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

Great. Let's keep it going with J.B. Hunt and very excited to welcome on stage, President, Shelley Simpson; Spencer Frazier, EVP of Sales and Marketing; and Brad Delco, everyone's favorite IR person, Of course as we know.

Thank you so much for being here. Shelley, obviously, given your diversification, given your market size and position, you are a great read on what's happening in the macro as we speak. So we'd just love to get maybe a couple of minutes from you, kind of overall and what are you seeing out there?

Okay. Great. So I've talked about us being in a freight recession now for several quarters. I might change that slightly to say we're coming out of a freight recession. One of the things that we talked about is our customers were working on destocking, switching over to maybe pre-COVID inventory levels. For the most part, our customers coming through July have -- I would say, pretty much completed that as part of their planning process. Our customers are cautiously optimistic about the rest of the year. We tend to be even more cautious than their cautiousness. But I would say most of our customers are saying that Freight will be up slightly coming through the back half of the year. Some are talking about a peak, some are talking about no peak, more moderate peak I would say it's kind of all over the board depending on which customer you talk to. But I would say, slow and steady up would be more what we're planning for, and hopefully, we'll have a nice surprise.

Nice. You've been reluctant to use the word green shoots before. But that's dangerously close to green shoots, probably one of the more optimistic kind of outlooks we've heard so far at the conference. But any way you can parse that? Any particular end markets, geographies, types of customers that seem better than others?

Well, we are very diversified. So I think that, that is good news. If you look at our Dedicated Contract Services business, that's the portion of the business is closest to the end consumer. And that business is relatively stable. And so that has been more resilient through the freight recession and so have some confidence as we hear part of that. We don't have a lot of customers really concerned economically. They tend to be more optimistic when it comes to things like that, the -- we really do a lot of surveys and discussions with our customers one-on-one as to what they're thinking there. But I would say retail, I think the destocking has occurred largely from a retail perspective, and that's certainly going to drive what happens here in the back half of the year. That might be my feedback there.

Got it. Shelley, you and the team have been through many cycles, certainly more than I have. Have you seen a cycle like this where you kind of have ended the destocking and the downturns over, but your customers are so reluctant to actually hit the button on the restock because they're not sure what happens to the consumer and the macro kind of -- how does it end? And b, is this like water building on the other side of a dam where when they all finally hit the restock button together like everything falls apart?

Well, I would say no one has been through March 2020 through the second quarter of this year. And so it's made everyone very cautious around what they think the future will be even us as well. I will say for us, we're thinking very long term about our growth trajectory and also how our customers think about growing with us. So for us, we're going to make sure that we're prepared and ready that when our customers say, we're ready to go, that we're ready with them.

Got it. Let's talk about the Intermodal business. Obviously, your primary business, kind of, a, how are demand patterns looking like there? b, obviously, the rail service levels have improved quite a bit. I think the last time we met, you said -- I think John Roberts said that it's kind of back to 2019 level, but not as good as it was before that. So kind of how do you see that progressing in the coming quarters as well?

So our 3 major rail providers, I think, have all made great improvements towards consistency and service. And that's been very important for us. We've talked a lot about that being able to convert from the highway back into intermodal, grabbing some of that share that we've lost to the highway sector over the last several years. And I think that part is important -- I'm sorry?

Yes. Service levels as well as how this demand is...

So if you look at what's happening in Intermodal, demand for the most part, if you look at inbound to the West Coast or inbound imports certainly have started to recover, and we're off of negatives into, I'm going to call it, a neutral position now. That's going to be more positive and more favorable for us. We have talked about we've seen positive momentum of what's happened inside Intermodal, particularly for us. The other thing we said, Ravi, is we do believe we were gaining market share through the bid season. We have fully implemented bids as of July. And I think that we're starting to see some of the results of our bid season and taking market share off the highway, but also just in general, customers not having to destock as much and starting to work towards replenishment.

