line today, we have the CEO and President of J.B. Hunt, John Roberts. We also have Mr. John Kuhlow, who is the CFO of the company. And Brad Delco is also joining us from the company, too. So thanks, gentlemen, for joining us this afternoon, for me, I guess, yes, afternoon for you, too. So thanks very much.

Good to see you. Thanks.

Let's go ahead and get started. So there's a lot we want to cover today. But I think the first thing that we probably need to cover in a little bit more detail, just to kind of get it out of the way, is just -- let's just talk about the Intermodal margin guidance here for a moment, just to sort of put this in perspective so we can think about this business, because it seems like there's a lot of tailwinds going on right now from a cyclical perspective. And I think there's an argument about some secular opportunities for Intermodal growth to reaccelerate, maybe even over a multiyear period of time here. But I just want to make sure that we sort of understand where we're going with this business, how you guys are thinking about it more broadly. I don't think you meant to talk about potentially changing guidance necessarily on the last call, but can you talk a little bit about how you think about the profitability of the Intermodal business going forward?

Sure. Yes. We are trying to communicate that we're keenly aware. We haven't been able to reach our margin targets over the last several years, which are stated in 11 to 13 for Intermodal. We have said that we are evaluating very intentionally the performance of our bid work through this season, to help inform whether or not those rates can support returning to those margin targets, which are really a by-product or a driver for the return on invested capital requirements that we have for that business. And we believe that this year, towards the end of the mid-cycle and the -- with the performance and compliance around those bids, we'll know a lot more and can be more articulate about our commitment to those margins going forward. Or if we have a need to change those margins, what that will entail in terms of how we approach the business going forward.

Okay. Okay. Yes. No, that's very helpful. I appreciate that color. So I guess when you think about Intermodal, because it's biggest business from a profit perspective, how do you see the opportunity? So there's a cyclical component to it, and there's a secular component. And I think over the course of the last couple of years, there has been some, I think, some question mark, to a degree, about how much secular growth is still left for the business in North America. We have a view on that, but I wanted to get your perspective. As you think about sort of that business over the next, call it, 3 to 5 years, how much of an opportunity is still out there? Let's maybe talk about volume first because that's probably the first thing that people think about when they think about the opportunity.

From our bid research, as we've talked about many times, we still see a lot of candidate-worthy lanes and loads that fit those bearings and transit times. We've been a little bit hampered over the last few years with challenges on the systemic performance. A lot of different variables have contributed to that. But that near-term challenge doesn't take away from the potential and organic opportunity for us to continue to believe there is conversion that we can participate in as long as all of the parties that are involved in this, including our customers, can do their part. And then if we think about the last couple of years, that pressure has caused us not to grow the fleet for the first time in probably, really, ever, but certainly in the last very long term. I know that we're confident in our new order that we see sort of a resurgence of that organic growth. We're particularly focused in the East region on that today. And we hope to see the whole system perform at a level, both, again, from the customer side, the rating, the handling of equipment, the turn and container management and from the railroad side, that will all be married to our own challenges and driver shortage, et cetera. But from an addressable market, the freight is there. It's a question of, can we get a proper rate for it? And can we execute it in a way to keep customer coming back?

Okay. Okay. That's helpful. And when you think about the return profile of that business relative to some of the other stuff that you have going on, which is quite interesting and just potential to drive a lot of growth for you in the future, where is Intermodal stacked within the portfolio today?

It's such a vital part of what we do because it's such a good business in and of itself. With regard to the energy that it takes to move that freight, the infrastructure on which that freight can ride is so robust. Yes, we've got pinchpoints and elements that we need to work on, both from a holistic standpoint. Intermodal is a vital part of what we do, and it's really kind of a center offering. But what you're referring to on the elements of our fleet business, our brokerage business and our highway businesses, our final mile business, all of that is built to complement the supply chain needs of our customers. So really, no one part of the offerings that we have, other than their current size, necessarily is more important. They're really all important to us. But because Intermodal is so big and so unique, it continues to be a very important part of what we're doing, and we believe it will be going forward.

Got it. That's helpful. You mentioned you didn't grow last year. You have an order, I think, at 6,000 boxes in for this year, for 2021. Can you talk a little bit about sort of that process of sort of not growing last year. Obviously, it was pandemic year, so there's a lot of different things moving on there. So I guess, when you think about that investment in growth, is maybe 2021 a little bit more representative of what you think you should be doing on a more regular basis going forward? Or does that -- is it maybe a little bit of catch-up in this number, and we should expect lower numbers maybe going forward?

