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

Okay. Welcome back. I'm going to get right back into the transportation track for the day. We're really pleased to be joined by the folks from J.B. Hunt. From Hunt, we have Darren Field, EVP and President of Intermodal. We have Josh Phelan, who's the VP of Finance, Highway Services; then we have Brad Delco, VP of Finance and Investor Relations. So thanks, gentlemen, for joining. Really appreciate it. Darren, maybe I'll hand it over to you to kind of give a quick intro and then we can kind of dig into Q&A from there. And just as a quick reminder, folks on the webcast room, you have a lot of information in front of you about how to ask questions, but you can certainly submit questions, and we'll get a get it asked to the folks up here on the stage. But Darren, with that, let me pass it over to you.

Sure. Well, first of all, thanks for having us here today. Really appreciate, it's a lot of fun to be back in person. I can tell you, it's the first one of these we've done in person in a couple of years, and so it feels great to be able to catch up with everybody today. So the environment out there for our organization is exciting. I mean our customer demand remains really, really strong. We feel great about the services and the way we go about providing solutions and talking about how to solve challenges that our customers have. And so that's our focus has been really how can we help our customers through a challenging supply chain environment. The other piece that's been going on in our organization is just really very, very focused on taking care of our employees. And certainly, in 2020 and '21, we all went through some challenges but feel like we're really in a great position with our people. We're growing. We've been certainly very focused on attracting new drivers, but we're also growing in our maintenance teams and our operations personnel to help us go solve challenges for our customers. And then finally, lots and lots of technology work in our organization as we focus on building out new technology that helps us solve for our customers. So I guess that's kind of a quick little snapshot, and we'll go from there.

Great. Well, it's been an interesting start to the year. Certainly, we've had weather, supply chain dynamics, rail services at varying sort of points in the spectrum. We had Norfolk Southern here earlier and obviously one of your key partners in the U.S. and rails. And so maybe can you give us a sense of sort of generally speaking, how you're viewing the start to 2022, I don't necessarily need you to give guidance per se, but kind of how are think -- how do you feel about things relative to what maybe you're expecting and kind of maybe how you think the year is going to play out?

Okay. Well, I think that where we're at today in February feels different than certainly where we were at just a month ago. January was a challenge from a COVID perspective. You had -- our customers were challenged with their workforce. Certainly, the railroads have all faced some challenges. And let's face it, there was a significant spike in folks missing work -- time from work and that certainly influenced some of the output there. Coming out of that, we continue to be very, very encouraged with the demand environment where our customers are leaning in, asking for more help. And so I think that for where we were at going into our plan for the year, I still feel really good about that. Certainly, January had some challenges here and there. But I think that as we've come into this month, we're seeing things kind of normalize and get back to what we would have anticipated those to be. the railroads have -- and I was able to listen to Norfolk Southern's presentation this morning and certainly appreciate the way that they phrased it. We're counting on the railroads to see velocity improvements as the year goes on. I think that we have been engaged certainly with all of our rail providers talking through their challenges, whether it be a labor-oriented problem or an infrastructure and facilities kind of challenge and really feel like they all have quality plans to see improvements, and we're anticipating that they will achieve that.

Okay. When we think about rail service specifically -- I guess we sort of finished the second half of 2021 without really any material improvement. As we think about 2022, would the general expectation be that it would sort of improve along the curve that folks like Norfolk have talked about, which is more of a back half kind of oriented type of improvement there? Or is it something that because of what you noted earlier with February and COVID normalizing to some degree can that be realized a bit earlier in the year?

Yes. I think it has a lot to do with how successful all of them are at onboarding the various labor elements that are needed in order to improve throughput and productivity of those assets. Certainly, as equipment has been onboarded, whether that's chassis, whether that's flat cars, containers, drayage capacity, all of those elements really work in concert to find a velocity improvement and can certainly influence the railroads productivity. All we can really do is listen to their plan and take feedback that they're providing in terms of how quickly we would see that. I don't know that I have any different insight than what like, for example, Norfolk Southern said this morning, so I would anticipate that back half of the year should see some improvements. We're hopeful that we could see improvements before that, but at this point, we're probably taking their commentary as what to expect.

