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

Great. Well, my name is Garrett Holland, senior analyst covering transportation and logistics at Baird. We're very pleased to have J.B. Hunt participating at our Industrials Conference this year. J.B. Hunt, as you know, is an industry leader for transportation, supply chain services across its scaled and integrated platform of offerings. Joining us from the company are Nick Hobbs, Chief Operating Officer and President of Contract Services; John Kuhlow, Executive Vice President and Chief Financial Officer; Stacey Griffin, Senior Vice President of Intermodal Pricing; and Brad Delco, Vice President of Finance and Investor Relations. So we're going to dive right into Q&A, but if anyone participated on the webcast has a question, please submit it through the portal, and I will relay it to management. So no shortage of things to cover here, but we'll start with demand and what you're seeing through peak season today.

How do you characterize demand so far ahead of the holidays and the supply-demand imbalance for free capacity?

Let me take that. I would just say, as Stacey said in previous -- some of our breakout sessions, it's been in peak since probably June of '19, yes? '20?

2020.

'20, yes. So it's been strong. So demand is strong. The consumer is still wanting product. There's just not enough of it on the shelf. So that's driving a lot of demand for services across the board. And so it's very strong is how I would say it right now, particularly on the dedicated side, I'll talk about that for a little bit, and final mile and then let Stacey talk about intermodal demand. But on the dedicated side of things, we've had a robust year with a lot of equipment adds, over 1,500 trucks in the last couple of quarters. And our pipeline is fuller today than it was a year ago this time. So there's still a lot of demand out there. And again, that's really focused on private fleets. So people are efforting to leave their private fleets because they've got a lot of headaches in their regular business with COVID and other things. And so if we can come in and give them a good solution, they really like that. And then on the final mile, we're having a very strong sales year in final mile, a lot of demand for final mile. And -- but there's a lot of labor challenges around that from warehouse to loading straight trucks and various things. And then the second seat helper is also in high demand. That's the equivalent of a warehouse helper. So there's a lot of demand. And cost is going up on the contractor side. So there's a lot of demand for that and a lot of fits and starts. So as product comes in, there will be a big wave of it coming in for a week or 2, and then it will kind of diminish down. So the pipeline of inventory in the entire U.S. supply chain is just very, very choppy. So -- but overall, consumer demand is very strong, and customers are needing product on the shelf. So I'll let Stacey talk a little bit about intermodal demand.

Intermodal demand, again, has been stronger than what the intermodal industry has been able to support for the last year. There are some things that -- little points of relief that we're starting to see. Certainly, we're seeing gradual improvements at the ports. We're seeing demand for transload capacity out West has ticked up. We're seeing those modest improvements just in time for the big day, the big shopping season. So we expect that to continue through the rest of the year. The challenge continues to be, though, on the labor side, whether it's labor in Southern California at a transload facility or a consolidation facility or if it's at a deconsolidation facility in the Midwest or somewhere else in the U.S. That's really where the crunch is. But they're -- clearly, customers are trying to solve for it, but it's a labor solve and those constraints still exist.

No. That's great perspective. And my next question really, as you talk to customers and look across your portfolio of businesses, are you confident we can declare we're past peak supply chain congestion now? Do you see some of the incremental actions, 24/7 port operations, some of the new container fees as solutions that will help and importantly, provide some credible path to normalization and network fluidity?

I'm not calling it yet.

Hey, Garrett, this is Brad. I'd just say, I mean, we've seen an incredibly volatile market, supply chain for the better part of the last 18 months. I think it would be very premature to call it. And maybe some of that is because we've said in the past, we thought things were going to get better. And we've been a little bit wrong. And so maybe a little reverse psychology would suggest, let's not make a prediction and just keep our fingers crossed that a lot of the efforts are going into solving some of the labor challenges will ultimately result in greater fluidity for all of the North American supply chain.

Now a fair point. And on that topic, obviously, we've had a few days to try to digest what's been going on with the vaccine mandate. I'm very interested in your understanding and interpretation of how the mandate impacts your employee base, how you're preparing for compliance and what you think the impact will be on the drivers and industry supply. Obviously, we didn't get the explicit carve-out, but the interpretation seems to be a bit more favorable. So I was hoping you could make some sense of it all for us.

