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

All right. I think we're live. Good morning, everyone. I think this is our next session before lunch. But pleased to be hosting here J.B. Hunt. Shelley Simpson from the Company President; Brad Hicks, President of Highway Services, before dig in to [ the second ]; and Brad Delco, SVP of Finance. So appreciate you guys coming down here. And before we turn it over to Shelley, just real quick, can we queue the audience response system, so you guys know the drill by now?

We can get question #1 up for J.B. Hunt. Do you currently own the stock? Just pick up that [ chart ] looking thing, yes, overweight, 2 market weight, 3 underweight or 4 no. I will get you guys some clickers later. Question #2, to owners in the room. What is your general bias towards J.B. Hunt right now? Positive, negative or neutral? All right. Got some potential folks going over here. And then question #3, in your opinion, through-cycle EPS growth for J.B. Hunt will be above peers, in line with peers or below peers? All right. Appreciate the responses, everyone. So Shelley, Brad and Brad, thank you for coming down to the conference. Really appreciate you guys being here. I know you spoke yesterday at another event as well. Can you just give us an update on where rate markets are? I mean I want to focus this conversation on the long term, but obviously, some folks do care about the near term as well. What can you tell us about past year, the freight recession and where we sit today, what the path forward is in 2024?

Well, first, Brandon, thank you for having us here. We're excited to be at the conference. I talked about two main themes yesterday. First was we felt like that a translation of what we were seeing on inbound imports wasn't necessarily correlated directly to our volumes. I think that was somewhat of a surprise because I think people are interpolating that they were seeing on inbound imports into -- directly into our volume, both on BNSF and then just largely overall. That was one of the comments. I mean the other comment that I made was just is it a bit of competitive bid season surprisingly so for us. And so those are kind of the two [ hose ] of yesterday. We talked about being in a freight recession now, and we're on month 21 or so of a freight recession in total. Cannot really say when freight recession is going to end. But for us, we really focus on long term and really drive more value for us.

Okay. Appreciate that clarification. Does that mean that you're just not seeing a lot of volume expansion in the network? Or are there things within your control customer wins that are relative outcomes?

Well, I think what I'm saying is the volume increases that you saw on the West Coast port in particular, I believe it was up 20%, and I think BNSF volume was up 29% is not a direct correlation to what our business is doing. So we haven't seen that same change in our business today.

Okay. Understood. And from a customer perspective, what are you hearing from a destock perspective from consumer appetite?

I mean the most other customers have said they're in good shape from an inventory perspective. Every customer is in a little different situation. But if you were to think about 2023, that was a big part of the story of our customers, resetting inventory and really working that inventory down, not to say that customers don't have different objectives for 2024, but that's not been a large headline for us.

Okay. Appreciate that. I guess longer term, though, in the intermodal business, which is your biggest segment, we've seen some changes with relationship with Burlington Northern in the West. Burlington is your rail partner out West. What's been the changed relationship there? And are there more mutual beneficial targets between the two?

Yes. So Brandon, I've served on our executive team for the last 17 years. And I spent the majority of my first decade or so on the commercial side. So working with customers, got the opportunity to work very closely with the BNSF really since 2011. And I would tell you, our relationship is just as strong today as I've ever seen our relationship. We announced in March of 2022, our joint commitment to really expanding the intermodal marketplace and thinking about intermodal from a long-term stable and something our customers could really lean into from an overall capacity, cost and service perspective. We announced that we will be growing to 150,000 containers over the next 3 to 5 years that was in 2022, and that really comes down to what our customers are asking us to do and also commitments. And we believe for not only the BNSF, but also the Eastern network where we also have been more focused on service. So it's been a rough go from an intermodal perspective, overall service really for the previous prior of 2022, probably the last 6 or 7 years. Pretty tough service environment for our customers, certainly intermodal, appear to be something more resilient than what they were seeing. I think we've seen some of the improvements that have happened there. Intermodal also lost market share during that time over the highway. And so we have recognized there's a lot of rate that can convert off the highway into intermodal. We're working very closely with the BNSF. We launched two joint products in 2023 with the [indiscernible], which is our Mexico service offering that rides with the BNSF and also with Quantum, which is more of a truck-like service. So one of the things that we did in the fall of 2022, Katie Farmer, the CEO, and her entire leadership team as well as our entire leadership team spent a dinner and all-day session together, really solving for our joint customer. So what our customers need from intermodal to be long term and sustainable. And how do we drive more value for our customers. So just think of the CIO speaking [ deeper ] every part of our organization collaborating on our joint customer. One of the biggest changes that allowed us to do that was we really are the primary channel provider on the BNSF. So in the past, they were competing channel providers, primarily us. So I think we can think more strategically with think longer term about our prospects and what we can do together, and that's one of the reasons that we launched or doing the service.

