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

Really happy to have J.B. Hunt. We've got, from my left, Darren Field, President of Intermodal; Brad Hicks, President of Highway Services; John Kuhlow, CFO; and we've got Brad Delco in the audience as well.

So I'll start with questions. As you guys have some, raise your hand, we'll get you involved. Maybe and I'll leave it to everyone to take the first one. Maybe just a general market, macro update. Lots of talk last week about inventory levels at Target and Walmart; spot rates falling, China shut down, some point going to reopen. Just what's the lay of the land as you see it from a demand standpoint?

Brad, why don't you start? And then...

Yes, I'll start. Good morning, everyone. Great question, Scott. There's a lot of different things going on. We certainly saw spot rates decline throughout the month of April. They appear to have stabilized over the last couple of weeks. That aligns with also tender rejection, data that's publicly available. It's also -- while it dropped, it got to that kind of 9-ish percent, 10%, and it's maintained throughout that same period. I would say that our customer demand remains very high. They are talking about inventory. But for the most part, they're suggesting it's the wrong inventory, that it got -- missed the season that it was intended for. And so they're trying to figure out ways to divest of that because they have demand and more inventory coming in. And so -- but that's kind of what they're having to work through. But when I think about demand for our 360box product, which is our JBT, where we're -- we said it earlier, I think Brad did, Intermodal 2.0. We're trying to leverage all the experience that we've gained in Intermodal over the years and running a trailing network that's much more focused on the trailer and less focused on what the capacity type is. And when we think about how we run that network of drop-drop against our live network that's in our brokerage segment, ICS, and really bringing those 2 together, creating benefit and value for our customers. So high demand on the capacity front, I'll mention dedicated and then I'll kick it to Darren for Intermodal. But dedicated had a phenomenal growth year in 2021. Believe it or not, our pipeline is more robust today as we sit here in May than it was a year ago in May. And so even with the extreme demand that we saw last year, we're seeing equal or greater demand for that product this year. And so obviously, there's a lot of things going on. I don't know that it's slowed down necessarily. We have heard from customers that throughout the pandemic, they were shipping inefficiently, meaning that truckloads were going out less than full at times. And they seem to want to be getting back to maximizing utilization, whether it's a container or a trailer. And so perhaps that's contributing to some less truckload volumes, but the overall shipping of goods has remained relatively constant for us.

Before we go to Darren -- I just want to follow up on one thing because I think it maybe is an important point. So what you're -- it sounds like what you're hearing from customers is -- that maybe have bloated inventories, it's of maybe seasonal things from earlier in the year that maybe was supposed to come in got delayed and now they're stuck with it. But the inventory that they need for spring/summer is not necessarily bloated.

Correct. Yes. Those...

So we still need to bring -- we still need freight to move that?

Most of our customers are remaining very optimistic on the outlook for the demand for their businesses. And yes, it's bloated inventory that missed the season, whether it was Christmas inventory that got in late, whether it was Easter merchandise that got there late, and so that's, by and large, what we're hearing from our customers.

And I would just -- first of all, it's great to be here in New York City and in person and get to see all of you. Intermodal demand remains very high. We continue -- I don't know of a customer that isn't asking us for more and how soon can we bring on more equipment and be able to accommodate additional volumes and growth for our customers. Our demand for capacity in Southern California specifically, which is nearly all import-related, is extraordinarily high. And again, our customers are all very concerned about the capacity plan later this summer and in the fall as they get ready for the holiday shopping season. So our communication with the customers also points to it's the wrong inventory. I joked with the group earlier. One of our customers mentioned a warehouse full of little plastic skeletons literally just arrived. So the point is, why does that kind of inventory show up and consume space? Who knows? But it's here and it's here late and it's not Halloween yet. So what are they going to with that? I don't know. But all of our customers are talking about continued demand and need and they just continue to say, "How can you give me more intermodal capacity? I want to grow with you."

So a couple of follow-ups for you. What -- you mentioned the ports. What is your best view of what's going to happen as China reopens? And then as we've had this period of China not being open right now, have we -- is that showing up in your volume where April and May volumes have slowed from what you were seeing in March?

Yes, that's been part of our, I think, bright future. There's not a lot of -- we're not seeing any demand fall in Southern California specifically. I mean demand for our capacity out there has remained strong. I would just anticipate that there will be another slug of imported goods that is going to find its way across the Pacific and look for ways into the country. We do have some customers talking about diversifying their port mix, more all water. And so I do think there's questions remain this fall as to what that will mean. At the same time, demand for capacity again in Southern California remains strong, and I don't really believe that's influencing our volumes today. If that -- if there was additional demand for capacity for imported goods, we aren't yet in a position to accommodate new growth out there. Every month, we're onboarding more containers today. And so as we onboard that equipment and look for some pickup in velocity from our rail providers, certainly, that gives us an opportunity to grow even faster. But we're growing today.