Got it. So let's sort of key in a little bit on intermodal and talk about box deliveries. Can you give us a sense of how you think about, I think you have 6,000 more boxes in 2022 that need to be delivered out of the original 12,000 box order? And then maybe there's growth beyond that? I guess it's probably somewhat dependent on what the market is doing and kind of the discussion we were just having around railroads. But is it fair to say that you're on pace for about 3,000 in the first quarter, 3,000 in the second quarter, is that reasonable?

I think we highlighted that we anticipated those would flow in evenly over the first half of the year. So that's reasonable. We feel great about where we're at today. in terms of what we've been able to onboard through the first quarter, so there's no update to that here today, but we feel very confident in our ability to bring on that equipment. And as we think about the rest of the year, we will continue working with our customers and rail providers to talk through a host of growth opportunities. And as soon as there's more to say about additional equipment, we'll say it.

Got it. It makes sense. What is the lead time on new boxes if you were to order today, when do you think you'd be able to get them?

Yes. I think that the actual manufacturing capacity is strong in Asia, and that process is, I'll call it, 4 months of lead time for the raw materials and to get going in production, the delivery game plan around whether or not you're using liner ocean services or some sort of charter vessels, which we did for the first time last year. That can maybe create a few more questions for us, but I think that 4- to 6-month window is realistic. If you wait, I think there's build capacity available this summer. If you wait until April, May or June to place that order, I don't know if that capacity will still be there. So that's part of the question is. I think the timing is here in the near term, important to get going on that part of the project -- part of the decision. Yes.

Got it. Makes sense. And then on pricing, I guess, we're coming off of, obviously, a very strong pricing environment for transportation in general in North America. That appears to be carrying over into the first half of the year. Anything incremental from a pricing perspective that we should be thinking about in intermodal for 2022? I know you guys, I think, are probably fairly optimistic about what the contract rate environment might look like.

Yes. I mean, the facts are that the industry, whether you're a railroad or a drayman or an equipment owner of any sort, we're all facing cost increases. The equipment itself costs more, the labor to secure drayage capacity, whether that's just pure driver wage or you're actually purchasing drayage equipment trucks and chassis, everything costs more. So that's certainly driving the need for a strong pricing environment. We are obviously encouraged that the pricing is able to cover our costs. I think that, that element is important to how we think about it and don't really anticipate that anything would be any different in '22 so far. We have been encouraged by our ability to talk through cost challenges with our customers. We've also talked about things they can do to eliminate cost, which can then be reflected in the pricing environment as well.

Yes. Yes. Got it. That makes sense. I guess I wanted to understand how you think about some of the supply chain congestion that we're dealing with, in particular L.A. Long Beach. And so I'm curious how you think about the market share now that's moved between truck and rail. I think if you look at the port -- I think it was actually an article in the journal about it over the weekend, in general, as volumes coming in after the long delayed queuing off of the coast, it seems like shippers are generally preferring to go truck via the normal sort of rail. Now I know a lot of that is specifically about on-dock rail, which is not exactly what you do, but I feel like it has that impact on domestic intermodal as well as international intermodal. Can you talk a little bit about that? And do you feel like there's the opportunity for that share to shift back at all this year?

So that is kind of a question #1 of question #1 for us is just how to think about the long-term solution for those customers that need help in that area. Obviously, a lot of the business we handle comes from some sort of an import item that has transloaded and found its way into a domestic intermodal solution, but we've been really, really proud of our organization's ability to offer highway solutions to customers that need faster transit than maybe intermodal can provide. In that when those, when that cargo has been sitting, waiting to offload from a vessel for a month, the customers need that product to get on the shelf, and at times, the highway solution has been the fastest way to do that. We have participated in highway solutions for ocean equipment as an example. So containers are coming off of international steamships, and we're using flatbeds to truck that business into the interior of the country. Now I don't think that is sustainable in the long term correct solution, but it's certainly, we're happy that we were able to provide a solution for the customers. And that gives you a better open dialogue about planning for the long term with those customers around how do we structure a game plan to help them with the transload model in Southern California. I do think that the uncertainty of what is coming on the vessels today. And is it going to ride on a train intact international? Is it going to transload and go domestic intermodal? Or is it going to need some sort of a highway solution? That's changing by hour, by day at times during this last fall and even today. And all of us will be better at creating efficiency if we can plan the resources needed and provide a sustainable solution. And so the more we talk to customers about building out a transload solution for them, they're very engaged and interested. And I think drayage capacity on the international intermodal is -- and a chassis availability for marine chassis, it's a really big challenge for our customers. And so when we can get involved, we can eliminate some of those questions and our domestic intermodal product really helps drive predictability for the customers.

