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

Okay, great, and good morning. We're going to go ahead and get started with the 10:00 fireside chat. I'm thrilled to be joined by John Kuhlow, who's the CFO of J.B. Hunt; as well as Eric McGee, the Executive Vice President of Highway Services; and Brad Delco, who used to be my friendly competitor, and now I have to think of as just my friend, who's the Vice President of Finance and Investor Relations. We've got a lot of ground to cover in a 30-minute session, especially given the breadth and depth of the markets that J.B. Hunt sees. There is a link if you have questions that you want to pin to me, it should be below the presentation window. You can go ahead and send those to me, and we can try and work those in. With that first, guys, thanks so much for joining us this morning. And if it's okay, we'll maybe just jump right into a few questions.

Great, thanks. Thanks Todd.

So maybe to start, John, maybe this one's for you. I think that your team has done a very good job of communicating that the capital is allocated based on the returns of each of the business segments. And with the updated margin targets that you provided during the first quarter, does that change how we should think about growth within each of the respective segments? The dedicated margins went up. Intermodal came down a little bit, but those are margins and it's not really reflective of the return. So how should we think about the growth profile and capital allocation for each of the businesses going forward?

Well, Todd, I think you're exactly right. We did update some of the segment margin targets. But that doesn't necessarily change our return profile and how we look at allocating capital. Capital allocation is a little weird for our company in the sense that there's not a -- where there's this pot that we have to divvy up and where we decide to allocate capital. Ours is more of where we see the growth and where the opportunities are, and that's where we focus our capital attention towards. That really hasn't changed. It is -- we see growth in all of our segments. And that's where we determine where to invest the capital and when. The capital that we have is longer dated. When you think about Intermodal and in the containers, those are a 20-year asset. And so there's going to be ups and downs, peaks and valleys on that return in margin profile throughout the cycles. But over the long term, we still feel good about our return metrics for each of the segments.

Yes. That makes sense, John. And then is there a thought around the fact that certain segments may support and kind of step in and kind of having the value of all the segments together as you think about growth with the business? Or is it purely just kind of on a stand-alone and where the growth is as you think about growing the business going forward?

No. I mean, we are a consolidated entity, and we do have segments based on our service offerings, and those will ebb and flow, as I mentioned, on the different cycles. But we use the segments to benefit the entire organization, and as we demonstrated with dedicated through the pandemic. When we had equipment that wasn't being used because some customers had shut down, we were able to redeploy that elsewhere, and we use our brokerage segment to help us and the others on backfill, things like that. So we really are a consolidated entity, working towards satisfying our customers' needs. And we have segments that we'll use to serve those as we see fit.

Yes. That makes sense. And maybe just kind of the last high-level one on the mix of business. I don't think that your team has specifically spoken to targeted contribution, either EBIT or revenue, across the segments. But do you think about an optimal mix of how much you'd like Intermodal to contribute relative to Dedicated? Or how do you think about or how should we think about maybe the contribution from each of the segments into the future, particularly as you see some growth in some of the faster-growing currently smaller segments right now?

Yes. Really, again, Todd, it's more where do we see the growth, where are customer needs, and that's where we develop or devote our attention and our capital resources to serve that. And so it's not that we have -- are looking at certain segments to either subsidize or take care of the others. It's just where is the growth, and that's where we plan our CapEx.

Sounds good. So let's talk a little bit maybe about where some of the growth is, and maybe that's across all the segments right now. But maybe I'll start with Dedicated and the fact that we've seen very, very good fleet growth within Dedicated over the last several years. Obviously, a little bit of a pause last year with the pandemic. And it sounds like going forward, the target is kind of around the mid-single-digit range for Dedicated. Eric, I'm not sure if this is one that you want to take or, Brad, you can kind of feel it how you want to, but is mid-single digits, is that really where the market's growing at right now on the Dedicated side? Or is that more of a level of what you've determined is kind of comfortable for Hunt to grow and to add fleets and not incur kind of substantial start-up costs from kind of outsized growth in the dedicated market?

