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

Yes. The tuck-ins for the most part, have been over on the final mile side. And so I'll talk about that here in a segment. On the dedicated, I would just tell you that we're not going to go purchase a competitor. We're not really looking to do that. But we think we do acquisitions every day when we take over private fleets. We just don't have to pay a premium for them and have an intangible. So we'll go purchase a company's private fleet, run those, run those more efficiently. So we view that as acquisitions. And so that's what we do constantly. But as far as going and buying a competitor on the dedicated side, I don't see that happening. We've not done that in Dedicated, and I don't see that happen on Final Mile. We've done 4 or 5 small tuck-ins to really to help us get on the furniture, and really help us get in the fitness equipment and off-price retail. And so those segments along with appliance, which we had a strong position in, we think we're good where we're at. We're always -- if deals come to us, we'll look at them. But for the most part, I think we're settled, and now we're just going to try to execute. And as we've talked about in final mile, we're really focusing on improving the bottom line and putting some business at risk now that we've proved our service. And so we're having quite a bit of success in doing that and retaining some business and some has exited. But for the most part, we've kept it with better rates. So you'll continue to see us improve there. And on the Final Mile side, we've had some pretty significant wins recently from some of our competitors and service issues that they're having with some customers. And so we've picked up some business at appropriate margins there. So we are seeing some growth in Final Mile. So other than I say growth in sales. But then I shared also that our volumes are down on furniture on our existing stuff. So that we're facing some challenges there, but a lot of that, we've got variable PTE in there as well because a lot of that on the Final Mile side is non-asset.

Now it's interesting that step away from Intermodal for a minute, especially dedicated almost 30% of revenues, 40% of EBIT. So it's good to hear the different things. Brad, let me just jump over on brokerage ICS for a bit, 12% of revenues, but you flipped to an EBIT loss now. It seems like the segment getting increasingly competitive, maybe just from an analytical point of view, segment turned to a loss from a profit, which happened earlier than expected, right? If you go back to fourth quarter '20 during the COVID demand wave. So volume is down 25%. Some of your peers were able to post some volume growth. What's the outlook for J.B. 360 ICS? And do you see that more competitive landscape? Or what's your view?

