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

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Good morning, everybody. Welcome again to the Wells Fargo Industrial and Transportation Conference. We're excited to have with us today members of the leadership team for J.B. Hunt. With us today is John Kuhlow, the company's CFO; Brad Hicks, President of Highway Services; and Brad Delco, VP of Finance and Investor Relations. And just a reminder for folks in this format, if you do have any questions that you'd like me to present to management, please e-mail me at [email protected]. So thanks, J.B. Hunt for joining us today. We're very excited to have you with us. And maybe, from a high level, I know we also know J.B. Hunt that you're very much thought of as an intermodal player here. You're much broader than that. Maybe at a high level, kind of walk us through the business line that J.B. Hunt participates in within transports.

Sure, Allison. Good morning to everyone. Brad Hicks. And when we think about Hunt, we really have 5 reported business segments. The first and largest is Intermodal, largest domestic fleet of containers in North America, currently, approximately 100,000 containers. Unique to us is that we do manage the dray components on the front and back end and leverage rail providers on the rail segment there. And so that's a quick synopsis of Intermodal. Next largest is our Dedicated Contract Service business segment, approximately 10,000 tractors, private fleet replacement focused, a little bit north of 10,000 on the driver side. And this is where we customize the solution and become a shipper's private fleet to facilitate their distribution needs. ICS is our brokerage segment, roughly 110,000 carriers that utilize our platform to supply capacity for our customers and how we solve for their needs to be able to say yes. Then we have Final Mile Services, newest segment that broke out 2 years ago, John? Here, we're -- some of that fleet is company-owned and company-employed. Some of that fleet is through third-party carriers that helps facilitate that Final Mile component. Mostly focused on large, big and bulky, think appliance, furniture, exercise equipment, bedding. And then lastly, our roots, which is our Truck division. And we've gone through a transformation there, really moving away from the company asset tractor and driver. But we are making heavy investments in the trailing fleet for our 360box initiative. And again, where we feel like we can offer a greater level of flexibility for our customers in terms of how we solve. That's the quick Reader's Digest version of J.B. Hunt's 5 segments.

Perfect. And maybe, John, we'll start with you. Just your thoughts, obviously, 2021 has started out pretty strong despite some of the weather challenges out there. How do you think of the trajectory of the business here as we move through '21? And maybe particularly Intermodal and Dedicated and we'll leave ICS and JBT for Brad to help. So just any thoughts there?

Okay. Sure. Yes. As you mentioned, we started the year, we were anxious to kind of turn the page on COVID and hopefully get back to some normalcy, and we started out strong. And then February, as everybody knows, was a hard winter month for us in the transportation industry in general. And so that was a little bit of a setback, but I think that we're performing well. Demand is really hot right now. And so we are -- the demand, we have seen a lot of growth and pickup there. But our outlook now is constrained by both the equipment and the labor problems. And that's kind of what we're focused on now. We've had some discussions early today. Labor at the ports is a problem. Labor at the rail is a problem. Labor at our customers is a problem and even within Hunt. And so it's not just a driver issue right now, it's across the board for a variety of reasons. And so we're watching that, trying to stay on top of things and address that as we can and hopeful that things begin -- start opening up and getting back to normal. But right now, it's not a demand issue. It's the equipment and labor constraints that we're faced with.

Great. And Brad, any incremental color from the businesses that you run in terms of how that trajectory looks here?

Yes. I would just add, we announced in Q1 that we doubled our trailer purchases for JBT for our 360box program, and that was in part because of what we saw as demand from our customers and being able to provide solutions to them. We are experiencing the same issues. It's not just an Intermodal problem, where we're seeing those labor constraints. So we're working closely with our customers to get better velocity of turning our equipment at the shipper and the receiver. But demand is really high, and so that's not going to be the issue. The issue is making sure that we have the right capacity for our customers' needs as we move deeper into the year. We really don't see a letdown in that demand at this point. Maybe earlier in the year, there was a thought that we might see a little bit of loosening. But quite frankly, we don't -- all the indicators would suggest that it's going to remain strong throughout the balance of '21.

Great. And I want to turn to technology, obviously, a growing theme within the transport space. J.B. Hunt is certainly playing a role in that as well. Could you maybe walk us through this 360 platform? Kind of where you are in the life cycle of that? How you're looking at that to evolve, any incremental investments that we need? Just some broad color on J.B. Hunt 360 here.

