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

Good morning. So thank you for joining our discussion with J.B. Hunt. We have, with the company, Shelley Simpson, the CCO and EVP of People and HR; John Kuhlow, the CFO; and Brad Delco, VP of Investor Relations and Finance. I'm Brian Ossenbeck, I cover transports and logistics for JPMorgan. We're very excited to have the team joining here to finish out the morning session here at the Industrials Conference. It's going to be all Q&A. [Operator Instructions] So Shelley, John, Brad, thank you very much for joining us here today at the conference. Appreciate it.

Thanks, Brian.

So I think the first one, just to stay with the near-term here, what's the latest -- you gave an update not too long ago, but what's the latest status on the weather disruptions across the network? I think the previous mark was like $15 million to $20 million of EBIT. You lost maybe 20,000 loads. Is that still a reasonable range to work with? And as things we've been hearing all morning from other companies, things seem to be getting a lot better. Do you think you can start to make up some of that ground?

Okay. Brian, I'll take a crack at that first one. We gave at an earlier conference this quarter a talk about the operating income impact of $15 million to $20 million, as you alluded to, and Intermodal, $20,000, $25,000. I do think there's been strength and dislocation in the market that could be benefits to like an ICS or a truck business. But a network business like Intermodal, the reasons why I would say it might be harder to make up some of that volume is versus periods in the past where there has been weather is typically in the first quarter, there's slack in the system. And that slack in the system would allow you to make up that volume. I would say anyone who's been paying close attention to us, it's probably not been slack in the Intermodal network or in the system since, call it, June of 2020. So I think it will be harder to make up some of that volume. We had whether, there was a derailment as well. And so we're probably 7 to 10 days behind where we thought we would be from kind of getting back to the rail fluidity that we wanted to be seeing. But still feel like, for the most part, hopefully, these challenges will be isolated to Q1, and we'll start seeing even more progress in Q2 with regards to rail fluidity.

Okay. I think that's fair. I mean, with the disruptions, there also comes some positive aspects of it in terms of price and how people are valuing capacity. So maybe we can switch to that for a second. The market does seem to be coming in stronger than you expected, I think, based on some of your initial -- more recent comments. So based on how that looks so far, I guess, Shelley, you mentioned in the last conference call, has a potential to maybe upsize the container order on the Intermodal side. How are you feeling about that at this point? Is it too early to tell? And then, of course, we're all waiting for the updated margin profile for Intermodal and Dedicated. Again, similar question. Considering how strong things have been, putting aside the dislocations and costs, is that still tracking to some -- like a midyear event, I think, is what we're assuming? So any color on those 2 would be helpful.

Sure. So Brian, we are still evaluating our container adds. If you'll recall, we said we were adding 6,000 containers, and those would be earmarked for the eastern network. And so that, I would say, is on pace. We are pleased so far with the results, bids and discussions with our customers. We are really holding on a second option for the West Coast. And I would say our conversations are going well with our customers. I -- we are working right now to determine what we think we should or could do from a container add if we should and how many that would be really in preparation for our customers coming here into peak this year. So I think more to come in that very active conversations. We have added an incremental 750 TCI boxes, so that is new. That's something since our last discussion that's on top of the 350 we already had ordered. So about 1,100 being added this year in the TCI space as we have seen demand grow significantly inside there. We are adding in 360box as well as our customer demand has been strong. We have 1,500 trailers on order, and we're evaluating inside that space as well. I would say, across our business, demand is very high. Our customers are leaning into us. We have been pleased with our discussions with our customers. We really tried to play -- roll back the tape and play it again from 2017 and '18, Brian. And we did the exact same thing in 2020, although not everyone was super happy with us, outside of our customers, with our margins. We felt like staying and honoring the commitments we had made to customers was key to our long-term growth. We gave our customers updates along the way through 2020 and moving here into bid season. That has proved to be valuable for us. Our customers are responding well. They do want more capacity. And they're understanding the inflationary cost that we have as an organization, and I think as an industry as well. We are continuing to keep them updated. I did just do a video call for them 2 weeks ago and walked them through the challenges from the weather, the port and drivers and really focused in on what I think is an under told story right now what's happening in the driver market. Finally, on the margin change that you talked about. Again, John really just tried to articulate that we recognize it's been choppy. Over the last several years, the market has been. It's choppy again here starting out this year. I don't think anybody expected the disruption that we're seeing. But we are very committed to helping our customers, making sure that we're leaning in with them and having good conversation around costs. I think that you'll get to see that as we march through the year and see our change to profitability. That's important for us. That was also important for any new container adds that we would be moving on as a plan to this year. So I think you'll get to see more of that. Hoping to give more update, at least around the adds, probably at the end of this quarter.