Yes. Well, I'll try to do that. So first and foremost, how we're prepared for it, we've been working on some software with a provider of ours that would allow us to upload all our employees into a database. And if you have been vaccinated and got a card, you can submit it and that shows that you're compliant. If you have not, then it would notify the individual that we need a negative test every week. And so the managers could keep up with that. So we've been prepared in case the mandate come out and was going to stay effective. But where we think it is right now, and based on our understanding, is that Department of Labor Secretary Walsh has said that it doesn't apply to solo truck drivers. So we're going to hold him to his word on that. He said that publicly. And so that's a big relief for a lot of us. But it's still not total relief because we have a lot of mechanics. We have a lot of warehouse folks that is still going to cause a lot of disruption if that vaccine mandate stands. But our view is that there's a lot of people involved in litigation, including the American Trucking Association, is clearly involved in that because it's going to be very painful for the entire industry. And so we support what the Fifth Circuit has done in Louisiana and staying that order. And so we feel very good based on what we hear from our attorneys with the association and our own internal folks that we feel very good that there's a strong case against OSHA and their ability to implement that. So we feel very strongly that, that stay will be permanent is what we would think is going to happen, but we're prepared in case we're wrong in that.

No. That's very helpful. And maybe thinking a bit longer term, just given the extended series of supply chain shocks and disruptions over the past 18 months, are you seeing more shippers consolidating their transportation spending among the reliable high-quality providers like a J.B. Hunt? And how would you quantify that type of synergy potential as you look to help customers regain control of their supply chains?

A couple of different things on that. One, a lot of customers are reaching out and looking for help. But capacity has been so tight. They're looking everywhere for help. But the one thing about J.B. Hunt is we've got a wide suite of services that we can kind of help us. We understand what that -- what they're looking for, we can provide some type of help to them. It may not be intermodal capacity, but it could be team capacity off the West Coast if they're needing to transit, that's a lot shorter to get product. But our view is if we do that and when things normalize, it can go back to intermodal in our segment. So we try to provide a good solution. No matter what the customer wants, we think we've got a good portfolio to do that. So we are getting a lot of requests. And so the good thing that -- when this disruption is going on and there's a lot of upheaval and different things going on, we have a good solution, usually across the board, and we're fairly agnostic on which division gets it as long as it's a good solution for the customers. So yes, there's a lot of customers reaching out. There's a lot of customers you'll see in the dedicated side that there's a lot of customers we've never done business with, small private fleets that have come our way because they're having problems, and so they've approached us. So we're seeing a lot of people approach us. And our big customers, as Shelley says, they're leaning into us now more than ever to help them get through this.

No. That's interesting. And I know the technology investments have played a big part in that success. I guess to what extent do you view your technology platform as opening up a durable competitive advantage relative to the industry? And just help us understand how much more investment is needed there as you look to achieve some of that growth potential.

You want me to take a little bit of that? Or do you want to...

I'll let you take a little bit of that and then John on the investment...

So -- yes. I'll let John talk about the investment side. I'll talk about the competitive advantage. I think one that will help us, there's clearly some advantages and efficiency on loads per employee and various different things that we can do to help us be much more efficient on that side. But really, to me, the strategic play is the visibility that it gives all divisions to be able to work together in the most efficient way. And so whether that's filling in some backhaul lanes for intermodal or dedicated because we see all this visibility of freight out there in 360 or it's -- where we've got excess, we need some dray moves in intermodal, they can go out and [indiscernible] out there and get some other carriers to help or dedicated can help. And so there's just a lot with our density and our visibility that will really enhance our competitive advantage to really drive efficiency within our network. So we're excited about 360 from that standpoint as we build that out. John can really talk about the investment in it and where we're at on that side of it.

Yes. And so we're investing heavily in technology, both in the marketplace, 360 that Nick described, but also in our core transportation management system as well. And so we do see -- we did see in the third quarter and continue to see productivity enhancements related to our investments that we've made in the 360 platform. And we're also making a lot of advancements on our core transportation system that's allowing us to be more efficient. Now that doesn't get a lot of attention because it's kind of back office, but we do think that both of those types of technology investments are going to help us from a competitive standpoint. There's a right balance between technology and people, and we're investing in both. And we think that, that's going to present us with a strong competitive advantage.