Got it. I wanted to talk about sort of the market share of intermodal in the U.S. It feels that there's been maybe a shift away and maybe intermodal and rail in general has sort of been starved a little bit of natural market share through COVID because of some of the stuff that we just talked about, speed to market, some of the delays because of supply chain congestion. Obviously, the rails need to hold up their end of the bargain from a service perspective. But assuming they do, do you think that there, is it reasonable to assume that we might be on the front end of what could be maybe a longer period of intermodal strength because of that market share shifting back? It seems like there's a lot of reasons shippers will want to do it cost, fuel price, ESG concerns. There's lots of different factors there. So how do you think about the next couple of years? Or could this be a good cycle for intermodal?

Well, certainly, just from our customer bid activity, the data we see in the moves that our customers make suggests that intermodal could and should triple over time. I mean, there's millions of truckful Truckload shipments out there that can be served by intermodal. And in an environment where costs have increased rapidly. And some of those costs are here to stay. It's not likely that Truckload rates are going to fall dramatically. I mean driver wage increases are real, and it's very hard to picture a world where that will go away. And so the value proposition that intermodal can provide to a customer in the benefits from fuel and just cost are really significant. And then certainly, ESG areas where sustainability is important to our customers, intermodal is the best method to find a benefit there. And so the conversations about that today are much more frequent and more thoughtful than they've ever been in the past. We don't yet have a huge amount of customers that are specifically calling out ESG or sustainability benefits as being a reason for intermodal, but getting from it wasn't a subject to now it is a primary topic that you're engaged in is encouraging for -- certainly for us. And then you mentioned fuel. I think that this rise in the cost of fuel. Any time in the past, when fuel reaches $4 a gallon or even before then, it's certainly a big, big driver of intermodal opportunity and growth, and we'll, it can only help our customers' budgets, and so that's a big part of the dialogue.

And then maybe before we transition to the other businesses, just to sort of think about the margin profile of the business. So obviously, a very robust environment. And we also have things like probably some accessorial and some other fee-based revenues embedded in the business because of the lack of container turns and those kinds of things. And I think you've been very clear that as asset utilization improves, it's ultimately probably a net positive for you profit probably still gets better as you just generate more loads at a pretty, already a pretty good price. So when we think about margins, over the course of a cycle, it would seem like this is the period of time where there's still, there's the opportunity to maybe be above that longer-term margin range. I don't know if you have any specific comments. I know Brad's probably not with it, too many specific questions about margins, but maybe sort of the broad brush would be helpful.

Well, when we announced the long-term margin target, we felt like announcing the 10 to 12 was in line with where our return profiles drive our pricing and mindset. And none of that has changed today. Largely, our pricing is done based on the utilization of the equipment and the cost structure. And so if we can certainly find a pathway towards better utilization of the equipment, we feel like we can stay inside that long-term target guidance or target window, and that will certainly be what we would anticipate. We don't have any kind of update or Brad would probably hit me.

Fair enough. I guess last one, just as a competitive dynamic, it's an interesting point in the domestic intermodal market where you have some meaningful competitors that are shifting rail alliances, so moving back and forth out west, 1 this year, 1 coming next year. You have, I think, stated plans for growth from most of the IMCs. So we will see maybe one of the faster paces of box growth that we've seen in the last couple of years. To your point, if you wait until the spring, you may not be able to get your slot over the summer. Is this is this type of growth sustainable? I think I know the answer that you're going to give me, but how you think about that, does it concern you at all that we, everyone is kind of leaning into growth as it stands right now and adding boxes?