Okay. Great. Just to clarify 2 quick things, though. The TCI, I'm assuming that's temperature controlled. So just to confirm that. And then maybe just elaborate a little bit on the driver side because I feel like we hear that a lot, but maybe not as much, as you alluded to, not as much on the Intermodal side. So is that primarily the dray in trying to get fluidity or just enough people to move the boxes, which are clearly at record levels and showing really no sign of slowing down?

So Brian, let me just take maybe 5 minutes. Let me try to back us up for a bit. And I think it will help tell the story what's happening here in transportation, and honestly, the whole supply chain in general. If you actually go back to a year ago when COVID hit, everyone really went into hunker-down mode, not knowing really what would be expected from consumers, our customers, us as well. And so when you look at the railroads, they furloughed many of their employees. Driver schools shut down, the combination of those 2 things were fine in April and May, and then the economy started to come back. And the pace at which the economy came back caught everyone by surprise. We had not placed enough orders for new equipment. No one expected the level of change that would occur from an e-commerce perspective. So if you think about what's happening at the port right now, that's driven from the consumer side around how we are buying. We have not seen a change to that. So most of our customers felt like they would just kind of get through 2020, start replenishing on the inventory side here in first quarter, and then we've had even more disruption, really, disruption at a level that's similar to what happened during the peak of fall. And so I think it was building. And if you just fast forward to where we are today, our customer demand is still very high. Imports are at a very high level, considering what it has been in the past. If you just looked at how many ships on a daily basis are at anchor and at birth, you're at 4x or 5x what that looks like in total. Fuel is escalating as well, Brian. That's an important component. It's up for 19 weeks in a row. I think it's around $0.15 per mile in the truckload space. So now you start to feel that pressure of people wanting to convert, move into a more efficient way to do business and now get to what's happening with drivers. So if you back up to when those schools shut down, typically, in 2019, we had 525,000 CDLs issued. Now it's estimated at 375,000, down 29% of new entrants into the market that just did not come into the market. You add that to the drug and alcohol clearinghouse, nearly 52,000 drivers disqualified. Brian, nearly 2/3 of those drivers haven't even started the return to duty process. So I would say they probably moved out of being a truck driver. And then certainly, the COVID impact, which we think is more shorter term, but it's somewhere around 25,000. You add all of that up, and we're short about 220,000 drivers that's been building since April of last year. Now I think COVID will relieve itself more. And so we're estimating just under 200,000 missing from the market in total. And then when we just look at our own internal metrics, and this is when I would say it became really glaring for us. Typically, we take a breath in January and February. There's a slowdown, and we add more drivers in January and February to gear up for our second quarter demand from our customers. We typically hire anywhere from 120% to 160% of drivers during January and February of our need for those months. In this year, January and February, we were only able to hire 69% of those leads. So now you're starting to feel that impact that is occurring. If you look at cost per lead, cost per hire, sign on bonuses, in so many jobs, that step-function change, we think, is going to happen in total W2, so driver pay moving up. And the number of pay increases that we've instituted on behalf of our professional drivers is up some 4x to what it was in 2018. And I think most people remember what happened in 2018. So where the hot spots are at, it's really hot. I would say, North Midwest, big challenges, big opportunities there that we're going to have to work through. And that's the primary reason that we're seeing issues in the supply chain. So when you look at what's happening from outbound tender volume and in the number of rejects that carriers have, part of that is drivers, part of that is dislocation that's happening in the supply chain. From an e-commerce perspective, all of that, Brian, makes for an inflationary really environment. I feel encouraged with the conversations we're having with our customers and feel like we can have a successful year working more closely together.