I think rail service has been a recurring issue, like you said, probably for half a decade now. What has been the challenge more recently? And have you seen a pickup in service either on the West or in the East?

Well, I would say we've had a pickup in service. I think for our customers, they have a long history and how service has been over several years that has the thought pattern in their mind of what is available to move intermodal and what is not. And so that isn't necessarily what we believe for our future because the rails have been focused on providing good service. The BNSF and ASK with CSX, all three major rivers that we do business with, have improved in performance. We're pleased with that performance. We want to see that continue and we want to see it sustained. I think that's really important. If Darren Field who leads our intermodal segment for us, one of the things he would say is, last year was a proven year for our customers. Our customers are saying, well, there's not any volume. So service is naturally going to be better. What's going to happen when there's some pressure points on the system can you really perform? In the fourth quarter, we had a surprise peak and that peak, we executed. We, the railroads and ourselves, executed the policy. I think that was a major proven moment for our customers to say, "You know what, maybe things are different. But that's going to take time." You may have to have a repeated experience with our company and with the railroads that says intermodal is a good solution for long term.

I think some of the skeptical investors might say, intermodal saw a lot of growth, maybe 5 years ago. But have we just converted a lot of the low hanging fruit in the market? Therefore, going forward, it's much more like a market growth opportunity. Or do you guys still see this as a long-term growth vertical?

Well, we think it's a long-term growth. If you look at the -- our addressable market, the $625 billion across our 5 segments, so across our organization. If you look at the largest part of that market, $400 billion of that market is in the truckload space. So think about how our customers think and what they're focused on. We -- because we serve that part of the market as well, get access to over $100 billion of freight every year. From that data point, we know that there's between 7 million and 11 million shipments on the highway that can move intermodal. I think that we're telling our customers, listen, this is the service and we need you to convert without listening to what they need from us, then it would be more difficult. But that's one of the reasons that we launched like Quantum. And we talk to customers to say, what do you need to get you to convert West Coast to Chicago? What are the things that we need to be thinking about and they want a more truck-like experience. If you think about the original intent of intermodal back to 1989, Mr. Haverty and Mr. Hunt really struck the deal. It really does take freight off the highway. That's the exact same scenario that we're in today. So the product that we've developed really is more of a contour service. It allows our customers to say, "Okay, I know that you care about this freight as much as I care about this freight." It could be a discount to truck so the truckload price and be more stable from a capacity and service perspective. So I do think that with the railroad submitted to have a long-term sustainable service, there is a segment of the market, just traditional intermodal that will move back into intermodal. And then on top of that, I think we can create the market from a triple perspective inning.

Brandon, maybe one thing to add to that. When we think about our go-to-market strategy, it really isn't just predicated on holiday conversion. I mean if you look at -- I'd just call it a long-term secular trend between international and domestic intermodal. We've seen freight that comes in the country transload into domestic containers, that's been a trend that's been occurring for a long period of time. There have been recent announcements where specifically BNSF is investing a considerable amount of capital in the Barstow International Gateway and I think that, that creates an opportunity for an acceleration of transloading freight that's coming to the country out of international boxes, 40-foot boxes, 20-foot boxes into 53-foot boxes, which could also accelerate the addressable market, if you will, for our domestic intermodal growth in the future.

That was part of the CapEx last year, right, because you guys did have a pretty large spend when I shared investment.

