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

My name is Dan Moore. I'm the senior transportation analyst here at Baird. Pleased to have the executive team -- members of the executive team of J.B. Hunt with us today. My plan is to go through a list of questions here, and hopefully ask some reasonably intelligent questions. But very, very happy to have you guys here. Thank you for being here. I'm glad you got here in one piece.

And maybe to kick it off, big picture. It's been a dynamic market. Macro environment has been anything but straightforward. The U.S. rail network is working through the implications of potential first transcontinental merger. Just wondering if you could take a minute, just frame the backdrop as you see it today, especially the prefunded capacity that you guys have in place.

Okay, Dan, I think you just gave me like seven questions. So...

They're all going to be that way.

How about -- can I just start us with maybe just a quick overview of the organization, and that will maybe level set where we're at today. But thank you for having us.

Of course.

Dan, good to see you in the seat.

Yes. Right.

We can't believe it, Dan, you're doing it.

So as we think about the organization, our vision is really to create the most efficient transportation network in North America. We think about that with our customers across our 5 business units. And so we really try to solve for our customers based on what we believe is the most efficient way to move goods, not necessarily based on the products or services that we deliver overall. We do that on the foundations of our people, our technology and capacity, and that's really where we create our investment. People is at the beginning because we think that's what's differentiating for our organization, long tenure, inside our company. Technology sets in the middle, and we call that technology that empowers. We think technology empowers our people. It also empowers our capacity to come into market being one of the largest transportation providers here in North America. But our mission is really to drive long-term value for our people, our customers and our shareholders. When we take great care of our people, they'll take great care of our customers. And ultimately, our shareholders will be well taken care of as well. And that's founded on our principles that were really by our founders 64 years ago, starting with integrity, respect for the individual, how we think about innovation. Mr. Hunt was our founder that really never met an idea he didn't like. He was a big thinker, and that's something we really try to stay with organizationally. Safety, always at the forefront of how we think and then excellence in everything that we do. As we think about our 64-year legacy in the size and scale of the organization, about $12 billion in total revenue. And I think you called it challenging, the environment that we've been in, I would say, 41 months of a freight recession is -- that certainly challenged me during this time, Dan, but if you think about the people -- it's a little outdated because that's from 2024, we're down to just over 32,000 people really helping facilitate on behalf of our customers. With a lot of equipment, about 2/3 of our employees are going to be professional drivers. About 2,000 in our maintenance team and the rest are going to be our office teams helping support both our maintenance and driving team with 22,000 tractors. And then you can see the number of trailing units that we have in total. Our key priorities for this year, really focus on what we can control. And so can't do a lot about the macro environment, but can focus a lot on operational excellence. For us, that kind of comes out in 2 ways. One is making sure we're #1 for our customers from a scorecard perspective. So we want our customers to say that we are the best in the business and that they want to continue to do more business with us. We have the highest rating from our customers across the board, industry rating at a 53% Net Promoter Score, for example, in intermodal, that's likened to a Chick-fil-A score for us. So very proud of that work. But that's happened across all of our businesses. With our customer retention at the highest levels that we have had and also the consistency in our service. So that's put us in a really good offensive state with our customers, being able to help them solve for their supply chain challenges, helping us think about in this environment where freight has been very difficult, it really allows us to think differently with our customers. So that's the first place on operational excellence. And the second one is on safety. We are in our third year of consecutive record-breaking safety performance. And so in 2023, we reduced our DOT preventable accidents by 25%. We beat that again last year. We're on pace to beat that again this year. That really sets the foundation for us as we think about excellence to really push forward into meeting our objectives overall. Our second priority is really scaling into the long-term investments in our people, technology and capacity, those foundations that I talked about. We have thought about this recession a little bit differently, Dan, because we're in a position of strength financially to say, what could we do differently during this recession that would really push us over as we come out of this. And so for us, we really invested in our people and wages and really moving our people forward during this time in both wages and benefits. We also did a nice job in thinking about capacity, and I'll let Darren talk more about that, how we thought about the capacity we could bring to market on behalf of our customers on business that we think can convert into a more efficient mode overall. And then finally, third is really repairing our margins, really thinking about having stronger financial performance. Those are our 3 priorities for this year that I think we've done a fairly nice job here coming into the back half of the year of executing on our priorities. And then finally, I talked about our people, and this is not just a reflection of our management team from an executive perspective, it really is a reflection of our entire organization. We have a lot of tenure in our company. So the average tenure of our officers is just under 27 years at J.B. Hunt if you were to just take that into our senior VPs at 21 years, our VPs at 20 years, our directors at 14 years. We have a culture of innovation, but we're also a growth company. And so because of that, our people really lean into us even during this time. It's been a really good change for us overall.

