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

All right. So we'll get started here. Good afternoon. My name is Garrett Holland, senior analyst covering transportation and logistics at Baird. We're very pleased to have the J.B. Hunt team join us this afternoon for a discussion. From the company, we've got to Shelley Simpson, President; Darren Field, Executive Vice President and President of Intermodal; as well as Brad Delco, Vice President of Finance and IR. We're going to turn it over to the company for a few quick opening comments, and then we'll return for Q&A. I'll turn it over to Shelley.

Great, Garrett. Thank you. Yes. So thanks for having us. Our mission at J.B. Hunt is to create the most efficient transportation network in North America. We think about that across our 5 business units. And if you think about any package, whether it's coming inbound to the U.S. on an import or being manufactured all the way to the final consumption into your home, that's really the way we have aligned and structured our 5 business units to be able to handle that for customers. So think something bigger than a parcel shipment and larger than a box. For the most part, we can handle that across our businesses in total. When you think about the company overall in 2022, we were nearly a $15 billion company with about 35,000 of us executing every day on behalf of our customers. We are located all throughout the U.S., Canada and Mexico, and that is where we're focused on in total. We look at it overall from an asset and non-asset perspective, really solving for our customers based on what the most efficient way is to do business in total. We are very focused on our 3 priorities in 2023. We remain committed in our long-term approach to people, technology and capacity for us. We think about it from a people-first perspective, fairly simple. If we take care -- good care of our people, they're going to take great care of our customers, and ultimately, that's going to take great care of our shareholders. Our long-term view allows us to move throughout any cycle. So in the up and the down, we do try to work with our customers to think about what are proper returns based on what the cycle looks like. The second thing for us, just delivering value for our customers, very important. And I think you've seen us accelerate in this area really since COVID hit, how we're thinking about customers, how we are having a long-term approach, but also just making sure everyone in the organization is thinking about how do we create value for our customers. We want to differentiate ourselves and create a gap so that we can get a proper return from our customers in the up and the down cycle, and that will allow us to drive long-term compounding returns for our shareholders. One of the things in the company -- I'm giving you really what our Section 16 officers look like. But really, you could take this throughout the organization. We are a very tenured organization. If you looked at the 14 officers here, the average tenure at J.B. Hunt is 25 years. The strength of that is we have seen many cycles throughout our career. I've served on the executive leadership team for the past 16 years. And so I was at the table during the great economic recession and certainly, as we've come through and are going through the freight recession today. Take this down into our director level, a lot of tenure inside our organization. So when we have them think about what we need to get accomplished in total, they've had the experience to be able to do that. I talked about our foundations and how we think about that and people being at the forefront of how we do business over the last 62 years. But technology really is the gap between the capacity that we deliver on and how our people really take care of our customers. We do think of technology as empowering our business. So we are going to continue and will always have a people-first approach. But technology can empower our employees, but also can empower the shippers that do business with us and really any carrier that does business with us as well. And certainly, our final foundation around capacity, that is what we're known for, being able to say yes to our customer when they're asking us to solve a problem for them across our segments is an important component of how we do that. We do have leading positions in a very large addressable market. You look at the size of the company, we are a large company, but we are actually small inside the market that we serve. The market is around $625 billion. We think about all 5 of our segments being able to grow at a healthy pace. We allow our returns and our growth profile to really be measured as we're talking to customers. We do see long term being able to grow on behalf of our customers. That's why capacity becomes so important. We are mode-neutral, and I think that's an important component of how we go to market. We talk to our customers about their problem. And then we solve for it with one of our 5 business units versus starting with what products that we have and then trying to sell to our customers. We've talked a little bit about our technology, our brand strength. But for us, it really does come down to our people and how we believe our people deliver on behalf of our customers. If you think about our 5 segments, really, JBI is our largest segment. Darren is our President of Intermodal. For us, in total, Dedicated, our second largest. And if you think about our 5 businesses, the asset parts of our businesses are going to be concentrated between the 2 largest parts of our company. The other 3 parts of our business is going to be either asset-light or no assets from a capacity perspective in total. And when you think about it from a profitability perspective, the bulk of our income is going to happen through our 2 largest parts of our business. It also requires the most amount of capital inside that. Our other businesses are going to be higher ROIC as they start to get within their margin profile. And then finally, I talked about how we think about long term and how we do business with our customers. You can see, there are step-ups in our business when we see crisis happening in the supply chain. So if you go back into 2018, you can see that step-up, that function that occurred. You also see our long-term discussion with customers as profit follows. So loads are leading, price is lagging is the best way to think about that as we do our bid season for a full year typically in all of our transactional business, so Intermodal and the rest of our businesses, non-Dedicated. Dedicated is going to be on a long-term 5-year on average contract. That's going to be indexed to what's happening in the market from an employment overall. And then if you could see what happened through COVID, the exact same thing happened. But I think really, what this presents for us is just our focus, our North Star is ROIC. We are focused on generating the proper returns, and you can see our growth has been significant over the last decade in both revenue and operating income.

