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

All right. We're going to get going with our next session. One of the things that I enjoy about our conference is the opportunity to do, kind of, unique panel discussions. And this is one I have wanted to do for years, and we're finally getting to do. And I think it's -- I don't know that I've seen J.B. Hunt and BNSF speak at an investor conference together. So this is a pretty rare opportunity, and thank you guys for willing to do this. So on my left, we've got from J.B. Hunt, Darren field, the President of Intermodal; and then from BNSF, Tom Williams, the Vice President of Consumer Products. So I guess since we -- this is a rare, sort of, opportunity. Maybe just a first like a high-level question, maybe just an opportunity for each of you to just sort of share what you think is unique about the J.B. Hunt, BNSF, relationship, partnership, whatever you want to call it, relative to just the broader market. Just curious your -- both of your perspectives here.

Sure. Well, I'll take a stab at starting that. Look, it goes all the way back to 1989. We've -- our organizations have worked together now for multiple decades and have just -- the joint success is the definition of our partnership in that we can't be effective without BNSF, being successful. And we'd like to believe that in the Intermodal space, BNSF can't be successful without J.B. Hunt. And we're just -- we're aligned on our initiatives to define our products to solve challenges for our shippers and work together in a way that just expands the Intermodal market.

Yes. I mean, Darren said it, I think there's an understanding and this is kind of deep within our organization that we know that we win or lose together with J.B. Hunt as it relates to domestic intermodal. And so that understanding then drives a lot of things behind the scenes that we do that are unique. I was reflecting 2 weeks ago, I did a right along with the J.B. Hunt driver at our Alliance facility in North Texas. And so if you just think about the little things that you would see if you did that right along with me, you go on duty at a J.B. Hunt terminal that is like literally a 9 iron from the front gate to our Intermodal facility/we share a fence for neighbors. So it takes 30 seconds to pull that truck out, get to the facility. We turned through the facility in 18 minutes, which is I'm sure they had me with a very efficient driver and a very efficient [ level ] but 18 minutes. Okay. If it's 25 minutes on normal, that's pretty good. And then so the technology that he used to get in, we're connected to the J.B. Hunt drive app. So we're in their system. The efficiency of the delivery of the -- we dropped the load, we picked up an empty from the same location, took it to another location, picked up a load and come back. There were no deadhead miles throughout that. You just kind of -- you could feel the efficiency of that end-to-end Intermodal move throughout that day. So from capacity investments that we're thinking alike in terms of that strategy, the technology and process improvements that we're working on together, again, all coming behind this reality that we know that we win or lose together.

And maybe the answer is it's not changing, but curious, to what extent is the relationship evolving over the last few years? How are you -- what are the -- any things you guys are doing differently in terms of go-to-market strategies, thoughts on growth? Anything really? Is there -- how is it evolving?

Sure. Well, I think that when I look back at the first time Katie Farmer came to our office when she had stepped into her CEO role and looked across the table at John Roberts and said, I can't be successful unless you're successful and what can and should we do to serve the market in a way that it's not being served. And I think that was the origins of a series of discussions around how do we initiate a service that competes better with truck offers really, really high consistent service. And we launched Quantum last fall and with a nod back to the origins of our relationship when it was actually initiated in 1989 as Quantum and really feel like we've offered a differentiated service product that continues to grow and offer new value. And beyond that, we have employees working in the BNSF operating center in Fort Worth that are helping translate what customers need into the -- to the BNSF operating system in a way that we think differentiates our service. So I'll stop there and let you maybe think about any other areas that you think.

Yes. I think it's an acceleration of alignment, not a pivot and on two fronts: one, the stuff that I was touching on and that driver right along example in terms of how we're trying to take wasted cost within our networks out by how we work together so that we're both more efficient at the end of the day. And then Quantum is really taking it to the customer on Intermodal that, to some degree, have slowed the penetration of a lot of customer direct deliveries where there's potential cost of variability around fees or inventory, so forth and so on. And so breaking that down to Quantum to have a much, much more reliable product end-to-end is allowing cargo owners to look at intermodal for a difficulty of their freight. And we've seen 99% door-to-door on-time reliability with that. So in on both sides, our internal operations, but also the end-to-end for the customers just doing things to improve reliability, take waste out of the end-to-end process.