No. That's great. And maybe now just to dig into the business lines a little bit more. You talked about the strength of the dedicated pipeline. Could you elaborate a bit more on that? Certainly, the pandemic has probably pulled forward some of the dedicated demand above and beyond the targeted 800 to 1,000 trucks you had been targeting. Just talk about the sustainability for that growth and as you see the demand outlook continuing into next year.

Yes. So we've done a lot of research around what we think our market is, our sweet spot. And we've qualified nonunion fleets out there that's running Class 8 trucks, about $55 billion worth is our market that we're targeting, with a lot of different industries from timber to ag to medical, to retail, industrial, you just name it. So we got a wide variety that we target there. And we're not set on any specific equipment type. We just -- we like things that are really around the private fleet. So we really target private fleets. And so we've seen a lot of growth. And the key to our growth is that we keep our base solid, meaning that we have a 98% retention rate. So once we get a customer, we have a culture of great service and really taking care of that customer through a process we call customer value delivery, so that we're constantly trying to be more efficient, design and optimize the fleet. And so as we're doing that, we build up a lot of stickiness and customers renew with us constantly. And so we kind of continue to grow with our existing fleet, but also we do a lot of growth with people that are adjacent in an industry where we're already a fleet with somebody, they know somebody else. So we have a lot of growth. And so the one thing that we try to be very disciplined on is not to do capacity fleets. That's because somebody's needing 10 trucks for the next 6 months because the one-way market is there. We're very disciplined about what we let into our pipeline. We want that in the network, we'll take that over to ICS, let brokerage put some trucks on it for a little bit and really do that. But we want somebody that's going to be sustainable. So our contracts are long term, got indexes in them. And so we've really seen the demand. It continues to grow. And our limiting factor really, it's always a challenge to have drivers. That's usually kind of the limiting on how quick we can start up. But now it's how fast can we get the equipment, how fast can we get management. And so the growth has been good. We're trying to get prepared structurally from a management standpoint to be able to scale even more. We've got a lot of scaling that we've done already, but we think we're prepared for another wave, and we see the demand being very consistent for the next few months.

No. That's great. And interested if you could elaborate a bit more on start-up costs related to this new business. Obviously, they're probably higher in this type of environment, and you refer to some contract flexibility to help you adjust this higher cost environment. How would you characterize the profitability of the business you're bringing on? Is it accretive to segment margins and the targeted ROIC?

Yes, we price each deal individually based on the amount of assets we have to put on, how many tractors, how many trailers. And so we're very specific about that, how much utilization we're going to get. So we measure each one of those. So we're very confident that they're coming on. The one thing that I would say is a little bit different today than it was probably 2 years ago is that we could start up a deal in 90 days, and it's probably breakeven to making a little bit of money. And then with about 120 days, it's hitting its groove and doing pretty good. It may take us another 30 days to really get hired up because the driver market is very tough. So it takes us a little longer to get there on the driver side. We will get there. But the profitability, we look at that and we measure each deal, and we're very comfortable with our profit margins and where they're going to be. The start-up costs that we face is as we bring this in, it's like starting a new business. We have to drop data lines in a facility. We have to order furniture, relocation of managers, hire drivers, purchase equipment and get it repositioned and then all the training costs to really train the people to execute. So that's the cost, and that's spread over the life of the contract. So we incur that expense then we get it back over the life of the contract.

No. That's very helpful. And then quickly on the final mile business, what do you see as the growth outlook as we turn the calendar to next year? And obviously, you referenced some of those headwinds that impacted the final mile business as well, finding drivers, some of the inventory shortages that are weighing on the shipper base. When do you expect some of those headwinds to pass?

