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

Hey, guys, I think we're going to get started here. So we're mid through day 1 of Deutsche Bank's 2022 Transportation Conference. I'm Amit Mehrotra. I'm the transportation and shipping analyst here at Deutsche Bank. I couldn't be more excited to have J.B. Hunt with us today. Really interesting time for the company in terms of growth potential. And in that context, I'm super happy to have Darren Field here, who is -- I want to get your title exactly right, President and Executive Vice President of Intermodal. We have John Kuhlow all the way at the end who is CFO and Executive Vice President of Finance; with Eric McGee, Executive Vice President of Highway Services; and then Brad Delco, Senior Vice President of Finance and Investor Relations. So a lot of EVPs and senior VPs here representing, I think, a broad group of businesses at J.B. Hunt.

So I wanted to kick it off first by maybe getting Darren and Eric to just comment on just overall demand. We can get into intermodal and all that other stuff in a little bit more detail later. But I just want to -- on the intermodal side, you guys have characterized it by -- so we're just seeing more demand and capacity. If you can just talk about that. And then Eric, just talk about what you're seeing on the trucking side, the broker side that gives us a little bit of a sense of what's happening in real time.

Yes, sure. So I'll start with Intermodal and just highlight that, yes, coming out of Q2 on our earnings call, we talked about more demand than we had capacity to serve. I think that continues today with the sort of caveat I would just say is it is more aligned with -- there's more demand with improved service combination between our rail providers as well as ourselves. If we can get that velocity pickup that we've been chasing for a couple of years now, I think that really unlocks a lot of pent-up demand for intermodal service. I think there is -- truckload capacity is a little bit more available, and Eric is going to comment on that. And that's probably pull in just a little bit of business away from Intermodal, maybe a little bit more than what we thought about at the end of the second quarter. It's very small. I don't think it's a big challenge for us, but at the same time, the continued effort to get better velocity and service out of our rail product will only deliver significant growth demand from our customers. And so we continue to hear our shippers tell us that they want more from Intermodal, but they need better service. And so that's a big part of our focus today and certainly, we're very focused in that dialogue. [indiscernible]

We're getting that right there. Where are we on that?

Well, do you want Eric to take...

Yes, we can talk about Eric and then we'll come back to the...

Thank you. Well, I'd tell you, I'm at the first place you see transitions or changes inside the market. Historically, you'd see right after the end of the first quarter, volumes will be a little softer about the first, third of April. And then historically, the second quarter is a strong time for demand inside trucking. This was definitely softer than what we would have expected and softer than you have seasonally seen. And we saw that slowdown in April will continue into May and then on through now. So what ended up happening is you see shippers whenever the market starts slowing, they'll race back to routing guides. And you see published volumes of route guide compliance go up. The spot market activity starts going down, you see spot rates dropping. And after you see the capacity settle, shippers gain comfort inside the market transition, then you can actually have some of the conversations about some of that volume finding its way back into the spot market. We haven't seen that yet, but those conversations are starting to happen. So I'd tell you, volumes somewhat challenged in the second quarter. Spot rates falling. Capacity out there is pretty prevalent right now.

Okay. Great. And then can we just talk go back to that rail service question. I mean it just hasn't gotten any better, I mean, maybe slightly on the margin. One, can you just talk about that? And I think the way you guys measure service is obviously different than we look at it from a velocity and dwell perspective. I think it's percentage of on time within 90% of the arrival time or something like that. Correct me if I'm wrong, but just talk about how that's trended to be seen some green shoots recently on that metric and just overall.

Yes. So we certainly do measure our railroads. And we classify sort of the severity of rail service challenges based on the percent -- the number of hours needed to add to what we expected for the load to move in to reach 90% on time. And so typically, when the railroad is running very healthy, this would have been, I'll call it, back in 2017, probably, we saw high single digits, low teens in the number of hours you add. Today, it's significantly up from that. So it has bottomed out in very high numbers. I'm not going to give the exact numbers, but it's significantly about...

It could be a day or 2 in terms of...

