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

The first presentation of the last day. For those that don't know me, I'm Tyler Brown, I'm the senior analyst here at Ray Jay. I cover transportation, environmental services. I do heavy construction materials as well. But this morning, well, first off, I'm just excited that everybody made it out so early, so I appreciate that so very much. Great crowd. But this morning, I'm just really excited to have J.B. Hunt with us. So for those of you who may not know J.B. Hunt, obviously, this is one of the largest transportation providers in the U.S., a multimodal solution, have a real flagship intermodal product, which is great. We have Darren Field with us this morning. Just nestled in beautiful Northwest Arkansas. But today, presenting John Roberts, the company's CEO. We've got Darren Field, the EVP, Head of Intermodal; and Senior Vice President of Finance and who also heads up the IR, Brad Delco. So I think we're going to go through a few slides. Maybe give a little bit of a lay of the land, talk about the business just a little bit for those that may not be familiar. We'll jump into a Q&A and fireside after that. But if you have questions, please feel free to interrupt me for sure, I don't know about John, but me for sure, we can take those questions as we kind of go through the morning. John?

Thanks, Tyler, and it's tough to get a laugh at 7:30 in the morning. So we'll work on our delivery. I do thank you all for making it out this morning. Great to have a nice full room here. This is a conference that we always kind of kick off our year, don't assume -- don't assume that you know everything, so we'll just have a brief kind of fly over, and then Darren is going to take us a little deeper into Intermodal. And we'll close with a couple of thoughts on how we allocate capital and our balance sheet, and that will lead us into hopefully some good questions, of course, forward-looking statements covered. We reset our mission about two years ago -- I took a step back and looked at the organization and the different services we provide and landed in a very broad statement of creating the most efficient transportation network in North America. It's a real shift for a company like ours to sort of not position the assets we have necessarily at the forefront of our purpose. This helps our folks really think about mode neutrality, which is something we'll talk about. We just believe in every business we have as a stand-alone with a real complementary nature. If you think about the supply chain management that we have to face in North America, you really have a point of manufacturing or a point of import all the way through key steps of consolidation, distribution, point of purchase, point of consumption, okay? And so we provide industry-leading services in every one of those key aspects of the supply chain. And when we step back, which we did recently, we said this is really a goal, which is to say, what will drive our decisions if we're trying to achieve this lead status? And that might mean we don't have certain services tomorrow that we had yesterday. And so that's really been a big change for us and a very important guiding light for the organization. We really concentrate on a very focused customer value. Long ago, in the late '80s, our founder, Mr. Hunt, met with a Railroad CEO, Mike Haverty, and agreed to shake hands and move all of our longer haul freight in the western region of the country from the highway to the railway. And that's so important to the culture of the company because by having a customer value focus, we can let ourselves evolve into a different state of mind. At that time, we were the largest truckload carrier in North America. And that was the best part of our business. That was the best internal return for us because you had a pickup and the delivery of thousands of miles, just generating revenue, one truck, one trade, or one driver. But when Mr. Hunt saw the economics and efficiencies of the railroad, he said, that's got to be better for the customer. And as you know, today, we are, by far, the leading domestic Intermodal provider in North America, and it's a very efficient way for us to provide those services in key lines all across the nation today. Darren will talk a little bit more about our plans there, but the other piece that really stands out here is the idea of long-term compounding returns. This gets to a financial discipline that is very evident if you look at the history of the company over the last probably 25 or 30 years. Not to say we haven't had our ups and downs, but over time, we've made thoughtful, careful, disciplined decisions about where we invest to serve those customers. One of the questions that we ask ourselves is first, excuse me, does the customer need it? Second, how big can it be? And third, can we make an adequate return on investment so that we can reinvest in the business? And these are principles that we don't waver from, we won't waver from and have served us very well. Lastly, just to comment on technology, in 2017, we really put our best foot forward there, hired a new CIO and committed ourselves to investing in the future. In transportation, it's very difficult to differentiate your company through technology, especially if you're an asset-based company. Part of that mission statement is calling out the idea of using technology to harvest the most efficient decision for any transportation needs. So for instance, I mentioned we were the largest truckload carrier in the country in the late '80s when we decided to convert the company to Intermodal in key lanes evolving. Today, our truckload business is essentially without any tractors at all. We have what we call 360box program that I think a number of trailers is...