You both mentioned Quantum. I know it's something we've talked about. I don't know that I fully understand what is different about Quantum versus regular J.B. Hunt, BN. Maybe just either one of you just a minute just like what exactly is different about this? How big is this work going to go?

Well, Tom highlighted, they have through the years of debate with customers around how to convert business where there's a business-to-business transaction. So in many cases, our customers would have historically viewed Intermodal as a risky opportunity for them to put a business transaction shipment on it. And so we challenged each other in a way to say, how do we get a customized answer where we're literally planning from the beginning all the way through the end, okay, what time does the shipment have to tender to us? What time does the driver have to arrive? What time do I have to make it in the gate, and then what are all the different monitoring processes along the way? And you're actually predefining with that customer what your actions are in the event that there is a challenge. I mean, look, we're in an outdoor world, and there will be challenges from time to time. It's how you react to those and how can we solve for the customer in a different way. And so, so far, our business is operating at a door-to-door on-time service well above our goal. We're in the high 98%, 99% on time and customers continue to grow and give us new opportunities. But this is true highway conversion. It's not intended to be a different service level for existing Intermodal. We are attacking the highway opportunities out there and have had good reception and good success and really believe that over the long term, we can grow the Intermodal business using our Quantum product.

I want to bring it a little bit near term now. Just -- let's talk about the demand macro environment. It's usually how we start, right? Maybe Darren, I'll give you a first shot and then Tom, if you have thoughts. Just update on demand, volume trends as we're trending through the quarter, better, worse than expected. I don't know. Any color you want to share here?

I'm probably going to stop short of giving any kind of intra-quarter update when we came out of Q1, we were effectively flat year-over-year. We were positive in our Transcon business, and we were negative in our Eastern business. I do think it's important to define -- I'm not sure that all of the competitors define their networks the same. Our Eastern network or our Transcon network would be any shipment that touches Washington, Oregon, California or Arizona. So a shipment from Chicago to Denver is in our Eastern network or Mexico business that doesn't touch the West Coast is in our Eastern network. And I think that definition is probably different than some of our competitors. In the East, we were negative 7% in the first quarter. We were, I think that the feedback we get from our customers is, in many cases, the customer's volume was down. And so some of that negativity is more around the customer just didn't have the business. But the broader feedback from our customers has been just truckload capacity is loose. And costs have surprised our customers. I think they've been pretty aggressive around how concerned they may be that those prices sustain for the full cycle. And so there's been a lot of debate about how long will the lower truckload rates last? And nobody knows. We joked earlier that today is 1 day closer to hopefully truckload rates beginning to climb. We'll see when that happens. I have no idea when that will happen. But volume demand has been okay. Competition from the highway has been significant. And -- but our service has never been better. Our capacity is built to serve our customers and pricing will continue to be a challenge.

And we'll get to price in a second. So Tom, I mean, we could see your volumes every week. Intermodal is up 13%, start Q2, right? It feels like there's pretty significant increase in international Intermodal and less so in domestic. Why are we seeing this? Is this just why aren't we seeing more transloading? Does this continue -- I don't know, any thoughts?

Yes. I mean it's a great question. One of the key factors for the first quarter is that if you go back to the first quarter of '23, international volume was in the pit of despair. So coming back out of that, the relative growth has been stronger in international. We did see that if you go back to the normalized trend, IPI was a little bit stronger than trend line versus transloading, but we still really look at that secular trend, and we listen to what the cargo owners are telling us about their long-term interest in transloading. And we're certainly making investments for the long term that are consistent with that secular trend continuing. And when we think about Barstow, the investments that are domestic Intermodal facilities and so forth.

So you think we -- over time, right, we will see more transloading that less.

Correct. And that trend that we've seen over the last decade plus continuing and listening to what our customers are telling us.

And we've seen just in the last month or so, ocean rates have really, really spiked. Is that -- I don't know if that's a supply issue or a demand issue. Do you have visibility? Like is there like a big wave of volume that's going to start coming?