Certainly, it's more than -- yes, it's more than a day by quite a bit, more than 2 days. So we have seen that bottom out. And yes, it's gotten better, but it's still historically the worst we've seen prior -- we never saw numbers like this before the pandemic. So we continue to be optimistic about the plans and the identification of what the issue is, and it's really a labor and crew issue for our rail providers, and I think that the feedback I've gotten is that the onboarding of new employees has gone slower than what they would have anticipated just 2 or 3 months ago. The turnover of their new hires is heavier than what they would have anticipated. And so if anything, you can't solve the problem until you fully identify it, and I feel like they have done that. So I'm still optimistic about the long term, I guess what I'd say today compared to where we've been since the second quarter, just -- we haven't seen anything -- we haven't seen it deteriorate, but we haven't really seen it get better. And at this point, it feels like we're months away from getting it better and that's probably a 2023 story.

And so 2023 is kind of shaping up to the speed is like stars aligning on a few different -- one maybe rail service gets better, and that's out of your control. But then you have all these initiatives with Burlington Northern that could start to gain more traction in 2023. Can you just talk about that? So I know they're opening up something in the Pacific Northwest, which is dedicated to J.B. Hunt, and that's obviously interesting opportunity. Talk about that in kind of the idiosyncratic opportunities as a result of this venture.

Well, when we came out in March with the announcement of expanding our container fleet up to as many as 150,000 in the next 3 to 5 years, we gave ourselves quite a bit of flexibility there. Certainly, we believe, and BNSF believes in the growth story for domestic intermodal. That story is built on customer demand, whether it's just GDP growth, but largely on the transload model at the ports of entry, points of entry for import business really is a great opportunity for us. And then just there continues to be highway business out there today that we know Intermodal is the best solution for. So we're confident in our ability to grow our business along with BNSF. We also know that in an effort to do that, we have to educate our customers on what we're doing to expand capacity. It can't only be about J.B. Hunt buying containers. We need the railroad to talk more about what they're doing. I think that the announcement in Tacoma was a great step and a signal to our customer base that we're serious, and they are doing things different. I mean when is the last time a railroad actually announced the opening of a new terminal for lift capacity? So that's a great story, and we're going to launch service there next week. I would also say that when we came out in March with that announcement, we felt like we were on a pathway to improve service faster than what we've achieved. So on the short term, we're all very focused on we need service improvements right now today. And so we want to be cautious on how much we're saying about capacity expansion projects that are coming in the future. Our customers, they care, but they want to hear about what we're doing about the here and now, probably more than they want to hear about that long-term effort. So I think that the Tacoma example is a great example of things to come. And as soon as we have more to say about projects like that, we will. But we know that we can't just say we're adding containers and we added some lift capacity in the Seattle market. We like to talk about more. And as soon as we can do that, we will.

I want to get John and Eric and here in 1 second, but I want to -- just 1 last question on Intermodal before we move on. So I guess with Katie Farmer and Alan Shaw now heads of those companies, I feel like you have more wind to our back relative to maybe what happened 5 years ago where the mindset was just maybe completely different. Talk about how important that is. It's qualitative, but I just don't -- I mean, it feels like once in a long time, the rail partners are actually growing in the same direction as the IMCs and J.B. Hunt in particular?

Yes. And you highlighted 2 key leaders of our 2 largest rail channel partners providers that is important. They both have had a lot of time dealing with customers, dealing with BCOs, dealing with us and thinking about growth strategies, whereas the operations-oriented leadership talks about cutting costs, creating efficiency or maybe even just expanding margins based on cost takeout. And those are 2 different mindsets. And we feel like that both of those leaders really give us -- they care about what our customers have to say. And I think that the dialogue is different than what it was over those previous leadership groups. Now all that being said, we've built what we've built in conjunction with those railroads through previous management. So it's work, but the railroad industry with the implementation of PSR seemed to move away from customers, and our experience wasn't positive on the service front with that. We really didn't experience a service improvement out of PSR. And so we're energized by discussions with those leaders on how do we grow.

I think you guys are outperforming even when intermodal growth is relatively low. I mean some of your direct competitors have significantly higher box counts and lower growth. And so at some point, you're seeing it underneath the numbers. It's just not maybe to the magnitude that we all want.

That's well said.

So John, I wanted to get you in here and talk about returns on invested capital because I know it's kind of the mantra that guides every decision from a capital allocation perspective. The company is now moving on to grow their box count to unprecedently high levels. And one thing I'd say is as many as 150,000, so maybe there's some checks and balances to make sure that the return thresholds are being met. But how do you -- can you just like peel the onion back a little bit, like what gives you the confidence to make this type of investment at this time in the cycle when the rail service is perpetually disappointed? What is in this contract that allows you that confidence that you're going to meet your threshold?