Real quickly, I'll touch on capital allocation. You've seen our history. First and foremost, our CEO and our President say growth is oxygen. We have been growth -- focused on growing across the 5 segments at acceptable returns. Our #1 priority for capital is reinvesting in our company. We do want to maintain investment-grade credit rating. We have been supporting our dividend, and it's been growing, I think, now for at least 17 consecutive years. And then we'll use excess free cash flow to opportunistically buy back stock. And so we'll continue to invest to prepare our businesses for future growth, and I'm sure we'll have some questions on that as I turn it back over to you. So Garrett, thanks again for having us. Great conference.

Thanks for being here. With that, we'll dive into the Q&A. If the audience has any questions, feel free to submit it through the portal or raise your hand, and we'll work you into the discussion here. Maybe just to start, a lot of experience on this stage and in prior downturns. Based on the operating data that you see, where would you say we are in this current freight cycle?

Well, you called it a freight cycle, so I'm going to stay with the theme word of freight, because we talked about being in a freight recession now really since the back of last year all the way through second quarter. And on our third quarter earnings release, we did talk about business improving primarily in our Intermodal business. That's going to be the start of the supply chain. We reached an inflection point where we went positive on our growth in Intermodal. We saw some of that from what was happening on the import side and certainly some of what our customers were saying. As a reminder, the freight recession largely was attributed to what was happening in inventory and our customers' destocking and also just getting inventory in a better position. Having said that, I would say we're in a more positive direction than we were in the first half of the year, which was really going through the hardest part of a freight recession largely driven by inventory. Our full review, I would say, you're seeing positive signs that we talked about from third quarter in Intermodal. And I think you're seeing the truckload part of the market still working through, I would say, bouncing along the bottom, trying to find its way up, but still plenty of capacity on the truckload side. And then Dedicated certainly, I think, in a long position with our customers, long-term contracts. I think those are in a more favorable light. Having said that, there is a difference between a freight recession and an economic recession. We've said we're not great economists. And so you probably heard cautiousness on our call just based on what we saw geopolitical and really what's just happening from a consumer perspective. So a little more caution on the third quarter call, primarily because we're just not sure what's going to happen with the consumer.

That's helpful. I guess as you think about this peak season and quarter-to-date trends, are you seeing any shifts in demand as you talk to shippers?

Well, as we mentioned, we set a single week volume record for our Intermodal business during September. And we highlighted on the call that at that point in October, we hadn't seen any change. Import data still is hanging in there, and I think AAR data would suggest that volumes are still holding in there. So we're busy. Customers today are coming up with sort of a new approach. And by that, I mean it's less about, hey, I need another price reduction and more about, how can we get a more stable relationship going? What should we be considering today for our future? And we're encouraged by that. I think it's kind of a new approach to saying, what's a shipper of choice? And what do I need to be preparing for at -- in a time when capacity tightens up and gets -- and truckload market maybe becomes less available and prices are going to climb? So customers are at least interested in talking about it. I'm not ready to say they're jumping on the train of, I'm going to be paying a lot more, and I need to go lock up capacity, but they're concerned about it. And so that -- I think that's a sign of the times around, hey, earnings season for transport's very, very difficult. There's nothing healthy out there, and our customers care about that. They care deeply about it. And I think they've all identified that, hey, this is cutting pretty deep, and I better get ready for some pricing discussions because really, it's not sustainable. And so I'm encouraged by the dialogue. Customers are talking about how can they utilize intermodal to offset maybe cost increases coming in their highway business. And so we believe that we've got an answer to help them with their budgets without it being a rate reduction on our side. It can be a cost-savings opportunity for the customer to convert highway business to intermodal. And so we think the future in '24 has some real opportunity, but there is this idea of the consumer economy, and we don't know about that. So that's the watch out.