Todd, I'll take that, and appreciate the question. So dedicated fleet, let's say, is plus or minus around 10,000 trucks right now. And I think most people are aware, the focus for dedicated for us is really on private fleet conversion. We think it's a pretty substantial addressable market, close to $60 billion. And we've communicated a goal to sell roughly 800 to 1,000 trucks a year, and that would be on a gross basis. There would naturally be some attrition. So it's a number less than that. I think probably backs into maybe more of a mid- to high single-digit fleet growth per year. I don't know that the limitation in terms of 800 to 1,000 is really based on demand. I think it's just being responsible with the level and need for management to be at each of one of those individual accounts and wanting to make sure that growth is managed where it could be handled and service standards and quality can be really high. So that's how I'd answer that. I'd invite John or Eric to add anything more to that. But clearly, we're in an environment today where demand is far greater than that 800 to 1,000 normal range. But we think over the long term, that's a good target for us.

Yes. Okay. That makes sense. And maybe to the comment on the environment being strong right now. Within Dedicated, are there any issues right now with either getting equipment or driver availability that's going to impact kind of the growth expectations for this year? Let me pause and ask that one and I've got kind of a follow-up along the same sort of lines on just some of the cost inflation and the resetting of the Dedicated contracts.

So that's an easy answer for me, Todd. The answer is yes and yes. So I think equipment as well as driver availability is a challenge for our industry. It's even a challenge for J.B. Hunt. And so I think what that does is really cements or supports the value proposition of outsourcing a private fleet to a J.B. Hunt to manage because this is what we do each and every day. And so I think that's -- while it could be a hindrance, it's also something that I think is also driving the demand up for our services.

And Brad, just to be clear, I mean, when you say it's -- we understand it's an issue for the industry. But I mean, specifically within Dedicated right now, are there any issues that you're seeing specific to Dedicated as far as growing here in the near term or getting equipment in the near term on the Dedicated side?

I would say it's having a modest impact. I mean, we're probably seeing a little bit in terms of start-ups. If it was a 3-month start-up, it might be moving to a 6-month startup. But I don't know that it's really changing our view or expectations for how the fleet will perform over the course of the year.

I'd add too, Todd, there, that the efforts, obviously, to secure drivers now is a monumental effort. We have a machine here at J.B. Hunt that is phenomenal at hiring drivers, but it's more costly than ever to do so. And it's harder and it's a challenge across the industry, and it's a challenge at J.B. Hunt. And when we hire, we hire a region and job specific. So it's really understanding where that job is and what's the pay relative to that area and what's the pay relative to the work that we're asking the drivers to do. And that's a cost challenge right there that we have to make sure that we have priced into the deal. So we fully expect that we'll have the drivers to satisfy the demand, but it is a lot more difficult to secure and it's more expensive to find those drivers in this environment.

Eric, you're going to throw me a little bit off on kind of the cadence I wanted to go through, but because we're talking about drivers, it's really top of mind for kind of the industry right now. So maybe just to spend a couple more moments on just the driver market in general, what has your experience been? And maybe this is more kind of an over-the-road question versus Dedicated, but we've heard that there's maybe some diminishing returns right now on driver pay. And so historically, if we took up driver pay, we'd see more people come into the market. We've heard issues with driver schools. So maybe if you could just elaborate and spend a little bit more time on driver availability, some of the things that you're seeing kind of across the different segments as far as recruiting and bringing drivers in. And then maybe just some expectations for how this plays out. If this is something that we'll see from a normal cycle standpoint, whereas driver pay starts to drift up, we'll see drivers come back? Or maybe if this is something that's structurally different right now?