Well, as you mentioned, I mean, ROIC is kind of, as we like to talk, is the North Star for the company. So every investment that we make -- we model out returns and we are targeted, which we don't share by segment, but to a targeted return profile. With respect to the container investment, I mean, these are 20-year assets. The models are priced and designed to go through cycles. And so what gives us comfort on the investment that he talked on specifically is, as Darren mentioned, he laid out the 4 to 5 points that give us comfort. One is GDP growth, okay? So that's kind of the boring side to this story. The highway to Intermodal conversion is big. We announced our investments in transloading. And then there's also market share. Couple all of that with a renewed alignment of goals between our rail partner and us, that is the biggest thing. We don't make a lot of public announcements. We're not overly press release happy. And the fact that we had a long-term partner and us together make a joint announcement is what gives us comfort in the quantities that we're talking about here today. We said we'd grow to 150,000 over the next 3 to 5 years. I think with all of the demand things that Darren has highlighted, all of our focus on new services is what gives us comfort in making that investment.

Well answered. The question I had to follow up to that is that in a couple of years, what would be the circumstances where you say, okay, we're just going to pause it a little bit. Would it be the rail service continues to be challenged. There's a cyclical dynamic that occurs because there are 20-year assets. And so embedded in that return is obviously a downturn at some point. But what do you think would create that circumstance where maybe you're deferring a little bit?

Well, again, the -- we have commitment and interest on both sides, improving rail service. And so if for whatever reason, that doesn't materialize in 3 to 5 years, then we'd have to make adjustments to that. These -- we have not placed specific orders for these. This is our plan. We have the ability to slow that if needed. But again, it's -- it would be catastrophic events that would prevent rail service or demand destruction that would cause us to pause that, just like in any other environment that we look at, so.

Eric, can I talk about 360box for a few minutes. So it's interesting where as we think about how the cycle plays out, and companies with assets like J.B. Hunt has behind them, whether it's trailer assets or containers or whatever. I mean do you think that the downturn for vis-a-vis 360box is kind of moving to power only business model is -- mutes the downturn? How do you think the cycle plays out in the context of how the trucking business has evolved and progressed?

First off, if you think about the size of the trucking market, you look at the drop trailer space, and it's about half of the trucking space and whatever you look at to determine what the size is, it's somewhere in the $400 billion range and about half of that is dedicated. About half of what remains is drop trailer and the other half is live. The live has predominantly been functionally brokerage, and then the drop has been your large asset providers. So as you think about our evolution as a trucking company and we shifted capital into dedicated and intermodal, the answer for us on the trucking space for our customers was to provide brokerage. Starting in 2007, we did that, which allowed us to do projects. It allowed us to lease some boxes and answer some of the drop trailer needs those customers had. And then by and large, it was hitting the live aspects of their business, the spot aspects of their business. So if you think about what our customers have been asking us for and how we've grown intermodal, we listened to them along that live path to 100,000 or 150,000 containers, and they ask for that capacity and that equipment. They still have 10x or more in drop trailer business that is truckload. And so those same customers that no one love us that talk to us about growing intermodal or asking us, how do you provide more equipment in the drop trailer space. So what we did with 360box was took the knowledge that we had from running a trailer network inside Intermodal, integrated that into our technology, 360, and connected to the capacity that we have 1 million trucks coming into the 360 platform to find the best truck to fuel that network. And what's different now, I'd say, Amit, than any time before is for the first time, we have now taken that siloed drop trailer market and we've taken the siloed live market, and we've integrated those together. That creates density and it creates efficiency and allows us to move those boxes around. So I would have told you that the biggest concern I would have had in the power only would have been in the market that is tight, a market where capacity you can chase the highest spot rates and capacity is moving around. We saw capacity to lean into the box network during that period of time. And right now, if you look at the integrated power that we utilize inside 360box on our operators, brokerage, our own assets inside our company, we have more capacity than ever coming in pushing in right now. So as a downturn comes, capacity is prevalent, and we'll listen to our customers as we grow that box count.