So at a high level, there's definitely concern in the market that freight with consumers is going to slow, the freight pie is going to shrink. Now we've said, hey, we think there's a lot of pent-up intermodal demand and that intermodal slice of the pie should be growing. But if you have the overall freight pie shrinking, is there a risk that Intermodal sort of just misses out on the cycle? How do you -- how do you think about that uncertainty that's out there?

We have the opportunity through our 360 platform to see shipments every day that should be intermodal that aren't because the industry doesn't have enough capacity today to accommodate it. So it feels like there's an awful lot of intermodal opportunity even in a slowing economy. There's so much demand to convert and really feel confident that there's a lot of business to convert there. In addition to that, you do still have a tremendous amount of intact intermodal, that international equipment going into the interior. And more and more today, customers want to talk about a transload model. So that's another really significant growth opportunity certainly for us that will be there for many years to come.

Can you -- is there any way to quantify what you just said in terms of like what that pent-up demand is that you think you see?

Well, we -- in 2021 alone, we saw 150,000 loads in our platform that should be intermodal, as an example. In terms of the international and transload growth, I think that's -- there's -- domestic intermodal is roughly half of the industry. So there's millions of shipments to grow in that space. Now I don't think we're going to convert it all in one season. That will take a lot of time. And it will depend -- each customer will have a different strategy. But a number of our customers are asking for that service more today than ever before.

We'll get back to Brad in a second. Just 1 or 2 more, just quick follow-ups for you on that, Darren. Just update on container ads throughout the year. Are we seeing any signs of box turn improvement?

So we talked about we carried over roughly 6,000 of the 12,000 order we announced more than a year ago and said we would receive all those by the end of the second quarter. We're fully on pace for that. And then we announced the expansion up to 150,000 over 3 to 5 years. We're probably not going to do any more equipment announcements, but there will be equipment that continues to arrive in a steady fashion as the year goes on. Box turns continue to be challenged from rail velocity. I mean our railroads aren't -- we're seeing some slight improvement in service. It hasn't yet produced any real material change in velocity. It hasn't gotten worse, but it hasn't gotten better. And so box turns remain steady where they were. Again, we're focused on the returns on that investment in that equipment. And I feel good that our prices reflect a slower moving piece of equipment. It certainly is an opportunity for the future, but as of today, really not a material change in our turns.

Okay. Brad, let's -- we talked about spot pricing. What are you seeing from a contractual pricing standpoint in the truckload market?

Yes. So through bid season, our strategy was to really increase our published freight. And we feel, by and large, we've been successful at doing that. And really, a factor in the spot market is also the dislocation of capacity that we experienced in '21 -- '20 and '21. It's getting back to normal to a degree. And so really, it's a little bit of a balloon squeeze where published rates are now at a level and quality that carriers will be willing to commit to that freight and then routing guides are holding up. And so you're seeing a lot more freight move under contract versus spot. Obviously, spot has softened. We've seen that in our overall volumes and the rate. But we're really pretty happy with what's happened on the published side. And so we're seeing routing guide compliance north of 90% at this point with us and other carriers. And so there's just not as much falling out as there had been. The other thing that's interesting, it's a lot like Darren, maybe not to the same scale yet, but we are really excited about 360box inside of our JBT segment. Customers want that product. It gives them greater flexibility at their warehousing, and it's more effective and efficient for the driver as well, the idea of the live-live market, which has historically always been brokerage. And then the drop-drop market has predominantly been large asset providers. And we've reimagined what that is for us. And so we have very few tractor assets at this point, and we leverage independent contractors, third-party carriers from our platform to execute inside of 360box. And what we're also seeing, Scott, is that we're bringing those 2 networks together to help drive efficiency. And so when Darren needs to -- gets a little bit out of balance, a lot of times, we'll ship empty containers via the railroad to get them back to the market. What we're doing is we're leveraging live-live network freight to reposition our trailing box back to the right geography for the network. And so it's really the best of both worlds tapping into over 100,000 carriers that we have on the platform as well as the other capacity options we have.

And so as the spot has softened, have you seen any slowdown or degradation in demand for that power-only J.B. 360box?