I won't know yet on the out years. I do think there's probably a little bit of catch-up here because we didn't introduce new equipment. That's the first time we've ever done that. I can tell you that for many, many years, our position was that as long as the equipment was turning at an acceptable rate, and those numbers changed a little bit over time, but they were sort of before, and we had positive rate trajectory that we believe those 2 things, utilization and demand, warranted growth. And we kind of said, if you see at a macro level, good turns and good rates, we ought to keep adding equipment. And then when we met some of the challenges around the turns and some of the rate challenges, that caused us to pull back in and really evaluate those criteria to make sure that we were approaching the business in the right way. A part of what we do as the segment leader here is consider market share, what percentage of the market should we be participating in? And to me, that's always driven by what percentage of the container market do we own. Now as we return to growth, that decision was made very thoughtfully on those key assumptions around rate, quality and utilization. So we're kind of getting back to a place where we have the right tension and demand that helps us keep the rates and level of quality, and we have the right tension and demand that will help us utilize those investments properties, not always only about the rate. We really have to see that equipment turning. Going forward, we kind of base our thinking again on that concept of demand, supply and tension that will hopefully drive us to the right number of containers, so basically to maintain our market share. And again, back to your first question, now what's that organic conversion really look like? We were hopeful, and so, therefore, that total addressable market would grow, and we would participate.

Got it. That's helpful. I guess, as we're thinking about the outlook for Intermodal volume growth, I think there's a couple of things in addition to sort of the normal cycle of freight in the United States that I feel like are beginning to come a little bit more into focus. And one of them, maybe the first one is on the railroad side. So obviously, we've had some disruption in the way that the rails approach the market as they've gone through their PSR processes. And this year is going to be, I guess, in theory, a big step forward from them. But there has been this sort of willingness or desire of the railroads to pivot more towards a growth profile once they've gotten their margins to where they feel like they're better, they're more profitable. They want to kind of pivot to growth to generate more income over that better margin. So do you see that, beyond '21, as an opportunity for maybe the rail industry to lean a little bit more into volume growth on the Intermodal side? Or is that not something that you necessarily think is going to be a factor for growth over the next couple of years?

No. I think you're right on, and we're counting on it. We believe that the PSR work of gaining efficiency, eliminating inefficiencies being substantially behind us leaves those businesses with the question of what do we do now? We got our order, whatever, 52, now what? What do we do with this infrastructure? Well, the more current view would be organic conversion from highway to rail, in part. And I think that we see the direction and discussion embracing that more today on the rail side. And we're hopeful that they will educate themselves on what we need, what our customers need for them to do. I think the dialogue is open. I think the relationships are good, and the communications are very fluid. And I think it will lead us to that place where they can understand what they need to do to be active participants. I've said recently, if you want to talk about domestic intermodal, we're the right people to talk to. And so I think we attract interest in that way, and we'll command a lot of audience with those folks on what's needed. It really gets down to reliable service. And in the absence of that, our customers who are inventory managers substantially just can't afford to have erratic service, and they won't tolerate it. And I think that's something railroads may have to learn a little bit more about because of their history, right? They have long had so much control over what they do and what they don't do, and their shippers have typically been captive. But people we deal with aren't captive, and we've got to take good care of them. And we hope they'll hear that and address it.

Got it. Okay. No, that's helpful. The other angle that we hear a little bit more so about, and I want to get your perspective on, is the ESG angle. So we just did an ESG panel, and it's obviously a significant topic for investors. It had been in Europe for a long time, but over the last year or 2, it's really kind of taken off here in the U.S., and there's a lot of focus on it. But there also appears to be a lot of focus on it from the manufacturer or the shipper side of the house. So can you give me any perspective? Is that beginning to come into the conversation? And I guess, maybe, to further out that conversation, is there a value that can be attributed by shippers to ESG that can be brought into the conversation of that split, that basic one of saying, "Intermodal has to be priced X amount below Truck because there's sort of that spread that always has to exist." Does the value of ESG play at all into that over time?

I really think it does. And I want to just comment, and then I'm going to ask Brad to more specifically address your question. The comment is we have definitely seen a move in ESG. We, the company, has definitely seen an increase in the priority. You may know, Chris, we just named Craig Harper our Chief Sustainability Officer. And that is a direct result of the interest level that our customers have, that our shareholders have, frankly, that our employees have about what J.B. Hunt's going to do going forward to address this. But as we discussed this with the Board, a lot of energy comes into play around serving the customer. And where Intermodal has such a unique position, how do we capitalize on that? And can we uncouple that relationship you just talked about between here's Truckload, Intermodal has always got to be cheaper. In my mind, I can imagine a better scenario where there's more value presented on that Intermodal side from a capacity and environmental and reliability, a safety, congestion, et cetera, et cetera, that might warrant a different attitude and perception to run price. Let me ask Brad Delco to comment. He's got some very good thoughts on this idea.