14,000.

14,000, I don't want to say so much that probably take Brad along, make sure he keeps us in check here. And we learned through time what's best for the customers not to own those assets, but to go and find the right asset. So we have over 1 million trucks signed up under this technology platform, and it allows us to take in that demand and then run it through the algorithms and make assignments that are far more efficient for us. I think the key point I want you to take from this introduction is J.B. Hunt is an evolving company. J.B. Hunt is a growth company. J.B. Hunt is a customer-focused company, and that has got us to this point that we're at today. There we are. There's a good team here that has 342 years of management experience at J.B. Hunt, not in the business. Most of us grew up here. We were talking last night at dinner, I think you said you came into Intermodal in...

In 2000 when it became a business unit.

2000, and what was your job?

I was a Director of Field Operations.

Field operations out there. I was a sales guy. These folks all grew up here. And we worked together in a way that I think is unique. And we actually highlight this part of the company because we see it as a real differentiator, a real advantage for us. And the folks that are here that are fairly new, Stewart Scott, 7 years. He's the CIO I mentioned, but everybody else, you can see is in their high teens and 20s and some of is 30s and I like to say back in the 1900s, we were in the field. And if you look at our revenue distribution, you'll see what is essentially a fairly consistent distribution of positioning. We just let the pie get bigger, right? This Intermodal business is very, very unique. It has a number of unique qualities that we can talk about. But it really affords us to be way in the lead here. And if you look at our current position on investment, we are leaning forward in what we think is a renaissance in the Intermodal business. There was a time, if you know the industry that we were going through a motion called PSR, precision scheduled railroading, which was essentially constraining the railroad with the intent to create a better velocity, better -- more reliable service, higher profitability to reinvest, I get the idea. But through that time, we really saw a lot of constriction and I felt like we were maybe facing a little bit of maturity. Well, we don't think that anymore. And if you just appreciate the distribution here, you see DCS is really about the same size. Our ICS business, as you can see, has grown and the truckload business has actually kind of constrained a little bit. We really manage those two parts of the company very consistently and sort of a harmony. We refer to that category as the highway services. And then FMS up here is final mile services. Distribution of operating income, didn't have a final mile back in 2012. And you can see a still fairly consistent distribution. Important to note that there's more assets here in the green and the blue, for sure, and that will continue to develop. So that operating income production is very much linked to the capital requirements of each business. We also consider the resiliency of the businesses when we invest. For example, Dedicated has a 98% retention rate of its client base. So we know that even though that's a very heavy lift from a capital point of view, it's a very good investment for us once we can capture that business and get it under contract. This is what we've looked like for, I guess, 10 years. Pandemic really was an uncertain time. I ran the company from a little room over my garage, as I'm sure many managers did. And what happened, we weren't sure of is that we were very essential to the economy even in the pandemic. We left on a Friday, called the play. Everybody's going to remote and guess who can't work remote? Drivers, mechanics. So we really had to rally around that over the weekend. That Monday -- I remember this vividly that Monday, we -- our driver force showed up. We had an advantage that we work outside and we work independently, and we trusted that and really leaned into two priorities during the pandemic: The safety and well-being of our people; and honoring the commitments we've made to our customers. And that was our sort of war cry. It was just no substitute, no compromise. And that led to customers really leaning towards us because we were able to say, yes, we have a large fleet. We reallocated those fleets and dedicated. There's over 13,000 tractors we dedicated today. There were essential shippers and nonessential shippers. The nonessential were hurting. We were able to pull their trucks away and allocate those to the food shippers that we had, the staples, and everybody went through that. It just created a real kind of momentum for us. And you can see the result. I mean we really have been able to capitalize on being in position, being customer value-oriented, being people-focused, having the technology to get the job done. Let me stop there and turn it over to Darren for some Intermodal comments.