Well, I'm certainly, I don't want to speak for any of the other intermodal providers, but from our perspective, what's happening with our rail network and our rail providers, where we're really energized and excited about our position, we would anticipate a very strong growth for a long period of time and certainly having some of those channels no longer on BNSF can only give us an opportunity to go and refill that capacity that the railroad has. We're aware that, that means, okay, you may have a competitive environment, whether that's a pricing element. I don't, we'll have to wait and see, but we are encouraged by the way we interact with our customers, the way we're interacting with our rail providers and really still feel like growth for intermodal is a long sustainable game plan at J.B. Hunt.

Got it. Okay. Maybe transitioning over to dedicated for a minute. So a lot of trucks added to the fleet over the course of '21. As you think about 2022, how do we think about fleet additions? And then if you can sort of give us a rough sense of how to balance the start-up costs versus maybe leveraging some of the profitability of the business that started up in '21?

Yes, I'll take that, Chris. So dedicated is coming off a pretty strong year with startups. I think, in terms of what we reported, there were over 1,800 trucks added to the fleet in 2021, which I think does stand out relative to a lot of the asset-based players out there. To kind of steal some of the words that Nick Hobbs used from our more recent earnings call, the backlog and pipeline for opportunities is bigger now than where it was a year ago. Nick did graciously take up his annual truck sales target. I think it was previously gross sales of 800 to 1,000 and now it's 1,000 to 1,200. I know that team is having a lot of success. A lot of momentum has continued from 2021 into 2022. So we'll see. I mean -- but I think that you can think about dedicated as continuing to have a lot of the momentum that you saw in the latter part of '21. As it pertains to the margin question, and you asked Darren earlier about the start to the year, I think one of the beautiful things about this sort of diversified model is weather disruption or COVID disruption, it impacts the 5 segments differently. In some instances, you could see benefits and in some instances -- and so there's always -- what I'm realizing being on the other side of the fence now is you have to take the good with the bad and the bad with the good. And so I think at the end of the day, how you manage those different challenges, it's really what could differentiate different service providers out there. Dedicated did see some challenges around labor availability with COVID. Start-up costs are continuing because start-up opportunities are there. But I still feel pretty strongly that over the course of the year as those start-ups mature, and we've seen that now with some of those, some of those accounts have started in the third and fourth quarter last year, they're hitting their targeted levels of profitability that we would expect. So hopefully, that covers all your questions, Chris.

So how does COVID kind of play through that specifically? So is it the ability for new fleet starts to be able to sort of seat those new fleets? Or is it just the existing driver pool you're having attendance dynamic issues that we're seeing across the industrial space?

I think it's probably more of the latter. I mean I think the availability of labor, we do provide benefits for those to -- for the protection of our employees and stay home, get better, paid time off. And so that affects utilization of assets that affects your ability to start up. Maybe circling back to your prior question, too, and I probably should at least put some caveats. I think that the pipeline of opportunities and demand is quite strong. I would say the 3 challenges to growing dedicated will be obviously one, finding drivers; number two, trucks; and three, trailers. And maybe not necessarily in that order, I would say the availability of labor and -- as well as equipment is something that could be a challenge to overcome in order to see similar types of growth.

Okay. And if I think about big picture dedicated, 2020 was a year, I think where margins were maybe outsized because of some of the disruption that you guys were able to help your customers with during that year. And so margins end up being quite good 2021 was a bit more of a normalization, I guess, of those margins to a degree as we think about the environment we're in right now, any reason to have a strong opinion one way or another about if this is a more normal year or something outside of normal?

Is this a margin guidance question?

Sort of, yes.

Long-term margin guidance range is 12% to 14% on, we were actually just shy of that last year. I think we finished the year at 11.8%. Intermodal is right in the middle at 11% in the midst of the 10% to 12% range. I think it will -- I hate to answer. It all depends. I mean I don't mind seeing us facing start-up cost pressures because I think essentially, all you're seeing is that spring being coiled. And at some point, you'll see to the extent you do see growth slow, then to the extent you're seeing these businesses manage on an account-by-account basis to hit the targeted ROIC levels, then the margins will play through that as they should.