Got it. I have this question for you or Brad, but just can you remind us again what the timing or cadence of your contract renewals are kind of when do you start to get into 2024 bid season and maybe what does that initially look like? I think there have been some channel has sort of pointed to like probably a step down in Intermodal pricing and then the last few weeks, maybe even if you're seeing any of that.

Yes. So our intermodal bid season typically is from its third, fourth, first and second. That's the way we think about it. And that's when pricing has been reset. So when I said we're finished up, we'll tend to start the very beginning of this season will happen here in the next month or so. But the bulk of our bids are going to be priced really in the first half of the year for implementation. So, I would say that's on bid season. Pricing has been reset here coming into Q3. We haven't speculated or started to work on what our 2024 bid seasonal price will look like. We'll optimize for return on invested capital and then develop our volume and pricing strategy as a result of that.

Got it. Let's go to Dedicated. You kind of mentioned the resiliency of the business. Obviously, it's a big growth area within transportation overall during the pandemic and that resiliency continues. What happens when the up cycle comes? Like do you expect to see a big leg up? Or will it again be kind of stable and resilient through the up cycle as well?

Yes. Well, one thing that we're really proud of is what has happened with Dedicated through really this downturn in the freight market. I think our strategy of focusing on private fleet conversion has really benefited us from a resiliency perspective. When things start to rebound, that should be good news for us, continuing inside dedicated contract services because that means the labor market will start to get tighter. Other considerations will start to occur, and we'll continue to have conversations with our customers around that. If you look at what's happened with Dedicated, any time the market tightens up, we tend to have customers start to think about outsourcing their private fleet into someone like J.B. Hunt. So we've had a good first half of the year in new sales, feeling confident about the second half, really within the range of new sales in total. I think for us, we have a 98% retention rate inside Dedicated. And so that's what we're focused on, making sure that we grow with our customers over a long period of time, I think in the up and the down market that we can thrive inside Dedicated.

Got it. Running in how the business works kind of do -- like in slow periods like this, I mean your customers don't have stuff to move, you're like -- you don't have stuff to move, like when you're talking to your customers, is this when you like create strategies for the future? Is this when you kind of are more able to have a conversation on, hey, let's talk about your supply chain needs and your dedicated needs versus when the world's on fire, everything is like I don't have time or this.

I think it's so important during this time that we've become very offensive with our customers and how we think about their strategy. We are unique in that we are co-located with our customers. We're in about 750 different locations around the country with our customers. And if you think about what we've gone through from a freight recession perspective, some of our customers, maybe their volume isn't at a threshold where if they typically need 20 trucks that we can fully utilize 20 trucks. We tend to reoptimize that go back and present a business case to our customers that maybe we should take out 1 or 2 trucks from them, reduce their fixed costs inside the contract. And that for our customers say, you know what, you do have our best interest in mind. And so we try to think about our customers over a long period of time in total. And so that also allows us when the market is really hot, and we are struggling to get drivers so we can go and have a conversation with the customer in that moment to say, okay, here's what we need to be thinking about. When our customers see us flexing both ways, they tend to trust us and really help us think about our strategy. But that's one of the key things when you're at 98% retention, Ravi, I think our customers bring us into those conversations to think about what should the future look like, whether it's -- whether footprint should be or how they should be thinking maybe new markets they want to serve One of the things that's important for us during this cycle is that we get a customer in a position where they're fully utilizing the equipment that we have for them. That way, when they look at their business and say, this makes a really good business sense for us to continue to stay with J.B. Hunt. When that business comes back, the first thing you start to see is our customers start to add back to that contract, the business went away and then start to grow as a result of that. If you think about new business sales and our current accounts, those current accounts will start to grow as a result.

Got it. As resilient as the demand side of Dedicated as you guys have had a few -- I mean, you and all your peers have had a few cost inflation issues in that business. How is that looking? Kind of are you going to lap the worst of that? And kind of what's the trajectory like for the next couple of quarters?