So hitting on Intermodal. Sorry, I actually feel a lot better than I sound. We are the largest intermodal provider in North America with just over 125,000 containers. We have a proprietary chassis that only fits our container, and we own all of that equipment. That goes all the way back to Mr. Hunt's belief in making sure our intermodal customers had the same experience with an intermodal shipment that they did with truckload, and we really believe in controlling our own equipment, maintaining it, taking great care of it and designing and innovating with that equipment over time. When we think about the position we're in today, we do own more equipment than what we're using. Back in March of '22, we announced plans to grow to 150,000 containers jointly with BNSF at that time. And I think that it's important to remember our customers were coming off of a number of years whether it was from an implementation of PSR components that struck some of our customers in a negative way and didn't really feel good about the service they experienced. And then we got into COVID, and we didn't have enough capacity to meet our customers' needs. And Shelly highlighted nicely our focus on operational excellence. I think the equipment pre-investment is also along the same lines as operational excellence and that we were trying to repair the reputation of intermodal that our customers had experienced up until that point. And now we're in a good position and really set well to grow into the future. We don't need to spend a lot of money to buy containers at this point. We're set for a nice pathway certainly to grow. We have long-term relationships with BNSF, NS and CSX. We certainly have relationships with nearly all the railroads in North America and look forward to using those railroad relationships long into the future. We highlight our map in that we think that the way we go to market, the way we bring customers and translate what the railroads capabilities are for the customer and then translate back to the railroad, how they need to, what kind of network requirements, what kind of service it needs to exist in order to attract additional highway conversion business. We see somewhere in the neighborhood of 7 million to 11 million loads annually that we believe are ripe for conversion to intermodal. The vast majority of that business is in the Easter network, which would be served by today, Norfolk Southern and CSX combined and look forward to years to come with expansion and highway conversion to intermodal.

Real quick. I just want to highlight an announcement we made on our second quarter earnings call, really lowering our cost to serve. We announced that we are going to attack about $100 million of structural cost and committed to our investors, our shareholders that we would give updates each quarter as we executed on this plan. We just recently reported our Q3 results, very, very proud of the performance overall of the business with flat revenues. We were able to grow GAAP operating income 8% and GAAP EPS 18%. And highlighted that we had achieved greater than $20 million of cost savings in the quarter. So clearly, on an annualized run rate basis. Getting really close to the $100 million we've identified. The one other thing we did add is that our internal target is a lot greater than $100 million. And so we still see opportunities for us to challenge ourselves in the 3 areas of the business where we think there are opportunities around driving efficiency and productivity. Darren talked about asset utilization and then how do we think about leveraging technology to look at business process. So we're off to a really good start on lowering our cost to serve. Really think that sets us up well in terms of creating nice operating leverage for our business, particularly if or when market dynamics change. But from a balance sheet perspective, very healthy. We're at 1x trailing EBITDA. So have -- we consider to be very modest, but very, I would say, targeted levels of leverage on our balance sheet. We've always kind of used 1x is our target. And that sets us up really well when we think about prefunding our growth. We don't really require a lot of capital to take advantage of the opportunities that may come to us moving forward. And then I'll just end here on the last slide, our #1 priority for capital is to reinvest in our business. And you could see that highlighted here by the blue bars. The gray background is our trailing 12 operating cash flow. So we've been operating well within our cash flow generation, which has been strong. We have been, you could see the purple bars, opportunistically buying back stock over the last 2 years. And I think year-to-date have returned about $728 million on that share repurchase authorization. So going forward, like I said, I think we're in a really good perspective from where we need to spend capital. The one business segment that -- well, I don't think we talk about enough, but dedicated is really our most capital-intensive business. When we do need to deploy capital in that business to grow, that comes with 5-year contracts with fixed and variable components to our pay with annual price escalators linked to ECI and CPI. So really success-based CapEx, and we look forward to periods of time where we do have to deploy capital in that area to support our growth. So Dan, probably more than you asked or bargained for, but turn it back for that one question that encompassed about 7.

No, I think we're done.

Wonderful.