Yes. The monthly progression in volume and the busiest week, record volume week, is certainly a sharp contrast to a lot of other dynamics in the marketplace. So what's driving that? And from an operating side, how do you service that volume?

Yes. So I think that -- and I told my team, we had a '24 planning session last week. And I had all of my leadership group in and just talked about how proud I am of their service sort of tenacity in 2023. I think together, we've really, really lifted our culture, and we've really jumped through hoops to serve our customers at the time it was most important. On a town hall recently speaking to every employee we had, I said, "Hey, it's our prove-it moment." Because in August, I sat on a stage at an investor conference and said, "I don't think there's going to be a peak season." We weren't seeing any signs of it. Our customers gave us no warning that this was coming. Yet as they're tendering orders and we're watching load bookings, everybody is kind of looking at each other like, wow, we got to get ready. Well, our rail provider was ready. Our equipment was in the right place. Our field operations teams have been so hungry to be busy again and to really challenge the maximum of their capacity. And I think they jumped through hoops and everybody executed. I do think it was a differentiator with BNSF. They really, really delivered on the capacity we needed. Shelley and I went to Fort Worth in December of 2020, coming out of that first fall of pandemic. And we sat in a Board meeting with BNSF talking about customers' frustration with our inability to move more goods. And we said, we have to start right now preparing for 2021. And we settled in on an amount of capacity that would have been a record, and we built a plan to execute on that. Well, by the time '21 came around, we really still couldn't even execute. After a year of planning, we were working hard with them. Nobody was doing anything on purpose to limit our opportunity, but head count at the railroad was a struggle and velocity of equipment. Customers weren't able to unload. I mean there were a lot of factors in that. This last September, we raced past that number. We never had a conversation other than day-to-day, hey, load bookings are way up. We're going to -- we need to get empties. We need to pull down the stack in this market. We need to ship a trainful of empties to California to prepare for it, and everybody just went into action and operated. And I really think it's a strong testament to our ability to serve the customers. Now that represents the opportunity to talk about our future with them, too.

Yes. It's certainly exciting times. You made an announcement yesterday with respect to the partnership with BN, the Quantum product. Spend a minute talking to us about that, the potential that represents and the relationship as it's developed with BN.

So we probably have a lot of people in the room that may not know that in 1989, Mr. Hunt and Mike Haverty, the current President of the Santa Fe Railway, shook hands on a train in Western Illinois, establishing a plan to grow to be a trucker partnering with a railroad who at the time were enemies, really to grow a new offering of -- in Intermodal, at least for our business. And we actually called it Quantum then. We bought trailers. They were decaled with Quantum. I don't know -- I need to learn this history. I don't know exactly how long that lasted. Quickly, our customers said, "Hey, it's really confusing, J.B. Hunt trailers and Quantum trailers." And we pivoted to all J.B. Hunt logo-ed equipment. So I don't know how long the Quantum name lasted. But then fast-forward to 2022, we're in an off-site executive session, BNSF leadership team, our leadership team. And we challenged each other and said, "What do customers want to buy today that they can't get in the market?" And really, the idea of Quantum was reborn, and that is simply service-sensitive business that a customer has been hesitant to use intermodal for. So it is targeted at highway conversion. Let me say this, what it's not. It's not meant to be, hey, I have a service problem with my intermodal business, upgrade it to Quantum. That's not what it's for. It's a highway conversion model. It's a -- we're -- we have a team of people working in Fort Worth with BNSF that are monitoring the business. It's customized. It's agile. So we may truck a load by design a day or 2 a week because that's what the customer's supply chain needs, while Intermodal is the right answer for 3 days of the week or maybe they're watching the network, and there's a weather event in Montana. And the trains -- there's a mudslide, there's flooding, there's something that might cause a delay. And so we pivot to ICS and we're trucking the load for that customer. Now when it moves intermodal, there's an intermodal rate on it. When it moves highway, there's a highway rate on it. It's not like a guaranteed service, but it is a targeted program for highway conversion with a very high service level. We have executed a pilot now since -- really since late June. We're delivering on up above 97% on-time service to our customers and actually moving 24 hours faster than if the same loads had moved without the Quantum team monitoring them. So we're really excited about what it can do to expand our addressable market. Shelley highlighted that we operate in very large addressable markets. Well, the intermodal growth opportunity for us lies inside the highway addressable market. And so this is one of the efforts that we've -- we're developing in order to attack more highway conversion for intermodal.