Sure, Allison. We've talked for a couple of years now about the investments in technology, the investments in scale and the investments in our people. We're still at kind of the end of what we initially had focused on, but we will continue to have investments in 360box. 360box is really our platform. And the platform enables the flexibility in being mode-agnostic, as you've heard us talk about. And so as we work with shippers on their needs, we can leverage the platform and create the scale whether that be Intermodal, brokerage with our trailing assets in 360box and even finding benefits in Dedicated and Final Mile in terms of how we get the proper visibility of all of our capacity to be able to give the most efficient answer on behalf of our customers. And so those are the investments that we've been making, we will continue to make. I will touch on that we had an announced partnership with Google earlier in the year and we believe that, that will lead to continued investment and advancement of our capabilities as we think about technology and the role that technology plays. Our goal is to be the most -- have the most efficient network in North America. And so that's what our focus is. That's where our investments are and anything that we can do to provide greater visibility, transparency that allows for better service of our customers is where our investments are placed.

That's great. And you mentioned your Google partnership. Can you maybe walk us through the reasoning behind that? What -- I guess, what is that bringing to J.B. Hunt over the long term here?

Yes, sure. First and foremost, it was really our cloud decision, a selection of a partner as we think about the future and our business needs. And we feel like they were best placed to help us from a cloud services. But beyond that, it's really the potential of their data science and how we can benefit from where they're at on machine learning, artificial intelligence. And then we have a co-innovation partnership initially focused predominantly on visibility of the supply chain as well as predictive analytics. And so we're anxious and excited about that partnership and believe that we will be able to get enhanced capabilities that allow us to make better decisions on behalf of our customers and our carriers. You guys want to add anything to that? On the Google?

No, I think that was well said.

[ Please ] try to refrain from partnership. Our legal team will...

Oh, sorry.

This is strategic...

Strategic alliance.

Sorry, I just got in trouble.

Not a worry. In light of those strategic alliances, you just went into one with KeepTruckin. Maybe talk a little bit about that one as well.

Again, looking to find anything that we can do to augment our capability for visibility. And so that announcement is really driven around access to visibility in the carrier community. And we feel like it's just one of many that helps us continue to improve in that area for our own decision-making and, like I said, really for the benefit of our customers.

Great. Maybe we can move on to JBT. You talked about, obviously, demand remaining elevated. How do you see the cycle evolving for JBT at this point?

Well, JBT, we are in the early stages of our 360box initiative that we really just launched about 12 to 18 months ago. But what we are seeing is a significant demand for a drop trailer solution. And it really is allowing us to reshape or reimagine what our Truck segment can be. When we think about the old way for almost 60 years, that was an employee model with a company-owned tractor asset, and that confined us to really in terms of the flexibility of the capacity that we did have. Today, now we're moving more into an environment where, yes, we'll supply the box, but we have many choices in terms of how we power that box. And so it does allow for a more flexible solution for the shipping community that desires to have drop trailer equipment that enables efficiencies on their side of the transaction. So demand is really strong there. And with the labor driver market that we do see opening up that flexibility into the 100-plus thousand carriers that we work with, definitely gives us a different advantage from 24 or 36 months ago in terms of how we thought about that business model. So really, if you looked at us over time, you've seen that business unit really in decline for the better part of 20 years. But now here we are growing and reinvesting in it. So it's very exciting to again reimagine what our Truck line can be.

That's great. And you mentioned a few times just in terms of the labor shortages and trying to increase productivity. Is there anything specific out in terms of initiatives that you're using to sort of mitigate some of those cost pressures? How are you, I guess, going forward in this very tight labor market for J.B. Hunt at this point?

Yes. We're certainly doing a lot of things in an effort to minimize. I don't think that the word mitigate is a fair word in the environment we're in because that cost is up. And so there's things that we're doing that will mitigate the increase of the cost, but that cost is very real. And quite frankly, it's what's driving the vast majority of the rate movement that we've seen over the last 12 to 18 months. The cost to attract, recruit, hire and retain a driver today is significantly higher than we saw pre-pandemic. And I don't know if that's going to change anytime soon, but we're making investments in our corporate driver personnel group. We're making investments in how we can onboard and maybe train a less experienced driver. And we're even working with the outlets in terms of military or other sources where we can recruit in new entrants into the driving profession. All of our customers are working on similar type initiatives for their own labor needs because that's a choke point for us, quite frankly, right now. We've seen the amount of time that it takes a trailer to be unloaded has increased almost 80% over the last 12 months. And so that means that, that inbound trailer is sitting at the receiver for 83% more time and that's not -- it's not helping us with velocity. So they've got their set of challenges and their work focused on that. We're doing everything we can to ensure that we can meet the capacity commitments that we've made to our customers. That was extremely important to us in 2020, it remains important to us in 2021 and we think that, that leads to a higher level conversation, a higher level of strategy with our customers that enables for better retention and opens up other business opportunities. And so we're going to look to continue to honor our commitments any way we can. But it is -- we're not mitigating the cost. We're just minimizing the cost increases in those areas.