Sure, Ken. A couple of things come to mind for me. We did kind of outperform in the '21, '22 windows versus our expectations. And I think that, that did demonstrate kind of the power and the benefits of the technology investments in the J.B. Hunt 360. And so we'll give ourselves a good check there that, that technology enabled the scale that we had spoke of previously. In doing so, what we did find ourselves may be different than many others, we got a little disproportionate in the mix of our contractual volumes versus our spot volumes. And we were actually inflected. Normally, we would be in a 60-40 relationship contract versus spot. We found ourselves through the disruption of the pandemic and that accelerated growth, we kind of found ourselves in a 40-60. And so I do feel like while that might have benefited us in '21 and '22, it hurt us towards the end of '22 coming into '23 with what happened to the spot market and just the dramatic shift that we've seen there, which really was unprecedented. We've certainly seen flips before but not that severe drastic anytime more recently. So that kind of put us at a disadvantage coming into Q1. And then obviously, as we've been working our way through bid season, our goals and priorities were to grow back our contractual volumes and by and large, I feel like we've been successful at doing that through the bid season. However, bid compliance as was referenced earlier, has not been anywhere near historical expectations. And so that's further dampened what we experienced in Q1, the dramatic shift in volume. We touched on this at our quarterly earnings. Some of our volume disposition was not market loss. It really was that we were a good outlet to support the other businesses in J.B. Hunt through the peak demand cycle of the pandemic. And so that meant that we were supporting a lot of overflow freight for dedicated and needs maybe where we were short drivers at certain points in time. Maybe we were an enabler for them to start a fleet when they couldn't get the equipment. We would start that supporting it with brokerage, and then it would transition into Dedicated as Nick was able to onboard the tractor power or trailing commitments that we needed there. And we saw that similarly in Intermodal. Another example of Intermodal is that in the disrupted port West Coast rail service, a lot of shippers wanted to convert their freight to highway. And so we were a great outlet for that in brokerage. We've now seen a lot of that go back now that the volume is not creating kind of turbulence in the Intermodal service system. And so we see that go away. We see Nick shore up his fleets and that business dried up for us. And so when we evaluate externally, it doesn't look great. When we look at it, kind of breaking out those subcomponents, we're still not satisfied with where we landed, but certainly, the picture did improve. And now it's really about trying to rebalance our cost to today's flow of volumes in the market that we find ourselves in today. Brad mentioned this, it is a variable model. And so pressure and downward pressure on purchase transportation, that's our largest expense in brokerage is a top priority for us. And I think you'll see continued improvement in fundamentals as we turn the quarter as we work through the balance of the year in terms of managing costs. I will mention that the other side of my responsibility, which is JBT, that's our predominantly our 360box product. We did see double digits growth in Q1 in that area, and we continue to be excited about the prospect of that business. And both of those are leveraging third-party capacity at this point. We've slid over all of our owned tractor assets that were in JBT into our Dedicated contract service business unit. Most of what we had when we made that shift, we're Dedicated light fleet. Some of them had evolved into really legitimate fundamentals of dedicated, meaning that's a long-term contract with fixed and variable economics and inflationary indices. And so it just made sense for us to continue on that journey. So fundamentally, we have no tractors that we own inside of any part of highway, whether that's JBT or ICS, and we're leveraging all of our third-party capacity, and that's a hybrid of independent contractors, small fleets that contract with us as well as brokerage capacity. And just making that best decision about sometimes it would have been an ICS reported load, but we like it to help move the network on the 360 box. And so we will haul that inside of JBT. So it does get a little harder to understand the makeup, which is why we've been talking and kind of referencing the business as highway services. And really for me, it's about drop trailing needs is our JBT side of that. Live load needs is our ICS component of that. But really, we're trying to manage those 2 networks closer together today to drive efficiency.

So I was going to come to the blending and the moving of assets, but let me just stick with brokerage for a quick second, just because I want to understand because we had such a swing, right, we went from making money quicker than we thought to now seeing losses, is there a time frame to working back to profitability based on what's on the market?

Again, we don't give guidance, but we're certainly working hard every day to better balance our cost position and our purchasing position against the flow and the volume. It's hard out there in the brokerage world, it's a fight. Eventually, we'll see capacity start to exit at a more material pace. We have seen some exits. And certainly, there's a thought that there's a lot more to come...

You're not seeing an accelerated pace of capacity exiting from the corporate side?

Not yet. We're not. We're seeing some higher than normal, but I wouldn't consider it an accelerated disposition at this point.

So not like capacity capitulation?

Not yet. Now we pay real close attention to what rates are and what we believe carriers cost foundation is, and we do believe that they're in a loss position today, have been probably 7, 8 months running, and it's worsened. We've seen in other cycles that it could take 9 to 12 months before you get to that accelerated disposition of capacity. So I do think that we're nearing that, but there's not a lender today that wants a truck back and certainly, a truck that was secured during the pandemic at a very elevated cost. And so we know that lenders are working deals and extending terms and foregoing payments, trying to help the survivability of some of those carriers. But ultimately, that will come to a head, and we would anticipate that sometime in the second half.

I just want to kind of -- you both touched on some of the moves you made from one category to the other, and LTL brokerage has pulled out of ICS into a Final Mile. LTL seems to have a bit more stable market. Does that make ICS more volatile then in terms of taking out the stability of LTL? Or am I looking at it wrong way?

We didn't look at it that way. What we wanted to do is make sure that we best position each of our businesses in the business units that make most sense. And I'm going to pivot to Nick on the LTL with one of our most recent acquisitions and what that acquisition did for final mile and the complementing nature of LTL, we just felt like it makes more sense for us to service that mode inside a final mile, which was really what drove the assets that we had in JBT into dedicated. Again, when you think about what were our vision for JBT is 360 box and managing our box network. We don't need tractor assets to be able to accomplish that. Nick manages 13,000-plus tractor assets in Dedicated. And so we just feel like it positions us to give a better comprehensive solution to our customers. So I'll let you go a little deeper on Zenith.