Well, I'm hoping that they pass sooner rather than later, but it's a big challenge because what we're really facing is there's more demand for final mile delivery. If you think about the big-box retailers that sell appliances and they sell furniture, a lot of times, they had their own employees doing that. They work on the store. They're all going to a central fulfillment model. So instead of each store carrying the inventory, they're moving it back into a central location and fulfilling out of there. And so that's driving a lot of need for either contractors or company employees with helpers to do that. So that's driving a lot of need up. And when you do a thorough background check, it really limits the resources. So that's driving the price up on those contractors. But the demand is there. We're going to have a very, very strong sales year this year. Setting up on the pipeline is looking good for next year in final mile. So the demand is there. What's been very unique in this fragmented industry is the contractor rates in general have been probably -- I've talked to some customers through some of the acquisitions. They've not had rate increases in like 10 years from some of these guys. And so now that is really coming at them, and that's kind of a shock wave to them because that's never happened. But now with the problem we get in second seat labor, you can't find a Class 6 truck out there. It's very hard right now because the manufacturers are trying to manufacture Class 8. So any chips are going there, so they're limiting Class 6. So it's just really a challenging time, and that side of the industry is not used to it. So we're kind of on the front end of the spear on that, on talking about rates. And so that's very challenging with some of our customers right now. But we feel good that we're making progress in that because we're taking the same model to really say we're going to give great service and want a good ROIC on that. And that seems to be resonating with a lot of our customers there. So we're setting up for a good future next year. Stacey, do you want to talk intermodal?

Yes. Turning to intermodal now. Stacey wanted to pick up on some of your opening comments that indications out west that port fluidity is starting to improve. Can you elaborate on that? And what are some of the remaining levers J.B. Hunt has to drive more volume growth through the network in this challenging environment.

Well, I will reiterate, I think as it's related to the port, those improvements are pretty gradual. Certainly, very important given the time of year, but gradual. We're not seeing widespread improvements in our customer unloading though. And so that continues to be a challenge. We know customers are trying to solve for that labor issue, but the overall unloading pace has not materially improved. Some facilities have, some customers have but it's still a bit of a balancing act, I think, as they're solving for that. You asked about those levers that we have. From a J.B. Hunt carrier perspective, our primary lever is adding equipment. We have done that. Our equipment continues to flow in. We will continue to add equipment to solve for our customers' growth demand. The second lever that we are using is really being very focused on awarding capacity to those customers and those customer facilities that are doing the best at unloading because that helps us serve more and move more loads. We have dipped into our enterprise capacity solutions. We have -- including ICS, to really solve for our customers during this very difficult time. And so that's not moving intermodal [ works. ] That's not showing up on our low ticker today, but we think we really have a lot of confidence that, that's going to pay off in the long term, as we saw for those customers. And that's part of the value of our 360 platform, is to give the customer a solution today in this environment, and then we can pack them to the best solution for them in the long term.

No. That's very helpful, Stacey. And I was interested if you could talk a little bit more about J.B. Hunt's pricing approach within Intermodal. Obviously, you're doing a great job trying to optimize the price cost dynamic in this inflationary environment, but talk about the work you're doing with the annual budgeting process as we work through the next bid cycle.

Cost increases have come at us very fast this year. Driver wage is higher than ever before, not going down. Railroad, cost increases are there. As a carrier, we have to be responsive to those cost increases and their cost expectations. Our annual process is really around building out -- establishing a price that's going to produce long-term return on our investment. So that's how we look at it. So we're really solving for those inflationary costs that we're facing. And we're letting accessorials sit beside that core pricing to really deal with the more -- what we hope are transitory issues on the utilization turn time challenge. And so you have core pricing that's dealing with inflationary cost and solving for the appropriate return, and then you have the accessorial pricing piece that's solving for more of a short-term issue that is controllable in the long term. When the cost associated with that, lack of velocity goes away, then that revenue stream goes away, which makes sense. And that's what we want to empower our customers to solve for.

That's helpful. And are you seeing the accessorial charges lead customers to turn the equipment faster? And how would you frame up a more normalized level for quarterly box turns?

We haven't seen the material improvement in our box terms that we would like. Again, it's not a short-term solve for the customers. What those accessorial programs have done is very clearly monetize what that behavior is and empower our customers to have a conversation inside of their own organization that says, "Hey, I have a labor problem that's producing an unloading problem. And this is what's happening in my train spend because of it. Now how do we solve for that" and take that, if it goes to an HR conversation, how do we solve for it and our wages and benefits discussion.