Let me -- let someone else take the stage here for a second. I feel like I'm dominating here. Brad, do you want to take that?

When we think about a lot of the challenges, and I'm assuming that we're still staying on Dedicated. We saw inflationary cost pressures on the equipment, we saw pressure's actually getting and receiving the equipment. We had to hold equipment longer than what we would normally do, we actually had to hold more units based upon downtime as a result of extended life on some of the equipment. So we were seeing a lot of costs there. One of the biggest cost items though through that period of time where we saw unprecedented growth in our history was around labor and particularly around not just what it took to bring new drivers into the system but also going out and recruiting and attracting those drivers, training those drivers. And so where we are today, given that the market has cooled I would say we're seeing less pressure on whether it was sign-on bonuses or other actions that we took to grow the fleet at that pace. So I would think inflationary cost pressures in that business have moderated from where we were. But I think that there's still challenges out there as it relates to upward pressure on maintaining the equipment. Actually, there are still parts that are, in some ways, difficult to get in a timely manner, and so we're working through all that.

Brad, are your customers sympathetic to the fact that your costs have gone up? And are they like, hey, the market's cool, so maybe pricing needs to enhance?

Yes, I'd say sympathetic. I think -- Yes. I think our customers are always trying to balance those trade-offs of cost capacity and service cost is always a focus. And we have to talk through that and find the ways to have open, transparent conversations with them. From a Dedicated perspective, we have different things in place with our agreements to kind of guide those conversations and then the other things that we're trying to do is really make sure that with the commitments that we have in capacity and cost. But then when we come into the next bid or the next thing that there's no surprises with what we need to do to be able to execute on the service that they're expecting from us. And I do want to talk just one thing, you hit a button. You said, okay, our customers all of a sudden going to hit a button, whether it's dedicated or otherwise, and we're going to have this massive wave change. I don't see that at the moment. I think our customers have their inventories rightsized and they're going to make sure that they've got not just resiliency in their supply chain, but agility in their supply chain to keep that inventory flowing and they could speed it up, they can slow it down to meet their customer demand, but to keep their inventories, I would say, considering interest rates and other things at a level that's probably where they're at today. Now again, we have to see different demand catalysts and other things that would give them more confidence to have more of a just-in-time to adjust in case position again.

That's a good point on agility. And I had a nearshoring question, Frazier, so maybe I'll ask you that now. But also on that point, have customers shorten their supply chain so that it's now much closer to them. And so they don't need to preemptively make that restocking decision as far out as they used to. Is that some of what's going on?

Yes. I think there could be some of that. I think the things that they're really looking for is consistency, and consistency across the board and then how they can execute their supply chain. But we do see nearshoring continuing to be a trend, and that's going to be opportunities for us to leverage our network from whether that's our transload network, our facilities in Mexico and things like that and our teams to take care of that business. So we want to make sure that we're in a spot to grow where our customers need us to be. But we want to make sure that we can hit that service consistency in that value proposition wherever it's at.

Can I make one note on -- you asked me for customers are sympathetic. I want to just specifically call it Dedicated. Most of our customers either have had a private fleet or they are running a private fleet alongside of our private fleet. What they are sympathetic about is understanding our drivers, and understanding the work that they're doing. I do think through this cycle, customers have understood better the value of the professional driver to their supply chain. So I think that's the one area that we've done a great job working together to say, how do we get more professional drivers on the road, [ seat ] the trucks that we really can have a more fluid supply chain.

Got it. I want to move to ICS, obviously, a segment close to your heart. But again, one of the beauties of that business is kind of irrespective of an up cycle or a down cycle, kind of the business should be relatively stable there. But again, there was some concern that spot rates went up and contract rates didn't that would sort of crush the margins there, but spot rates have not really gone up. Does that mean the outlook for 3Q is actually better at ICS than it may have been at the start of the quarter?

Does it mean that what?