Yes. With our acquisition of Zenith, it was a furniture LTL company that we purchased and really like that. What we're going to be able to do basically take first mile, middle mile, last mile in the furniture space. They were the best in the LTL business for furniture. And so we think with the LTL coming over on the other side on the non-asset, we can take some of our systems, hopefully, integrate them, and it just fits more nicely with us handling the LTL portion over there, where we're very familiar with that. So we're just trying to get put it before we can execute it and focus on growing it the best. So that round up in Final Mile and then the what we would call the dedicated, very similar dedicated in the truckload business. We want to get the assets out and move them over there, and we execute that. They just rolled into our normal business without any headcount or anything like that.

For me, Ken, our vision statement at J.B. Hunt is to create the most efficient transportation network in North America. And so through that lens, that's where we felt like it's best positioned there for us to not have duplication of an offering. And Nick was starting to get much heavier into LTL capabilities. And so we just feel like putting those things together and then we made the decision. So first, this criteria was, let's put them together. The second criteria is where does it best live to be supportive now and in the future. And in those examples, it was dedicated in Final Mile.

So let's jump to Intermodal as we've got a couple of minutes left here and the Big Kahuna within J.B. Hunt, right? So if you think about the deceleration in Intermodal volumes, you talked about down 2% down 4%, down 8% last quarter. Has that -- we talked about not seeing any change. Is that stabilized at that kind of exit level? Or is there any continued deterioration that you would talk to.

It sounds like a guidance question. My response to that, I mean, I'd say, again, similar to what Brad had already mentioned, we haven't seen much of a change from March I'm not going to necessarily specifically call out that, that means year-over-year percentages haven't changed, we'll repeat what Darren Field shared. April and May a year ago was actually when things in Intermodal really started sort of taking off, and we felt rail network was performing well. We are onboarding a bunch of new bids and awards that we were receiving before the rail network really and the fluidity challenge really heat in kind of the late June, July period. So we do have a little bit tougher comps in May and June, but we haven't seen much of a change in sort of the volume or demand outlook since what we saw in March.

The only thing I would maybe add is that we have been optimistic about the awards that we've been getting through the bid season in Intermodal as well as in highway unfortunately, going back to that bid compliance, it's just not materializing in real freight. And so you go into a bid, you have a strategy, you want to grow in these areas. You want this amount of volume and by and large, we've accomplished those things. But with compliance at an all-time low, it's just not translated into incremental volume the way we had anticipated through the bid season that it would yet anyhow.

Can you put that into perspective and as much as you can describe it in terms of what happens with pricing in this part of the cycle, right? You're not going to answer a specific Intermodal question, but in this part of the cycle, when you have truck availability so weak, what -- compare your amount that's under consistent contract and people looking for capacity versus how you have to compare and contrast with the spot market. And I think if I remember right, you're pretty kind of as opposed to trucking, which is all that March to May bids, overwhelming amount, it's much more balanced at Intermodal. So can you give your perspective on it?

Yes, we talk, I think, in Intermodal, and I think it's a little bit different on highway. 30%, 30%, 30%, 10%. So 30% implemented in the first quarter, second quarter, third quarter versus fourth quarter. And if you think about when that pricing action occurs, it's the quarter prior. So we effectively repriced 30% in Q4 that implements in Q1. You would expect us to be about 40% through with new awards, new implementations by the end of the first quarter. In light of this environment, we've seen shippers pull their bids forward. And so we -- I think we shared in the first quarter, we were about 50% through new implementations. That doesn't mean that we have 50% of our business, all under new contracts in Q1, that's where we kind of landed at the end of March. And so you'll obviously have a greater portion of your book of business repriced in Q2 versus Q1 and Q3 versus Q2 before, I guess, October, so we'll start the process all over again. So in terms of -- I think your question was relative to the truck market, our Transcon volumes were down 9% in Q1. That is typically where you see the widest spread between a truckload rate and Intermodal rate say, historically, that's 20% to 25%. What's driving that weakness in volume is largely related to imports coming into Southern California. And so what I've shared is our SoCal Southern California outbound volumes are obviously worse than the down 9%, maybe other elements of the network, for example, inbound SoCal is doing better than that down line. So that does have a mix impact on our business in terms of yield or revenue per load. What I think is important, though, is our East Coast volumes were up 1% in Q1. So you think about the network, the shorter length of haul, where we're going to compete in Intermodal more directly with truck, it's in the east. And at least I can still say we grew volumes in Q1 in the East, which is the most truck competitive. Granted, they're up 1%. So what happens in highway, what happens with contract truckload rates will influence what's happening in Intermodal. I just say -- I would say it's probably not to the degree, probably doesn't see the same volatility.