Great. Well, thank you for the market update there. There's a lot to chew on. I'm assuming shippers really aren't pushing back too much on any of that. I guess, what do you hear -- before we -- I want to get more into 360 and everything that's going on there, brokerage being a theme of the conference here, especially today. But what are shippers -- I guess, what are they pushing back on, if anything, at this point, given that it does feel like -- and you have been talking about this is going to be like a 2017, '18 cycle all over again?

Yes. I think, Brian, what's frustrating for all of us is that in 2017, moving into 2018, things started to be a little more predictable in 2018. Here, we've moved out of 2020. I think our shippers have planned a budget. It would be a little more stable, and we've moved into 2021 with as much instability as we had during peak season. So we're trying to educate. Our mission is to create the most efficient transportation network in North America. So we want to move to where our cost servicing capacity is best on behalf of our customers. We're jointly working on that. I think they have an awareness to what's happening in the market. We're trying to arm them. So as they're talking to their C-suite, that they have good factual data about the market and about what J.B. Hunt is doing and how we can both combat that together.

Got it. So it's a good segue into 360 and everything ICS related. You've talked about building scale there. We certainly saw it in the numbers last quarter. It's a strong market anyway, but certainly, I think it was pretty noticeable, even separate from that. So it does seem like you're at scale or at least getting pretty close to it. And the first wave of investment is starting to maybe come to an end. Can you just talk about how close we are, to scale, if you can comment on that? And then just -- it doesn't sound like spending is going to slow down. So what is kind of the next order of investment, as like you said, you look for more ways to do more business with more customers and find more ways to say yes, in a way that makes sense for both parties?

Well, you said scale is starting to get there. And I might say maybe it's getting there for our first set. But to create a marketplace, it does need massive scale. And so to think about eliminating that waste, all shipments, all capacity, really located somewhere centrally as critical, having the right level of access, transparency and visibility to really create that efficiency, I think, is so key. So we are still long-term focused on creating scale in the platform. I think we are being smart about how we are scaling as a business. We had plenty more business that we could have executed on behalf of our customers, but it really just didn't match up with what the market was looking like. So we're trying to solve for our customers in different ways to help them through the problems they were having, let's move into where supply and demand matches more real time, allowing our price for both pieces to that to be more in line with the market. So that's been an opportunity, I think, for our customers in general. I would say we are leaning into what our customers are telling us. And those have been the same key problems that we've had as an industry, and we've had -- at J.B. Hunt, that's our mission in the platform. That level of transparency and visibility is really key for us. That's where we are investing. If you think about the growth that we had in the fourth quarter, it wasn't just in brokerage, it was also in 360box, so us bringing to the market a drop trailer scenario. I've talked about this for a bit now that the market is so inefficient, partly because we were in 2 separate markets. We run, as an industry, a brokerage market and then a drop trailer big asset carrier market. Well, if you think about that, those 2 networks actually need to lay over each other to fill in the gaps into what makes sense. Part of the reason we grew significantly in the fourth quarter in JBT was a direct result of the platform and how we are able to leverage the platform for 360box. So we're not just growing in brokerage, we're growing in 360box. And we're growing across the organization inside the platform. That's a key component as to how we think and how we think about scale on behalf of our customers.

So you mentioned the 2 different networks, and maybe this is a difference you can help clarify. But you've talked about connecting the internal with the external marketplaces. And I think that's going to happen later this year. And just one of the questions we get from investors is how much of the activity on 360 is third parties, meaning independent in the marketplace versus ones where J.B. Hunt is involved on one side or the other. So maybe you can address that, the kind of the mix of business. And then how we should think about the connectivity with the internal and the external, which seems like it's one of the milestones for this year.

Sure. So Brian, clearly, we are starting to get some efficiency gain from this system because our move to profitability was quicker in the fourth quarter. We have stayed with a second half of this year, stable on a profitability perspective based on our modeling. We have been ahead of our model for most of the time, hoping also to repeat that, but we do believe scale is so important on behalf of our customers in general. When I think about how we actually scale in the market, a key part of that is our internal system. And so that system we call match. And that really is allowing for more exception based work to happen, allowing our technology and platform to really work through anything that can be more connected quicker. And so making sure that, that happens. And then where we have that exception based work that would be happening in our internal system, that does -- we are piloting right now. That is set to go live sometime in the second half of 2021. That's an important component for us as well. Making sure that our people know we're not eliminating people. We're going to continue to grow because our customers are going to need us, our carriers are going to need us. So we're going to be great problem solvers in any of those exceptions. And we're going to be talking through relationships with both our customers and carriers. So technology more enables us to really accelerate growth. It doesn't replace what happens with our people, but it does replace the monotonous process where our carriers wanting to connect very quickly, and our customers are wanting to as well.

