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

All right. Let's go ahead and get started with the next presentation. So for those of you that don't know me, I'm Tyler Brown, the senior analyst here at Raymond James. I cover the transportation industry. I cover the garbage industry. I cover the rock industry. I cover a lot. But this afternoon, I'm extremely excited to have J.B. Hunt with us today. Presenting today is Ms. Shelley Simpson, the current President, though, I'm going to talk about that in a minute, but recently announced CEO come July; Mr. Darren Field, the EVP and Head and President of Intermodal; Mr. Brad Delco, Senior Vice President of Finance. So J.B. Hunt has been coming down here a long time. You guys come down here every year. I'm very grateful for that. I appreciate it. So I think a lot of us probably know a little bit about J.B. Hunt. But as you -- for those of you that don't, obviously, J.B. Hunt is a very large transportation provider, multimodal. They have a lot of exciting things going on, technology, some new service offerings, and they really have a flagship Intermodal product. But I think we're going to go through a little bit of that in some slides. So I'm going to turn it over to Shelley, but I do want to -- again, congratulations on the CEO announcement. Maybe we could just start there and talk a little bit about that and the change in the role and leadership and if anything changes, J.B. Hunt while it's under Shelley.

Yes. So maybe I'll go through the presentation, Tyler, if you don't mind. Thank you for having us. Excited to be here. And I want to get to -- I actually have a leadership chart, I'll talk a little bit about that. Hopefully, that will make some sense. As we think about our organization, we really think about it from a vision perspective, really thinking about creating the most efficient transportation network in North America. For us, we really think about that through our mission, which is very near term for us, and our near-term mission is to drive long-term value for our people, our customers and our shareholders. That's a constant theme for us, how we're talking to our customers on a regular cadence. For us, we do think about our people first. We believe when we take really great care of our people, they'll take really great care of our customers, ultimately taking great care of our shareholders. We do that through our company foundations. This is where we invest, in our people and our technology and our capacity. And we live all of those with the 5 behaviors of our value system that really started with Mr. and Mrs. Hunt nearly 62 years ago. If you look at our organization, really in 400 locations across the U.S., those are going to be locations that we really actually own or lease, have large facilities at, but we're also on location at 700 different customers. So in our Dedicated Contract Services segment, we tend to live on site with our customers, really acting as if we were an employee right there with them. If you could see the number of tractors and trailing units inside our organization, just under $13 billion and there's 35,000 of our people doing that every day. About 2/3 of those are going to be professional drivers. The rest are going to be in our maintenance teams and in our warehouse and office locations. If you think about the organization, we really think about our 2024 priorities in 3 key areas. Number one, really focus on operational execution. So how do we be excellent in all the work that we do that will allow us to really drive more value for our customer. For us, we want to talk about value as often as we can with our customer because we do live inside a bid process on typically an annual basis in our one-way part of our business. And then in our Dedicated and Final Mile segments, those are going to be longer-term contracts by nature. So because we're living with our customers, we're having those conversations, the more we can drive value with our customers, the longer we can be with them over a contract period as well. We beat retention rate and making sure we stay with our customers long term as a key part of our strategy. Our second priority is really scaling our long-term investments. It is the way that we think not only with our customers, but also internally with our people and our capacity. We've made significant investments over the last few years. As we've grown substantially, we started to think about what does our growth prospects look like over the next several years. You've seen us grow first with our people inside our technology as well, but also with capacity. This year is a great opportunity for us to think about how we scale into those investments. And then finally, and always, we remain focused on making sure we deliver long-term returns on behalf of our shareholders. This is our tenured management team. I said, Tyler, this is what you were talking about. This chart is really our 14 officers. And if you were to look at -- or 16 officers, [ if you think about it ].

14 section 16 officers.