No. I mean there's more demand than we have capacity for, just again, similar to what Darren was saying from an intermodal standpoint. I think that customers generally want stability. And when they go through environments that they've been in, where there wasn't much in the way of anything that was stable for them, they want the assurance that they have the capacity, and that's where I think the appeal of 360box in a power-only environment is. And so given our size, and maybe we're a little too optimistic here, but even if there is a downturn or a slowdown in our economy or further slowdown, I really feel that given our size and what that product is that we can kind of power through this particular cycle and find ways to grow just based on the feedback we're getting from customers and the demand.

And how is this market of still rising contractual, falling spot -- how is this impacting ICS right now? Is this second quarter the sweet spot for ICS?

Yes. I mean, normally, what happens -- we call that the pivot, right? And when the pivot happens, then -- typically, in brokerage, margins expand for a period of time. And it's likely that you're going to see that this particular quarter. Brokerage volumes overall do appear to be a little bit down in the quarter in terms of the macro. I hadn't seen -- I mean, it will be interesting to see what happens in May. But -- is it me?

No, no, we're good.

But obviously, it went negative in April. And so we'll see what that holds. And our goal is to outperform the market. I mean we want to take market share. So if brokerage markets are growing, we want to be above that. There are points in times when brokerage contracts. We saw that in April at least. I don't know if that will hold for the whole quarter. And if that happens, we want to still outperform wherever the brokerage markets land. So it's a little bit more fluid in brokerage, and that's probably where our company feels it most, when we have shifts in the overall supply chain of demand versus supply. I mean Darren is talking more multiyear agreements and dedicated, typically 3- to 5-year contracts, in some cases, more, a little bit more immune to the environmental factors that you see just when spot moves.

But we're not -- there's not enough differentiated about 360 within ICS to grow the volume?

Well, no, I think we're optimistic overall. But 360 is not just ICS, it's our whole company. Darren benefits from it. Our truck segment benefits from it. As I mentioned, there's a lot of our live freight that's finding its way into JBT that gets reported in JBT that otherwise would have been brokerage historically. We're optimistic -- that's where we want to take market share. Now I mean if the market is down 30%, I don't know that we're going to be in an environment where we're up 20%, but we do feel like we should always outpace whatever the market is doing in brokerage.

Do you think we're in that kind of market already where brokerage volumes are down in that 30%?

At least -- no, they're not down 30%. I think the index that was published for the industry in April, I want to say it was down 2%, 2% to 3% in April. And so we'll just have to see. Yes.

Chris, you had a question?

I want to, Darren, clarify something. I think you said that Intermodal lost 150,000 loads to truck.

So we executed 150,000 loads through our platform that intermodal is the correct answer for. We didn't necessarily lose them. Customers came to us asking for an intermodal solution. We said we don't have capacity today. We can onboard it as we get back to that capacity, but we can execute the business for you through our Highway Services Group.

But then when you were talking about new boxes coming on, did you say that over the next few years, you're hoping to bring on 150,000 more loads?

I didn't say that at all. I think what we're seeing is we're going to onboard equipment on a steady pace, and I anticipate us growing. We've got a lot of new capacity coming on board at BNSF as other channels exit that rail. And we certainly have a tremendous opportunity. Certainly, I would -- our goal will be to grow more than that.

Okay. That was -- okay. I guess I totally missed it. Because that was going to be my question, like if you lost 150,000 but took back 150,000, and then you're there with 12,000 extra boxes, like that doesn't sound like a good equation.

No, that wouldn't be a good equation. Agree. Agree.

So maybe to that point, and maybe we'll bring John in for a second. You guys have announced we're going to be buying lots and lots of boxes. How much of those are committed now and if we want to -- if the market slows and we're wrong, we want to pivot away from that investment, can we do that? Or are we now locked in on these box sets?

Well, I think that you want to be respectable to orders that have been placed, but we have a great relationship with both our OEMs and also our container and trailer manufacturers. And we have the ability to flex that as needed. And so we're not going to buy just because we've made an order if the demand is not there.

But I mean, are you already ordered for your '23, '24, '25 based on that press release? Did you put in a multiyear order for boxes? Or you order a year at a time, [ give or take? ]

We typically do a year at a time, and we let things go. But they have seen our announcement. We have frequent conversations with them. And so we have good dialogue on what our needs are and how that is onboarded to us.

Okay. Darren, just maybe -- you mentioned BN, you mentioned change with Schneider moving to UP next year. Just how is -- it feels like there's changes with the BN relationship. Just talk about that to the extent that you can and how you guys are approaching the market differently.