If you look, I believe we spent just over $1.6 billion in net CapEx. I wish we did have our slides up here today, but there's a wonderful chart where we look historically at our cash from operations and how we deploy or how we put that cash to use. An overwhelming majority of our capital is used to reinvest in our business. We have been supporting dividend growth over a long period of time. I think we're at 21 years or so of consecutively growing our dividend and we opportunistically buy back stock. The CapEx last year, we won. I'll show you till March of 2022, we committed to growing our domestic intermodal fleet to 150,000 containers by the end of 2027. We understand the market is tough. I would say, we also had another one of our investor slides up, we would show the tenure of our management team. If you looked at our executive officers, they have over 366 years of experience at J.B. Hunt. So on average, is about 25 years per. But that's also throughout our organization. If you look at our senior VPs, I think it's 21. VPs it's 19 -- 20; and directors are 14? All directors are 14. So we have 10 years throughout our organization. A point here on the capital side was a lot of that capital we spent last year, one, to continue longer process -- progress towards the 150,000 containers. But we were really challenged to support our growth during the peak of COVID in light of some of the supply chain disruptions that were impacting our vendors. Think about trailing equipment, think about purchasing trucks, think about all the tips in the technology that goes into trucks for some of the safety technologies and advances that have been made. So we played catch up really most of last year based on how little we were able to replace or replenish some of the aging of our fleet during that period of time. Our capital budget for this year is $800 million to $1 billion. So a pretty significant step down from where we were last year. But now and into the future, we will always remain ROIC focused when we deploy capital. We will do so in a very disciplined way, be very thoughtful how this creates value for our people, how it creates value for our customers and ultimately, how it creates value for our shareholders.

Yes, I appreciate that, and I want to get into the capital maybe a little bit later, too. But Brad, maybe this is a great segue. The highway services division, I think that's somewhat of a new development for the company because it used to have a dedicated asset-based trucking business, right, maybe of truck, but that's more over the year. Maybe can you talk about the change in priorities that...

Thanks for having us. You're doing the very best job at freezing us out up here. I don't know if you all feel it is, "Oh my gosh, it's cold in this room." Thanks for finally throwing me a question, so I give one movement. But I lead what we call highway services. It's 2 of our 5 reported segments of our truckload segment and its ICS, which is our brokerage segment. Our truckload segment really is the foundational roots of our organization that goes back 62 years, Mr. and Mrs. Hunt. That's part of our company, and we were an over-the-road trucker. We owned our equipment. We had employee drivers for the vast majority of those 62 years. More recently, really maybe let me then back up and say, okay, that's 62 years and running. Then we have our brokerage segment that we officially launched, I guess, in '07, Shelley? So not certainly as long on the time line. And that was focused entirely on leveraging third-party capacity and broadening our ability to offer solutions to our customers for a variety of their needs. You pass forward and we made technology investments in the J.B. Hunt 360, that really is our operating platform. It's how we conduct business, and it largely is the way that we access the carrier community for those freight needs. That's really what birth the new idea for us in JBT where we didn't necessarily have to have the truck and employ the driver. How can we leverage the platform to get the power that we need and we're going to go ahead and supply the trailer? And so we own the trailing fleet. It's a lot like the network that we have in intermodal where we have 100-plus thousand containers. That's my focus for JBT with our box strategy, 360 boxes, what we call that product and really only 3 to 4 years in at this point, but we have seen growth o where our truck line was pretty stagnant in terms of its revenue growth over, say, the prior decade. We've really been able to accelerate growth in the product that our customers -- our one thing and needing from us, it offers the higher level of flexibility than an asset provider only, but it also has the fixed component of the trailer, which you don't largely get in a pure brokerage solution. And so really, our brokerage model and our highway, our JBT are focused on that $400 billion segment that Shelley spoke to, about 50-50 is dropped opportunity versus live opportunity. And so our brokerage answer leads the way for us when it's a live solution. Our JBT 360 box leads the way when it's a drop solution. But there are many times where we're able to merge those two systems to create sustainable solutions for our customers, reduce empty miles, still empty leg, so to speak, how we maneuver our network when we have to perhaps do empty repositioning, would have largely been a cost for us as an asset provider. We're able to leverage the live market so that we can move that equipment to the next destination more effectively and more efficiently. I'll make maybe just one more comment about where we're at today. It's been an incredibly difficult freight environment and really, in particular, in the brokerage segment. It's been very pronounced not only for us, but for the industry. You heard Shelley mentioned that we're 21 months into the freight recession. The way we look at that is what rates are doing against carrier costs. When those go negative, inflect negative, historically, in freight cycles, we've seen that last on average 18 months. And then rates start to inflect. Capacity has balanced itself against demand better. And then we're on our way on the next part of the cycle. Here we are not 21. We've not seen that yet materially. I believe that it can't last forever. Certainly would anticipate at some point this year, I see that being flat, we are starting to see capacity leave the marketplace, maybe not at an accelerated rate yet, but it is on the decline. So I think that, that's favorable. And we likely will see it first inflect in a meaningful way in our broking segment. That's the near-term pulls. What's going on right now today, haven't quite seen that yet. We've seen little pockets of work, but nothing with the same momentum at this point. So we're not out of the woods given the difficult backdrop of what '23. I know Shelley it's very hopeful that, that is the very worst of the worst. And I believe that it is like because I do think you're going to see meaningful change throughout the year. We're just not quite seeing that yet here in February.