And then maybe just we had the Chairman of the STB here talking about the continue to sustain poor performance on the West Coast from the rails and their need for employees. So how is the -- Burlington's network had a bit of an overall too, right? They've moved off Swift and Schneider and Hub Group years ago onto the UP network, how has Burlington's network responded in as much as you can talk about your service levels from the railroad.

Yes. I mean I'll share what Darren shared on our earnings call and say that we've seen meaningful improvements in rail velocity and fluidity and service in general. In that, I think at the time, we were saying we were pretty close to being at pre-pandemic levels from a service perspective. I think the caveat there, hey, pre-pandemic service levels weren't necessarily great, but we certainly come a long way in the last call it, 12 months from where we were to where we are today. There's a lot of capacity on the rail system where we are now. We certainly have a lot of capacity with our Western rail provider and so a lot of opportunities for growth in the future. And that's obviously all the investments that we've talked about that we're making today, maybe they're not for the second half of 2023. But J.B. Hunt has always managed this business for the long term and a lot of the investments and things we're doing with our people, things we're doing with our facilities, things we're doing with our capacity in our containers and our chassis and our trucks and our technology are all for what we think that opportunity looks like 3 and 5 years from now.

So Nick, let me -- I guess we're kind of getting to the end here, but how do you think about long-term ROIC levels given your prior Chairman talked about the Purple [ Cal ] type of investments, where to focus and how to pivot given new investments in brokerage last mile Dedicated, outside of Dedicated Intermodal. How do you think about how to direct that capital, and what that can do for J.B. Hunt?

Yes. we clearly look -- I mean, that's our North Star is ROIC. And so we have targets for each of the business units on how we want to deploy our capital. We still feel very strongly about all 5 segments. We're investing heavily in them for the long term. We're not worried about the next 2 quarters. We want to execute the best we can there. But our vision, if we're going to put our capital in our trucks on the Dedicated side, we don't buy the trucks of the trailers until we have assigned income the contract. So it's kind of a pool system. And then on the Intermodal side, we made that announcement on our capital on our containers, so we're in it for the long haul. We think we've got a lot of capacity available on the BNSF to fill up. And so we're still making those capital investments there. And then on the brokerage side, we're still making some small investments on the technology side from a capital standpoint, but we've got past the big hurdles, I would say, in that. And so we are very disciplined on our capital, and if there's another area that we think we can invest in that's logically adjacent, we're always open to it, but we're driven by what our customers need and want. And then we try to give a proper return back to our investors.

I think the way our CEO says that all the time. What do our customers need or want? Do we feel like we can be successful at it and can we generate a fair return. And so really, as long as we can answer those 3 things, Ken, it would open up ideas of where we might go next if we feel like we can say yes to all 3 of those things.

So I guess just to wrap it up then, if I hear you right, right, and again, I want to get your input on this, but no real green shoots continue no real changes from March, still low bid compliance, some tailwinds on operating ratio, whether it's lower fuel, but you counter that with some rising costs need to replace equipment. So still a tough backdrop. Any other message you would want to leave with us.

It's a matter of when, not if.

Matter of when, not if.

That's what our CEO said at the end of our first quarter call, and we'll stick with that.

So outstanding. Brad, Brad, Nick, thank you very much for joining us. Appreciate you into the conference.

Thank you.

Thank you.

Thank you, all.