So how I would address that is we have over a 30-year relationship with BNSF. We're exclusive to their network, and we have both enjoyed tremendous growth success of our Intermodal business with -- in conjunction with their system. There have been times in the past where other channels created anxiety in the dialogue, okay? I'll just say it like that. And largely those -- that anxiety is leaving. And so today, it's 100% strategy on growth. And BNSF, I think I could say this for them. I don't want to speak for them, but they have no interest in losing market share to their competitor. They fully anticipate to be the largest intermodal provider, and we are the domestic channel that helps them do that. And so we are talking today about better technology connectivity. We're talking today about investment strategies we're making in order to be more efficient as well as investment strategies they're making in order to be more efficient. And I think that our dialogue with customers today, let's say, a BNSF sales channel was visiting with a shipper, they were probably very careful in the past to talk about, "Well, I have multiple channels to access my network. Here's what I'm doing." Today, that sales force goes in and talks about J.B. Hunt's capacity and J.B. Hunt is the method of accessing my network. So that's different in a way. But a whole lot of it is still just the same. I mean we've always grown our Intermodal. And so I don't want anybody to think that the growth story at J.B. Hunt is only because Schneider is leaving BNSF. The growth story at J.B. Hunt is because we have the best product in the industry. Our customers want more of it. And yes, that new capacity available on BNSF is sort of a tailwind, but we were going to grow our Intermodal with or without Schneider moving.

But is it fair that -- I mean, there certainly are opportunities to keep some of that business on BN's network with them?

Absolutely. I mean the customers are asking us about it. The customers want diversification of their Western rail providers. They don't want to shift all of their business from BNSF to UP. And let's face it, next fall, while all those different channels are trying to get their load moved on that one other Western railroad, we're going to be sitting there with ample growth capacity and wide-open highway for our business to grow on.

How much of the container growth do you think gets deployed into transcon markets versus -- I'm just trying to think how much of this ultimately will accrue East as well?

Yes. Well, I do want to say, I mean, Eastern network growth -- long-term Eastern network growth opportunity in Intermodal for highway conversion remains the biggest market for Intermodal to attack. There's more business there than there is in the West if we're not talking about the transload market. Now if we grow and when we grow the transload market, that really gives a lot of opportunity to maybe make that a little more equal weight. And then the Western network is more reliant on the import economy. In the East, you're moving more durable goods. You're moving a lot of food, a lot of beverages, things that are going to be consumed regardless of the economy. There's a lot of strength in that business in the East, and out West, it is largely dependent upon the import economy.

Okay. Intermodal margins, they've been above the long-term target in the last couple of quarters. As long as we're in this environment where container turns remain depressed, is it fair to think that we'll stay above those long-term targets?

Well, we don't -- we're focused on the return on our investment. We're very focused on our pricing to cover the weakness in the turns. I mean I think that it's an industry factor. I don't believe any of our competitors are turning necessarily faster than we are. And so it's found its way into our system in terms of pricing for that weaker or the longer time of the asset. Is there a future to where maybe we get a velocity pickup and that finds its way as a benefit back to the customer? I mean if you -- if we were to get better velocity and the customers are talking about cost takeout and they want to benefit from that, I think the industry is likely to do that, but I don't see any material change away from our long-term margin guidance. We have costs coming at us. The industry has a lot of cost. It's more expensive to buy equipment. It's more expensive to hire drivers. I mean those are real. And so a future environment where demand weakens at all, we'll have to wait and see. But I don't -- there's no change to our long-term margin.

And what are you seeing from a contractual pricing, rev per load environment in Intermodal? It was up 20% ex fuel in the first quarter. I assume that naturally decelerates throughout the year. But maybe what's the underlying [indiscernible]?

Well, I mean we always -- I think we've talked about 1/3 of our business implements each of the first 3 quarters and then 10% in the fourth quarter as -- that first quarter still had a pretty good carryover from the previous year, and prices have been strong enough to cover our cost increases. But I can't really give you any kind of guidance on what our prices are doing. What I would say is they're up, and we're certainly satisfied with our returns today, and it's 100% about growth right now.

Truckload, brokerage, intermodal, do you see any risk of contractual pricing inflecting down over the next 12 months?

I think in the highway space, there could be pressure there depending on what happens in the second half of this year. However, as Darren mentioned, and we've talked all morning, there's so much cost that has found its way in over the last 2 years. And so it's not going to be a typical down cycle. That would be what my prediction would be. And so could they come off? Yes. I mean they're at all-time highs right now, Scott. And so it'd be hard to think that they'd continue to go up, unless there's more cost. I mean the reality is labor costs are up, equipment costs are up, insurance costs are up, fuel costs are up. And so you have to account for that. I think you'd probably see it mostly in brokerage first, followed potentially by highway or by JBT. Back to Darren's point, though, the discipline and the approach that we take in all of our businesses around understanding and making sure that we understand our costs relative to what price is doing will remain the front and center for us and always being focused on return on invested capital. But there's also talk about when Asia or China, in particular, opens up from their COVID shutdown, does that bring a wave of freight that flips us back into a little bit more of a hectic environment leading into the second half of the year. If that plays out, then maybe there's not as much downward pressure on published rates going into next year's bid season.