This is great. I really appreciate you taking the time to walk through these slides. I think it really frames things nicely. But maybe to pivot back to that initial question. There have been a lot of changes in the market. It's been a lot to keep up with for me. I can't imagine what it's been like for you. The government shutdown has certainly come with its fair share of challenges, second and third order effects of it, front loading of inventories, tariffs, a lot to process. How do you think about the state of freight today? To your point, we're going on nearly 4 years of downturn. How do you think about the path forward when you contemplate things like fiscal and monetary stimulus potential for enhanced rebate checks, things of that nature?

Well, I think this is the longest downturn of my career of 31 years. I think maybe the longest downturn maybe in our company's history for the duration. And so it's been difficult, Dan, to get really excited about any one thing because we've had false starts and just seems like more variables that are coming at us than not. And so you just said a lot of things about just this year. That doesn't even include what happened in the previous 2.5 years. As we've really set the company up at the beginning of this year, as we realized that tariffs were going to create some disruption in the supply chain, talking to our customers, that's one of the reasons we really took a step back and said, "Okay, we've got to thrive even in this environment." We can't wait on a turn, and we have to make sure we put our company in a position to win. And so that really was us putting together our executive team, and this is the first time we've done it at this level. We've done a nice job over the last 2.5 years managing our cost, the way everybody has, but this was really a deeper dive. It was really going across more than 10 different areas across the organization. And each executive taking that area and really determining nothing really was off the table if it didn't jeopardize our long-term potential. And so you saw us come together, and that's the reason that we made the $100 million cost take out. But that was for 2 reasons. One, that allows us to repair our margins. But two, it makes us more competitive in the long term on behalf of our customers. And that's very important. We're large in our space, but it's a $600 billion addressable market for us. And so we're a growth company. It's important that we grow, but it's important that we maintain our margins inside our margin target or get towards our margin target. And so that was kind of a two-pronged approach for us. As we've stepped through the rest of this year and now certainly, things are coming out on regulations, Dan, we did write a white paper that's available on our website as well, really just trying to outline for our customers, "Okay, this is what's happening in the environment. It's up to 400,000 drivers. Why don't you make the assessment on how much you feel like that will come out in the next 2 years? If that will be shorter than longer? What those things are?" Our customers count on us to give them and be experts on how they should be planning. We knew they were coming into budget season. I will say, I think from a customer's viewpoint, Dan, they have been hearing us for a while now. They understand the need for price, but no one's just willing to write a check immediately. They understand inflation. As we've given them that data, I would bet customers say, "You know what, let me just keep riding it the way it is", but that's helpful to them for their upper management. If something were to change, they now have that so they can understand that. We're putting our company in a position to win. And so for us, that means we're going to keep focusing on operational excellence, keep growing our market share. I think you saw some of that separation happen for us in the third quarter. Very proud of the work of our teams doing that, very focused in on what we can do. And most important, as we start to come out of this, I don't know when that will be. Is that next year, early next year, late next year, 2027. As we do, we are in a position of strength. We've lowered our cost to serve. We're continuing to lower our cost to serve. We have the capacity. We prefunded our growth to our ability to really extract value when the market does turn is even greater as we move into next year.

Right. And I'm sure there are sensitivities around getting really deep into the cost structure question. But could you just frame again what the initiatives were that were established earlier in the year, the divisions that they affect and ultimately, what that means for the next 12 months because it's kind of an iterative process. It's going to develop over time. I just want to be really clear about the messaging on that.

Sure. So Dan, when we announced that, what we said was, first of all, it would impact all 5 of our business segments. We didn't necessarily break it down by segment. We said, hey, you -- we have public target -- margin targets in each of our businesses. To the extent one of our businesses further away from our margin target, then it's probably an area where you would say might get a greater proportion of -- or you might attribute greater of these cost-saving initiatives to that area of our business. Where I would highlight, Dedicated is not far off. As a matter of fact, in Q3, we operated within our margin target range. So does that mean that there's not opportunities for us to reduce or lower our cost to serve in Dedicated? No, they've done a really good job. Part of that execution actually got them back into the margin target range. Whereas Intermodal, we were a couple of hundred basis points off of the low end of our margin target range, also holding on to a lot of equipment. So what we said is it would impact all of the businesses relative to their size and scale when you think about us on a consolidated basis, but giving some consideration to where we were relative to those targets. And then in terms of the areas, I mean, we outlined kind of the 3 areas. We talked about productivity and efficiency. Really, that's just -- let's just keep it simple, doing more with less. And some of that has to do with span of control and our people. And so we have -- throughout this downturn, we have had no mass layoffs. We've managed through -- headcount through performance management as well as through attrition. And I think we're off about 15%, Shelly, from peak. But versus where we were a year ago, we're down around 6.5%, I believe. And so we've seen our volumes hold up relatively well versus the resources needed to support that volume. And so I put that into the productivity and efficiency bucket. Asset utilization, Darren, when we were talking about Intermodal, we had record performance in terms of our asset utilization in Intermodal in the third quarter. And so a lot of great and hard work that Darren, you can go into a lot of details on. And then the third bucket is thinking through process and leveraging technology in terms of how we drive. Again, it ties back into number one, productivity and efficiency. Those 3 buckets, it's hard to say what falls into which bucket because Darren can give the example of how we were driving so much productivity in our Intermodal dray fleet in Q3, which actually was a function of technology helping us drive better asset utilization. So they're all very well interconnected, if you will, but certainly came out of the e ahead of schedule on our cost initiatives.