Sure. So good morning, everyone. I thought I'd give you a quick little stat run down. We own just over 115,000 containers at the end of last year, over 6,600 trucks that do nothing but support Intermodal pickups and deliveries. One of the things we're proudest of is the way we communicate our capacity commitments to our customers, the way we surge with those customers, the way that Intermodal can, at a lower cost produce surge capacity, moving an empty container on a train costs far less than driving a trailer over the highway in order to create capacity. All of our containers are equipped with satellite tracking. And certainly, the long-standing agreements with railroads has separated us. That 1989 moment where Mr. Hunt and Mr. Haverty shook hands somewhere in, I think, Iowa or Western Illinois on the back of a train to say, yes, we're going to do this together. And here we are 30-plus years later. We are BNSF's largest enterprise customer, and we're also Norfolk Southern's largest enterprise customer. And then over 10 years ago, we entered temp-controlled intermodal. It was rocky in the early stages. But over the last 5 years, I would say, we're continuing to invest and grow that, and we see that as a nice runway moving forward. So -- so when I look back at the last 10 years, there's kind of a flattish part there, 2013 even through '18. Revenue was growing. Our volumes were tricky for us and our operating income was kind of stuck. A lot was happening during that window of time. And John touched on it, PSR, while the railroads really highlighted it as an opportunity for them to earn more, expand their margin. It was painful to us as a shipper. It was difficult for us to replace volume lost when they would close down a lane with more volume in other lanes. And part of PSR, to us, meant railroads really dictating the conditions and the way the customers acted. And customers have choices, and that's the role we play with the railroads is to really help educate and communicate what are our customers really want? And they need some level of flexibility and PSR didn't always translate to flexibility. What's different and what's happening today that makes us excited about the future, I think that our rail providers are significantly more aligned with us today about the long-term future of growth, the opportunity for their business to grow and Intermodal being the biggest driver of growth in the rail industry. Coal is not growing and other industrial products don't have the compounding growth elements that Intermodal certainly can. Just last March, we announced jointly with BNSF, our effort to achieve 150,000 containers over a 3- to 5-year window. We're going to do that. That's going to be part of where we're headed. That hand shake between John Roberts and Katie Farmer also happened, and we're committed to each other, and we're excited about the future. I think that many of you may know Schneider has been a long competitor of ours on BNSF. And about a year ago, they announced they were leaving and going to Union Pacific, and we are largely the last intermodal channel to access BNSF's network and BNSF's network is the largest intermodal network in North America. And so our opportunity to grow the way we're communicating with each other some hurdles that used to exist in front of us went away. And so today, when we put our operating teams together to work on solutions for our customers, that working together with BNSF is just very different, and we're excited about the future. I think the pandemic also taught the railroads a significant lesson around international supply chain and international steamship containers that come into the ports and ride trains into the interior, everything about that process slowed down tremendously. And then the opportunity to speed it up with dray trucks and chassis ownership, just it was difficult. And as the railroads looked at the domestic market versus the international market, frankly domestic players are operating faster, and it's one phone call to J.B. Hunt to execute thousands and thousands of dray moves rather than trying to reach out to thousands of dray drayman to go operate the international business. So as we move forward with BNSF, what we're most excited about is their announcement around Barstow and their future where they're going to transload a lot of business. And we're going to be their provider and partner in that effort. There's a massive investment in infrastructure in Barstow, California, going on today, which certainly gives us a lot of energy and excitement for the future. Intermodal is a coiled spring right now. We have the drivers, we have the people, we have the containers, and our customers want back in and services improving dramatically already this year, and so we're excited about the future.

Coiled spring.

I'll be real quick here, Tyler. I know we're coming up on time. But this chart kind of speaks for itself. I do think a little explanation. As you can see, the gray line is sort of operating cash flow. What do we do with our cash? John Roberts said it best. We consistently reinvest in our business. We are a growth company. We think about opportunities, how we can support the businesses and the needs and what our customers need? And so the lion's share of our capital and our cash gets reinvested in the business. First priority of our capital. Second priority, obviously, supporting our dividend. I think we've grown our dividend consistently for 17-ish years. That's certainly a priority opportunistically repurchasing shares. And what you've seen, which has been fairly rare in our history. We have done a couple of small tuck-in acquisitions in support of expanding into some new channels and new verticals, specifically in our final mile business. One thing I do think is misunderstood though about the capital intensity of our business, if you think and John talked about it. Really, capital is in our Intermodal business. We made a big announcement as Darren said, to expand our fleet. At the time, we had 104,000 containers. We essentially -- last March, said we're going to grow this to 150,000 in the next 3 to 5 years, call it roughly 40% growth in those 3 to 5 years. That's a fairly significant undertaking. Intermodal is, I would consider to be more of an asset-light business. We have the 115,000 containers. We have around 6,500 dray trucks to support the movement of those containers once they land at origin or originate at location. The second piece, if you think about the most capital-intensive business we have, is in our dedicated business. And so long-term contracts, we don't go out and buy equipment and say, wow, we hope we can sell our services to get the utilization out of this equipment we want. So a lot of our capital spending is success-based. The contracting process for us in dedicated takes about 18 months to 2 years. We get a signed contracts. We go out and procure the equipment. So when you see -- I would say, there may be a perception of a cyclical industrial company spending capital. I just sort of want to clarify a lot of the capital we spend is success based. So beautiful chart, like the trend. This is sort of the long-term history. And then what's going to support our ability to reinvest, if John Kuhlow, our CFO was here, he would say this is the most beautiful slide we have. It's our balance sheet, have just under $1.3 billion of debt, which has us around 0.6 or 0.7x trailing 12 months EBITDA. So modestly leveraged cash on the balance sheet and ready to push forward with a lot of opportunities ahead. With that, Tyler I've given you 5 minutes.