Perfect. Perfect. And I want to delve into a little bit more on ICS. I guess, first, what's sort of J.B. Hunt's decision to build that ICS business? What did you see in the marketplace that you felt was missing?

Yes. I think, for us, when we go back to -- when we decided to move into the brokerage segment, part of that is listening to our customers and understanding what their needs are and then also evaluating where we sit or where we sat in our overall service offerings, and we felt like there was a gap. Again, I mentioned when we do that Truck business with a company-owned piece of equipment, a company driver, we can only say yes if we have that equipment available. And we also weren't in things like flatbed services or refrigerated services or LTL services. And so that's what really got us excited about opening up that business segment to fill that gap. And then you have to fast forward to really just a few years ago, when we launched really our digital approach in 360, the 360 platform and the digital marketplace or the marketplace. And so that's us making sure that we stay current. And as we look ahead, we feel like that's an evolution of the business model that we were on the front end of. And we're excited to participate and we're optimistic about what the future holds as we continue to find new unique ways to leverage our platform to create efficiencies for our customers.

And how should we think about investment into that business? Like where are you within that life cycle of investment? Has a lot of the heavy lifting been done? And obviously, technology it's ongoing here. Any thoughts there?

Yes. We've had heavy investment, but I think we're going to continue to have heavy investment. As I mentioned, the Google Alliance, and I'm pretty sure that's what I said earlier. But that's going to open up new opportunities for us to continue to invest in. And so I don't think we're over a hump, so to speak. And quite frankly, I think we're in a very early stage of both what 360 is and can be as well as our 360box capability, having only approached the market with that strategy for the last 18 months. So we see that -- the market sizes. We do see reports that suggest shippers will depend greater on brokerage as a solution in the future than they have in the past. That's been a trend over the last 15 years that's continued to grow. And as their comfort and confidence grows in what the strategy is or what the overall service level is, they're more and more open to that as a solution, and it does offer them a greater level of flexibility. So I think to answer that question, there's still a lot of investment as part of our road map. And we believe we're in the early stages of the success that we're seeing. Brad, would you add anything to that?

I agree. I mean, I think, Just to reiterate the point, obviously, these investments, as Brad’s predecessor leading highway services would say, are in people and scaling the platform. And obviously, in technology, all of those investments will continue. But the idea being is that these investments will allow us to scale disproportionately to our cost. And I think we've already started to see some evidence of that with the performance in that segment over the last several quarters, and hopefully, that continues.

Great. And I just -- we had some questions come in. So I just want to take a pause and go through some of those. First one is on return on invested capital. Obviously, a focus for J.B. Hunt. An investor trying to -- asking what is the balance? You adjusted margin guidance, you increased CapEx. How should we be thinking about that medium-term ROIC opportunity for J.B. Hunt?

From an ROIC perspective, I mean, we look at a lot of things, a lot of financial metrics that we look at to manage. But ROIC is the fundamental primary objective and the metric that we watch and monitor. We have a diverse, what I consider a diverse, portfolio of services that we offer to our customers through our operating segments. And each one of those has its own kind of return threshold depending on whether we have assets or technology or people. And so the way we manage that is looking at what does the investment provide for us? So in times where we're investing heavily in building scale in ICS and investing in people and technology, that's going to be a period where you see a little bit of degradation in the ROIC in that period. But the way we look at it is over the long haul. And similar with Intermodal when we're -- as we announced earlier that we're investing heavily this year and adding containers. And so in that given year, where that investment is made, you'll see some degradation. But over the way we monitor and watch it is over the life of those assets, and a container is a 20-year asset, and we feel good about the returns that we will make over the life of those assets. So that's how we watch ROIC and how we're performing as a company given our diverse portfolio of services.

Perfect. And another question, more on the lines, I guess, for Intermodal. A lot of M&A noise on the rail space. Any thoughts on how that could be impactful to J.B. Hunt over time?

I think it's too early to tell, Allison. I mean no telling where it could come about with all the news and the noise out there. So obviously, we have a very close relationship with our rail providers, and we'll just obviously stay very close to that. And when we feel -- if we have some better visibility as to what may play out, we'll probably be in a better position to comment on that.

Perfect. Understood. Understood. And I would say, just going back to, I guess, John, just the comments around returns, you went into it quite a bit. As you kind of think in terms of investment ongoing, is returns really that focused in terms of where you're investing for growth longer term? Is that the biggest hurdle that you expect your businesses to monitor here?