I think one thing that's important, Brad, I've heard you say this multiple times, it's important for us to deliver it in our financial performance. And so for us, there are some that are ahead of schedule that were -- I don't know if any behind schedule, so that's good. but we want to make sure that it's recognized. And so we recognize that there is inflation that's continuing to come at us. And so I just want to make sure that our -- that's what we've publicly disclosed is our first $100 million, but our sights are set on something much larger.

Yes. It's been a long time since there's been a supply-driven narrative. I mean the only one I can remember is back in 2000. So maybe to expand on the regulatory dynamic that seems to be present. You mentioned your white paper. I think a lot of us are trying to assess notwithstanding the stay yesterday, which I think is more of a speed bump than anything, more of a judicial -- administrative speed bump. How are you thinking about ELP? How are you thinking about nondomiciled driver CDLs? How substantive is the development in those areas, particularly over the next 12 months because I think the biggest impact is likely to be felt between now and the end of next year?

Well, Dan, one thing we've talked about in our second -- third quarter call, we talked about what we saw coming into the rest of this year, which really would be -- we think there's going to be a peak and things kind of loosened as the quarter happened or progressed, not necessarily for J.B. Hunt, but from a market perspective, I think that both of those themes are still there. Maybe one thing that we've seen a little different is we see pockets of tightness, not tight, tightness that are occurring in our brokerage area, which typically that's where you would see some of that happen. We're not ready to say to what extent that is any of these government regulations, but that is the major change that has happened. Again, it's pockets of tightness, not across the board, but we have to see some of that. So we've seen some states already enforcing. We've also seen, I think, there's a level of fear from some of the contract carriers of what if I operate outside of my state or if I operate outside of who gave me my nondomicile CDL. I think there's a lot of misunderstanding about it as well. And so as they are learning and trying to understand, I think that could be some -- a little dislocation that's happening today. But if you just do the math, we really reconcile to the 3.5 million drivers that are out there. There's more than one data source. But that's the one we're closely align to. And so if there -- we really count up to 400,000. So I mean, I would say that, that number 400,000 on 3.5 million is meaningful. Now over what time period? And that's what it really comes down to. We're in a freight market that is no good, right? And so you're in a depressed freight market. And seeing a few signs of pockets of tightness that would tell me typically, when freight is down like this, you wouldn't feel those bumps. That could tell you the bumps could be bigger than maybe what we're expecting.

Good context. domestic Intermodal. So there's been a lot it's been a lot to process this year. Anytime unexpected events occur, it presents both challenges and opportunities. I think it's very clear that the market is trying to pivot to being more competitive, maybe for the first time in a long time, pivoting to a concerted effort to try and grow domestic Intermodal. At the same time, there's also increased competition between the rails in a way that a transcontinental rail wouldn't otherwise represent the market. Can you frame the domestic Intermodal market? What's going on? And where you see yourselves in the midst of everything that's developed?