Got it. And I think you did mention that you have been -- is that correct?

It's been more competitive than expected. And when I speak of this season, I'm speaking about our one-way parts of the business, so primarily intermodal and JBT. I see it's not as competitive. It seems to be a little less competitive than really the two parts of the...

Brokerage is less competitive...

I would say we would not...

I would say less competitive. I mean this is a near-term question, but I guess, longer-term ICS results have been volatile. What is the profitability target for that business? Or is this more we get much larger relationships with many more shippers, so it's worth to breakeven.

We certainly have a profit expectation. Our targets are 4% to 6%. We know that we've not been there more recently. We kind of have to go through a reset with the boot and bus freight market and the combination of our 360 digital platform marry that against more recently the unfavorability of theft and fraud and us having to really balance the tech driver of our solution versus manual processes in the near term. There's some freight we've had to pull off the platform because of higher risk, high value and manage that manually because of the risk severity. The strategic theft. These are criminal networks, very sophisticated that kind of balanced on the scene, predominantly where people are using third-party capacity. They're finding creative ways to imitate, they're finding creative ways to purchase empty numbers and recording that then they're able to accept tenders undeveloped to us, they're the bad actor and that thing happen. So doing our best for that, we've had to kind of maybe come a little bit more center against our leading platform versus historical manual brokerage and believe that we're largely through that reset, and now we need to grow and support the investments.

By the way, if there's any audience questions, just raise your hand, we'll get you a mic. Brad, maybe on the line, is brokerage just too competitive? Or is the landscape a number of big platforms in the future?

I think that it creates an advantage for our customers because when we think about our portfolio of services, mortgage will allow us to fill in any gap that our other businesses might not be able to provide an answer for. I do think you're always largely going to see more volatility in our brokerage segment relative to cycles than you will see in the other 4 business units that we have that. It really have a deeper foundational kind of function that they each own independently. If you go all the way to dedicated those are largely 5- to 7-year contracts that are driven economic inflationary indexes around what rate needs to do. So there's not a whole lot of rebidding and new negotiations all the way to that far extreme. I do believe that COVID itself drove this really anomaly driven tightening and then a quick decline. I mean not many industries can endure a plus 40% rate quality and a minus 40% on the back end of that. And by the way, in that 3 years, I think we all would agree that we all sell the inflationary. Cost pressures are more meaningful in this last few years than they've been at least in my working lifetime. And so that cost didn't go away even though the downward pressure because of the oversupply. And so I think that, hopefully, once we get back to maybe a little bit more normal and distance ourselves from maybe anomaly, I still think you're going to see greater volatility in brokerage, but maybe not to the extent that we've seen in the last few...

Appreciate that. And maybe we can follow up audience question #4?

Worker classification. I wonder how that's stated to play in the rest of the JBT [indiscernible] business?

What was the question again? I'm sorry?

About worker classifications for independent contractors.