Got it. Okay. That's helpful. And then let's talk a little bit about ICS. So Josh, maybe if you could give us some perspective on how things might look this year obviously, brokerage in general, I think, had a big year in 2021 because of the tight capacity that we're in. I'm guessing that carries over well into 2022. But, it seems like the rate side might have to just normalize to some degree because there's just been so much rate embedded in the revenue growth of the business. But can you give us a little bit of sense of how you think about the revenue opportunity for ICS in '22?

Yes. '22 has started off strong. Like Darren's comments you made on the intermodal side. Yes, it's hard to look at pricing right now, and I think it's going to decrease at some point. I will say we've got a good mix of what we call published business inside ICS and spot. We're having very good success on the public side because this started Q1 of '20, the disruption when all that happened, I would say, first half of bid season last year, though, there wasn't the tremendous rate movement that you saw back half. So right now, we're going through those first half bid season bids. So we're seeing some success getting rates where they need to be on the public side. Right now, spot, it's still remaining pretty steady. And so there could be some decrease back half. It's kind of what we're thinking, but we don't know. But if that happens, we do expect margins to improve. So as capacity will loosen if spots going down.

Okay. And the load growth opportunities, do they seem just as good as they've been. Obviously, the spot side is quite tight. I'm guessing there's opportunities there.

Yes. Demand is still strong, both in ICS and Truckload. Customers really want our boxes right now. We're investing in truck and our trailers and added 3,000-some-odd trailers last year and continue to add this year. But through our large customers' demand for our box and our capacity is really good right now.

Got it. Let's talk a little bit about the costs and the investment in ICS in general as you guys have been scaling that business and that platform up. So I think heads has been a clear area of investment for you over the last couple of years, and there's been some technology costs as well. Clearly, revenue growth has been extraordinary in that business. How do we think about sort of the potential for leveling off of the cost structure as we move forward. I'm not just talking about 2022. I'm just sort of thinking big picture. The ability to scale the platform that you have now by just sort of adding revenue to a fixed base.

Yes. And I would say we're we put a plan together was it '20? '19, '20, kind of a 5-year plan for what we wanted ICS to look like with our heavy investment in tech and our platform promotion and how we're utilizing that both for ourselves, for our customers and our carriers. I would say we're on plan to get to where we thought we could leverage and scale from a profitability margin percentage standpoint. And we're about halfway there. So there is still opportunity. I don't even remember what guidance you gave on the margin for ICS. Probably should know that, but they'll tell you here in a minute. But we're about halfway between where we wanted to be in about a couple of years. And honestly, we're ahead of plan. We were ahead of plan in '21, and we're ahead of plan in '20 but still opportunity to leverage in.

What are the big investments that still need to be made? Or what are sort of the key ones for this year and next in terms of where you want to add still?

We're still investing in tech heavily.

Okay.

We started with our external platform for our carriers. And right now, we're investing internally for our people and how our people can interact with capacity along with how we can better connect seamlessly with our customers. So still heavy tech investment inside highway.

Got it. And how do you see this market kind of shaping out? I guess that's one thing when you look out, there's a number of players out there that are talking about having a platform out there, technology platform that they can ultimately leverage. How do you see that sort of evolving over time? Is this a market that can support 10 or 15 digital freight platforms? Or is it something that's maybe closer to 5 or 6? I guess it's hard for us to sort of see that.

Yes. And I think it's a great question. I don't know that I have the answer for you either. We think about it a lot from a carrier experience side. Our carrier is going to want to go to 14 or 15. Are they going to want to go to 4 or 5? Can one person do it? Don't know what that looks like. But there's going to be several successful platforms out there. How many? I don't know. We anticipate being one of them, but there will be more than 1 for sure.

And then one question I always find myself asking is there are 2 approaches it appears. There's people like you who bring a freight background to a technology problem, if you will. And so you have that expertise, the customers, the loads, the freight, and you're adding the technology, building it up. You have people coming at it from a bit of a different angle where it's maybe technology first without necessarily the freight background. When you talk to your customers or other people in the industry, what are the puts and takes as you see it with those 2 different approaches?