Yes. Hey, Chris. And I shared this earlier, but I truly believe, one, J.B. Hunt's made a lot of progress on the ESG front. We really didn't do a good job of disclosing a lot of information over the course of the last 12 to 18 months, and we've certainly improved our disclosure, really, more from a defensive point of view or defensive stance. And I think you will see us switching more to offense this year because, you're exactly right, I think there is really strong components of what we're building that all -- with the intent of eliminating waste and, obviously, eliminating waste is certainly helpful to reducing the carbon footprint. But I do think we're not there today. I think we've shared that European customers seem to be pushing more on the ESG front than some of our other customers. But there -- I think there will be a day where you can essentially decouple the cost of Intermodal base rates versus Truckload base rates. And so if a Truckload base rate is $1,000, but they're going to have to spend $300 for carbon offsets, and total cost is $1,300, well, maybe the cost of Intermodal base rate is actually higher than Truckload at $1,100, but the carbon offsets is only $100, so your all-in rate is $1,200. We're not there today. I don't know if we'll be there in the next 12 months. But I think, over time, our Scope 1 emissions will be someone else's Scope 3. And I think everyone's focusing on their footprint, whether it's their own or somewhere along their supply chain. And I think it will be a pretty healthy driver of future demand to convert truck traffic to intermodal or to the rails.

Yes. Yes. Okay. No, that makes sense. It seems like an interesting potential and something that we might see develop, like you said, maybe not over the next 12 months, but it certainly seems like something over the next few years. This is going to become a bigger piece of what your customers are sort of asking for from their transportation providers. Okay. That's helpful. I would be remiss if I didn't get a couple of sort of the detailed questions in when we're thinking about Intermodal. So when you think about sort of just the outlook for 2021 and how that may develop, right? So I guess we're here in the first quarter, comps get a lot easier in the second quarter and so forth. But how do you feel sort of the demand environment is, number one, from your customers as we're starting off 2021? Is it getting better than what we saw in the last quarter? And could you talk a little bit about sort of how you're progressing through the early part of bid season?

Well, unfortunately, we were getting a better look before all of the weather changed. And so our monitors, our meters are all kind of going lackey right now on what is real and what is being held back by weather. I'm afraid we're going to have to get through this event and see what we didn't get to handle that we thought we would handle. I would just say, in general, that things seem to be on our plan before the weather came, in both the progress we hope to make in managing volume and in the early work of our bid responses. And the customers' reaction to that, it's too early to call it. But I would just say we were on our -- we were within the boundaries of our plan and felt like we were -- had to take call of good plays, and they were working. I just think we've got to announce kind of get through all this next week or so, definitely feeling the effects of the weather, no question about it. Darren sent me a note, me and John Kuhlow, a note last night and just said, "Hey, be aware that there are gate restrictions. We are definitely feeling differently than we might have even 2 weeks ago, just given our forecasting practice." And he was just kind of waving a flag and saying, "I just want -- before you guys go to conference, be aware that weather is going to be a thing, and we're going to have to process and get through it." It doesn't change our kind of core confidence in what -- where we're headed and what we're doing. It just is kind of a temporary setback and -- that we think we'll pass, and we'll get back to work and be able to report more clearly on that.

Got it. Yes. I guess that one of the big questions everyone has had is about sort of congestion. It's very difficult, I would imagine, to be able to perceive any improvement on congestion when you have to sort of take one step forward, potentially two steps back because of the weather impacts we've had. But if we -- maybe if we isolate in Southern California and think about what's going on with the port. We talked to the port of L.A. about 10 days ago, and they mentioned about 40 ships sitting off the coast, waiting to get in and probably talked about a sort of a process that's going to take through June-ish or so before they fully recover. How does that putting weather -- current weather aside for a minute, how does that prospect play into your outlook for this year? Is that about what you expected before all this weather issue?

Everything kind of flipped on its side going into this pandemic and then all of the resulting inventory factors that kind of got off their normal time line. And so we came into the holidays with a little different sort of pressure. And then we rounded the corner of the year and, all of a sudden, we've got 2x the wait time on the water to get in. There seems to still be an inventory challenge. I think we heard the same thing as in June. That demand is sitting there, waiting to be moved. So we will try to continue to better understand how to facilitate that every way that we can for customers. And longer term, does that mean considering work with our customers on transloading, for instance, or anything that might help unclog all of that out there. I don't know that best solves the problem. There are other problems that get created by that. But I think we're just hopeful to get some clear lanes to see how quickly we can start processing that. The bottom line is there's a lot of pent-up demand that we should be participating in. How efficiently and how progressively we can do that is to be seen, I think, in the next several months.

Okay. Got it. And then this reminds me, there's a question that came in over the livestream. Certainly, if investors have questions, feel free to do that or submit it directly to me via e-mail. But I got a question from one of the audience members asking about how sustainable you think the demand environment is? This has been a bizarre sort of year and some change with the big drawdown. And then obviously, this resurgence and a consumer that appears quite robust coming into '21. But what's your sort of perspective on the sustainability of demand, particularly in the back half of the year when the comps maybe aren't quite as easy?