We're staying close to that. I don't think that it's going to have a material impact in the way that it's written and the way that we go to market for our independent contractors. Certainly, there's more information that we need, obviously, and the long-term impact of that, and it really will come down to us what rulings if you think about the ABC testing. And when things get challenged, maybe we'll have to recalibrate a little bit. But at this point, based on my understanding of those new requirements, how we structure our business with our independent contractors, we don't feel like we need a change of...

All right. Can we queue up audience question #4? In your opinion, what should J.B. Hunt do with excess cash? Two, on M&A at the top, share repurchase, dividends, debt paydown or internal investment? And then question #5, sorry about that. In your opinion, what multiple of 2024 earnings should J.B. Hunt trade? We'll give you an option of 7, Brad, greater than 30. All right. All right. And then question #6, please. What do you see as the most significant share price headwind facing J.B. Hunt? Core growth, margin performance, capital deployment or execution and strategy? And Shelley, maybe along these lines, we didn't talk about dedicated, but that is a large business for you guys, too. It's definitely a differentiated trucking business relative to some of the other truckload competitors, which has seen a lot of growth over the years. But I think the outlook this year is a little bit more tepid from a top line perspective. Is that right?

Well, if you look at 2023, we had a nice sales performance here inside dedicated. Very pleased with the results. And I would say, very resilient from a new customer and new start-up. We sold 1,150 trucks in 2023. One of the things we did in '23, we been very offensive in our strategy with our customers as some of our customers' volume really lower than what they needed for -- from a tractor perspective. So we went to our customers and talked to them about lowering their fleet. That's about half of the change that occurred from a tractor perspective. And then the rest of the losses in our business, but this business is the most resilient part of our company. If you looked at our retention of the customers, we're at 93% retention that has really stayed above that level for the last 5 to 10 years or so. And so I feel like that part of the business, if you look at '23, we did have record revenue and record operating income on DCS. We also expect that in FMS, but in DCS specifically, we had record profits in a freight recession coming into '24 are really dealing with a balance of 1,150 trucks that we sold. We had some trucks that we took out. It's going to be difficult here in 2024 to grow both top and bottom line as a result of that. I feel really confident about our sales pipeline and what that looks like and what our win rate is as a result of the sales growth. But this business tends to be a business. Can you source the rest of our company that in that crisis then would tend to grow big and then kind of come out of the sort of cost. Hopefully, this year, we'll have more start-up costs than we expect because that will create what we internally call away. So what we do for this year will set us up for 2025 nicely, that's what we're experiencing here in this year.

Great. And you guys have been acquisitive, I think final mile, but on the forefront for M&A.

Well, we did really build out our Panama services, not only with acquisitions, but some organic growth as well. It really was about size and scale and also being across the industry. I think in 2023, you saw us really challenge the services that we provide, the value that we create and the pricing or the returns were just not affordable for our company. We've really challenged that in the market and down really good results. It's one of the reasons we had record operating income. We don't see an acquisition today in our future. It's tough to say that we wouldn't do it, but we believe that we have the right scale. Now it's about building from here.

Great. In long term, you guys have historically been focused on [indiscernible]. I don't think that has changed, right? I mean you are near the lower end or below lower end of intermodal margins right now. What's the path to getting back to thresholds that you guys have seen?

Well, I think I've been pretty clear that pricing in the one-way parts of our business, intermodal, JBT and ICS for J.B. Hunt are unsustainable. The market has to give our cost and the inflation around our costs in the lowering price environment just on it bodes well from a margin perspective. So that's one thing. The other thing is, we have a lot of past readings ready, so when our customers are ready to come out of this freight recession. So you'll see us naturally gain it from moving more freight and being more efficient with the current capacity, yes.

Got it. Unfortunately, I think we're close to the end here. Just maybe one last one on that 150,000 container fleet. What's line of sight and when you get to that size and get the utilization line?

I mean we've been -- we've given a range of when we want to get there. We're not really careful and thoughtful about our approach. We did look at the recession as a great opportunity for us to use our balance sheet, our strength as an organization and think about our long-term process that's prepared and ready to do the same thing from a container perspective. I would say it will be at the list of creating long-term value for our people, our customers and our shareholders. And so any moves that we make around continued purchases would have that in mind for our long term.

Well, unfortunately, I had the time. Shelley, Brad and Brad, thank you so much for coming. Thank you.