Yes, section 16 officers. Those officers, our average tenure inside J.B. Hunt is 25 years. We are a promote from within culture. Those people start their career very much like I did, 2 weeks out of college, and you grow your career. Part of that is because we're a growth company. And so because we grow a lot as an organization, we have a lot of opportunity for our people. But if you actually take this same slide and take it down several layers, at our senior VP level, our average tenure in the company is 21 years. Our vice presidents are at 20 years and our directors are at 14 years. Very common in our company to have long tenures. So to your question, Tyler, we do have long-term succession planning. I am the fifth leader inside the organization over our 62-year career. And we just happen to have Mrs. Hunt still somewhat active, at least in my conversations, but also Wayne Garrison, Kirk Thompson, both former CEOs, still on the Board, John Roberts and then myself moving forward. So a succession plan that I think really has had decades of experience inside that. If you look at our investment highlights, we really do have leading positions in all 5 of our business units with large addressable markets in total. We do go to market completely mode neutral. So because we've developed our service offerings really all focused on North America, our customers can move goods from a full pallet all the way to moving their entire supply chain with J.B. Hunt. We can actually do that, including going into your personal homes. So think about induction into the supply chain in North America, all the way to your personal home, those are the services that we're going to be performing for our customers. We do have a lot of network density and scale as we really sit in that top position, top 3, 4 position in all of our services in total with -- or the 2 largest actually being in the top position from a market share perspective. Our technology platform, we've made good investments in. That's really what empowers our people. And then we do think that we have a best-in-class system and people that help us overall. I talked about the addressable market, although we are large in size in our space, actually, the market is substantial as well. So a $625 billion market. And if you look, the largest part of that market is in the highway services area. So if you think about how our customers view their transportation spend, they're constantly thinking about how do I solve for the trucking part of the business. That's going to be on the one-way side of the business, not Dedicated, but the one-way side. Great opportunity for us to talk to customers how to build more efficient fleets into our Dedicated fleet and also how to convert into more sustainable options into our Intermodal product as well. And this gives you kind of our last decade view of how we've gone to market in total. You can see all 5 of our segments. You actually don't notice a red sliver that used to live inside our Dedicated segment. We broke that out several years ago. So you can see all of our services are growing as we go to market, thinking about our customers holistically and driving solutions for them. As we think about our technology, we really do think about how does it empower, number one, our people to drive out waste in the system; two, our capacity, making our fleets more efficient and also safer on the road; and then three, how we utilize our technology platform to really connect to other providers to give our customers the best answer in total from a cost servicing capacity solution. And then finally, and I'll turn it over to Darren, really, this is our long-term revenue trend along with operating income. I've talked about being a growth company in total. You could tend to think of J.B. Hunt when there is some kind of supply chain crisis, our customers really lean into us. They really trust our brand to make things happen. You could see that happen in 2018, a stair step up. Same thing happened during the COVID years, a big stair step up. So we tend to go up, kind of find that sweet spot and then continue to grow from there. And in 2023, we were not immune to the freight recession that's been happening in the market now for more than 18 months. But it still was our second best revenue month and also our third best operating income for our history. And with that, I'll turn it over to Darren to talk about our segments.

Thanks, Shelley. When -- Shelley highlighted some of our business units, but I want to go a little bit more in-depth. Intermodal is the biggest business unit at J.B. Hunt. We operate over 118,000 containers at the end of 2023. In March of '22, we announced plans to expand our container fleet up to 150,000 containers by 2027, and we're well on our way to doing that. We operate our own private drayage fleet, 6,300 trucks, over 8,000 drivers, do nothing but support our Intermodal business. And really, we have longstanding relationships with most of the North American Class I railroads and we feel really confident in our growth opportunity in Intermodal as it really represents the most efficient way to bring on new capacity and be a more sustainable transportation solution moving forward. When we look back at the 10-year growth run rate, there was a period of time when the railroads probably slowed down some investment. We went through what we called PSR, precision scheduled railroad. That really kind of slowed down or they closed down Whole lanes of operation and that slowed down our growth, but I think all of our rail providers are reinvesting in their networks and our opportunity for growth is significant over the next decade and beyond. Dedicated Contract Services is the second largest business area at J.B. Hunt. This is where the largest number of J.B. Hunt employees live. We're at over 13,000 trucks, 30,000 trailers. We have 93% retention rate with our customers. That's actually slightly down from last year with the current environment. So many of our accounts may reduce 1 or even 2 trucks at those 700-plus locations that Shelley mentioned. We really attack the private fleet market. We don't -- we are interested in solving and creating fleets for all of our customers, but we found that the density of our system and having so many resources allows us to be more efficient and take cost out for our customers, and that's been a really strong growth story for us. And I'd like to call this the boring slide. And what we love about DCS is their just continued growth cycle is just fantastic for our shareholders, and our customers continue to want more of this product and we're excited about the long-term future there. Integrated Capacity Solutions is our highway non-asset brokerage business. This is really where we -- they are the largest user of our 360 platform, where we bring carriers on board and we bring shippers in, and that helps match capacity. Certainly, it's an important part of our solutions as our customers for years have asked for more highway answers from us, and this is our live load, live unload business unit to handle that. As you look at the growth trajectory, there has been really good growth through the pandemic. '23, like Shelly mentioned, has been a significant challenge to our brokerage business, but we feel confident in the value proposition we offer to our customers moving forward. Now when I get to Truckload, this is how 62 years ago, Mr. Hunt started the company. This is the J.B. Hunt that many people of the motoring public have seen for years, and we've really adapted this business over the last few years in the pandemic. And that development of the 360 platform has given us a great opportunity to pivot and change the way we do this. Today, we operate over 12,000 trailers, company-owned asset trailers in this business, but we match those trailers for a drop trailer highway answer for our customers to really brokered power, in addition to nearly 2,000 independent contractors. Really, our customers have asked us for this solution, again, for decades now and this is a nice pivot for us, and we're excited about where we're at. You can just see the growth during the pandemic. And again, 2023, certainly from a market environment, has been challenged. And then finally, our Final Mile Services is the newest business unit at J.B. Hunt. This is where we take big and bulky products, and we go into the home, install appliances, deliver exercise equipment, that sort of thing. It's really a large growing market for us, and we're excited about where we're headed there. Growth for -- Shelley mentioned that our opportunity to grow and perform in Final Mile, we saw the best results ever in '23 from an op income perspective and, again, really excited about where we're headed there. I think Brad's going to handle our capital allocation slide.