The outlook at ICS is better than what we thought at the start of the quarter.

Yes. I would say for.

This is the warning look.

Yes. I saw that. Here's what I would say. For us, we're in a unique position organizationally because when our customers think about J.B. Hunt, they do think about our scroll. They see that yellow scroll and they think about all services that we can provide for them. During the crunch of the supply chain, our customers came to us and just wanted an answer. And if we couldn't do it in Intermodal, we were able to serve them in Dedicated or in the Highway space, whether that was in JBT or ICS. So we have a little unusual activity, I would say, happening in ICS, where we had customers that we were doing business across our segments that we couldn't do it in one part of the segment and ICS would fill in that gap pretty quickly. That business has now gone back into Dedicated and Intermodal. And you're seeing some of that change happen overall. Here's what I would say. The brokerage bucket in general, has been impacted the most during the freight recession because the change that has occurred so quickly. So just like on the way up, from March on in 2020, brokerage saw a huge benefit. You're seeing that exact opposite happen. I would say, from a brokerage perspective, there's always going to be cycles that occur. Our ability to kind of shrink that impact to us is going to be really important, but I feel comfortable with what our strategy is, we are thinking about that, though, because things have moved so quickly up and down, making sure that we have a good model and strategy for the long term for our customers still supporting that scroll in the business unit and business needs that they have but also making sure that, that business can stand on their own with margins that are appropriate.

Got it. I do have a few more questions for you, but I want to see if anyone in the audience had any questions for you before that.

One of your rail peers was up here earlier a little bit talking about how they think the industry as a whole needs to work together better a little bit in order to be able to maybe gain some of that share back as a customer, one of their biggest? What do you think are some things that they can do or that you'd like to see from the industry as a whole in order to kind of better position that over-the-road conversion.

Yes. So I might change that slightly to say, I do believe that we have to be jointly focused on the customer and what the customer need is to create long-term value proposition for customers to come off the Highway and into Intermodal. Our customers are very interested in a consistent product with the right level of capacity. And I think that's been a struggle for the last -- almost 7 years. A real struggle from an Intermodal space, another reason why our full suite of services had to kind of supplement what was happening in the market. For me, it really -- and I'm just going to speak for J.B. Hunt because I can't really speak for the rest of the industry, and we are exclusive to the BNSF. For me, I would tell you, I feel like with the railroads having a focus on customers, they're now starting to think more about speed and consistency and what that needs to look like. So really us working together to say, let's design what that should be for customers in these segments. So obviously, in their key lanes, they understand what that's going to look like. But being able to measure customers and success with customers jointly is going to change the way our customers view our Intermodal product together. I think once we start to do that customer start to say, okay, so this is the Intermodal that I am used to experiencing this last 5 or 6 years, now we're through whatever the challenges were, and I can resume to having Intermodal as a stable part of my supply chain. Stability was a huge issue. And I think that's why our customers went away from Intermodal in general. I do think that, for us, all 3 of our railroads are very focused on our customers. They're very focused with us and they are focused on what's happening from a service perspective. So we see huge growth potential, it's one of the reasons that we've made a commitment to grow up to 150,000 containers in the next 2 to 4 years. We're doing a lot of planning around that, making sure that we are ready. Our equipment is in position. So when our customers are ready to mode [ convert ] out of Highway into Intermodal that we're in a great place. As long as the railroads are jointly focused with us on our customer, I think we'll be able to do that.

Shelley, we had both the Canadian rails here before you and they are both -- each of them was touting their new services from Canada to Mexico. How do you play a part in that with the BNSF. What structural changes do you see in any in the Intermodal space going forward?