Yes. To pick up on that point, clearly, an opportunity -- you define 7 million to 11 million loads yesterday as the market opportunity. But to what extent is market share and outcome versus a goal, specifically within the intermodal market? How do you distinguish between those?

I'm sorry, say that again?

So are you -- I mean, what are you doing to really incent that market share transfer today? Is it service-oriented? Is it demand-oriented?

Okay. I -- market share to us is -- I would say we're more focused on that highway conversion than we are just fighting in a bid for the business that has always been intermodal. Now we're the only channel really marketing BNSF today. So we want to grow our market share as it relates to any customer that has historically said, "I want to have diversification of the Western railroads. And then I want to have diversification of the carrier mix on the Western railroads." Today, we would anticipate some market share from that. But our focus is highway conversion, transload of international intact moves, how can we grow with those, and we do that by differentiating our service. And we want to have pricing that is sustainable and earns an appropriate return in our investments.

And how would you characterize the pricing market today in Intermodal? And where do you see risks or opportunities as we think about '24?

Well, clearly, in '23, there was downward pressure on price. We did expect that going into the year. We really felt like with some of the costs that had come on board to the industry, weaker velocity, asset utilization was down, we thought, hey, more volume, better velocity. We can turn the equipment faster, that -- make the drivers more productive with their time on the drayage fleets. There is an opportunity even with negative pricing for us to come out on a better side of that. That's probably not really how that happened. I mean, volume didn't come on board as fast as we would have liked to have. And so certainly, there has been pressure from negative price. I think our focus has been delivering excellent customer service, honoring the commitments we made even at weaker prices and then talking to our customers about our future. And it's simple. We -- driver wage is not going down, and rail employee wages are not going down. Equipment is not going to be cheaper. The utilization of that equipment can be a tool that gets spread over more loads. And can that translate into some cost-benefit for the customer? Sure. But the other variable costs are just -- they're real. Everybody is facing them. And I really do anticipate that our discussions in 2024 pricing cycle will be increased discussions, at least at J.B. Hunt.

And you clearly stated ROIC is the North Star. Describe the path and time frame back, at least at JBI, to the target margin.

Yes. The fiscal cycle, I'll call it, at J.B. Hunt at least, and really, this is created from the pricing cycle, we kind of measured, call it, July through June as the result period from the previous year's pricing cycle. And it -- we can look back historically at big pricing moves, and the reality is that cycle still continues. And so it's pretty hard to really change anything, the trajectory that we're on with price until you get through that cycle. And so I really do feel like we can get on the right path in the back half of '24. I don't know exactly when that happens, but I know that the dialogue we're having with our customers and their value that they get from the product and the service we're offering gives us a chance to accomplish that. I expect to make really material improvements in our next cycle. I don't know exactly how much it will be or when, but it's certainly an expectation of our management team that we get there as fast as we can. I'd like to believe it will be one cycle. I -- we'll have to wait and see.

That's helpful. Maybe shifting to the Dedicated business, another industry-leading position. What are you seeing from a demand standpoint there? Obviously, freight market demand is lower, but you've been clipping along at a healthy growth rate annually. You're optimizing fleets. What are you seeing in the Dedicated business today?

Yes. I think it's important that our Dedicated business really is private fleet conversion. That's our focus as an organization. We really don't want to be in a bid process. If we are in a bid process around creation of a fleet or a capacity fleet, that's going to live a little more in our highway business than it is inside Dedicated. I would tell you our pipeline has held up this year and is healthy. Going into next year, it is healthy as well. We spent a lot of time during this freight recession talking to our customers about what the optimal fleet size should look like. We were fairly offensive in that strategy. Just from our learnings from the past of knowing what happens when there's a lot of pressure around cost, we want to make sure our customers aren't coming to us. We want to walk our customers through what we believe that they can do. And then that will come back to us over a longer period of time. Typically, when we're doing something like that, if we downsize a fleet and we're offensively doing that with a customer, we're going to get something for that. We always want to get into longer-term agreements or get something inside that, whether that's a change in how we adjust our pricing, things like that. So I would say the majority of that work happened through second quarter of this year, maybe even a little bit here in the third quarter. But forward view, I would say, more positive forward view around where our customers are at, again, assuming no economic change from a freight recession perspective, feel pretty good there. Also took out trucks just -- we had a hard time getting new equipment. We've been onboarding new equipment this year. So we had extra trucks that we've turned in as well. And so a combination of those 2 things. And then a little bit of change, really one bigger fleet for us, and that was more of a competitive rate reduction that we just decided to walk away from. And so for the most part, feel good about our pipeline, feel really good about our future.