They gave me the 2 slides to close up on. So Tyler, you're up here soon. Just real -- I think, a good depiction of when you think about how J.B. Hunt has deployed capital. The dark gray line, if you can see that on the screen, has been our cash from operations and how we reinvest that capital primarily into the business to grow. Dedicated is our most capital-intensive business. But as Shelly and Darren both alluded to, a lot of that capital deployment is success based. So when we go out and secure a long-term 3- or 5-year contract, actually, on average, 5-year contract, we will go out and procure trucks or trailing equipment in order to serve that. So we like when we see our CapEx budgets go up. Usually, that's a good indication of some of the success we're seeing selling. So cash from ops has been healthy and been growing over time. You see we've redeployed that. 2020 and 2021, we got behind on refreshing and replenishing some of our fleet. Largely due to some of the supply chain disruptions that we saw with some of our OEMs, we caught up a little bit with the replacement cycle at '22 and '23, and we've provided guidance for 2024 capital expenditures between $800 million and $1 billion. Then finally, just a real quick look at our balance sheet. We try to maintain leverage at around 1x debt to EBITDA. And so we're there today, but we still look at -- [ target ] priorities of capital, one, reinvest in the business; two, support our dividend, which has grown, I believe, consecutively for 21 years; opportunistically buy back stock; and we, every once in a while, see something in the market that will supplement our acquisition strategy. So thanks, Tyler.

Yes. Perfect segue. First question. Now we do -- it is open question. So if anybody has any questions, please raise your hand. But I have to ask about the Walmart deal. So there was an announcement that came out, I think it was last week, maybe 2 weeks ago, that you were purchasing their containers. Can you give us any color on that transaction? Let's just start there, just broad, and then maybe we'll see where we can go with that.

Sure. Well, as we released, we've acquired their container fleet included in that acquisition of equipment. We previously announced plans to grow to 150,000 containers. So I would say it's a step along that pathway. Certainly, there are commitments to each other related to capacity and services on our part, volume from Walmart to us. And certainly, we view that opportunity to integrate that equipment into our system, continue to develop fluid terminal operations with our rail providers and we're excited about the long-term future we have there.

I might add, too, Tyler, if you think about we focus -- Darren talked about, we focus on private fleets inside Dedicated, maybe think about that a little bit more like that in Intermodal. We've talked here for a bit. Within our one-way parts of our business, we really would like to replicate some of the components in our Dedicated Contract Services and Final Mile Services segments, and part of that is long-term contracts. And so you'll see in that announcement that that's part of what we did inside this agreement as well. So excited about it.

Right. So it has a little bit of a Dedicated feel to it, just in a different segment. So is it -- and sorry, I don't mean to harp on it, but is it incremental volume per se? Or...

Well, certainly those containers when owned by Walmart weren't sitting -- aren't...

Correct. So it should -- right. So it should be fairly remunerative fairly quickly.

Well, there's not any commentary about the relativity of it. Certainly, we're excited about the future there and look forward to growing into the fleet.

Sure. And so Shelley, you mentioned 2023 has been a tough market, maybe even longer than the whole year. It just seems like it's been 1.5 years kind of a crummy market. But just any thoughts broadly about the market? Are you guys seeing any signs that things -- this bid season, I think we're kind of getting into the thick of bid season, are we seeing any signs or any proverbial green shoots maybe?