Well, I don't know if I would call it a hurdle. It is the way we look at any type of service offering. For example, we have a process where if Dedicated is adding an account and they want to purchase more equipment, they need to meet some ROIC thresholds. So that's how we monitor a lot of these services and the way we look at it. So we're trying to find the areas where we can maximize our return. And there will be times when we would allow that return threshold to go down if it's part of a broader investment that we think provides a higher return over the life of that investment. But I don't see it as a hurdle, but it is kind of our initial talking point on how we determine what services we provide.

Great. And as we think on highway services, the evolution of that, I just want to go back to you, Brad. Customer first, obviously, pricing tight capacity, how are you balancing the impact of those that you're meeting, I guess, the needs of the customers, but you're getting paid for the services and value that you're providing them? Can you maybe walk through how you kind of think about those dynamics?

Yes. We talk a lot about our technology advancements and -- but I still feel like our business and our industry requires supply chain professionals, and we rely heavily on them to ensure that we have open lines of communication and really a transparency with our customers. And so when we think about those tech investments, it's all about better visibility and that visibility translates to transparency. And so if we're going to be transparent about where we sit and recognize the costs associated with the environment we're in and we get out in front of that, then we can really focus on how we solve for their needs. And so that doesn't mean that you can look at the returns that we have as an organization and we're not looking to take advantage of the environment, but there are realities of the costs that we're all facing today whether that be the labor, whether that be equipment, whether that be insurance. And so the cost to serve is up. That's a very real thing. So you got to move past that and then you can really focus on how do we solve for their needs? How do we solve for their peak? How do we solve for their imbalances that occur throughout the course of a week? And so being able to do that in an effective, efficient manner and when you think about all the services that J.B. Hunt can offer and the flexibility that exists, it really does get back to us being mode-agnostic. We want the most efficient solution for our customer. And sometimes that means promoting and utilizing our Intermodal service. And sometimes that means leveraging our brokerage element for those needs. And sometimes that means that we're better off using the box program. Sometimes we can have customers that move throughout all 3 of those over the course of a week or a month, depending on what their needs are in terms of transit and so on and so forth. So I think that we've positioned ourselves to be able to say yes. We talked a little bit about that last year. And we want to find a way to yes. And I think our customers understand that, they lean into it. And we've continued to grow with our customer base as a result of that. That being said, our brokerage and 360 platform has enabled us to tap into or access other markets that we have not historically served. Historically, J.B. Hunt has predominantly been with large national shippers. And our 360 platform really has enabled us to move into the small- to medium-sized or even micro-shipper in terms of size and be able to solve their needs where, in the past, that wasn't of interest to us. And so we've opened up new markets through our strategy and enhanced our ability to serve those that we've worked with for long periods of time.

Great. And we had another question come in. Final Mile, why is this interesting for J.B. Hunt as a business?

I think it fills yet another gap when we evaluate what our service offerings are when you think about supply chain. And I also feel like many times, we've moved in areas that we hear from our customers is a strong desire for us to move into. And so if we listen to the customer, if we feel like we can perform that service well and make a fair return and it creates a further extension of our existing service offerings, that's really what drove us there. We also see and saw trends around e-commerce and the continued growth in that area and feel like there was a gap in terms of a reliable performer for the delivery and install of big and bulky. And so that's the path we've been on for the better part of a decade now. And obviously, we've seen a lot more growth over the last several years. It's also a business model that's somewhat mode-agnostic. Sometimes we do that business with our company employees and our own equipment and other times, we rely on third-party carriers to support the Final Mile and we just manage the oversight and the fundamentals of that. And so really, we can solve for whatever the customer need is and the service level. A lot of times, the company model is around highly technical installs if you think about appliances, whereas some of the furniture, it's maybe better suited for a third-party carrier to help facilitate those transactions. But when you think about supply chain, knowing that we have an Intermodal product that can facilitate imports in-land, and then we have brokerage and Truck line that can facilitate regional distribution. And then you have Dedicated that predominantly serves in more of a local distribution model to a store, we felt like there was a gap in terms of delivering either from the store to the end consumer or more directly to the consumer from a distribution facility. And so we felt like that was a gap, and we've been very satisfied with the progress that we're making in that particular segment.

Great. So I'm hearing we're running out of time. Any closing remarks that you guys would like to make before I let you go?

I think we're good.

Yes. We’re good. All right. Well, thanks so much for your time, gentlemen.

Have a great day.

Thanks, Allison.

Thanks.