Got it. So the -- one of the things you mentioned in the last call was you hinted a surprise, which I think at this point, we all assume is the Google partnership that was announced not too long ago. So can you just talk us through like why this makes sense now to expand the 360 platform? What was missing, I guess, previously by virtue of that as well? But what do you think of this multiyear strategic alliance provides? And maybe you can walk through some of those transformational areas you alluded to in the release about visibility and predictability? And of course, real time pricing, which is still the end goal.

Yes. So Brian, I think you know us well enough to know we don't normally announce something unless we think it can be meaningful for our customers, our company and our shareholders and really focused on our customers here. So we have identified the problems. We have been working on our platform and our mission as an organization really to get after that efficiency. And we do have a multi-cloud strategy for our platform in general. And that's really how the conversation started. But what happened was the conversation really just started to evolve. And we spent about 12 weeks together, really, with 4 of our most senior leaders, identifying what was available from Google and Alphabet? What problems were we jointly thinking about for our industry? How could they help accelerate the problems that we are trying to think about? And we've never been shy to say we don't think we'll be the only platform, and we also do think we're the only expert. There are definite experts. We do have great contractual relationships with other providers in spaces that we think that they give better expertise. But in this case, this is different for us. It is an alliance. And I would maybe point you to 2 key pieces. The third one, the third bullet in our announcement really was around co-innovation. And I think that's really key, working towards what is the problem for our industry, and how can we solve that together. And together means that we have a team and they have a team that's dedicated to those so that we're working in concert together, bringing the best of both. So that leads me to our second bullet. If you think about what the best of both is, we think that we are transportation and logistics experts, understanding our customers very well. And they happen to be really great from a technology when it comes to data science and search capability and just connectivity to people and consumers. And so if you imagine those 2 being together, you can then start to imagine some of the ideas that we have to jointly market on behalf of our customers. So that's really the way we're thinking about that. There are foundational pieces to our more aspirational ideas. So those foundational pieces, we're working on right now, and you hit on the heart of it. Visibility, transparency and access, that's really core for us and what we're going to be doing. And then we will build off of the success we have there to think about new products coming to market.

Okay. And I know you probably can't say a whole lot in terms of maybe some specifics we'd like to hear about. But at least one of the broader questions we have is, what is Google -- have you worked with Google or Alphabet or anybody outside before? I know you talked about the cloud strategy, but have they been involved in 360 before? Is this a complete -- you talked about a new operating model, I don't know if that's to be read as an overhaul or just advancing it. And then I guess the other question is really, what does Google get out of it, I guess? Do they have -- if there's a data, which is a key part of all this, of course, does that stay with J.B. Hunt or is there some sharing agreement that they might be involved with?

Yes. So let me just make sure I clarify the reason that we have an alliance. Our alliance is really commercially driven. So it's the work we're doing in J.B. Hunt 360. They really created the alliance. In addition to that, we are in the cloud with Google for a large portion of our business. And so the ideas and the adiation, how we thought about the market together, our cultural alignment, that's really what created the alliance from a commercial perspective. And I feel like that is advancing the organization. So think of it like this, Brian, we are the customer. In this alliance, we are still the customer. And so we are going to do what we believe is best for our customers. We share those customers also. And so that makes it even better for us to jointly go to a customer that we're trying to help solve supply chain issues. But we are wrapping around bigger industry problems in really thinking about our customers in the center of all of that. So I wouldn't say it is a change to our organization. It's going to further accelerate J.B. Hunt 360, and that is the focus of what we're working on. But it also can go outside of our 360 platform, although that is our focus. We want to make sure we do take advantage of our relationship in other areas that we think that they can really help us with.