So we were talking a little bit about this morning and just -- I'm reading the same things that you all might read in terms of ocean box velocity, the impact of the Suez Canal. I read an article speculating or an opinion that maybe the impact of that velocity slowing down because of Suez was a little bit underestimated. And then there was some weather in Asia. Again, we're watching that, but we'll certainly be speculative to say what's on the horizon as a result in terms of both West Coast demand and the IPI percentage changing.

And do you have any visibility to West Coast port volume has been now growing, East Coast. Is that, I guess, part of maybe, Panama, Suez, like there's East Coast labor negotiations happening. Do you think that, that -- do you have visibility from your customers, does that trend continue for now?

I would say everybody is watching, including us, what is playing out on the East Coast. And so that's still off into September. So we're certainly watching that very closely.

You had a comment, price is tough, I think that's what you just said. Any more color how we're thinking on how bid season is going and...

Well, the only -- it's kind of a repeat of our Q1 call. We're coming out of the fourth quarter, demand was strong. We felt good about our service quality and felt like the opportunity to improve pricing existed, and that's not how the early phase of the bid cycle played out for us. And so I don't have an update on that. I would tell you, we felt surprised in Q1 by the longevity of the depressed truckload rates and I don't think you're reading anything day that would suggest that's changed.

And so how do you -- when you get surprised with how bid season starts? How do you evolve? Is it you say, okay, we wanted to get price. Now we give up price to protect share. Do we say we're willing to give up share. How do you approach I think season when it's not...

I think you take one customer at a time. I mean, every single pricing event is kind of its own life cycle. We're identifying signals from our shippers where you can identify that a customer is concerned about their ability to get the capacity they need for the entire cycle. And so in some cases, maybe we've tried to offer some shorter-term pricing programs. Some of that's been successful. Some of it hasn't. I think that adapting in the cycle is what all of us have done forever, and we'll continue to do that and recognize that we need to grow our volumes, we need to improve our margins. We need to improve the quality of the revenue on behalf of BNSF and all of our rail providers. So I mean, when I said it's a challenge, it's a challenge on all fronts. We want to grow and we also want to improve pricing this year, that's so far, that's been difficult.

Can you start to improve margin, and we had a 7% margin in Q1, like lowest in 20 years. Sorry for the reminder. Can we improve margin before price turns? Or is that...

We're in a unique situation in that we have more equipment than we've ever owned that's not being utilized. So certainly, growing volumes can contribute to a little bit of margin improvement. It won't -- it's not enough. But that can certainly point us in the right direction volume is worth more today than it's ever been worth to us given the magnitude of our capacity, and we will continue to work on that. But pricing will always fix margin faster than anything else.

So this cycle, your point is you'll show if we had -- if we can ever get volume and price at the same time, we're going to show better leverage than maybe what we've shown in the past. But for right now, maybe there's some seasonal volume improvement, but we're not getting price, so don't get -- certainly don't get carried away.

I would say, I'm not talking about the second quarter. I'm just talking about, as we move forward, we're looking for more ways to grow whether it be from our Quantum product, whether it be from new demand in Mexico or certainly a competition with truckload capacity in the east is are all areas that we're attacking. We're -- we have shown growth in our Transcon business and believe that our customers will continue to need more capacity. We're watching closely those imports and looking for will there be a transload opportunities continue to come our way, and we'll just have to wait and see.

And do you still feel like 10% to 12% is the right margin range.

Absolutely. I recognize that we're outside of that range by a larger gap than ever. And certainly, it's going to take a minute to repair it. We believe that through quality service through more normalized cycles that the products and the pricing that we can achieve in the market support those kinds of margins. If you outperform a 12 for any extended period of time, we're going to have upset customers, and we're probably going to have upset providers. If you're not performing at a 10, I think that we recognize that we need to find a way to either remove some cost, and certainly improve the quality on pricing it's probably both in that case. So that's a good spot for us to live in, in terms of the return on our investments and it feels like that's where -- that's certainly the goal. We don't have any update to change that. I don't believe we will have an update to change that.

[Operator Instructions]. Do we have mics? You can speak up.