Well, I mean, Tyler, it's still early in bid season. So we're not quite 20% finished. I will tell you in the one-way parts of our business, it's been more competitive from a bid landscape, from a pricing perspective. So that's maybe a little bit different than what we thought would happen. But just really too early to tell. And I would tell you, since the pandemic, our ability to forecast, our customers' ability to forecast has been very difficult. We've relied on our experience and how long we've been in each of our roles to really help develop the plans, and we're typically giving our customers those updates. We did spend good amount of time here recently with our customers. And I would tell you, our customers are neutral in general to 2024, which I think is -- maybe you could call that a green shoot, I'm not sure, but at least being neutral is in a good position.

I think you've talked about bid compliance. Maybe you can give a little bit of perspective what that means and how that's changed over the last couple of years.

Sure. Yes. So bid compliance is really when a customer tells us they're going to give us 100 shipments, what percent do they give us of that. And so if you looked historically, prepandemic you would find Intermodal in the 90s, upper 80s, sometimes, but you would be pretty close. And think about a network. When you're operating a network, very important to know what shipments you're going to get on a daily basis. You would see in the Truckload space, it'd be slightly less than that, you would find that maybe in the 70s in all of the one-way parts of our business. I've said this for many quarters now, the results of our bid compliance is slightly better than awful. Our customers are struggling with being able to forecast. I can't give you feedback yet on bid compliance. I think they're working really, really hard. But part of it is they can't forecast us as consumers, like what are we actually going to buy. So if you think about when we buy something different in the pandemic, coming out of the pandemic and also how they source, so if you just think about their sourcing changes from labor, that's what's creating so much volatility or part of the reason it's causing so much volatility. I know our customers want to get back to more predictable, bid compliance, we certainly do as well as asset-based provider, very important for our network. But I think if we could just see something better there, we would feel better.

Perfect. And then I know, Darren -- so Intermodal has been under a lot of pressure on pricing. Now part of that is the market. Part of that is the Truckload market. But there has been some unique things around some storage fees and accessorials. And maybe you can talk a little bit about that and how that's exacerbated, maybe some of the optics around pricing.

Well, certainly, in '21, really was a window of time when we didn't have enough capacity to actually onboard business available to us. And that resulted from our customers', in many cases, inability to unload that equipment at the same pace that they had prior to that window of time. And as we sit here in '24, our customers are unloading the equipment back to the same, if not better than prepandemic levels. And so that's -- those charges or those fees collected are based on an activity and when the activity no longer exists, then those charges no longer exist. And that's -- it was an appropriate action of the industry at the time, and it's appropriate of the industry today to be looking to find value for our customers through our service and capacity and ability to convert Highway business that was caught up on the road during the pandemic and convert it back to Intermodal.

Okay. Can we -- maybe we can switch gears -- well, actually, let's finish with Intermodal. I think you've talked about 10% to 12% margins long term. There's no change there. I mean you've been better before. Can you just talk about the long-term trajectory? But maybe even more the durability of margins because, quite frankly, last year was a rough year. But margins, while they were maybe at the low end of that range, they still were pretty close. So I think within that range if I think off the top of my head.

Certainly, there is absolutely no change to our long-term margin targets. 10% to 12% is the appropriate return profile for our investment in those assets. And that's -- that wouldn't change for us. I think that as we got through 2023, clearly, we owned more equipment for that window of time than we were actually utilizing. So that created some pressure. And certainly, pricing will negatively impact or positively impact margins faster than volume does. But there's certainly both -- there's 2 components to it and layering on new volume can drive out cost through a reduction of empty miles, better utilization of the driver's time. All of those factors are why as we continue to grow and look for better ways to convert Highway business off the Highway to Intermodal, we feel that we can achieve that margin long-term target and would not expect that to change really ever.

Perfect. Okay. Done with Intermodal there. I do want to turn over to Dedicated really quickly. Super sticky business. I think a great business where you're matching assets and liabilities. You're basically -- to Brad's point, you're spending capital for basically a contract in hand. The retention rate did dip. Can you talk a little bit at that -- I don't know if you've shown that chart, but it does bounce around maybe more than I thought. Can you just talk a little bit about the retention side?