Yes. You may want to take that? I can take it. So I would say, you heard Spencer talk about near shoring. We don't see a major change occurring from routes coming into L A. Long Beach in a great magnitude over the next decade. However, we do see Mexico continuing to grow and grow market share. We are a large provider inside Mexico. That's something that we're constantly thinking about. We did just make an acquisition last year in Laredo to make sure that we were well positioned for our long-term growth. We're working on that strategy. We feel confident with our customers as to what that looks like overall. And I would say Mexico continues to grow for us. It's been a good growth channel for us the last 5 years. We expect that to be a good growth channel for us for the next decade.

Got it. I want to talk about J.B. Truck as well because that segment that doesn't get as much attention given its size, but 360box has been a great product for you. Kind of the whole power only thing has been a big growth area for the whole industry. Do we have a definitive answer on whether that was a one-off during the pandemic or a real growth area going forward? How is the cyclicality of that business looking relative to some of the other segments.

Yes, I think that's a great question. Go ahead, Spencer.

Yes. I think when you think about our customer supply chains, the large part of the market, about 50% of that does demand that dropped capacity at the loading and unloading. And so really, we think 360box has a long runway, a lot of opportunity. And really, when you think about the way that we manage our intermodal network, there's a lot of things that can translate over into managing that box network the same way and to make sure that we have the pricing, the consistency of service and execution to provide that service to our customers and get the right returns. So we're excited about where we're at. And I think that to Shelley's point, things that happened during the prior 12 and 18 months, I don't know that we were managing a network the way that we can today and also going forward. So we're looking forward into this bid season and saying, okay, what can we do to really put our network in a position that serves our customers, drives the most value there.

And I would say density is so important in the Highway space. And so for us, we look at our highway services area, which is JBT and ICS, more complementary together. So one of the strategic moves we made at the beginning of this year was to really move all assets from a truck perspective outside of our JBT segment. So really, that's just going to be trailers, we're using our J.B. Hunt 360 technology and really blending those two networks together to be able to eliminate inefficiency. But keep in mind, although we are large in that space, we're still not large enough, and it takes time to build a really great network. And what I would say, it took us many years to develop an intermodal network. For us, it's not important for us to get really big, really fast. We want to make sure there's several things from a technology perspective, what the network should look like, how do we make sure we retooled for post-COVID, all of those things we're working on from a strategy perspective, but highway services is very important strategically to our customers and it becomes strategically important to us. What we would like to do is take all of our shipments that we the largest part of the market in the highway space. All the shipments in highway that we can convert into intermodal for a more efficient way, a more consistent way to do business. That's going to allow us to continue to move into that space and then develop a network from a truckload perspective, that makes sense with a drop trailer box and then live loads really complementing that, making the most efficient way to move business.

That makes sense. And maybe we can close out by talking about a topic that I know is close to your heart, we use technology, you guys have always been like a tech leader among your peers, whether it's EV trucks or your partnership with Google on the ICS side. Can you talk about like 1 or 2 projects that maybe you're like most excited about and that can add more value to your customers in coming years?

Yes. So first, I would say our Google relationship is not just ICS, that's across our entire supply chain in all of our business units. And I would say we're just excited because our J.B. Hunt 360, we externalize that to the market. But actually, our internal systems is J.B. Hunt 360 as well. So it's the first time we've taken our inside system and externalized that to the market and really being able to think about the market be faster speed, how we think about that. If Stuart Scott were here, who's our CIO, he would talk a lot about what we're doing from an efficiency perspective and how we can think about that. So that's one area [indiscernible] helping us lead inside that space is kind of the business lead with Stuart. And then we are moving operationally into the cloud and onto our new system, that's very important for us. So we imagine by 2025 or so, we'll be fully moved to a brand-new platform called J.B. Hunt 360 that's fully integrated for the next 20 years, really reimagined our ability to now think about how do we leverage our technology investments to deliver not only for our customers but also become more efficient in total, we really think we can unlock that.

And given that Google partnership, kind of are you working with them on any AI kind of platform?

We are. We're actually working with them in several areas.

Okay. With that, I think this is a great place to end. Shelley thanks so much for your time, Spencer and Brad as well, and we will join soon.