No. That's helpful. And I guess just at a high level, we talked about a number of inflationary pressures and capacity challenges. Just how would you describe a trajectory investors should be thinking about pricing for next year?

That sounds like an ask for guidance. Brad, would you like to answer?

I'd love to. Stacey is making her debut here on the Investor Relations front and knows how to pick up on those questions very well. Garrett, we -- I think our comment on pricing expectations for '22 is simply it's probably a little premature to send any sort of signals to the market. As you know and most people know, it has been very dynamic, very volatile. To the extent you think that we will be incurring inflationary cost pressures, obviously, we'll have to do what we need to do with rate and pricing. But at this point, it's probably too early to make any public comments on what we think the expectation should be for next year.

Fair enough. I guess as investors should think about the growth algorithm, should we anticipate some better balance between pricing and volume growth? Do you feel confident in that?

Well, Stacey, this is probably you, but I'd say the demand is there for us being able to execute more volume. And that's, I think, across all of the business segments, just a matter of is there capacity or supply to serve that demand. And I think Stacey did a beautiful job of breaking down kind of core rate that we think will address what we think are sort of more permanently inflationary cost pressures really around wage and labor. And then we have some kind of transitory pricing mechanisms that hopefully are to address transitory cost pressures associated with the inefficiencies in the network. So to the extent those inefficiencies go away, so will that revenue stream will be in a lot better place with a lot more capacity to serve our customers' needs. So that's kind of how I'd respond to that question.

No. That's helpful. Interested in the team's views on just the segment margin target. Obviously, there was a lot of debate earlier this year on the expansion trajectory. And lo and behold, here we are near the midpoint of that prior range. Just interested in your thoughts on your ability to remain near the upper end of the 10% to 12% segment margin target. And just where are you outperforming some of those assumptions that went into that reset?

We're not making changes to those revised long-term margin targets. Again, we're not going to offer any guidance for 2022, and -- but we absolutely anticipate our price to cover our cost. That's the plan. And we're going to continue to focus on our returns, not specifically our margin.

Yes. Think about it this way, Garrett. I mean we have invested in more containers, more chassis, more trucks, more in wages to people. And our volumes were down 6% in Q3. And so we still need to protect a return on that large amount of assets we've invested in. And so margin is really the outcome of an equation. But if you think about us really solving more for returns on capital versus margin percent, I think that will always be how we think about it and approach pricing, whether that's pricing and how Nick's team prices each dedicated opportunity or how Stacey and her team price intermodal opportunities. So to the extent we can get better utilization on equipment, you can get the NOPAT or the EBIT or however you want to look at the numerator of the equation because we really -- we know what the denominator is. We know what we've invested in the fixed assets and in the people to serve these demands and needs. So utilization then will have a lot to do with kind of how you solve for the margin question.

No. That's great. Just to pick up on one of those points on container additions, you still expect to receive the incremental 5,000 to 6,000 of containers by year-end. And solving for that ROIC target, how do you think about the decision to add more containers again next year?

We shared in our last earnings call that we expect to add those 5,000 to 6,000 by year-end. We really don't have an update to that. Certainly, it does continue to be a challenge, but we have new equipment on the water right now continuing to come in through the end of the year. We feel really good about the plan that we put in place to land that equipment. There will be some overflow into next year. With respect to an add in 2022, we do not have a plan to publicly disclose today.

We're still -- obviously, it's a very fluid situation, and we're still trying to evaluate. We're going through our process now for our 2022 plans. And we'll use the same model that we've used in the past. It's an ROIC focused, and that will dictate the level of container adds, tractor adds, trailer adds, similar process to what we've done in the past.

No. That's great. I just want to thank everyone. With that, we're out of time with the webcast session, but special thanks to the J.B. Hunt team and all their perspective today. Thanks to everyone on the webcast for joining us. Hope you have a great rest of the day and rest of the conference. Thank you very much.

Thanks, Garrett.

Thank you.

Thank you.

Take care.