And just because Eric is in this every day, and I realize there's folks in the room that may not be as familiar with a lot of the terminology Eric used. But from simplistic way of thinking about this, J.B. Hunt is well known to be the largest operator of Intermodal container fleet in North America. And so I would say that, generally speaking, we're really good at managing assets in a network business. And so effectively, what Eric is saying is we're now managing instead being a container for managing trailers almost in the same way. And like how Darren relies on -- and his business relies on the railroads to move these containers in a hopefully dense network in a way to drive efficiencies. Eric and what's happening in 360box is we're moving trailers around in a network, but utilizing the power of our 360 digital freight platform to source third-party capacity. So maybe to go back to your question and say, well, you think about downturn planning for our trucking business, really the two most important assets to maintain high utilization would be the truck, which is a valuable asset. They're really not even as valuable as the driver, which is probably your most valuable asset. And so what we're really doing is we have 1 million different eyes or trucks that come on to our platform and look for loads that are very efficient for them to move. And so our investment really isn't a trailer, which is not as capital intensive as owning a truck, not as maybe difficult as trying to keep an irregular route over the road driver, busy during all parts of the cycle. And we're driving efficiency in the network, whether it's a drop trailer network or whether it's a live load and live unload network. And so you can -- given the asset-light nature, your cost is really going to fluctuate with the market because the market is really coming in the market. The clearing price is being created effectively every day based upon what capacity and what volume we have in the platform. And so that's why you would see, generally speaking, the economics hopefully prove out that it looks very similar to a brokerage model where rates go up and rates go down, but your costs would also float with the market. I'd also say, too, the value, I mean, the 360box brings for our customers is just flexibility, sheer flexibility. If you're aligning a truck and driver and a trailer as an asset provider, you're -- all those things have to line up perfectly for you to be able to say, I'll take 3 loads today and I'm like 3 loads a day every day, and take 4 or 5. When you're using a trailer network or a container network like Darren does in Intermodal or we do in 360box, you have a lot more flexibility with those just the trailers and then the sheer capacity that you can dip into to be able to move that equipment around.

Yes. That makes sense. Darren, you started off by saying that what's happening in the trucking spot rates is having a little bit of an impact, not a big deal, but a little bit of an impact. When I look at intermodal contract rates, national average, you're still quite a bit lower than truckload contract rates even quite a bit -- a decent amount lower than what I would say historically has been the case. So there's still obviously a huge economic incentive to move by rail. Can you just flesh that out a little bit? What are you seeing? Is it on select lanes? Or what's the demand leak into Truckload? Is it -- just compared to spot market certainly?

Yes. Well, it's -- you've got -- in the Eastern network, the gap is smaller. And so at times, in the shorter length -- basically, the shorter the length of haul of the intermodal load, typically the smaller the gap between what it would cost for a truck for certain intermodal. And at times, we're seeing customers choose to go with a truckload solution. We've said it before, we're mode indifferent. We want to solve what the customer is asking for. We make a recommendation. And so when intermodal, we believe, is the best answer, we're going to tell them, but then we'll also give them a very realistic perspective on the service quality to expect. And by that, I don't mean 95% on time. I mean this load is going to take 3.5 days, but we can truck it in 36 hours. And that role -- that plays a role in the way the customers are thinking about that decision. And so that's why we're highlighting to our rail providers how important the service improvements are. I also think that over the last 2 years, there's a group of truckers out there that have gotten used to longer length of haul and going out to the West Coast because intermodal wasn't able to actually solve the demand. And that group still operates today. Now that the pricing has, I think, changed on them, but it's an occasional influencer. Again, not a huge percentage, but it's influencing decisions on some shipments from our shippers that can get access to a truckload guy. The economic value of intermodal still outperforms the cost of the trucks. So if you want to save money, intermodal is going to do that for you. But the dollars and sense of it all are not the only factor in the decision.

With service and then even if we add detention and -- all that truck could add up.

Sure. You bet.

If I could add, Darren, agree or disagree with me. The realities are, and you brought this up, the contract rate for a truck versus the contract rate for intermodal, there's still a fairly healthy spread. But as most people are aware, there's a fairly large gap between where contract rates are and spot rates are. And so normally, that gap will narrow, and it narrows 1 of 2 ways. Contract rates come down or truck spot rates come up. And I think it's important to highlight, as Darren alluded to, on the margin, we're talking on the margin, there's opportunities where a spot truckload rate can be competitive with intermodal. But to the extent you saw a meaningful increase in the amount of spot demand in that lane, it would change the price of spot rates. And so therefore -- so it's not necessarily a very sustainable long-term strategy for customers to say, well, this week, spot rates are cheaper than intermodal, so let's go move 100 loads into that lane. Well, as soon as you move 100 loads in that lane, spot rates are going to raise.

It's like comparing apples to oranges because it's intermodal contract versus truckload spot. And that may be 10% difference now and that arbitrage changes completely when you actually have those.