No, that was perfect, actually. Very, very interesting. If we do have any questions, again, just let me know. I do want to start Darren a little bit about the Intermodal renaissance I love it. Barstow, Intermodal capacity investments, the investments are certainly being made. So maybe help everybody understand why? Why would a customer shift to Intermodal? Maybe some of the benefits of Intermodal from both a quantitative and a qualitative perspective.

Well, the first and easiest answer is it's cheaper than buying a truck to move over the road. That's really how it got started, but there are significant environmental benefits. Every shipment that occurs on rail is going to burn less carbon emissions into the atmosphere and that's certainly a good thing and something our customers care more and more about every day. And then I talked about that ability to scale and manage surge capacity. I think that's widely misunderstood that Intermodal provides kind of a unique benefit as we hear from our customers what they need to prepare for peak season. We're building out a plan to execute for them and to create extra capacity in markets when our customers need it. And so that's a big part of it. The other element I would, maybe, call out is that equipment, these are 20-year assets we're buying. We do -- we're very returned focused, as I think we highlighted, but the container fleet, it can sit quietly and doesn't have to cost you very much money if we get into a bumpy patch. And so our investment in those assets and our ability to provide a return on those assets is very strong. But ultimately, for the customers, consistency and capacity and it saves them money, which those two things are what they want most.

It's a bit greener as well.

And it is a bit greener.

Greener. What is it? 60%...

60% about, that's a good number.

At least something for the shippers to think about. So John, I want to turn over real quickly to dedicated. There's a lot of talk about Intermodal and rightfully so. It is a big piece, but that DCS piece is a very large piece of the overall EBIT mix as well. It's an incredibly sticky business. I know you said you were a sales guy. I think you're a sales guy and dedicated, if I'm not mistaken. So can you talk a little bit about DCS, what that is? What's different? How is that different than just plain vanilla trucking, the depth of that relationship. And then when we think about it from a return on capital perspective, why is that such an attractive business?