I think they're both great approaches, honestly. If you lead with the tech side, they may have better applications than we do, and they make things really easy. You think about e-commerce. So -- we come from operational side and think of everything that you need to know about a load and what could go wrong and we design an application to do that, and it might take you way too long to book a load where somebody from the outside just thinks, "Oh, well, you just need to know where it's going and what it needs to get there?" And that's it. So that's the benefit from the tech leading is they write good applications and have a good experience from the interface on the tech side. But the back end where we come from, we probably provide more expertise on the operational side. But I think they're both great approaches. The ones that can marry those 2 together will be really successful.

Yes. Okay. Makes sense. A question came in from the webcast. I want to make sure that I get to it. I guess it speaks a little bit to sort of the longer term -- coming back to intermodal for a moment, the longer-term opportunity there. The rail industry has been focused on PSR and efficiency, which has also come with some reduction in resources. So as you think out over the next few years and when you have conversations with your railroad partners, how confident are you that the industry actually can sustain sort of the growth that would provide you the opportunity you talked about before?

Well, that is the sort of the question of the time in the railroads that called it PSR and eliminated some services and removed resources for the sake of improving returns on their assets, we're not naive to think that, that wasn't a good game plan if they were unsatisfied with the return profile that they were generating. I mean that's certainly -- anybody in business can take that approach. But there's only so much margin expansion you can achieve before you really just have to go out and grow. And so while PSR was a -- certainly a primary topic over 2017 and '18 and '19, today, when we meet with our rail providers, it's all about what are we doing together to generate growth while maintaining margin profiles that warrant reinvestment and expansion in their resources. So that all feels very appropriate. And at this point, we feel like we're driving returns in the way we're compensating the railroads, so that they're energized by investing and growing. And so as long as the industry can sustain that, I think we will continue to grow. In a future state where the railroads can't generate a return that maybe they require, then I anticipate they will slow down their investment, which, in turn, slows down our ability to grow in that business. But it feels today that there's ample opportunity for them to invest in their infrastructure because they're satisfied with the idea of growing long term.

Okay. That's helpful. Wanted to ask about CapEx and sort of your level of confidence of getting the assets that you hope to get this year. So I think the CapEx budget is up, and I think there's an expectation or a hope of getting a decent amount of tractors and obviously, we have the boxed down boxes as well. But how do you think about that ability for the OEMs to be able to deliver?

Yes. So on our last call, John Kuhlow, our CFO, gave the net CapEx budget of $1.5 billion, which is a big number. I think most people can read into that, that some of that is the 2021 CapEx that is rolling into 2022. Darren has containers, you can't just buy containers, you have to buy trucks to move the containers, you have to buy chassis. And so I do think there's risk. I think John Kuhlow clearly stated that on our call. Do I have any additional update? No, but I as kind of I mentioned around the opportunities for dedicated. I do think the real constraints to seeing really solid growth is the availability, obviously, of drivers, trucks and trailers. And I think it's a challenge to get trucks. I was at a conference not too long ago where the opportunity to get trucks is out there, but you may have to take delivery of trucks with certain features that you might want because of the chip shortage. And so the lane departure warning systems or the collision mitigation system. All the little things now that we've become accustomed to specing into the equipment for safety or for other reasons. And then you have to ask yourself, do I want to take delivery of this and sacrifice some potential safety because of needing a truck? And so long-winded way of me saying, there's still risk.

Yes. Okay. Fair enough. And then in the context of that, CapEx spend, I think there's some, a little bit of comment about M&A. Can you talk a little bit about any thoughts or appetites or any ideas around M&A as we think about 2022, where it might fit in, if it does at all?

For J.B. Hunt?

For J.B. Hunt.

Well, about a week or 2 after our earnings call, we did a small tuck-in acquisition for our final mile business. And I think if you followed J.B. Hunt for a long time. We have historically not been a very acquisitive company. We did speak about acquisition opportunities in final mile, things that would provide an extension of services and/or help us get deeper inroads into a particular customers or industry and you saw us do that in furniture and fitness equipment. And so I think where things stand today, I don't necessarily know there's anything imminent, but we'll continue to be opportunistic and look at opportunities, but more likely than not, the deal sizes are going to stay relatively small.

Got it. All right. I think that is just about all the time we have. So thanks very much, gentlemen, for joining us. Really appreciate it.

All right. Thank you.

Thanks, guys.