Well, we gave you kind of a view all the way back to the last Great Recession. So if you'll look at this with me, I think this -- there you go. If you look at 2009, this is really important. In the last Great Recession, our Dedicated Contract Services really had a pretty substantial hit from a financial perspective. It looked a little bit more like our one-way parts of the business. And one of the things that we did was to say, what components can we change that makes us stickier and more resilient over the long term? One of our pivots during that -- the Great Recession was to focus on private fleets. And so really, how can we create value? How could we still operate what maybe in the markets known as Dedicated, but we moved that over to our Truckload segment. So we still offer the service, but it's not really our private fleet part of our business. And so you'll see that really change in 2013, I think, or '14. That really was like one deal that changed. But for the most part, we'd be climbing up from there. And you can see we've gone north of [ 100 ] for now several years. I would tell you in 2023, we had a good pipeline. We did a good job of selling new deals. And I think from a customer perspective, it just shows the value we can create even in a downturn. Part of our downturn, the 93% customer retention rate, about half of that was us being offensive with our customers, recognizing that their volumes had changed. And we went to them to say, let us redesign your fleet. We think we can take trucks out and move those trucks somewhere else. So if you think about half of that happened, that's good for our business over the long term because those customers, they don't have to go do their own optimization to say, well, my transportation cost is too high. We've done that work for them. Once we take that out, it really helps solve for that. But really proud of the 93% during a recession. I would say, very remarkable in this business unit. And again, these are the parts of this segment that we really want to try to replicate in other parts of our business. It's not going to be the same because it's not the same type of business like a private fleet, they're going to go to the store on a regular basis. However, we do think we can take components of that, driving value for customers.

And it's kind of bigger picture, it's very much the culture at J.B. Hunt. I mean you guys really just don't want to be generic, right? And maybe you can talk a little bit about that. And I mean this is -- again, it's an industry that does tend to be a little bit generic at times, but you're looking to do things that are simply not generic.

Yes. I would say we really do want to make sure we deliver on the promises that we make. That starts with our people. I think that's really important that we honor our commitments to our people, certainly honoring our commitments to customers, but also to our shareholders. So for us, we're focused on our results. What can we do to impact our results? We're taking the same Great Recession with the other parts of the business, they got more impacted. They say what are the things that we can do to make these parts of the business more resilient? And I think it's just a concept focus for us to say, okay, where is a difficult part of business? It's a massive market. So we can still look for the business that makes most sense for J.B. Hunt, for our customers and our shareholders, and that's what we're working on.

Tyler, I want to jump in here. A perfect example of that, Darren alluded to this, Mr. Hunt, Mrs. Hunt started this business running trucks. And so JBT is a segment still to this day, but I'm actually going to flip over to that chart. We didn't really call this out. If you look at the top right, again, we're not really owning the assets and the business, we're owning trailers. And so if you look at the land between non-asset power and asset power, so this is a huge market. Our customers really relied on the large asset-based truckload carriers to provide drop trailing equipment, which creates efficiencies for drivers, but also at their warehouse, drop a trailer, loaded or unloaded, sort of at their leisure, if you will. And that was -- that's the benefit of using large asset-based truckers versus getting capacity through more of a brokerage channel. So how do we create, how we play in this large market, but do so in a way where we can generate the right or appropriate returns and create value for our customers, but also create more efficiency for the drivers. And now the driver is not waiting 3 or 4 hours to be loaded or unloaded. So power only, you've done a nice research note on that, but I think remaining committed to trying to find ways that hit that large addressable market, but do so in a way where we think the availability of returns on capital are attractive enough for us to really be in the market.

We'll finish up on the last one about how you guys think about things long term, and to Darren, to talk about your container goals. Some people would say, you're doing exactly the wrong thing at the wrong time. But maybe you're doing the right thing at exactly the right time. And again, I think that J.B. Hunt just takes a very long-term approach to things. And maybe you could just talk a little bit about that. And again, kind of what the prospects are to fill those 150,000 containers.

Well, why don't I start and then Shelley may have some commentary here. The pandemic -- and not that you're solving for that environment at all times. The one thing that Shelley highlighted that is so important to us is honor commitments to our customers. We honored the commitments, but we couldn't go beyond the commitment at that window of time. And that prompted some of our customers maybe to acquire their own capacity. And so at the end of the day, we want to display the willingness to invest on their behalf, design our network around their supply chain, be the voice of that customer to our rail providers in a way that our rail providers can understand and ear and adapt, too, themselves. And I think that's part of the mission. And beyond that, that announcement back in 2022 had our logo on it and BNSF's logo on it. We did that jointly. There's a lot of importance in that visibility that they were locked in with us. It is our strategy together because we know there is so much Highway business that can convert to Intermodal and even more international equipment that goes intact, maybe a 53-foot -- a transload out of a 40 out of [ 5 40s ] into some fewer number of 53 is the right way to go. So we're very convicted in the long-term opportunity to grow Intermodal.

Well, perfect. I think we're about out of time. You guys are great at logistics. I don't know that we are -- I think we messed up with the schedule. I don't think we have a breakout. Is that right?

No breakout.

Yes, sorry about that. But anyway, thank you so much for coming. Thank you.

Thanks, Tyler. Yes.