Sure. Growing Intermodal, converting highway business to Intermodal has long been our mission. Certainly, we've had a lot of success in educating customers on how to use the network that exists and how to put that supply chain answer into their toolkit. And I think that the rail industry did go through a period where there was elimination of service lanes in an effort to improve financial performance, and we respect and understand the need to do that. But our customer experience in, call it, 2015 through '19 up until the pandemic was pretty poor with rail service. It wasn't a highly thought of. Supply chain answer was largely price driven. And I do feel like the rail roads got refocused on their service product, got very -- really Intermodal became the growth channel available. There wasn't a lot of growth opportunities in industrial products. And certainly, their coal businesses were falling. And so there was, I guess, a different level of attention on how do I improve the service product. And I think that we felt really good about the way we communicated around those needs with our rail providers and really work together in a way to bring out a better operational experience for our customers and look for ways to grow. Now all that being said, railroads can work together. BNSF, steel-wheel interchanges business with both CSX and NS here in Chicago, for example. There are a number of places where the railroads work together to drive efficiency for each other. How can they continue to do that? I don't know if a transcontinental rail merger enhances that in any way. I think that's what the STB is charged to do. Are they actually enhancing competition? We'll all be waiting to see. I think that I understand why someone would hear a transcon railroad that left Los Angeles and went to New Jersey is going to be better than 2 railroads trying to meet. I can understand that. However, the density and all of the overlapping of networks is very important in the rail industry, and it's not as simple as, well, the transcon railroad will run all the way across the country and then everything else will kind of just stay the same. They all really complement each other. There's a lot of car balance in the way the assets get utilized together. And so there's a lot yet to be determined. I think we certainly shared on our third quarter call that we don't necessarily view this as something that has to force a change in the way we operate. We continue to see tremendous opportunities for growth of our Intermodal business in local Eastern networks where Norfolk Southern and CSX both operate. We certainly can recognize that there's things that Norfolk Southern does that CSX doesn't do. And there's things that CSX does that Norfolk Southern doesn't do. We've utilized 2 railroads in the East for a reason for a long time. And certainly, our customers look to us to have the answers around how do I put together my Intermodal answer inside my supply chain network. I think it's very important. I'm sure CSX may have talked about the Howard Street Tunnel. That project was underway well before any kind of merger was announced. That is a really big significant impact on the CSX network moving forward and allows them to really compete head up against NS in many of the Atlanta up to the Northeast routes. And so we look forward to an opportunity to understand how we can benefit from that. We're like a lot of people, we're going to be sitting back watching and we're going to be communicating with all of the railroads about what our customers want and expect and need in order to utilize the Intermodal network and feel like all the railroads want to hear what we think about that. So we'll look forward to more news to come in the future as this thing has a life of its own, really.

For sure. Very dynamic. No questions. Automation, brokerage, opportunities for cost out, opportunities for better buy rates, improved identification of capacity. Anything else that you think that's relevant in the organization from the standpoint of automation and cost out? I know it's a term everybody seems to be latching on to here in the last 12 to 18 months, but I don't want to miss the opportunity to at least address it.

Yes. Actually, if we could just go up a level for us because we do so much more than just brokerage, although that will also participate inside that space. As we think about automation, one of the things for efficiency for us is to first start with making sure we have a lean process. We want to make sure that we understand what's the most efficient way to move goods or move shipments or even do this type of work within a load. And once that's established, it really is about automating what's possible through our already investments, the investments we've already made through J.B. Hunt 360. So we have a modern platform. We have the ability to really scale inside that platform. And so what steps can we take inside that? And then we're layering on top of that, what AI makes sense from a cost-benefit perspective for us to really drive increased efficiency and productivity? And so what I would tell you, we did make a public announcement with a company called UP.Labs, I referenced that on our third quarter call, that's really taken 2 different processes. One, I'm going to say from beginning of the order to completion and really identifying the waste inside that system and how could we really create automation inside that. And so when we think about automation, we don't just think about it from a people perspective. We actually think about it from a dray perspective and a number of assets perspective and how many resources do we really need to have in that. The second area that we've worked on is really in our quote-to-cash area. And so how do we think about our business, not just the number of people we have there, but actually, do we have the right bill at the right time? Do we have a good opportunity for cash flow? And also, are we under billing in any place? So those have had nice returns, if you will, for us to continue to make investments. But we're doing that across the board. If we were to look at what we were to do, you talked specifically about brokerage. We manage over $2 billion of carrier transactions and 60% of that we've automated in check calls and how we're looking at the number of hours we've saved across all of our different customer experience teams and orders and how many are coming in automated. That's getting better every single day. And so for us, we've got all of those process in place across the organization with a lot more to come. I think it comes down to what I said at the beginning. We want to show that in our financial performance. And as we have that financial performance, we'll walk through kind of those steps that we took to make that happen.

I had hoped to have some time to answer some questions from the gallery here, but we are out of time. I want to thank you all for being here. I hope everyone has a good conference, a good set of meetings and look forward to catching up with you guys when you report the results after real report.

Thank you.