Well, I think you touched on a few things inside that, Todd. One of those is the driver schools that you mentioned, although those are ramping back up and will supply drivers back to the industry, the gap that was left when the driver schools didn't supply what was normal or what was historic is not going to be able to be made up. So that part is going to continue to leave us a little behind. In terms of supply, there's still challenges across the board, whether it's drivers or warehouse or office employees that is driven, in large part, by what's going on with government, unemployment and benefits. And some of those, I think we may see some reprieve on. I think there's 13 states in June that's pulling back on some of those benefits. So that may push some applicants back into the market. But most of that won't change until September. So there's still going to be the challenges that we expect to see for the next several months. And again, that's affecting drivers, but we're seeing it inside the office with office employees as well. So it's -- you have to make significant increases in terms of driver pay and some of the sign-on bonus incentives to pull some of that capacity back into the market or enticing that passing back into the market. So I've been with the company 23 years, this is the most challenged driver environment I've ever seen in my career. And obviously, that again goes into this the most challenged environment I've seen in the office employee side as well.

Yes. No. That's interesting. It's obviously a really unique time just in general. Eric, how do we think about, I mean, your comment around the sign-on bonuses, the wage increases? How do we think about the offset of that or the margin impact of that? I mean, is the rate environment right now strong enough to offset the cost inflation that you're seeing? And then, just to kind of close the loop on Dedicated, one thing that I did want to ask is, is there any issue with the lag where if driver pay is going up, that you need to see that for a period of time to kind of go back to your customer and support that in the rate increases? So kind of 2 parts just on really the driver pay side of it.

I'll hit -- and Brad may want to add more color here, but our dedicated contracts, well, many of those are tied to indices that as the market changes, there's a little lagging effect to that. But as the market changes around some of the -- some of those indices, those will predicate increases with our customers automatically. So it makes the conversation a lot easier and a lot quicker to have those implement now, again, with the lag in mind. In terms of the broader market, when you think about the -- just the small care community, where 90-plus percent of the drivers in the market are inside a small carrier, those carriers typically don't live in the published world. So the needs that they've seen in terms of price to brokers or to shippers have already -- a lot of that's already been baked in the cake. A lot of that's already been given. And you've seen that with margin squeeze on the brokerage side. You've seen it with the spot market rates being at record highs. So you're seeing that translate already to some degree. Now the bid season that started in October of last year, those rates start implementing in February of this year, February, March, April, May and June. And so we're in the cycle right now where we've seen probably about half of that business implement with new rates, and there's still more of that to have. So some of that pricing, where you've seen the cost side impact already, whether that's giving incentives to drivers, raising driver pay, equipment costs, a lot of cost has already been outlay-ed, some of that recouping is inside the customer pricing that is implementing as we speak.

Got it. That makes sense. And I don't know if there's anything maybe to be said, anything more on Dedicated pricing or the CPI piece kind of covers it. And so you're able to go back to the customers in kind of a pretty real-time basis and recoup those higher costs?

That's right.

Great. Maybe just to shift gears and Brad's conditions, I'll kind of move Intermodal to the end, but I want to make sure, given the time that we've got, to get some questions in on Intermodal. But maybe one place to start with the updated margin targets, and I know that you've been asked a lot about this. But when we take a look at profit per load, I mean, it's one thing that it has moved down a little bit over the past couple of years. How do we think about the impact of on profit per load from mix versus cost inflation and maybe the stability of kind of profit per load and what would drive that back up going forward on the Intermodal side?

Yes, Todd. I mean, I'll kind of that quickly. I mean the reality is we've seen rates move up considerably. We had a big rate cycle in 2018. We're in the midst of that right now. And so I think when you really drill down into sort of the unit economics, which I appreciate you taking the time to do, you can see contribution per load get back to or even move above prior levels. And that supports this idea or notion where you could have a lower margin target, but with contribution per load being similar or better than prior periods, maintain similar returns on your investments you've made. And the key focus there is thinking about containers and those being 20-year assets. And if equipment is going to be on the rails for a longer period of time, or if the equipment is going to be in customer locations for a longer period of time, that has to be factored into pricing discussions, but also how you think about the proportion of chassis and trucks to your container levels also can play into that in terms of the asset intensity of the overall business. And so all those things were contemplated and thought through in extreme levels of detail when we went through the process of updating our margin targets.