Okay. Very interesting. I'll see more surprises maybe on the next earnings call. So when you talk about the connectivity, when you look upstream, I think that's one part you've been working on more recently with TMS and ERP integrations, which is a bit more commonplace, but I think you're relatively more advanced on that. How far upstream can you see, I guess, for a lack of better word, in terms of freight that's coming to you? Is that an area you feel like you need to build more scale, because I feel like once you get more busy upstream, everything just works so much better downstream in terms of optimization and reducing some of the costs and optimizing the solutions. So where do you feel like you stand from a 360 perspective, getting good connectivity and then, therefore, seeing what's happening downstream as real time as you can?

Yes. I think that's a great question, Brian, because although I think we're advanced in our space, we are nowhere near where we believe we need to be with our customers. And so we have reimagined the experience our customers really want from a transportation logistics provider in their supply chain. So much broader vision from a 360 perspective overall. We are advanced in our space. We really don't advertise or publish a lot. We aren't big on doing press releases every time we do something, but I think you're familiar with the connectivity we have. But we also -- if we think we have a competitive advantage with a particular provider that we're working on new ideas, we don't necessarily go-to-market with that. Number one, we might be vetting it out; number two, we might be wanting to get a head start in that space and really focused on our bigger mission. So I think this is an area, too, that our new alliance can help us with. As we're thinking about connectivity, that's connectivity across the supply chain, that's connectivity with our customers and any provider that can really transport and move goods on behalf of any customer. So I think much bigger vision that will help us in where we connect, whether that's TMS providers or any API connectivity. Anything like that, that's kind of maybe the start, but we have much bigger vision around that.

So when you look at the long-term vision and better access, more visibility to capacity, increasing the transparency, I mean, we'll see how the brokerage model evolves, but it almost seems like that endgame, however long that is from now, like you could maybe even see this move towards kind of a managed transportation fixed fee cost plus. Is that a possibility in terms of just how the economics might work when we get to that end game realizing that might be quite some time away? But could you see a scenario when the brokerage model moves towards more, I guess, of an advisory type of role in that regard?

Yes. I would say I can see a platform acting more like that. But I also can see always needing brokerage, always needing people. When you think about even the travel agency, I thought most people did their travel online. But the reality is there is a lot of travel agents that are out there, and it's because of the specialization, the boutique and really the handholding that is needed, sometimes in problem solving. So I can see that as a scenario. I can see a lot of scenarios. I will tell you this, brokerage is taking share in the overall market. And I think it's the ability to really solve with what feels like so much more scale on capacity that if you're only an asset provider, and somebody has to have the asset, and that is really important. Clearly, we believe that is important that brokerage is taking share, that brokerage is solving more problems. We believe we can continue to solve more problems with our customers and bring them the best of what's available in Intermodal and Dedicated and Final Mile. So we think the combination of those 2 ways to move to market. It allows us to understand from a driver perspective, what carriers might be interested in as we are a carrier ourselves. So we hope that we're playing and understanding both sides really well to gain the most advantage for our customers.

Yes. It does sound like the hybrid auto, at least in the near term, we're seeing a little bit more from the truckload carriers, they're talking about trailer pools, they're talking to power only, putting it on their platform as they run into the same driver challenges you're talking about. So maybe you can elaborate on that. It seems like it's just a sign of the market and how they're trying to scale. But you also mentioned 360box is growing, but I think it sounds like a pretty large number. I don't know exactly how many you have. But is that your answer to that challenge of scaling, but not necessarily being able to get or wanting to maintain that level of drivers that would move 1,500 trailers?

Yes. So Brian, if you think about our mission and what we want to do as an organization, our 360 platform actually was founded on that mission. And so although we announced it in 2017, I was working on that behind the scenes there for a few years. And one of the things that we did with our customers about 6 months before we announced J.B. Hunt 360, we had a customer advisory forum with all different sizes of customers, and we gave them a sneak peek. And it was at that advisory forum that our customers gave us the idea for 360box. So they love the idea of the marketplace, they wanted us to consider having dropped trailers, and that's when we got to work on that launched in 2019. Took us about 2 years to think about that because, Brian, when you think about a drop trailer network as an asset owner, you're constantly thinking about the network. Well, in a platform that has a lot of live load -- live and load businesses or shipments, typically, that is segmented from the drop trailer environment. But when you could put those 2 together, now you start to create a network with both and that really changes the game. And so that was our idea with J.B. Hunt 360 and 360box, that really formed from our customers' feedback. That's why we launched 360 box. And we've been very pleased with our customers' receptivity, our level of monetization and just where we're scaling in that space, our customers are asking more for that. We think it's important to grow in both parts of our platform to really give our customers the efficiency that they're looking for.