Anything you want to say before...

I mean I think we're kind of in the same boat here. I mean the costs are very real, and they're here for the whole industry. And until we can find a method of taking cost out, that I think could represent downward pressure on price. But I think that it doesn't necessarily mean downward pressure on earnings.

So that's where I wanted to go. So let's just play a scenario out where Truckload and Intermodal pricing are both down next year, '23 versus '22. You've got 4 different businesses -- 5 different businesses. Which of those businesses do you think could grow earnings in '23 versus '22 in an environment where contract pricing is down?

I think Intermodal absolutely can grow earnings even in a downward price market. Do not misinterpret that I think we're headed to a downward pricing market.

No, no. This is my scenario. I get it. Yes, not your guidance. Okay. So Intermodal is one. How about -- so we've got dedicated, final mile, Truckload and ICS. How do we think about...

I think both segments and highway have the potential to find success there and mostly because of the variable structure that we have. I mean the vast majority of our costs, both in ICS and in highway now, is purchase transportation via third-party carriers. And if rates are depressed, so too is PTE. And so ideally, those are somewhat aligned, and we're able to make the same level of profitability in any environment. It's the pivot where you can win or lose depending on how fast it goes down or how fast it goes up because there's a lag in either what the rate does if cost is going up or the inverse is and what we spoke of that's kind of happening here in the second quarter. And so I think that those business models -- it's one of the reasons we divested of all that equipment in our Truckload. In an old downturn cycle with 6,000 assets and things slow down, you get this fixed cost burden that you can't overcome. But by and large, we're using third-party capacity in those business models. And then just to touch on dedicated and final mile, again, most of those are multiyear agreements, fixed and variable pricing, have annual index-based pricing, meaning that typically, rates change based on those indexes. And those customers, they understand. They ran a private fleet themselves. They understand that there's ebbs and flows at times. But I don't think that there'll be tremendous downward pressure on the rate structures there because you're paying a wage to make sure that you have the driver to accommodate that shipment. And you see it in dedicated. We live with our customer typically at distribution centers, in some cases, manufacturing facilities. And so you're working hand in hand with them as an extension of their enterprise. And so you're feeling it together. They're not going to ask you necessarily to reduce your cost or your price in that scenario as much. So...

John, as the conservative CFO, where do you disagree? Because it sounds like they think all the businesses could grow next year even in a down pricing environment.

I feel like you're setting me up for that. I actually agree with them 100%. I feel like we -- there is this big overreaching noise around the global macro environment. And I think that you need to look at the core businesses of J.B. Hunt, and there are some unique opportunities that we have that don't necessarily follow the overall market concerns. And so I think that we do feel good about our growth for '23 for a variety of reasons. Not lost on us is the necessity to listen to customers. And so we had a customer meeting last week, met with a dozen customers. And the spirit of that meeting was to talk longer term more strategy, but there was nothing from the sentiment that, "It's time to pull back. We need to reduce." And so we listen to our customers, figure out where the demand is, and we use this fleet of services to take advantage of that.

We're basically out of time. Maybe, Darren, can you just give us 30 seconds on how you think about Scope 3?

Well, I mean in terms of ESG and all things sustainability and the way we're buying from -- if you're talking about us buying from the railroads or when customers talking to us about buying?

I think I was thinking about more from a customer standpoint than the intermodal market standpoint.

We are armed today to highlight to our customers the benefits of intermodal and what -- how much carbon emissions we're removing every time they ship an intermodal shipment. We talk about it more. It's a conversation that our customers care about. I don't yet believe a customer buys our service because of that and because of that alone. I think that they want to be armed and aware of the benefits intermodal is providing, but I don't yet believe our customers are making a buying decision purely based on ESG elements.

And so it's too early to do this, yes, but do you think at some point, we price differently in intermodal because of this? Not just grow differently, but do we price differently, too?

Possibly. I mean we'll have to see. I mean it's a market we'll all have to react, but there's -- there are a handful -- I have one very small example from over the last 2 years where a shipper said, "I want you to ship this intermodally," and our price was higher than the truckload rate because it was a very circuitous route. It was an unusual location. And that was a very small example where we use the cost base that we have to produce the price.

Okay. We got to wrap. Thank you, Darren. Thank you, Brad. Thank you, John. Appreciate it guys. We're going go in like 2 minutes right away with CSX in here.