That's great. Touching on the brokerage or ICS business. What are you seeing there? Obviously, a lot of disruption in brokerage today. You made an exciting acquisition with BN. Where do you see that business trending as we look out into '24?

Yes. So I would say brokerage has been the hardest hit, at least for us, but I also think for the industry in this freight recession. And if you think about our customers' business, it's a business that's least predictable. And so during COVID, it's the business that was like overflow business that customers who say, I need help, I need you to say yes, and we had an easy way to say that. Today, with what's happened in total shipments, most of that's impacted our brokerage business. For us, brokerage reminds me a lot of what it looks like back in the mid-2000s, when truckers were really competing on price. And that's something -- what do you learn through a freight cycle? One of the things I've really started to think about is we don't need to compete on price in brokerage. That just is not healthy for our long term. We need to take a step back, figure out where we're creating the right level of value and really start to get back into a return perspective overall. I think brokerage will settle in. But we took a different approach in the third quarter, and we actually started changing pricing on customers that just didn't make sense for a long term. If we can't make an appropriate margin during a freight recession, it's going to be very difficult to create even that more -- much more value. And so it's been somewhat of a reset inside ICS. I would expect them to continue to progress. And that's one of the reasons that we had the acquisition in BNSF Logistics, that part of their business. I think that shows the strength of the partnership that we have with the BNSF now, really since early last year, how we're thinking about what's the best of what they have, the best of what we have and how can we complement each other better, feel good about that. And we're onboarding that as we speak and feel positive about the direction of that business next year.

Very helpful. Just interested in your thoughts as to why we haven't seen more capacity for the truckload market. For all the challenges we've been discussing, why hasn't capacity gone away? Why are we closer to equilibrium?

Well, I mean, all that would be speculative. But I would say this: in this cycle, so much money was made during the pandemic from -- specifically from the small carrier community, maybe even large carriers, too, but small carrier community. I don't know how much they've saved back and how long that cycle will last. I will say you're starting to see some exits occur, but it does -- if you just did the math on how long that will take, it might take a little bit longer. I'll say we have pushback from carriers on pricing saying, you know what, I've given everything that I can. When the customers -- we normally will talk to a customer when a customer is pushing on us. I think that can change coming into next year. I'm not sure at what point of the year that will happen, but I can see that changing.

So when we think the cycle ahead, just help us understand the idiosyncratic opportunities that have positioned your business for good growth over the next 3 to 5 years.

Yes. I think what's very important is that we maintain our focus on our people, make sure that our people feel valued, heard, safe, respected and welcomed. And when our people feel safe in the environment that they're in, they start focusing on our customers. They start saying, okay, I hear all these layoffs, I know what's happening, but I know what's going to go on at J.B. Hunt. At J.B. Hunt, I'm going to be safe where I'm at, and now I can focus on what we want to go get done with customers. We talk a lot about focus on what we can control. What we can control is making sure that we deliver the very best product for our customers. You've heard Darren talking about it. We're doing that across our entire business. If you were to ask the company right now, everyone is focused on what we call customer value delivery. What is the value we're creating for customers? Our customers know that we're long term. We're going to continue to stay focused on that, and they also know that we're in the business to make a fair return. I think we've continued to build on that as a strategy as an organization. And specifically, during this part, you heard Darren talk about having a record week in Intermodal. We could have taken a different approach with our customers in that. We could have talked to our customers about pricing in that moment. Again, that would be short term versus building confidence from our customers that we can handle their business over the long term and that we would get paid appropriately for that over the long term as well.

Great perspective and update from J.B. Hunt team. Thank you so much for being here.

Thank you, Garrett.

Thanks, Garrett.

We appreciate it.

Yes.