Well, it's the most -- I think Brad can echo this, coming to us from an outside point of view, focused on our industry, but it's the most misunderstood part of the company. It looks and feels and kind of resembles a trucking business, which is -- it's nothing like that. It's a contract business, think of a private fleet. In fact, that's our target, addressable market is a private fleet. This is where a customer has made a decision and they have done this billions of dollars of times. We think the addressable market here is about $80 billion. And there's a part of that supply chain I mentioned that can't be served by a common carrier pool. It's not reliable enough. This is where the customer generally makes their money. It's the point of -- purchase, point of consumption. Think of replenishment into your store or a key element of material to manufacture. It just can't miss. And over time, there's been an accumulation of purchase and lease, company will go out and hire their own drivers, take on the regulatory risks, the insurance risks, the maintenance problems, fueling, et cetera. And what we figured out in the, probably, I don't know, early mid '90s, early '90s, was that we knew how to do all those things. And the contract structure is really the secret ingredient here. So when we go sit down, I think -- did you mentioned 18 months? I know we talked about that last night, but it's a very long sales cycle. And part of that sales cycle is engineering the right answer for the fleet. At the end of the sale process, we have a contract that supports a very specific design of utilization to do that routine that customer needs for us. It is a fixed and variable model. So every week, there's a fixed charge for the depreciation of the assets, the management costs, the fixed costs associated with drivers, benefits, et cetera. And then based on whatever activity occurs, miles stops, unloading, whatever else we might have built in, we'll issue charges against that -- directly against that activity. So you don't have any guess work in how much empty miles are we going to see? What's the utilization on a load going to be? That's trucking. This is an engineered contract position that, as I mentioned, has a stickiness, right? It's a resilient business. I actually ran that part of the business for about 13 years, so I do have some experience with it. And our focus really on that resiliency, was we started to find that if we lost business, it was such a long sales cycle that you couldn't grow the business. So we figured out we got to sell stuff that will stay. And then once we get it, we got to know how to take care of it so that the customer doesn't feel compelled to go and see if there's a better answer. In doing so, we've become by far the largest provider of our kind. I think our closest competition here is about half our size. The person next to that person is about half their size, and then it goes really downhill from there. The process is, we move in with the customer. All of our sites, I think we have almost 800 locations today. In almost every case, 99-plus percent we live in the building with the customer. We've become a part of their culture in their discussion. They lean into us to ask us for help. Last thing I'll say is one of the reasons -- one of the differentiating qualities that we introduced earlier was not assigning the equipment to an onerous lease position. So we are able to be more fluid and flexible with our customers and ebb and flow with their business. I mentioned the pandemic. We had -- Nicolas telling the story yesterday about an auto parts company that we had a fleet with that had to close their stores, there was no activity. And over here, we had a grocery distribution company that was double the demand. We pulled from that auto parts company and assign that equipment, drivers management didn't have to charge the auto parts company. We're able to surge up with the grocery company, and what Nick told us yesterday was that auto parts company just gave us 3 new sites. And the moral of the story is, if you can really find a way to be customer value focused, meaning don't take advantage of the short-term sort of industry flows, what would be best if we were the customer? Let's have some flexibility. In a downturn, I've had periods where I will take trucks out of a fleet and just work with that customer. Maybe take a little bit of a hit. And what I found, overtime, was every single time that customer's business came back, they called us for those trucks back and probably a little bit more. So very close relationship, really, really solid structure, super focused on return. So the build of these designs has return on invested capital requirement. And the margin is a product of making sure we achieve that. There's a lot of people that would say, hey, 12 is great or 10 is great or 8 great or whatever. But if you've got a 10:1 trailer to tractor ratio because this particular customer need -- warrants a heavy load, you probably need a 20% margin to make that business return for you, and we're very, very focused on that.

Growth rate [indiscernible]?

Growth rate is...

So we have about 13,000 trucks in that business right now. What we've said publicly is we target to sell gross about 1,000 to 1,200 trucks per year. So that's, call it, high single digits. And then most of 80%-ish of these contracts have annual built-in price escalators that are linked to ECI or CPI, which is higher today than maybe it was 3 or 4 years ago. So you can think of those sort of components to being top line growth. I would say one of the fantastic data points over the course of the pandemic. I think we added -- while we sold just over 2,000 trucks last year, goal, again, 1,000 to 1,200 a year prior, I believe we sold 2,500 trucks. So we've seen a lot of customers lean in during the last couple of years in that private fleet outsourcing that John spoke about.

It's a great question and one that we're putting some new pressure on just because part of the governing factor is having the talent. It's a very people-focused business. The capital is there, if we can get their trust built and we're getting a lot better at that. But by growing as much Brad just mentioned, we have a larger labor pool to work with. And I mentioned that we live on site. We need those managers to be really, really broadly experienced in not just assigning a truck and a driver, you've got to manage that fleet, you've got to think about safety, you've got to think about maintenance. You got to do billing, you got to work with customer, a lot of pretty heavy lifting there, and that's been a governor on us. And that 1,000 to 1,200 is a good number. When we were 6,000, 7,000 trucks, that was a good number. Now that we're [ 13, ] I'm starting to kind of get a little itch and think if it's an $80 billion addressable market, and we've just added all this talent in a couple of years, those folks are going to be more seasoned. Another point that Brad makes, which is incredibly important is, building in that ECS CPI rate component means we don't have to sit down every year and renegotiate. And so when you get inflation, you don't have to have these wars with your customer because we all kind of saw it coming.

Perfect. We got to take this downstairs. We do have a breakout, but thank you guys so much for coming.

Thank you all for being here this morning, so early.