So when you think about the different parts of the platform, the asset and nonasset, we've seen the disclosures about how JBT and JBI can use 360 to purchase capacity. Does that apply -- I'm assuming it applies to Dedicated as they can get better backhaul and you can build better contracts and maybe you could have more confidence in how you build those out. So maybe you can elaborate on how Dedicated benefits? And then if you could just talk about which one of the mode stands to benefit the most from a bigger, better 360 platform and why.

So really great question. And when we think about the waste that is in the system, I talk about the 3.5 million interested drivers, and 1/3 of all hours completely wasted. That's included in big fleets. And again, it's because lack of access, transparency and visibility to shipments and capacity in real time. That includes our dedicated fleets. That includes our intermodal fleets. And so the more we scale our platform, obviously, our own trucks can be a great beneficiary of that platform being the most efficient fleet on the road. And that actually goes back to credit our customers. So when you think about our Dedicated Contract Services group, that business is centered around a specific and unique customer. And every time we can interact in a platform and fill those empty miles on behalf of those customers, we have a happier driver, better W2 and happier customers as a result because they get a benefit from that. I know that John published this in our annual report in 2019, I'm not sure if it's going to be published in 2020. But we did save millions of miles for both JBI and Dedicated in 2020. So we did state we saved a little over 1 million miles in 2019. That grew significantly in 2020. They get no favoritism. They are a carrier but they understand the platform and they understand the connectivity into the platform. And Brian, you would be amazed at the size of carriers that are interacting in our platform now. It's not just the small carrier community. We've had great conversation with midsized carriers that understand our platform can just help them fill in what is today cost tomorrow can be profit for them and more W2 for their drivers. So our Intermodal fleets and our Dedicated fleets should stand to benefit. And then we have some ideas for Intermodal in J.B. Hunt 360. Those are some of the ideas that we're working on currently that we think we can bring to market that can be a new product.

Okay. Well, I think we all have time for maybe one more question. Certainly ask about the new products and Dedicated before too long. But I think the -- we're going to have a panel discussion on autonomous trucking. Clearly, disruption is getting a lot of interest in play right now from an EV, from an AV perspective. Maybe you can just wrap up in terms of how you view and how you're positioning the company to kind of monitor, leverage these sorts of technologies. Which ones you think are, just generally speaking, rank order going to have a bigger impact sooner? And you've done partnerships, you probably evaluated just about all of them. How do you think of this in terms of leveraging it, the competitive threat and finding a balance between the 2?

Yes. So I would say we're not just monitoring, we're actively engaged and involved in having conversations. Again, we don't necessarily disclose what those look like in general because we could be in discovery or we also could be working on something on behalf of our customers. So when we think about autonomous, one advantage that we think for ourselves as we scale our platform. And for us, our platform is not just brokerage, it's our multimodal digital freight marketplace. So it's everything that we have as an organization, really coming inside that platform, really autonomous and a platform work very well together. Now I want to make sure that I'm clear that I don't think in my career, Brian, that I'll have to think about the nation's highways moving up and down without a driver in the truck. However, I do think there are applications for that. So local markets, anywhere that there are specific roads, things like that, we'll definitely have to work through some of the safety discussions around that when there's decision-making and choices. But we're active in those conversations. Craig Harper leads us inside that space. I would tell you, I think he's very knowledgeable inside that and having conversations on a regular cadence on a regular basis. It's not something that we shy away from. We think that could be an advantage where it appropriately fits for our customers and our drivers and also our organization.

Okay. Great. Well, I think we're going to have to end it there, so we get back on track, everybody to lunch and then into the afternoon. But thank you very much, Shelley, John and Brad for joining us. We really appreciate your time. And hope you have a good rest of the conference. And for everybody listening, thank you as well.

Thank you, Brian.

Thanks, Brian.

Talk to you soon. Take care.